Friday Nov 07, 2025
Friday Nov 07, 2025
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There is a widespread perception among these enterprises themselves that this vital sector has been neglected, ignored or poorly served by the nation’s policymakers over the years
The question isn’t as absurd or as dramatic as it sounds. In fact, in the light of looming deadlines for Sri Lanka to start servicing its international debt in its own strength again, soon – 2028/9 isn’t a million light years away after all – it is quite pertinent and urgent.
All the more so because the tenuous tangent along which exports could shoot forex earnings into the stratosphere isn’t always immediately evident. And our island nation’s small and medium-sized enterprises may be closer to crash and burn than launch and dazzle than we dare think.
If current trends continue, small and medium-sized enterprises (SMEs) may collapse completely, once intimated Prof. Anil Jayanta, erstwhile Chairman of the NPP’s Economic Policy Committee.
It is the responsibility of a government to take small and medium-scale entrepreneurs to the international level, admitted Chaturanga Abeysinghe, one-time Executive Committee Member of the National People’s Power and now Deputy Minister of Industry and Entrepreneurship Development to boot.
SMEs are “the bedrock of Sri Lanka’s economy”. This has been the dominant thinking, as perhaps best captured by the ADB in its working paper on South Asian economies titled ‘Catalyzing Small and Medium-sized Venture Capital in Sri Lanka’ (Mar 2018). And the facts agree – SMEs comprise 75 percent of all active enterprises, providing 45 percent of employment and contributing 52 percent of gross domestic product (GDP).
However, there is a widespread perception among these enterprises themselves that this vital sector has been neglected, ignored or poorly served by the nation’s policymakers over the years.
Indeed, only an exceedingly minor and negligible percentage of small and medium businesses participate in earning foreign exchange through exporting their products and services, as painfully reflected in the Central Bank of Sri Lanka’s Annual Report of 2014 and pointedly reported in the Sage Journals piece headlined ‘Internationalization of SMEs in a Developing Economy: Empirical Evidence from SMEs in the Western Province, Sri Lanka’ (Oct 2023).
Our SMEs also argue that there are institutional obstacles as well as policy barriers, to increasing their value as forex earners, amongst other state sector shortcomings tantamount to governmental neglect of this vital sector. These pose the most insurmountable road blocks to their progress as well as stymie boosting Sri Lanka’s precious foreign exchange reserves through significant earnings.
The smallest entrepreneurs charge that there has long been an absence of meaningful and relevant policies that would help to boost Sri Lanka’s forex earnings through a more optimal operationalization of these SMEs on the international stage – a process referred to as ‘internationalization’ in the relevant documents.
A brief overview of this extant literature would perhaps be instructive to the country’s concerned policymakers.
The ‘5%’ road block
Academic research conducted recently by the University of Moratuwa’s (UoM) Business Unit indicates that there is an issue in this regard, “with exports accounting for barely 5% of total GDP contributions from SMEs, compared to over 90% in successful economies” (Dahanayake, 2022).
Citing “statements made by an SME advisor/coach [Bamunusinghe (2022)]”, the varsity white paper on the ‘Sustainability of Small and Medium Enterprises in Sri Lanka’ discusses “recent observations on the inadequate growth of SMEs on its contribution to GDP and employability rate in the country”, arguing that “there is an urgent need to increase SME GDP contribution”.
This is in a milieu where the potential to boost a more equitable trade balance and aid an only recently bankrupted state’s economic recovery on the road ahead is by no means insignificant.
That aspect is emphasized by the above university’s research: “The fact that they [SMEs] account for 90% of all enterprises in Sri Lanka and provide chances for employment that account for 45% of all jobs there demonstrates the critical role that SMEs play in fostering inclusive growth … Bamunusinghe (2022) further claimed that according to scholars, the nation wouldn’t be economically viable without at least 75% of GDP coming from the SME sector alone” (Dahanayake, 2022). And the author of that paper is unequivocal that “SME performance in Sri Lanka has often been dismal”.
