7 Reasons Why Small Medium Enterprises Are Important for the Economy
Small medium enterprises (SMEs) are businesses that have fewer than 250 employees and an annual turnover of less than 50 million euros. They are the backbone of many economies, especially in developing countries, where they account for more than 90% of all businesses and provide employment for more than half of the workforce. In this article, we will explore what SMEs are, why they are important for the economy, and how they can overcome some of the challenges they face.
KEY TAKEAWAYS
SMEs are businesses that have fewer than 250 employees and an annual turnover of less than 50 million euros
SMEs are important for the economy because they create jobs, boost productivity, support local development, and enhance trade
SMEs face many challenges such as access to finance, markets, skills, and technology
SMEs can overcome these challenges by seeking external financing, enhancing market access, investing in skills development, and adopting new technologies
What are SMEs?
SMEs are defined differently by different countries and organizations, but generally they are businesses that have a small number of employees and a low level of revenue. They can operate in any sector, from manufacturing to services, and can be formal or informal. Some examples of SMEs are:
- A family-owned bakery that sells bread and pastries to the local community
- A software company that develops mobile applications for various clients
- A clothing store that sells locally made garments and accessories
- A consulting firm that offers advice and training to other businesses
- A travel agency that organizes tours and trips for tourists
Why are SMEs important for the economy?
SMEs play a vital role in the economy, contributing to economic growth, innovation, employment, social inclusion, and environmental sustainability. Here are some of the reasons why SMEs are important for the economy:
- They create jobs: SMEs are the main source of employment in many countries, especially for young people, women, and marginalized groups. They offer flexible and diverse opportunities for workers to develop their skills and earn income. According to the World Bank, SMEs generate about 70% of total employment in low-income countries and about 50% in high-income countries.
- They boost productivity: SMEs are often more efficient and innovative than larger firms, as they can adapt quickly to changing market conditions and customer needs. They also foster competition and stimulate technological progress, which leads to higher productivity and quality. According to the OECD, SMEs account for more than 50% of value added in most economies.
- They support local development: SMEs are usually rooted in their communities, where they provide goods and services that meet local demand and preferences. They also contribute to social cohesion and trust, as they create networks and relationships among customers, suppliers, partners, and stakeholders. They also support local development by paying taxes, investing in infrastructure, and participating in social and environmental initiatives.
- They enhance trade: SMEs are increasingly involved in international trade, either directly or indirectly through value chains. They can access new markets, customers, and opportunities by exporting their products or services or importing inputs or technology. They can also benefit from trade agreements, e-commerce platforms, and trade facilitation measures that reduce barriers and costs. According to the WTO, SMEs account for about 35% of direct exports and about 40% of indirect exports in developing countries.
What are some of the challenges faced by SMEs?
Despite their importance for the economy, SMEs face many challenges that limit their potential and performance. Some of the common challenges faced by SMEs are:
- Access to finance: SMEs often struggle to obtain adequate and affordable financing for their operations and growth. They may face high interest rates, collateral requirements, or bureaucratic procedures that deter them from applying for loans or grants. They may also lack financial literacy or management skills that affect their creditworthiness or profitability. According to the IFC, about 40% of formal SMEs in developing countries have unmet financing needs.
- Access to markets: SMEs may find it difficult to reach new customers or expand their market share due to various factors such as lack of information, marketing skills, or networks; low quality or standards; high transportation or transaction costs; or unfair competition from larger or foreign firms. They may also face trade barriers such as tariffs, quotas, or regulations that restrict their access to foreign markets or value chains.
- Access to skills: SMEs may face a shortage of qualified workers or managers who can perform various tasks such as production, accounting, sales, or innovation. They may also lack the resources or incentives to invest in training or education for their staff or themselves. They may also face difficulties in attracting or retaining talent due to low wages, poor working conditions, or limited career prospects.
- Access to technology: SMEs may lag behind in adopting or using new technologies that can improve their productivity, quality, or competitiveness. They may face high costs of acquiring or upgrading equipment, software, or infrastructure; lack of awareness or knowledge of available technologies; lack of technical support or maintenance; or lack of compatibility or interoperability with existing systems or standards.
How can SMEs overcome these challenges?
SMEs can overcome these challenges by taking advantage of various opportunities and resources that can help them improve their performance and growth. Some of the ways that SMEs can overcome these challenges are:
- Seek external financing: SMEs can explore various sources of external financing that can suit their needs and capacities, such as bank loans, microfinance, crowdfunding, angel investors, venture capital, or public funds. They can also improve their financial management and literacy skills, prepare business plans or proposals, and build relationships with financial institutions or intermediaries.
- Enhance market access: SMEs can enhance their market access by conducting market research, developing marketing strategies, improving quality and standards, diversifying products or services, joining networks or associations, or partnering with other firms. They can also take advantage of trade opportunities, such as trade agreements, e-commerce platforms, or trade facilitation measures, that can reduce barriers and costs and increase access to foreign markets or value chains.
