Abstract
The study reviews the government SME development programs of Sri Lanka in the lens of transaction cost economics in order to understand whether they facilitate the development of a favourable transaction environment for SMEs to govern their transaction cost in an economizing manner. Data were collected from the national development plan, strategic plans of the cabinet ministries, which are responsible for the development of SMEs and other publications related to the government national level SME development programs. The study mainly analyses the activities of each SME development program being currently implemented by the Sri Lankan government, employing qualitative content analysis to understand whether they facilitate to access information and to select appropriate governance mechanism. The study recognized that SME development programs of Sri Lanka do not positively contribute to develop a favourable transaction environment for SMEs. The government SME development programs do not facilitate SMEs to access sufficient and reliable information which lead to make more rational decision, to safeguard transactions from opportunism and to select suitable governance mechanism. SME development programs have neglected in supporting formal governance; instead, they encourage relational governance to some extent only for selected SMEs. As a result, there is a high possibility that SMEs in Sri Lanka have a greater transaction cost which averts the growth of SMEs. Therefore, SME development programs need to focus their attention to develop a favourable transaction environment for SMEs providing reliable information which facilitate to make more rational decisions avoiding opportunism on the one hand and to select better governance structure on the other in order to accelerate the growth of SMEs in Sri Lanka.Sabaragamuwa University Journal Vol.13(2) December 2014; 59-81
Highlights
Small and Medium Enterprises (SMEs) are regarded as one of the main driving forces of economic development of all economies because they generate new Sabaragamuwa University Journal 2014, V. 13 NO. 2 pp 59-81 employments, introduce new business methods and products, reduce poverty, inflation and income inequality and solve the balance of payment problem (Prasad, Tata and Guo, 2012; Singh, Garg and Deshmukh, 2010; Tambunan, 2008; Zeinalnezhad, Mukhtar and Sahran, 2011).SMEs are considered as the backbone of economic development of a country (Fatoki, 2011; Malik and Nilakant, 2011; Najib and Kiminami, 2011).Recognizing the important of the development of SMEs, all the successive governments after the independence1, have devoted their attention towards the development of SMEs in Sri Lanka (Central Bank of Sri Lanka, 1998; Vijayakumar, 2013)
Under the liberalized policy regime introduced in 1977, the role of SMEs has been recognized in view of its export potential, ability to provide raw materials to the large firms, capabilities to produce under the sub contraction system and capacity to take the production process to rural areas (Central Bank of Sri Lanka, 1998)
Items related to the development of dynamic transaction environment to access sufficient and reliable information consist with the provision of information about exchange partners, current prices of both inputs and outputs, product quality and techniques have been employed to review transaction environment to access sufficient information (Bijman, Ton, and Meijerink, 2007; Joskow, 1985, 1990; Klein, 1988; Williamson, 1979b)
Summary
Small and Medium Enterprises (SMEs) are regarded as one of the main driving forces of economic development of all economies because they generate new Sabaragamuwa University Journal 2014, V. 13 NO. 2 pp 59-81 employments, introduce new business methods and products, reduce poverty, inflation and income inequality and solve the balance of payment problem (Prasad, Tata and Guo, 2012; Singh, Garg and Deshmukh, 2010; Tambunan, 2008; Zeinalnezhad, Mukhtar and Sahran, 2011).SMEs are considered as the backbone of economic development of a country (Fatoki, 2011; Malik and Nilakant, 2011; Najib and Kiminami, 2011).Recognizing the important of the development of SMEs, all the successive governments after the independence, have devoted their attention towards the development of SMEs in Sri Lanka (Central Bank of Sri Lanka, 1998; Vijayakumar, 2013). Governments, elected in 19562 and 19603 , provided various facilities for the development of rural SMEs to generate employment opportunities under the Import Substitution Industrial Policy (Karunaratne, 1973). In the Five-Year Development Plan (1972 –1977), the SME sector was accorded priority in the development policy with the objective of saving foreign exchange, creating new employment opportunities and distributing industries in rural areas of Sri Lank (Central Bank of Sri Lanka, 1998). The government policies in 1989 and in 1995 recognized the importance of SME sector as a vehicle for broad based industrialization, employment generation and poverty reduction (Central Bank of Sri Lanka, 1998)
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