7 Types of SMEs and How to Classify Them
SMEs, or small and medium-sized enterprises, are businesses that have a certain number of employees, turnover, or balance sheet total. They are important for the economy, as they provide jobs, innovation, and growth. But how can we classify SMEs into different types? In this article, we will explore the classification of SMEs based on various criteria, such as sector, size, ownership, location, and export orientation. We will also discuss the benefits and challenges of each type of SME.
Classification by Sector
One way to classify SMEs is by the sector they operate in. There are three main sectors: primary, secondary, and tertiary. Primary sector SMEs are involved in extracting natural resources, such as agriculture, mining, or fishing. Secondary sector SMEs are involved in transforming raw materials into finished products, such as manufacturing, construction, or utilities. Tertiary sector SMEs are involved in providing services to consumers or other businesses, such as retail, education, or health care.
The sector of an SME can affect its performance, opportunities, and risks. For example, primary sector SMEs may face challenges such as weather conditions, environmental regulations, or price fluctuations. Secondary sector SMEs may face challenges such as competition from low-cost countries, technological changes, or quality standards. Tertiary sector SMEs may face challenges such as customer satisfaction, service quality, or legal compliance.
Classification by Size
Another way to classify SMEs is by their size. There are different definitions of what constitutes an SME in different countries or regions, but a common one is based on the number of employees, turnover, or balance sheet total. According to the European Commission, an SME is a business that has:
– Less than 250 employees
– A turnover of less than 50 million euros or a balance sheet total of less than 43 million euros
Based on these criteria, SMEs can be further divided into micro, small, and medium enterprises. A micro enterprise has:
– Less than 10 employees
– A turnover or balance sheet total of less than 2 million euros
A small enterprise has:
– Less than 50 employees
– A turnover or balance sheet total of less than 10 million euros
A medium enterprise has:
– Less than 250 employees
– A turnover of less than 50 million euros or a balance sheet total of less than 43 million euros
The size of an SME can affect its competitiveness, productivity, and innovation. For example, micro enterprises may have advantages such as flexibility, adaptability, and customer loyalty. Small enterprises may have advantages such as specialization, niche markets, and creativity. Medium enterprises may have advantages such as economies of scale, market share, and diversification.
Classification by Ownership
A third way to classify SMEs is by their ownership structure. There are different types of ownership structures for SMEs, such as sole proprietorship, partnership, corporation, cooperative, or social enterprise. A sole proprietorship is a business owned and run by one person. A partnership is a business owned and run by two or more people who share the profits and liabilities. A corporation is a business that is legally separate from its owners and has shareholders who own shares of the company. A cooperative is a business that is owned and run by its members who share the benefits and responsibilities. A social enterprise is a business that has a social or environmental mission as well as a financial objective.
The ownership structure of an SME can affect its governance, financing, and social impact. For example, sole proprietorships may have advantages such as simplicity, autonomy, and tax benefits. Partnerships may have advantages such as shared resources, expertise, and risk.
Corporations may have advantages such as limited liability, access to capital, and professional management. Cooperatives may have advantages such as democratic participation, mutual support, and social responsibility. Social enterprises may have advantages such as social value creation, stakeholder engagement, and market differentiation.
Classification by Location
A fourth way to classify SMEs is by their location. There are different types of locations for SMEs, such as urban, rural, or remote. Urban SMEs are located in cities or towns with high population density and economic activity. Rural SMEs are located in areas with low population density and agricultural activity. Remote SMEs are located in areas with very low population density and limited access to infrastructure and services.
The location of an SME can affect its market access, cost structure, and human capital. For example, urban SMEs may have advantages such as large customer base, diverse suppliers, and skilled workforce. Rural SMEs may have advantages such as local demand, low rent, and loyal employees. Remote SMEs may have advantages such as niche markets, low competition, and community support.
Classification by Export Orientation
A fifth way to classify SMEs is by their export orientation. There are different levels of export orientation for SMEs, such as non-exporter, occasional exporter, regular exporter, or born global. Non-exporters are SMEs that do not sell their products or services outside their domestic market. Occasional exporters are SMEs that sell their products or services outside their domestic market sporadically or opportunistically. Regular exporters are SMEs that sell their products or services outside their domestic market consistently or strategically.
Born globals are SMEs that sell their products or services outside their domestic market from their inception or shortly after.
The export orientation of an SME can affect its growth potential, competitive advantage, and risk exposure. For example, non-exporters may have advantages such as low complexity, high control, and stable income. Occasional exporters may have advantages such as market diversification, customer feedback, and learning opportunities. Regular exporters may have advantages such as market expansion, brand recognition, and innovation capabilities. Born globals may have advantages such as global vision, networking, and agility.
SMEs are diverse and dynamic businesses that can be classified into different types based on various criteria. By understanding the classification of SMEs, we can better appreciate their strengths, weaknesses, opportunities, and threats. We can also design more effective policies, programs, and support systems to help SMEs thrive in the global economy.
Classification of SMEs
Small and medium-sized enterprises (SMEs) are businesses that have a certain number of employees, revenues, or assets below a certain threshold. The definition of SMEs varies by region and industry, but some common criteria are:
– In the US, SMEs are companies with assets of $10 million or less, while large businesses have over $10 million in assets.
– In Europe, SMEs are companies with up to 250 employees, divided into micro-enterprises (up to 10 employees), small enterprises (up to 50 employees), and medium-sized enterprises (up to 250 employees).
– In Malaysia, SMEs are firms with sales turnover not exceeding RM20 million or number of full-time employees not exceeding 75.
SMEs represent a significant share of the global economy and employment. According to the World Bank, SMEs account for about 90% of all firms and 50% of employment worldwide. SMEs are also responsible for driving innovation and competition in many economic sectors.
Global Demand for SMEs
The global demand for SMEs is influenced by various factors, such as economic growth, market opportunities, consumer preferences, technological changes, and policy support. Some of the trends that affect the demand for SMEs are:
– The rise of digital platforms and e-commerce, which enable SMEs to access new markets, customers, and suppliers online. According to a report by McKinsey, digital platforms could increase the GDP contribution of SMEs by $3.7 trillion by 2025.
– The increasing demand for green and sustainable products and services, which create new opportunities for SMEs to offer innovative solutions that address environmental and social challenges. According to a report by IFC, green SMEs could generate $4.4 trillion in annual revenue by 2030.
– The growing importance of social and creative industries, which rely on the skills, talents, and diversity of SMEs to produce cultural goods and services that enrich people’s lives. According to a report by UNESCO, cultural and creative industries contribute $2.25 trillion to the global economy and employ 29.5 million people.
These trends suggest that SMEs have a high potential to contribute to the global economic development and social well-being. However, SMEs also face many challenges, such as access to finance, skills, technology, infrastructure, and regulatory frameworks. Therefore, it is important to support SMEs with appropriate policies and programs that enhance their competitiveness and resilience.
References:
http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_user_guide_en.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://single-market-economy.ec.europa.eu/smes/sme-definition_en
https://www.smecorp.gov.my/index.php/en/policies/2020-02-11-08-01-24/sme-definition
https://en.wikipedia.org/wiki/Small_and_medium-sized_enterprises
https://en.unesco.org/creativity/sites/creativity/files/cis2015_en.pdf
https://ec.europa.eu/growth/smes/sme-definition_en
https://www.oecd.org/cfe/smes/Enhancing-SME-Policy-Coherence-through-Better-Measurement.pdf
https://www.worldbank.org/en/topic/smefinance
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