SMEs Output and GDP Growth: A Dynamic Perspective

In the contemporary era, the sector of SMEs has been considered essential for achieving macroeconomic objectives such as employment creation, poverty reduction and economic growth. Hence, SMEs have an ample and untapped potential to contribute in economic growth though enhancing entrepreneurial skills and indigenous technology. The contribution of SMEs sector to economic growth is thus a principle component in raising the internal efficiency of the resources. This study endeavors to find out the potential role of SME’s output in GDP growth for Pakistan considering some macroeconomic variables. While using data from 1980 to 2017, ARDL bound testing approach has been used to incorporate the dynamic perspective in the study. In model estimation, the GDP growth rate has been taken as a dependent variable, whereas, output of small sale industry, unemployment rate, government expenditure, interest rate, domestic investment, foreign direct investment and finance provided by banks to private sector have been included as independent variables. The estimation findings of dynamic model confirmed the direct and significant association between output of SMEs and GDP growth in Pakistan. However; the sector still requires a policy design to overcome the problems of the sector in war-footing grounds. These policies require a pro-active strategy that can cater more growth of the economy through progress of SMEs. In this regard, the strengthening and elevation of potential output of SMEs, made in Pakistan, tentative policy plan for Industry 4.0; and the distribution of SMEs in remote areas are the relevant recommended policy initiatives.