The impact of SMEs in the global economy
Small and medium enterprises, or what in the popular parlance are called SMEs, has long been accepted as the engines of economic growth and development. The impact of SMEs in the global economy is a very crucial role in the construction of a society which is free of poverty. The reason is that they not only provide ample job opportunities to the different strata of the society but also ensure the flow of money across the various levels of society.
The role of SMEs in job creation
SMEs also play a very critical role in the world economy by contributing to the employment scenario along with the input and output. There are certain points to be understood here. As per a report published in 2015, approximately 600 million jobs would be required worldwide over the next 15 years. Predominantly, most of the formal jobs that are available in developing markets are created by the SMEs. That is almost four out of five jobs available in the market. Despite playing a vital role in the development of the economy, it is observed that around 50% of the SMEs lack access to finance or capital investment. At any given point of time, the formal SMEs create around 33% of the national income and 45% of the total employment in developing countries. When we include the informal SMEs in the list, the numbers rise even higher.
What size of business is an SME?
SMEs are usually categorised by the number of workers employed, sales turnover and the capital employed. In other words, the number of employees and asset value classifies an SME. Different countries have different criteria for classification. For instance, in Canada, businesses with less than 500 employees are categorised as an SME. In Germany, the upper threshold is 250 employees, in New Zealand it is 19 employees, while in the European Union the upper limit is 250 employees for medium- and 50 employees for small-sized companies. In the United Kingdom, as per the Companies Act of 1985, to be categorised as an SME the turnover should not be more than £5.6 million and employee count should not be more than 50. However, efforts are on towards employing a common definition of the SMEs that would be accepted across the globe.
As discussed in the beginning, SMEs play a very crucial role in economic development as well as employment creation. Thus, they are frequently discussed by various agencies of government, researchers, academicians and scholars. SMEs face common issues globally. However, what differs in each country is the understanding of the various ways in which SMEs assist in boosting economic development. There are various ways in which SMEs help economic development.
- SMEs have the remarkable ability to fuel economic growth. They create many new job opportunities, drive the bandwagon of innovation and expand the tax base.
- SMEs also increase the competition amongst the peers and heat up the market scenario. This continuous struggle for supremacy brings out the best in a business. This triggers a win-win situation for both provider and the consumer. Moreover, this increases the aggregate productivity as well as economy-wide efficiency.
- New entrepreneurs bring forth innovations, ideas and skills.
- In recent years, SMEs have registered a higher growth rate as compared to the global industrial sector. The chief advantage of the SME sector is its potential to generate employment at low capital expenditure.
- The economic growth in many Asian countries such as Korea, Taiwan and Japan is directly proportional to the spurt in SME activities. SMEs play a very significant role in the rapid industrialisation and development of China, where approximately 99% of the total business ventures are SMEs. These SMEs together produce around 60% of the total industrial output and approximately 40% of the total profits and taxes achieved by the various industries in China. Again, various SMEs in the US generate more than half of the gross domestic products.
- SMEs act as a cushion against recession by adapting and innovating as per the changing circumstances. There is a big connection between the various levels of poverty, hunger and economic well-being of the society and the general condition of various SMEs in the country.
- In almost every country, the SMEs are a large proportion of all businesses in the country. In most developing and developed economies, over 90% of SMEs improve the employment rate. In fact, when big industries downsize and cut down jobs, SMEs keep developing and creating more jobs.
- SMEs adapt fast to the dynamic business world by switching on to e-commerce and online transaction of goods and services. The advancement in technology has not only eased out the process of selling and buying, it has helped the entrepreneurs to cut cost on advertising and marketing too. The various e-commerce platforms make life easy for SMEs.
- SMEs play a vital role in being service providers and traders to the primary industry.
- SMEs also produce the finished goods as well as services.
- SMEs contribute heavily to the development of various sectors such as manufacturing, agriculture and ICT services.
- There is a reciprocal relationship between an SME and the economy. Development in economy ensures the creation of more SMEs. The creation of more SMEs ensures a boost in the economy.
- Although the employment generated by SMEs is huge, they sometimes turn out to be temporary in nature. This is because quite a number of SMEs die out before they cross the five-year threshold. This results in further unemployment.
- SMEs have been criticised in the past for their staggering rate of bankruptcy. If the product or services offered by SMEs do not sell, they go out of business very soon.
- Sometimes in order to survive and be in the race, SMEs flood the market with cheap products and services. Although such produce can temporarily replace the original product it often cannot survive the competition. This completely ruins the brand image and the value of the aspiring SME.
- Moreover, SMEs lack the basic capital needed for establishing as well as expanding beyond a certain limit. Money crunch bites deep in the SME fibre eroding it bit by bit.
- SMEs depend on innovation in order to survive. However, the continuous pressure to innovate and create new options results in uncertainty and confusion. Nevertheless, innovation remains the best option for an SME to survive.
- SMEs need a supportive and encouraging environment in order to survive. Political instability, as well as stringent rules and regulations, laid down by the government restricts their creation and development.
- There could be numerous odd things that could go wrong due to a single decision. That is why covering one’s business with risk insurance is necessary. However, the shoestring budget at which an SME operates means they fail to buy a risk insurance for the business.
- SMEs also face taxation issues, if the government does not pay much attention to creating entrepreneur-friendly policies.
- Finding suitable employee for a particular job remains a big challenge for SMEs. Experienced people are either too expensive for an SME to afford or do not want to take the risk of working for a small business.
Thus SMEs have both pros and cons. It is only with precision and care that the government can encourage entrepreneurship by creating business-friendly policies and easy financing options. Liberal policies encourage prospective entrepreneurs to take the plunge and create value for themselves as well as society in the end.
In the long term, SMEs can produce a substantial rise in income, opportunities and the overall GDP. If the business environment is conducive and supportive to new businesses, they will not only generate more employment but also create a variety of products and services for the consumer to choose.
We offer a level 3 Certificate in Business Start-up to help anyone looking to start their own business and become an SME.
Bell, S., 2015. http://www.worldbank.org/en/topic/financialsector/brief/smes-finance
Katua, D.N.T., 2014. The Role of SMEs in Employment Creation and Economic Growth in Selected Countries. International Journal of Education and Research, 2(12), pp.461-72
Muritala, T., Awolaja, A. & Bako, Y., 2012. Impact of Small and Medium Enterprises on Economic Growth and Development. American Journal of Business and Management, 1(1), pp.18-22
Savlovsch, L.I. & Robu, N.R., 2011. The Role of SMEs in Modern Economy. Economia. Seria Management, 14(1), pp.277-81
By an iQualify UK staff writer