7 Reasons Why SMEs Are Vital for Economic Growth

SMEs, or small and medium-sized enterprises, are businesses that have revenues, assets, or a number of employees below a certain threshold. Each country has its own definition of what constitutes an SME, but they are usually the most common type of businesses in any economy. In this article, we will explore some of the reasons why SMEs are vital for economic growth and development.

Key Takeaways

SMEs are businesses that have revenues, assets, or employees below a certain threshold.

SMEs are vital for economic growth and development because they create jobs, foster innovation, contribute to social inclusion, support environmental sustainability , facilitate regional integration , stimulate entrepreneurship , and enhance resilience .

SMEs face various challenges such as lack of access to finance , markets , technology , skills , information , infrastructure , legal protection , regulation , taxation , competition , innovation , quality standards , etc.

SMEs can benefit from various sources of support such as favorable policies and incentives from governments , finance from banks and other institutions , technology from providers and partners , skills from training and mentoring programs , information from networks and associations , infrastructure from public and private sectors , legal protection from laws and courts , regulation from standards and certifications , taxation from exemptions and deductions , competition from fair and transparent rules , innovation from research and development funds , quality standards from accreditation and recognition bodies , etc.

SMEs can offer benefits for consumers such as lower prices , higher quality , more variety , more customization , more convenience , more responsiveness , more social responsibility , etc.

1. SMEs create jobs and reduce unemployment

SMEs are often more labor-intensive than large firms, meaning they employ more people per unit of output. They also tend to hire locally, providing opportunities for low-skilled and marginalized workers. According to the World Bank, SMEs account for about 90% of total employment in developing countries and 50-60% in developed ones.

2. SMEs foster innovation and competitiveness

SMEs are usually more flexible and adaptable than large firms, allowing them to respond quickly to changing market conditions and customer preferences. They also face more competition from other SMEs, which encourages them to improve their products and services, lower their costs, and increase their efficiency. SMEs are also a source of innovation, as they often introduce new ideas, technologies, and business models to the market.

3. SMEs contribute to social inclusion and cohesion

SMEs are often owned and managed by local entrepreneurs who have a stake in the well-being of their communities. They tend to reinvest their profits locally, supporting other local businesses and services. They also pay taxes and fees to local governments, helping to finance public goods and infrastructure. Moreover, SMEs can promote social inclusion and cohesion by providing opportunities for women, youth, ethnic minorities, and other disadvantaged groups to participate in the economy.

4. SMEs support environmental sustainability

SMEs are usually more aware of and responsive to the environmental impacts of their activities than large firms. They can adopt greener practices and technologies more easily, reducing their energy consumption, waste generation, and greenhouse gas emissions. They can also offer green products and services that meet the growing demand for environmental solutions from consumers and governments.

5. SMEs facilitate regional integration and trade

SMEs can benefit from regional integration and trade by accessing larger and more diversified markets, lowering their production costs, and increasing their productivity. They can also contribute to regional integration and trade by enhancing cross-border cooperation, knowledge sharing, and cultural exchange among SMEs from different countries.

6. SMEs stimulate entrepreneurship and human capital development

SMEs provide opportunities for individuals to start and grow their own businesses, developing their entrepreneurial skills and mindset. They also provide training and learning opportunities for their employees, enhancing their human capital and employability. Furthermore, SMEs can inspire other potential entrepreneurs to follow their example, creating a culture of entrepreneurship in society.

7. SMEs enhance resilience and stability

SMEs can help mitigate the effects of economic shocks and crises by providing alternative sources of income and employment for affected populations. They can also help prevent or reduce social unrest and conflict by addressing the root causes of poverty, inequality, and exclusion. Additionally, SMEs can help rebuild post-conflict or post-disaster areas by restoring economic activity and social cohesion.

Tips

To start an SME, you need to have a clear vision, a viable business idea, a market research, a business plan, a legal structure, a registration, a license, a bank account, a funding source, etc.

