7 Reasons Why SMEs Are Vital for Economic Growth

SMEs, or small and medium-sized enterprises, are businesses that have fewer than 250 employees and a certain level of annual turnover or balance sheet total. SMEs are the backbone of the global economy, accounting for more than 90% of all businesses and employing more than half of the global workforce. But what makes SMEs so important for economic growth? Here are seven reasons:

Key Takeaways

SMEs are businesses that have fewer than 250 employees and a certain level of annual turnover or balance sheet total.

SMEs are the backbone of the global economy, accounting for more than 90% of all businesses and employing more than half of the global workforce.

SMEs are important for economic growth because they create jobs , foster innovation , contribute to sustainability , enhance trade , stimulate entrepreneurship , support inclusive growth , and enable digital transformation .

1. SMEs create jobs and reduce unemployment

SMEs are often the main source of employment opportunities, especially for young people, women, and low-skilled workers. SMEs can provide flexible and diverse work arrangements, such as part-time, temporary, or seasonal jobs, that suit the needs and preferences of different workers. SMEs also tend to hire locally, which reduces migration and urbanization pressures.

2. SMEs foster innovation and competitiveness

SMEs are more agile and adaptable than large firms, which enables them to respond quickly to changing market conditions and customer demands. SMEs are also more likely to experiment with new ideas, products, services, processes, or business models, which can lead to breakthrough innovations and competitive advantages. SMEs can also collaborate with other firms, universities, research institutes, or customers to access new knowledge and technologies.

3. SMEs contribute to social and environmental sustainability

SMEs are often rooted in their communities and have a strong sense of social responsibility. SMEs can support local development by providing goods and services that meet the needs and preferences of local customers, by paying taxes and contributing to public services, by supporting local charities and social causes, and by creating a sense of belonging and identity among their employees and customers. SMEs can also adopt environmentally friendly practices, such as reducing waste, saving energy, using renewable resources, or recycling materials.

4. SMEs enhance trade and market integration

SMEs can participate in global value chains (GVCs), which are networks of interconnected firms that produce goods and services across borders. GVCs can offer SMEs access to new markets, customers, suppliers, technologies, skills, and financing. GVCs can also help SMEs improve their productivity, quality, efficiency, and competitiveness. SMEs can also benefit from regional integration initiatives, such as free trade agreements (FTAs), which can reduce trade barriers and facilitate cross-border transactions.

5. SMEs stimulate entrepreneurship and economic diversification

SMEs are the result of entrepreneurial activity, which is the process of identifying and exploiting opportunities in the market. Entrepreneurship can foster a culture of innovation, risk-taking, creativity, and problem-solving among individuals and society. Entrepreneurship can also lead to economic diversification, which is the expansion of the range and variety of products and services produced in an economy. Economic diversification can reduce dependence on a few sectors or commodities, increase resilience to shocks, and generate new sources of growth.

6. SMEs support inclusive growth and poverty reduction

SMEs can promote inclusive growth, which is growth that benefits all segments of society, especially the poor and marginalized groups. SMEs can increase income levels and living standards for their owners, employees, suppliers, and customers. SMEs can also reduce income inequality by creating more equal opportunities for wealth creation and distribution. SMEs can also empower women, minorities, youth, rural dwellers, and other disadvantaged groups by providing them with access to employment, education, training, finance, markets, and networks.

7. SMEs enable digital transformation and resilience

SMEs can leverage digital technologies , such as the internet , mobile devices , cloud computing , big data , artificial intelligence , or blockchain , to enhance their performance and competitiveness . Digital technologies can help SMEs improve their productivity , quality , efficiency , innovation , customer satisfaction , and profitability . Digital technologies can also help SMEs overcome challenges , such as distance , isolation , infrastructure gaps , regulatory barriers , or market failures . Digital technologies can also help SMEs cope with crises , such as the COVID-19 pandemic , by enabling them to continue their operations remotely , reach new customers online , access digital services , or adopt digital solutions .

Tips

Keep up with the latest trends and developments in your industry and market.

Seek feedback from your customers and stakeholders and use it to improve your products and services.

