Fri | Sep 22, 2017

Rosalea Hamilton & Vanus James | Asset growth for MSME job creation

Published:Thursday | July 28, 2016 | 7:00 AM

In his contribution to the 2016-17 Sectoral Debate, Industry, Commerce, Agriculture and Fisheries Minister Karl Samuda recognised as an imperative his "mandate to mobilise, harness and encourage the potential of the micro, small and medium-sized enterprises (MSMEs) through policy support". In pursuing this mandate, his ministry will review and update the 2013 MSME & Entrepreneurship Policy. This is an excellent initiative, especially if guided by micro data from MSMEs.

Recognising the importance of such data, Minister Samuda stated: "This sector is too important for us not to be able to properly characterise it and we can never hope to plan for the sector in the absence of a clear definition and information and data." In reviewing the policy, new information on the asset distribution of businesses in Jamaica, collected from the Scotiabank Enterprise-Wide Risk Management and Financing (SERMAF) project executed by the Scotiabank Chair in Entrepreneurship and Development at the University of Technology, Jamaica, during the period 2014 to 2015, is worth noting.

The SERMAF data enable an examination of the extent to which the amount of assets owned or controlled by the most efficient firms in Jamaica are limiting their capacity to expand, export, and create jobs. The first task is to identify the establishments that generate the highest productivity responses to growth of their capital-labour ratio. In order of performance, these are the establishments in the creative industries, including sports, which generate a 1.24 per cent growth of productivity for every two per cent growth of the capita-labour ratio; followed by the education-intensive sectors such as ICT, which generate a one per cent growth of productivity for each two per cent growth of the capital-labour ratio. Manufacturing ranks third, yielding a productivity response of 0.92 per cent to a two per cent growth of the capital-labour ratio. The leading groups of establishments feature a stable rate of profit on investment, are price-makers, not price-takers, and can mount a viable export response to grow their business and create jobs.

 

Top firms have little assets

 

Significantly, most of the leading establishments are MSMEs with small levels of assets. Firms in the creative sector report average assets of about $19.8 million, the smallest among all the sectorial groupings. This is followed by firms in the education and related services sectors with assets of about $21 million. By comparison, firms in the tourism-related sectors and manufacturing have average assets of $42 million and $63.4 million, respectively. So it appears that the establishments with the strongest productivity responses also possess the smallest average asset and, therefore, have the least capacity to effectively exploit their productivity advantages while creating jobs and exports.

 

Requires urgent attention

 

This is a matter for urgent national attention. For a robust response to market pressures to create jobs while expanding exports, this situation must be addressed by the financial system and by government policy. The MSMEs with the greatest productivity advantages must be facilitated to grow their assets. They must be more enabled to create new assets to put people to work while expanding their export markets. Specifically, the following policy initiatives are needed to enable these MSMEs to create jobs:

1. Improve access to credit or other financial inflows - related to this, there is need to more accurately measure assets, especially the intellectual property (IP) assets. These are being used but not adequately counted. This undercounting is hampering MSME's access to credit, especially since IP assets are now acceptable collateral for financial institutions under the new Security Interest in Personal Property Act (SIPA) legislation.

2. Improve evaluation of business risk and creditworthiness - this is the basis for the data collection effort in the SERMAF Project. The project enabled examination of other ways of evaluating business risk and hence creditworthiness in order to create access to credit to build up assets, especially among MSMEs. The SERMAF initiative has successfully demonstrated that some psychological predispositions of the owners of the establishments can positively impact the likelihood of making a profit and significantly lower the risk of loss. These predispositions relate to personality, opinions, attitudes, (latent) beliefs, moods and aptitudes. Taking into account the promise of strong productivity growth from growth in their capital-labour ratio, they can at least be used with asset collateral to assess whether to lend to an investment prospect to grow the capital-labour ratio.

In reviewing and updating the 2013 MSME & Entrepreneurship Policy, these policy initiatives should be considered.

- Prepared by Rosalea Hamilton, PhD and Vanus James, PhD, Scotiabank Chair, Entrepreneurship & Development, University of Technology. Email feedback to rhsermaf@gmail.com; scotiabankchair@gmail.com