To grow an SME, you need to have a competitive advantage, a customer focus, a marketing strategy, a sales plan, a financial management, a human resource management, a operational management, a risk management, etc.

To succeed as an SME, you need to have a passion, a commitment, a perseverance, a creativity, a innovation, a learning attitude, a problem-solving skill, a leadership skill, etc.

What is the definition of SME?

SME stands for small and medium-sized enterprise, a term that refers to businesses that have revenues, assets, or a number of employees below a certain threshold. The exact criteria for defining an SME vary by country and industry, but generally, they are businesses that are neither very small nor very large. SMEs play an important role in the economy, as they employ many people and contribute to innovation and competition.

Global demand for SMEs

According to the World Bank, SMEs account for about 90% of businesses and more than 50% of employment worldwide. They also generate up to 40% of national income in emerging economies. However, SMEs face many challenges, such as access to finance, markets, technology, skills, and regulations. The COVID-19 pandemic has also severely affected the survival and growth of SMEs, especially in sectors such as tourism, hospitality, retail, and transportation.

The global demand for SMEs depends on various factors, such as the level of economic development, the degree of market openness, the availability of infrastructure and support services, the quality of governance and institutions, and the resilience to shocks and crises. Some regions, such as East Asia and Pacific, have a higher share of SMEs in their economies than others, such as Sub-Saharan Africa and Middle East and North Africa. The demand for SMEs also varies by sector, with some sectors having more opportunities for SMEs than others.

Some of the trends that affect the global demand for SMEs are:

Digitalization

The adoption of digital technologies can help SMEs improve their productivity, efficiency, innovation, and competitiveness. It can also enable them to access new markets, customers, suppliers, and partners. However, digitalization also poses challenges for SMEs, such as cybersecurity risks, skills gaps, regulatory barriers, and digital divides.

Globalization

The integration of markets and trade can offer new opportunities for SMEs to expand their horizons and diversify their sources of income. It can also expose them to more competition and higher standards. However, globalization also creates risks for SMEs, such as trade disputes, protectionism, currency fluctuations, and supply chain disruptions.

Sustainability

The transition to a low-carbon and circular economy can create new niches and demands for SMEs that offer green products and services. It can also help them reduce their environmental impact and costs. However, sustainability also requires SMEs to adapt to changing consumer preferences, regulations, and technologies.

Frequently Asked Questions:

Q1: What is the difference between an SME and a SOHO?

A: A SOHO is a small office/home office that has fewer than 10 employees, while an SME is a small or medium-sized enterprise that has more than 10 but less than a certain threshold of employees.

Q2: How can SMEs access finance?

A: SMEs can access finance from various sources, such as banks, microfinance institutions, angel investors, venture capitalists, crowdfunding platforms, government programs, or trade credit.

Q3: What are the challenges faced by SMEs?

A: Some of the challenges faced by SMEs include lack of access to finance, markets, technology, skills, information, infrastructure, legal protection, regulation, taxation, competition, innovation, quality standards, etc.

Q4: How can governments support SMEs?

A: Governments can support SMEs by providing favorable policies and incentives such as tax breaks, subsidies, grants, loans guarantees , simplified procedures , reduced fees , public procurement , technical assistance , training , mentoring , networking , etc.

Q5: What are the benefits of SMEs for consumers?

A: SMEs can offer benefits for consumers such as lower prices, higher quality, more variety, more customization, more convenience, more responsiveness, more social responsibility, etc.

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://www.enterprisesurveys.org/~/media/GIAWB/EnterpriseSurveys/Documents/ResearchPapers/SMEs-age-and-jobs.pdf

http://seaf.com/wp-content/uploads/2014/10/Defining-SMEs-September-20081.pdf

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

https://en.wikipedia.org/wiki/Small_and_medium-sized_enterprises

https://www.worldbank.org/en/topic/smefinance

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

https://dictionary.cambridge.org/us/dictionary/english/sme