Collaborate with other SMEs, large firms, universities, research institutes, or customers to access new knowledge and technologies.

Invest in your human capital by providing training and development opportunities for your employees.

Use digital technologies to enhance your performance and competitiveness.

What is the SME?

SME stands for small and medium-sized enterprise, a term that refers to businesses that have a certain number of employees, annual turnover, or balance sheet total. The exact definition of an SME varies from country to country, but generally, it is a business that employs fewer than 250 workers and has an annual turnover of no more than 50 million euros or a balance sheet total of no more than 43 million euros.

Global Demand for SMEs

SMEs play a vital role in the global economy, as they account for the majority of businesses, employment, and innovation in most countries. According to the World Bank, SMEs represent about 90% of businesses and more than 50% of employment worldwide. SMEs are also important drivers of economic growth, poverty reduction, and social inclusion.

However, SMEs face many challenges in accessing markets, finance, technology, skills, and infrastructure. These challenges are exacerbated by the COVID-19 pandemic, which has disrupted supply chains, reduced consumer demand, and increased uncertainty. According to the International Trade Centre (ITC), the pandemic has affected SMEs more severely than large firms, especially in developing countries.

To support SMEs in coping with the crisis and recovering from its impacts, governments, international organizations, and private sector actors have launched various initiatives and programs. Some examples are:

The G20 Action Plan on COVID-19, which includes measures to provide liquidity support, debt relief, and trade facilitation for SMEs.
The ITC’s COVID-19 Business Impact Survey, which collects data on how SMEs are affected by the pandemic and provides recommendations for policy interventions.
The World Bank’s Fast Track COVID-19 Facility, which provides financing and technical assistance to help SMEs maintain operations and jobs.
The European Commission’s Coronavirus Response Investment Initiative, which mobilizes funds to support SMEs in sectors most affected by the pandemic.

Frequently Asked Questions:

Q1: What is the difference between an SME and a startup?
A: An SME is an established business that has been operating for a certain period of time and has a stable market position. A startup is a new business that is in the early stages of development and has a high potential for growth and innovation.

Q2: How can SMEs access finance?
A: SMEs can access finance from various sources, such as banks, microfinance institutions, venture capitalists, angel investors, crowdfunding platforms, government programs, or development agencies.

Q3: What are the main challenges faced by SMEs?
A: SMEs face many challenges, such as lack of access to finance, markets, skills, technology, infrastructure, information, or networks. SMEs also face high costs of doing business, regulatory burdens, tax issues, competition from large firms, or external shocks.

Q4: How can SMEs improve their competitiveness?
A: SMEs can improve their competitiveness by adopting best practices, such as improving their quality, efficiency, innovation, customer satisfaction, and profitability. SMEs can also leverage their strengths, such as their flexibility, adaptability, responsiveness, and niche focus.

Q5: How can SMEs benefit from digital technologies?
A: Digital technologies can help SMEs improve their performance and competitiveness by enabling them to improve their productivity , quality , efficiency , innovation , customer satisfaction , and profitability . Digital technologies can also help SMEs overcome challenges , such as distance , isolation , infrastructure gaps , regulatory barriers , or market failures . Digital technologies can also help SMEs cope with crises , such as the COVID-19 pandemic , by enabling them to continue their operations remotely , reach new customers online , access digital services , or adopt digital solutions .

References:

http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_user_guide_en.pdf

http://www.iwim.uni-bremen.de/publikationen/pdf/b101.pdf

https://marketbusinessnews.com/financial-glossary/sme-definition/
https://www.worldbank.org/en/topic/smefinance
https://www.intracen.org/covid19/
https://g20.org/en/media/Documents/G20_Action_Plan_on_COVID-19.pdf
https://www.worldbank.org/en/news/press-release/2020/04/02/world-bank-group-launches-first-operations-for-covid-19-coronavirus-emergency-health-support-strengthening-developing-country-responses
https://ec.europa.eu/regional_policy/en/newsroom/coronavirus-response/

https://corporatefinanceinstitute.com/resources/accounting/small-and-medium-sized-enterprises-smes/

https://www.investopedia.com/terms/s/smallandmidsizeenterprises.asp