7 Reasons Why SMEs Are Important for the Economy
SMEs, or small and medium-sized enterprises, are businesses that have fewer than 250 employees and a 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, reduce poverty, foster innovation, contribute to growth, support social and environmental goals, facilitate trade and integration, and enhance resilience and stability.
SMEs face various challenges, such as access to finance, markets, technology, skills, infrastructure, regulation, and support services.
SMEs can overcome these challenges by improving their management practices, innovation capabilities, quality standards, digitalization, networking, and partnerships.
Governments can support SMEs by providing financial incentives, subsidies, guarantees, and grants; facilitating access to information, advice, training, and mentoring; reducing administrative burdens, taxes, and corruption; improving legal and regulatory frameworks, infrastructure, and public services; and promoting trade and integration opportunities.
SMEs should have a clear vision, mission, and strategy; conduct market research and analysis; adopt a customer-centric approach; embrace innovation and digitalization; and build strong relationships with their stakeholders.
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 are also more likely to introduce new products, services, and processes, or improve existing ones. By doing so, they increase their productivity and efficiency, and enhance their competitiveness in local and global markets.
3. SMEs contribute to economic growth and development.
SMEs generate a significant share of the gross domestic product (GDP) and value added in many countries. They also contribute to the diversification of the economic structure, by creating new sectors and niches, or expanding existing ones. By stimulating economic activity and demand, SMEs boost the overall growth and development of the economy.
4. SMEs support social and environmental goals.
SMEs are often more connected to their communities and customers, and more aware of their social and environmental impacts. They can play a key role in addressing social and environmental challenges, such as climate change, gender equality, health, education, and human rights. They can also promote social and environmental responsibility among their stakeholders, such as employees, suppliers, customers, and investors.
5. SMEs facilitate trade and integration.
SMEs can benefit from trade liberalization and integration, by accessing new markets, customers, suppliers, technologies, and resources. They can also participate in regional and global value chains, by providing inputs or services to larger firms or multinational corporations. By engaging in trade and integration, SMEs can increase their revenues, profits, and market share.
6. SMEs enhance resilience and stability.
SMEs can help mitigate the effects of economic shocks and crises, such as recessions, natural disasters, or pandemics. They can do so by providing alternative sources of income and employment, or by offering essential goods and services to the population. They can also help rebuild the economy after a crisis, by restoring production capacity, demand, and confidence.
7. SMEs enable inclusive and sustainable development.
SMEs can support the achievement of the Sustainable Development Goals (SDGs), which are a set of 17 global goals that aim to end poverty, protect the planet, and ensure peace and prosperity for all by 2030. By creating jobs, reducing poverty, fostering innovation, contributing to growth, supporting social and environmental goals, facilitating trade and integration, and enhancing resilience and stability, SMEs can help advance inclusive and sustainable development for everyone.
Tips
- SMEs should have a clear vision, mission, and strategy for their business, and set realistic and measurable goals and objectives.
- SMEs should conduct market research and analysis, and identify their target customers, competitors, and value proposition.
- SMEs should adopt a customer-centric approach and focus on delivering high-quality products and services that meet or exceed customer expectations and satisfaction.
- SMEs should embrace innovation and digitalization, and use new technologies, tools, and platforms to improve their processes, products, services, and marketing.
- SMEs should build strong relationships with their stakeholders, such as employees, suppliers, customers, investors, and regulators, and seek feedback, collaboration, and cooperation.
SMEs: A Growing Industry in the Global Market
SMEs, or small and medium-sized enterprises, are businesses that have revenues, assets, or numbers of employees below a certain threshold. The criteria for determining an SME vary between countries and sometimes between industries. For example, in the European Union, a business with fewer than 250 employees are considered an SME, while in the United States, an SME may have up to 1,200 employees.
SMEs play an important role in the economy, as they account for the majority of businesses in most countries and contribute to innovation, diversity, and employment. According to the Small Business Administration (SBA), 99.9% of U.S. businesses in 2018 were small businesses, and they accounted for roughly 44% of U.S. GDP in 2014. In Canada, SMEs represent 99.8% of all businesses and employ 64.2% of private sector workers.
The global demand for SMEs is increasing, as they offer various advantages over large corporations, such as flexibility, responsiveness, customer orientation, and niche market expertise. SMEs also face some challenges, such as access to finance, regulation, competition, and skills development. To overcome these challenges and seize the opportunities in the global market, SMEs need to adopt strategies such as digitalization, internationalization, innovation, and collaboration.
Digitalization
Digitalization is the use of digital technologies to improve business processes, products, or services. Digital technologies can help SMEs improve their productivity, efficiency, quality, and customer satisfaction. Digital technologies can also help SMEs access new markets, reduce costs, and enhance their competitiveness. Some examples of digital technologies that SMEs can use are cloud computing, e-commerce, social media, big data analytics, artificial intelligence, and blockchain.
Internationalization
Internationalization is the expansion of business activities across national borders. Internationalization can help SMEs increase their revenues, diversify their customer base, reduce their dependence on domestic markets, and gain exposure to new ideas and best practices. Some factors that can facilitate internationalization for SMEs are trade agreements, market research, cultural awareness, and foreign language skills.
Innovation
Innovation is the creation of new or improved products or services that meet the needs and expectations of customers or solve existing problems. Innovation can help SMEs differentiate themselves from their competitors, increase their value proposition, and enhance their reputation. Some sources of innovation for SMEs are customer feedback, market trends, research and development (R&D), and collaboration with other organizations.
Collaboration
Collaboration is the cooperation of two or more businesses or organizations to achieve common goals or mutual benefits. Collaboration can help SMEs access new resources, skills, knowledge, networks, and markets. Some forms of collaboration that SMEs can engage in are strategic alliances, joint ventures, franchising, licensing, outsourcing, and clusters.
SMEs are a vital part of the economy and a growing industry in the global market. To succeed in the competitive and dynamic environment, SMEs need to adopt strategies such as digitalization, internationalization, innovation, and collaboration. By doing so, SMEs can leverage their strengths, overcome their challenges, and create value for their customers, stakeholders, and society.
Frequently Asked Questions
What are SMEs?
SMEs are small and medium-sized enterprises that have fewer than 250 employees and a turnover of less than 50 million euros.
How many SMEs are there in the world?
According to the World Bank, there are about 400 million formal SMEs in the world, accounting for more than 90% of all businesses.
What are the main challenges faced by SMEs?
Some of the main challenges faced by SMEs include access to finance, markets, technology, skills, infrastructure, regulation, and support services.
How can SMEs overcome these challenges?
Some of the ways that SMEs can overcome these challenges include improving their management practices, innovation capabilities, quality standards, digitalization, networking, and partnerships.
How can governments support SMEs?
Some of the policies that governments can implement to support SMEs include providing financial incentives, subsidies, guarantees, and grants; facilitating access to information, advice, training, and mentoring; reducing administrative burdens, taxes, and corruption; improving legal and regulatory frameworks, infrastructure, and public services; and promoting trade and integration opportunities.
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.unido.org/our-focus/creating-shared-prosperity/empowering-smes
https://www.oecd.org/cfe/smes/
https://www.un.org/sustainabledevelopment/sustainable-development-goals/
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