7 Reasons Why SMEs Are Important for the Economy
Small and medium-sized 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 jobs for over 60% of the workforce. But what makes SMEs so important for the economy? Here are seven reasons:
Key Takeaways
SMEs are important for the economy because they create jobs, foster innovation, support diversification, enhance social cohesion, facilitate trade, stimulate local development, and leverage digital technologies.
SMEs face many challenges, such as access to finance, markets, skills, technology, infrastructure, regulation, taxation, competition, corruption, informality.
SMEs can overcome these challenges by improving their management practices, innovation capabilities, digital skills, quality standards, networking, advocacy, partnerships, formalization.
Governments can support SMEs by providing financial incentives, subsidies, guarantees, grants, loans, tax breaks, simplifying regulations, procedures, fees, reducing barriers to entry, exit, trade, enhancing public services, infrastructure, security, education, health.
SMEs can benefit from the COVID-19 recovery by seizing new opportunities, markets, niches, customers adapting to new consumer preferences behaviors demands embracing digital transformation e-commerce remote work learning accessing new sources of finance support relief assistance.
1. SMEs create jobs and reduce poverty.
SMEs are often the main source of employment and income for many people, especially in rural areas and informal sectors. They offer opportunities for entrepreneurship, innovation, and social mobility. By creating jobs and income, SMEs help reduce poverty and inequality, and improve the living standards of millions of people.
2. SMEs foster innovation and competitiveness.
SMEs are more flexible and adaptable than larger firms and can respond quickly to changing market conditions and customer needs. They can also experiment with new ideas, technologies, and business models, and introduce them to the market faster than larger firms. By doing so, SMEs foster innovation and competitiveness, and contribute to the development of new products, services, and industries.
3. SMEs support economic diversification and resilience.
SMEs operate in a wide range of sectors and industries and provide a variety of goods and services to different markets. They help diversify the economic base and reduce the dependence on a few sectors or products. They also help buffer the economy from external shocks, such as natural disasters, trade wars, or pandemics, by providing alternative sources of income and employment.
4. SMEs enhance social cohesion and stability.
SMEs are often rooted in local communities and cultures and reflect the values and aspirations of their owners and employees. They help strengthen social ties and networks and promote trust and cooperation among different groups of people. They also help address social challenges, such as environmental protection, gender equality, or youth empowerment, by providing solutions that are tailored to local needs and contexts.
5. SMEs facilitate trade and integration.
SMEs are increasingly involved in international trade, either directly or indirectly, through global value chains or e-commerce platforms. They help expand the market access and opportunities for domestic producers and consumers and increase the variety and quality of goods and services available. They also help integrate the economy into regional and global markets and enhance its exposure to best practices and standards.
6. SMEs stimulate local development and growth.
SMEs are often located in rural areas or peripheral regions, where they provide essential goods and services to local populations. They help improve the infrastructure and connectivity of these areas and attract investments and resources from other sectors or regions. They also help generate tax revenues and savings for local governments, which can be used to finance public goods and services, such as education, health, or security.
7. SMEs leverage digital technologies and opportunities.
SMEs are increasingly adopting digital technologies, such as cloud computing, artificial intelligence, or blockchain, to improve their productivity, efficiency, and quality. They also use digital platforms, such as social media, online marketplaces, or mobile applications, to reach new customers, markets, and partners. By leveraging digital technologies and opportunities, SMEs can enhance their competitiveness and growth potential.
Tips
- SMEs should always conduct market research and analysis to identify their target customers, competitors, and opportunities.
- SMEs should always have a clear and realistic business plan and strategy to guide their operations, goals, and growth.
- SMEs should always monitor and evaluate their performance, results, and impact, and seek feedback and improvement.
- SMEs should always invest in their human capital, skills, training, and development, and foster a positive and inclusive work culture.
- SMEs should always seek to innovate and differentiate themselves from their rivals, and offer value-added products and services.
What is SMEs?
SMEs stands for small and medium-sized enterprises. These are businesses that have less than a specific level of investment and turnover. SMEs include both manufacturing and service sectors. The government categorizes them based on a combination of annual turnover and equipment investment.
Global demand for SMEs
SMEs play a vital role in the global economy. They account for about 90% of all businesses and more than 50% of employment worldwide. They also contribute to innovation, competitiveness and social inclusion.
However, SMEs face many challenges in the global market, such as access to finance, technology, skills, markets and regulations. These challenges have been exacerbated by the COVID-19 pandemic, which has disrupted supply chains, reduced consumer demand and increased uncertainty.
According to the World Bank, the global demand for SMEs is expected to decrease by 5.2% in 2020, the largest contraction since World War II. The impact of the pandemic varies across regions and sectors, but it is generally more severe for SMEs than for larger firms.
How to increase global demand for SMEs
To increase the global demand for SMEs, there is a need for coordinated and comprehensive policy responses at the national and international levels. Some of the possible measures are:
- Providing financial support and relief to SMEs, such as grants, loans, guarantees, tax deferrals and subsidies.
- Enhancing digital transformation and innovation of SMEs, such as facilitating access to digital platforms, tools, skills and networks.
- Promoting market access and integration of SMEs, such as removing trade barriers, simplifying procedures, strengthening standards and facilitating e-commerce.
- Improving the business environment and regulatory framework for SMEs, such as reducing bureaucracy, corruption and informality, improving governance and rule of law, and fostering competition and entrepreneurship.
By implementing these measures, SMEs can overcome the challenges posed by the pandemic, recover faster and stronger, and contribute to the sustainable and inclusive growth of the global economy.
Frequently Asked Questions
What is the definition of an SME?
An SME is a small or medium-sized enterprise that has fewer than 250 employees and an annual turnover of less than 50 million euros.
What are the main challenges faced by SMEs?
Some of the main challenges faced by SMEs include access to finance, markets, skills, technology, infrastructure, regulation, taxation, competition, corruption, informality.
How can SMEs overcome these challenges?
Some of the ways that SMEs can overcome these challenges include improving their management practices, innovation capabilities, digital skills, quality standards, networking, advocacy, partnerships, formalization.
How can governments support SMEs?
Some of the ways that governments can support SMEs include providing financial incentives, subsidies, guarantees, grants, loans, tax breaks, simplifying regulations, procedures, fees, reducing barriers to entry, exit, trade, enhancing public services, infrastructure, security, education, health, promoting SME policies, programs, institutions, platforms, awareness.
How can SMEs benefit from the COVID-19 recovery?
Some of the ways that SMEs can benefit from the COVID-19 recovery include seizing new opportunities, markets, niches, customers, adapting to new consumer preferences, behaviors, demands, embracing digital transformation, e-commerce, remote work, learning, accessing new sources of finance, support, relief, assistance.
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.worldbank.org/en/topic/smefinance
https://www.oecd.org/cfe/smes/
https://www.unido.org/our-focus/creating-shared-prosperity/empowering-smes
https://www.wto.org/english/res_e/booksp_e/wtr11-2b_e.pdf
https://www.itu.int/en/ITU-D/Digital-Inclusion/Youth-and-Children/Pages/SME.aspx
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