Obstacles for the Growth and Development of Small and Medium Enterprises in Sri Lanka: Case of North Western Province

Abstract

The backbone of the Sri Lankan economy is formed by Small and Medium Enterprises (SMEs) which is an essential component in a competitive and efficient market. New SMEs’ role in the economy is vital as it addresses the issues of sustainable development; job creation, economic growth, competitive market pressure and the overall stimulation of the country’s economy. SME failure rate in Sri Lanka is quite as high as 45%. Therefore, the primary objective of this study was to examine both internal and external organizational factors which are acting as obstacles for the growth of new SMEs in Sri Lanka. Thirty four major variables were identified as obstacles through Focus Group Discussions and literature review. Principal Component analysis (PCA) with Varimax Rotation was used to reduce the identified variables into five components. The most perceived obstacle was termed as Finance which is largely internal to the firm with an Eigen value of 8.17 and a percentage variance of 24%, while the other obstacles determined by PCA were Management (internal), Market (external), Infrastructure (external) and Economic (external) in descending order. The PCA has emphasized the stringency of providing collaterals/guarantees to obtain bank loans as the most impeding obstacle for the growth of new SMEs in Sri Lanka. Therefore, the study suggests that it is needed to revisit the micro finance accessibility of SMEs in the North Western Province (NWP) and to support them in formulating effective financial management plans within their early years from the inception to avoid failures.