Over the years, research has identified key aspects militating towards the underperformance of SMEs in Sri Lanka. These have included financial, regulatory and cost-related restraints (Levy, 1993, as noted in the World Bank Economic Review, Vol. 7 No. 1, pp.34-53).
And constraints impinging on the development of SMEs at both industrial and policymaking levels (Wickremasinghe, 2011, in the National Science Foundation’s Policy Research Division paper ‘The Status of SMEs in Sri Lanka and promoting their innovation output’ published in their TECH Monitor) suggest that the absence of specific or sharply focused policies are a substantial part of the problem of the low level of internationalization.
In shaping a conceptual framework as to what bedevils Sri Lanka’s SMEs, Dahanayake considered a gamut of research spanning 1993–2011 – and including findings of others, such as Aberathne (2005) and Hareshankar (2018) – to offer two hypotheses. One of which concerns us posits that there is “a significant impact of perceived political relations on sustainability of SMEs.”
The same UoM researcher concludes that “the government has a crucial role” vis-à-vis SMEs, and that “ministries related to SMEs and supportive organizations should work towards maintaining a protective, supportive and a sustainable environment”. Dahanayake asserts that “a transparent regulatory environment, effective bankruptcy regulation, and judicial system are vital for start-ups and SMEs”, recommending “Sri Lanka should mimic developed-world SME success stories if it wants to progress beyond middle-income status”.
Catalysing venture capital
The authors of a paper with great import to the topic at hand – Kulasinghe, Han, Hoshino, Rathi and Lambert – also argue in similar vein, asserting that “creating an environment conducive to economic growth is integral to achieving equitable economic growth in Sri Lanka” (ADB, 2023).
This paper – on the imperative nature of catalysing venture capital related to small and medium-sized enterprises in Sri Lanka – evaluates the viability of supporting the SME sector in the state by improving access to equity or risk capital.
While the paper doesn’t comment directly on prevailing policy directions as regards the island’s small and medium-sized enterprises, it highlights such a market-driven assessment of SMEs in general and SME finance in particular.
Its authors present “a recommendation for a government-initiated venture capital fund for SME enterprises in Sri Lanka” through an analysis of fund structuring considerations, and also by presenting documentation of international precedents.
An implication of this research’s findings is that such a government-initiated venture capital fund is lacking at present. And that its introduction by dint of newly minted state policies would militate in favour of a more practicable and expedient internationalization of the nation’s SMEs. Arguably targeted at boosting foreign exchange earnings.
Cf. Theories of Internationalization
It provides an interesting companion piece for reading alongside other research done by scholars at the Universities of Colombo (UoC) and Sri Jayawardenepura (UoSJ). These intimate that the theories and mechanisms for internationalizing Sri Lanka’s SMEs have managed to evade the attention of any policymakers as may be serious about the contribution that this sector could be making to the export equation.
Examining the connections and contrasts between 12 internationalization theories, Lakshman et al. argue in a 2021 UoSJ paper titled ‘Internationalisation of SMEs: Critical Review of Theories and Antecedents’ that existing internationalization-based literature and theories are insufficient to explain the internationalization of SMEs in developing countries.
They contend that these theories and models may not be sufficient to explain SME successes in developing and emerging markets, urging that Sri Lanka develop its own models and standards in pursuit of a unique SME success story (Lakshman, Kumarasinghe and Weerasinghe, 2021).
Of particular relevance to present policymakers as may be interested are these arguments:
These generalizations also lead Lakshman et al. to conclude [citing Vijayakumar (2013)] that “although the Sri Lankan government has taken several initiatives to promote small and medium businesses in particular, the impact on SMEs’ growth has been disappointing”. The impact on local SMEs’ contribution of dollars to state and treasury coffers can be demonstrably implied.
However, nowhere in their complex and theoretical analysis do these researchers offer any practical suggestions as to how Sri Lankan export earnings through SMEs could be boosted. Other than to propose an “integrated framework for SME internationalization”, which is conceptually fine-sounding but perhaps lacking in the practical gravitas that present policymakers may profitably pursue in the national interest.
[To be continued]
(Editor-at-large of LMD | A time to sow)