- Invest in skills development: SMEs can invest in skills development by providing training or education for their staff or themselves, either internally or externally, on various topics such as production, accounting, sales, or innovation. They can also recruit or retain qualified workers or managers by offering competitive wages, benefits, or incentives; creating a positive work environment or culture; or providing career development or progression opportunities.
- Adopt new technologies: SMEs can adopt new technologies that can improve their productivity, quality, or competitiveness by acquiring or upgrading equipment, software, or infrastructure; seeking information or knowledge of available technologies; accessing technical support or maintenance; or ensuring compatibility or interoperability with existing systems or standards.
TIP
One of the most important tips for running a successful SME is to keep learning and improving. You should always seek new knowledge and skills that can help you enhance your products or services, increase your efficiency and effectiveness, reduce your costs and risks, expand your markets and customers, and create more value and impact.
What is Small Medium Enterprise?
Small medium enterprise (SME) is a term used to describe a range of businesses based on the number of employees or annual turnover. These enterprises represent the vast majority of businesses in many countries, employ millions of people, and are the engine of the economy. However, the definition of what constitutes an SME varies from one country to another, depending on the characteristics such as annual sales, number of employees, market capitalization, or industry.
Global Demand for SMEs
The global demand for SMEs is influenced by various factors, such as economic growth, consumer preferences, technological innovations, environmental regulations, and trade policies. Some of these factors may create opportunities for SMEs to expand their markets, increase their productivity, and improve their competitiveness. For example, the rise of e-commerce and digital platforms may enable SMEs to access new customers and suppliers, reduce transaction costs, and enhance their visibility. Similarly, the growing awareness of environmental and social issues may create a niche for SMEs that offer sustainable products and services, or that adopt responsible business practices.
Challenges and Opportunities for SMEs
However, some of these factors may also pose challenges for SMEs, such as increased competition, changing customer expectations, regulatory compliance, and skills gaps. For example, SMEs may face difficulties in accessing finance, technology, infrastructure, and human capital, especially in developing countries. Moreover, SMEs may lack the resources and capabilities to cope with market volatility, supply chain disruptions, cyberattacks, and other risks. Therefore, SMEs need to adopt strategies that can help them overcome these challenges and seize the opportunities in the global market. Some of these strategies include:
- Diversifying their products and services to meet the changing needs and preferences of customers
- Leveraging digital technologies to enhance their efficiency, innovation, and customer experience
- Collaborating with other SMEs or larger firms to access new markets, technologies, and resources
- Participating in trade associations or networks to gain information, advocacy, and support
- Seeking external assistance from governments, international organizations, or NGOs to access finance, training, or technical assistance
FREQUENTLY QUESTIONS
Q: What is the difference between SMEs and MSMEs?
A: SMEs and MSMEs are both terms used to describe small and medium-sized enterprises. However, MSMEs also include micro enterprises, which are businesses that have fewer than 10 employees and an annual turnover of less than 2 million euros.
Q: What are the benefits of being an SME?
A: Some of the benefits of being an SME are:
- Flexibility and agility: SMEs can adapt quickly to changing market conditions and customer needs
- Innovation and creativity: SMEs can experiment with new ideas and solutions
- Customer loyalty and satisfaction: SMEs can offer personalized and customized goods and services that meet customer demand and preferences
- Social responsibility and impact: SMEs can contribute to social cohesion and trust, as well as environmental sustainability
Q: What are the challenges of being an SME?
A: Some of the challenges of being an SME are:
- Limited resources and capacity: SMEs may lack adequate and affordable financing, skilled workers or managers, or advanced technologies
- Market competition and volatility: SMEs may face high costs of production or distribution, low quality or standards, or unfair competition from larger or foreign firms
- Regulatory compliance and complexity: SMEs may face high taxes, fees, or regulations that affect their operations or growth
Q: How can I start an SME?
A: To start an SME, you need to:
- Identify a business idea that solves a problem or meets a need
- Conduct a market analysis to assess the demand, supply, competition, and opportunities
- Develop a business plan that outlines your goals, strategies, resources, and risks
- Register your business with the relevant authorities and obtain the necessary licenses and permits
- Secure your financing from various sources such as bank loans, microfinance, crowdfunding, angel investors, venture capital, or public funds
- Set up your operations by acquiring or leasing your premises, equipment, software, or infrastructure
- Hire your staff by recruiting qualified workers or managers
- Launch your products or services by marketing them to your target customers
Q: How can I grow my SME?
A: To grow your SME, you need to:
- Monitor your performance by measuring your sales, profits, costs, customer satisfaction, etc.
- Evaluate your strengths and weaknesses by conducting a SWOT analysis
- Identify your opportunities and threats by scanning the external environment
- Set your objectives and targets by using SMART criteria
- Implement your action plans by allocating your resources and responsibilities
- Review your results and feedback by collecting data and information
- Adjust your plans and strategies by making changes or improvements
Reference:
http://www.iwim.uni-bremen.de/publikationen/pdf/b101.pdf
http://seaf.com/wp-content/uploads/2014/10/Defining-SMEs-September-20081.pdf
Essential Topics You Should Be Familiar With:
