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. The abbreviation “SME” is used by international organizations such as the World Bank, the European Union, the United Nations, and the World Trade Organization (WTO). SMEs play an important role in the economy, as they contribute to employment, innovation, and competition. In this article, we will explore seven reasons why SMEs are vital for economic growth.
Key Takeaways
SMEs are businesses that have revenues, assets, or a number of employees below a certain threshold.
SMEs play an important role in the economy, as they create jobs, foster innovation, enhance competition, support local development, facilitate international trade, promote social responsibility, and enable resilience and recovery.
SMEs face various challenges, such as lack of skills, access to markets, technology adoption, regulatory compliance, and competition from large firms.
SMEs can benefit from government support, such as tax breaks, subsidies, grants, loans, guarantees, training, advisory services, and infrastructure development.
SMEs can grow and scale up by adopting best practices, leveraging technology, partnering with other firms, diversifying their products and markets, and participating in global value chains.
1. SMEs create jobs
SMEs are often the main source of employment in many countries, especially in developing regions. According to the International Labour Organization (ILO), SMEs account for 70% of total employment in low-income countries, 60% in middle-income countries, and 50% in high-income countries. SMEs also tend to hire more women, young people, and marginalized groups, thus promoting social inclusion and reducing poverty.
2. SMEs foster innovation
SMEs are more agile and adaptable than large firms, which allows them to respond quickly to changing market needs and customer preferences. SMEs also invest more in research and development (R&D) relative to their size, and generate more patents per employee than large firms. SMEs are often the drivers of technological change and industry transformation, as they introduce new products, services, and business models.
3. SMEs enhance competition
SMEs increase the diversity and dynamism of the market, as they offer more choices and alternatives to consumers and suppliers. SMEs also challenge the dominance of large firms, which can prevent market concentration and monopolies. By competing with each other and with large firms, SMEs stimulate productivity, efficiency, and quality improvements.
4. SMEs support local development
SMEs are usually rooted in their communities, as they rely on local resources, networks, and markets. SMEs contribute to the development of local infrastructure, education, health, and environmental protection. SMEs also support local culture and identity, as they reflect the values and traditions of their regions.
5. SMEs facilitate international trade
SMEs are increasingly participating in global value chains (GVCs), which are networks of production and trade that span across multiple countries. SMEs can benefit from GVCs by accessing new markets, technologies, and knowledge. SMEs can also enhance GVCs by providing specialized inputs, services, and solutions.
6. SMEs promote social responsibility
SMEs are often more aware of and responsive to the social and environmental impacts of their activities than large firms. SMEs can adopt responsible business practices that benefit their stakeholders, such as employees, customers, suppliers, and communities. SMEs can also engage in corporate social responsibility (CSR) initiatives that address social and environmental challenges.
7. SMEs enable resilience and recovery
SMEs are more resilient to shocks and crises than large firms, as they can adapt faster and recover quicker. SMEs can also support the recovery of other sectors and regions by providing essential goods and services, creating jobs, and generating income. SMEs can also help rebuild social capital and trust after conflicts or disasters.
Tips
- Know your customers and their needs, and deliver value to them.
- Invest in your human capital, and provide training and development opportunities to your employees.
- Embrace innovation and digital transformation, and use technology to improve your processes and products.
- Seek external support and advice from experts, mentors, and peers.
- Monitor your performance and finances, and plan ahead for growth and expansion.
What Is SME and Why Is It Important?
SME stands for Small and Medium Enterprise, which is a business that has a certain number of employees, revenues, or assets below a certain threshold. The exact definition of SME varies from country to country, but it is generally used by international organizations such as the World Bank, the European Union, the United Nations, and the World Trade Organization (WTO) to classify businesses that are neither very small nor very large .
SMEs are important for economic and social reasons, as they play a key role in employment, innovation, and competition in many sectors. SMEs often outnumber large firms by a wide margin and employ many more people. For example, in Australia, SMEs make up 98% of all businesses, produce one-third of the total GDP, and employ 4.7 million people . In developing countries, SMEs tend to have a larger share of the economy and the labor force .
How Is the Global Demand for SMEs Changing?
The global demand for SMEs is changing due to various factors, such as technological advancements, market opportunities, consumer preferences, environmental challenges, and policy interventions. Some of these factors may create new opportunities for SMEs to grow and expand their markets, while others may pose threats or barriers to their survival and competitiveness.
According to a report by the Organisation for Economic Co-operation and Development (OECD), the global demand for SMEs is expected to increase in the following areas :
- Digitalization: SMEs can benefit from digital technologies to improve their productivity, innovation, customer service, and access to markets. However, they also face challenges such as lack of skills, infrastructure, finance, and cybersecurity.
- Green transition: SMEs can contribute to the transition to a low-carbon economy by adopting green practices, products, and services. However, they also need to cope with the costs and risks of environmental regulations, standards, and taxes.
- Inclusive growth: SMEs can foster inclusive growth by creating jobs, reducing inequalities, and promoting social cohesion. However, they also need to overcome the barriers of access to finance, skills, markets, and networks.
Frequently Asked Questions:
Q1: What is the definition of an SME?
A: An SME is a business that has revenues, assets, or a number of employees below a certain threshold. The exact criteria vary by country and industry.
Q2: What are the benefits of being an SME?
A: Some benefits of being an SME include lower taxes, easier access to finance, greater flexibility, higher innovation potential, and closer customer relationships.
Q3: What are the challenges faced by SMEs?
A: Some challenges faced by SMEs include lack of skills, access to markets, technology adoption, regulatory compliance, and competition from large firms.
Q4: How can governments support SMEs?
A: Governments can support SMEs by providing favorable policies, incentives, and programs that address their specific needs and challenges. Some examples are tax breaks, subsidies, grants, loans, guarantees, training, advisory services, and infrastructure development.
Q5: How can SMEs grow and scale up?
A: SMEs can grow and scale up by adopting best practices, leveraging technology, partnering with other firms, diversifying their products and markets, and participating in global value chains.
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.oecd.org/cfe/smes/Policy-Note-SME-Outlook-2021.pdf
https://en.wikipedia.org/wiki/Small_and_medium-sized_enterprises
https://www.investopedia.com/terms/s/smallandmidsizeenterprises.asp
https://dictionary.cambridge.org/dictionary/english/sme
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