7 Reasons Why SMEs Are Vital for the Global Economy
Small and medium-sized enterprises (SMEs) 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 generally, they are firms with fewer than 250 employees. SMEs play a crucial role in the global economy, contributing to innovation, employment, and growth. Here are seven reasons why SMEs are vital for the global economy.
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1. SMEs account for the majority of businesses worldwide.
According to the World Bank, more than 90% of all firms in the world are SMEs, and they generate up to 60% of total employment and up to 40% of national income in emerging economies. In the European Union, SMEs represent 99% of all businesses and employ two-thirds of the workforce. In the United States, SMEs account for nearly half of the private sector output and create two-thirds of net new jobs.
2. SMEs are engines of innovation and competitiveness.
SMEs are often more agile, flexible, and responsive to changing market conditions than larger firms. They can adapt quickly to customer needs, introduce new products and services, and adopt new technologies. SMEs also foster a culture of entrepreneurship and creativity, which stimulates innovation and competitiveness. According to the OECD, SMEs account for more than half of business R&D expenditure in several countries.
3. SMEs create opportunities for social inclusion and poverty reduction.
SMEs provide income and livelihood opportunities for millions of people around the world, especially in rural areas, low-income communities, and developing countries. SMEs can help reduce poverty by creating jobs, enhancing skills, increasing productivity, and generating income. SMEs can also promote social inclusion by empowering women, youth, minorities, and other marginalized groups to participate in economic activities.
4. SMEs contribute to environmental sustainability and climate action.
SMEs can play a key role in addressing environmental challenges and advancing climate action. SMEs can adopt green practices, such as reducing waste, saving energy, using renewable resources, and recycling materials. SMEs can also offer green products and services, such as organic food, eco-friendly fashion, clean energy, and waste management. By doing so, SMEs can reduce their environmental impact, improve their efficiency and competitiveness, and create new market opportunities.
5. SMEs support regional development and integration.
SMEs can help foster regional development and integration by creating linkages and networks among local actors, such as suppliers, customers, universities, research institutes, and public authorities. SMEs can also benefit from regional integration by accessing larger markets, lower trade barriers, better infrastructure, and more favorable policies. Regional integration can enhance the competitiveness and resilience of SMEs and enable them to scale up their operations.
6. SMEs enhance economic diversification and resilience.
SMEs can help diversify the economic structure and reduce dependence on a few sectors or products. SMEs can operate in various industries and niches, such as agriculture, manufacturing, services, tourism, and digital sectors. By doing so, SMEs can increase the variety and quality of goods and services available to consumers and businesses. SMEs can also enhance economic resilience by absorbing shocks and recovering from crises.
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7. SMEs benefit from various forms of support and assistance.
SMEs face many challenges and barriers that hinder their growth and development, such as lack of access to finance , skills , technology , markets , information , infrastructure , and regulatory frameworks . To overcome these challenges , many governments , international organizations , financial institutions , business associations , NGOs , and other stakeholders offer various forms of support and assistance to SMEs . These include :
- Providing loans , grants , guarantees , subsidies , tax incentives , and other financial instruments to improve access to finance for SMEs .
- Offering training , mentoring , coaching , consultancy , advisory , networking , matchmaking , incubation , acceleration , and other non-financial services to enhance skills , knowledge , capacity , innovation , productivity , quality , standards , certification , branding , marketing , export readiness , digitalization , etc.
- Developing policies , regulations , institutions , platforms , programs , initiatives , projects , partnerships , alliances , coalitions , etc., to create an enabling environment for SME development .
- Facilitating trade facilitation , market access , regional integration , cross-border cooperation , etc., to expand opportunities for SME participation in domestic and international markets .
- Supporting research , development , innovation , technology transfer , diffusion , adoption , etc., to foster technological advancement and competitiveness of SMEs .
- Promoting awareness raising, advocacy, dialogue, consultation, participation, representation, etc. to increase visibility and voice of SME interests.
SMEs: A Growing Sector in the Global Economy
SMEs, or small and medium-sized enterprises, are businesses that operate below a certain threshold in terms of revenue, assets, or number of employees. The definition of an SME varies by country and by international organization, but they are often considered as the backbone of the economy and a source of innovation and employment .
According to the European Union, SMEs represent 99% of all businesses in the EU and employ around 100 million people. They contribute to more than half of the total value-added created by businesses in the EU. In addition, they are responsible for 85% of net job creation .
The Impact of SMEs on Global Demand
SMEs play a vital role in meeting the global demand for goods and services, especially in emerging markets and developing countries. They provide access to local markets, create linkages with larger firms, and foster entrepreneurship and social inclusion. They also adapt to changing consumer preferences and environmental challenges .
However, SMEs also face many challenges in competing in the global market, such as access to finance, skills, technology, and innovation. They may also suffer from regulatory barriers, unfair competition, and market failures. Therefore, SMEs need support from governments, international organizations, and other stakeholders to overcome these obstacles and enhance their competitiveness and sustainability.
Some of the initiatives that aim to support SMEs include the Small Business Act for Europe, which provides a comprehensive policy framework for SMEs in the EU; the World Bank Group’s SME Finance Forum, which facilitates knowledge sharing and best practices on SME finance; and the United Nations’ Global Compact, which encourages SMEs to adopt responsible business practices and contribute to the Sustainable Development Goals .
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