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Small and Medium Sized Enterprises and Their Effect on the Economy

In: Business and Management

Submitted By kmarzooq
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This report talks about a subject that affects the whole economy in all countries. Small and medium -sized enterprises (SME’s) play an effective role in solving many economic problems such as unemployment. Therefore, SME’s are at the heart of economic growth.

The purpose of my report is to show how SME’s help the economy in overcoming some problems. Also, this report discusses some SME difficulties and their solutions.

This report has three chapters. The first chapter consists of background. The second chapter is about SME problems. The last chapter discusses a real life example of a small business in Saudi Arabia.


This chapter defines SME’s and explains their importance.

A. Definition of SME’s

The SME definition is different from one country to another. In Saudi Arabia for example, small firms are identified by the Saudi Chambers of Commerce as firms which have 10-25 staff and whose assets are SR one million. On the other hand, the firms that employ 25-100 staff and their assets are SR 5 million are called medium- sized firms. (5:197) The definition of SME’s in the UK is as follows: the enterprises that have less than 50 workers are small enterprises whereas the enterprises that employ more than 249 workers are medium- sized. (1:1)

B. SME’s Importance

The effect of SME’s on the economy appears in many dimensions. Governments face several problems related to unemployment; SME’s can solve these problems (6:1). In Saudi Arabia for example, SME’s comprise greater than 90 percent of private firms (2:1).


A. Common Problems

SME difficulties are various among the economic environment; there are common problems in all countries. The main difficulty is the financing issue i.e. funds are insufficient. As the Saudi Arabian General Investment Authority (SAGIA) comments:
“A shortage of paid- up capital and credit makes SMEs vulnerable to fluctuation in supply and demand.” Another challenge is the weakness of human resources that leads to the lack of important data needed to make decisions. Also, SME’s face more and more problems such as the lack of new technology. (3:1, 2)

B. Problems in Saudi Arabia

The problems of SME’s in Saudi Arabia are more than in the other countries. This section focuses on two main issues.

a. Women

Some people thought that Islamic regulations, that prevent the association between males and females, are the main obstacle that face businesswomen in Saudi Arabia and that is absolutely wrong. The misunderstanding of these regulations causes this problem. However, there are many real obstacles stopping Saudi Businesswomen from taking their economic position. One of the barriers is the lack of immediate communication between businesswomen and government agencies. Another obstacle is the financing issue. It is more aggravated in the situation of businesswomen than businessmen. The absence of business training programs for women is also one of these barriers. (5:206)

b. World Trade Organization (WTO)

The Saudi economy is affected by the accession of the kingdom to a WTO. As a result, SME’s face more and more challenges because of WTO regulations which need a suitable environment to be applied. (2:1)

C. Solutions to Saudi Problems

Some problems related to businesswomen have been mentioned in the previous section. The government tries seriously to find solutions. As an example, women’s sections have been instituted in some ministries. Also, training programs have been established by the Chamber of Commerce. (5:206) Government supports are needed to overcome other problems. Also, the intervention of the private sector, which includes large firms and commercial banks, is very important. One of the suggestions to improve to SME’s in Saudi Arabia is to create an official authority that concerns all SME aspects, for instance, developing the relationships between SME’s and a private sector or government agencies. Moreover, other agencies that should be established are those that provide accounting services, marketing and managerial support and financial consultations. SME’s will be able to achieve their economic role whenever these factors are available for them. (2:1, 2)


This chapter talks about a real life example of a small firm in Saihat in the eastern province in Saudi Arabia.

A. General Background

ctivity is demolishing 1991 and their activities include transporting different types of building materials such as steel, sandThis firm was established in 1991 and its activities include transporting different types of building materials such as steel, sand, concrete and blocks. Another activity is demolishing old buildings. The range of its activities is bounded to Dammam, Qatif and Al-Khober. (4)

B. Manpower

When it was starting its activities it had only 16 employees. Two of them were accountants, 8 were drivers and 6 were laborers. This business has developed and expanded through 15 years. The number of employees doubled more than there times, so it is now 56 employees. They can be divided into five categories in terms of their job descriptions. Two of them are accountants, two are mechanics, 30 are drivers, the number of laborers is 21 and there is one electrician. (4)

C. Transporting Equipment

The expansion of the business includes the number of trucks. Fifteen years ago, the number of trucks was only 8 while the firm owns about 26 trucks now. The firm has different types of trucks. Some of them are used for transporting sand and concrete whereas the others are used for transporting blocks and cement. (4)

D. Technology

When the firm was established, it has a small office, telephones and a fax machine. It used a primary way to record by using books. Fifteen years later, an obvious change occurred and the firm has developed. Now, it has a bigger office, three computers, four printers and a barcode machine. Also, the internet is used and the books have been replaced by a computer program. Moreover, every worker has a mobile phone so contacting them will be easier. (4)

E. Business Problems

The firm faces many difficulties. The main difficulty is credit sales, it represents two third of the firm sales. So, the firm has two choices. It either continues sale by credit but with risk of not receiving money back, or it cuts dealing with credit but with the price of lowering income to one third. Another problem is the breakdown of equipment especially trucks. Repairing them is very expensive and very important at the same time. (4)

F. Current Situation

As mentioned in the previous sections, the firm has developed and increased the number of employees and equipment. As a result, the incomes have doubled three times and the business becomes much better than before. (4)

G. Business Future

As the manager said: “The business can be improved by increasing the number of employees and equipment so we can receive more orders than now.” Also the development can be done by using new technology such as the internet. Hosting a website, to enhance the marketing issues for the firm and to receive orders through it, is a good idea. (4)


Although the definition of SME’s differs from one economy to another, there is no argument about their role on the economy. SME’s face different problems such as financing issues. These problems and their solutions are discussed in this report. Finally, a real example of a small enterprise is explained in detail.


1. Bruce, Cathie. "SME BUSINESS: In the Net, or Out? Now's the Time to Choose." RedOrbit NEWS. 11 Mar. 2006: 1-3.

2. Bundagji, F.Y. "Small Business and Market Growth in Saudi Arabia." Arab News. 24 Oct. 2005: 1-3.

3. Estimo, Rodolfo C. "SMEs Face Problems in Kingdom." Arab News. 8 Mar. 2004: 1-2.

4. Al-Mehdar, Mohsen. Personal interview. 14 Apr. 2007.

5. Ramady, M.A. The Saudi Arabian Economy: Policies, Achievements and Challenges. New York: Springer, 2005.

6. Schlogl, Herwig. "Small and medium enterprises: Seizing the potential." OECD Observer. Jun. 2004: 1-4.

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