Small and medium-sized enterprises are currently a big topic in development. From the Sustainable Development Goals to the Trans-Pacific Partnership to the European Union’s new trade and investment strategy announced this week, major political accords are promoting a strategy of growing SMEs as a way to boost broader inclusive economic growth in developing countries.
A new study by the International Trade Centre — the joint agency of the World Trade Organization and the United Nations — identifies the areas where governments, investors and the development industry should be most closely focusing on in order to achieve that objective.
SMEs make up more than 95 percent of all firms worldwide, account for roughly 50 percent of world gross domestic product and are responsible for 60-70 percent of employment when counting informal sectors of the economy.
Yet when it comes to productivity and competitiveness, they lag behind the much smaller cohort of large enterprises — often by a wide margin. The gap in productivity between SMEs and large firms increases as a country’s level of development decreases, according to the ITC. In some cases, large firms are 10 times more productive than SMEs in developing countries.
This has direct implications for poverty and development. Lower productivity means lower wages and worse working conditions. “If we want to increase purchasing power, we have to work on the productivity of SMEs,” ITC Executive Director Arancha Gonzalez told Devex.
But how? Studies such as the ITC’s new report — “SME Competitiveness Outlook 2015: Connect, compete and change for inclusive growth” — offer a starting point.
The ITC report studied SMEs across 25 countries to dissect the main factors that determine their ability to integrate with and compete in the international economy. It analyzed a set of 38 indicators measured at the levels of the individual firm, the broader business environment and the wider national context.
The results were a number of insights that can serve as a basis for government policies or investment decisions to address productivity issues affecting SMEs.
For example, the biggest gap between small and large firms is in electronic connectivity — the ability of an SME to reach out to its customers and suppliers. Three regions — East Asia and the Pacific, sub-Saharan Africa and South Asia — ranked lowest in e-connectivity, the ITC concluded. For landlocked developing countries, e-connectivity was particularly poor.
Access to finance was deemed the largest impediment to a small or medium-sized firm’s capacity to compete globally. The inability of SMEs to tap into commercial lines of credit was one limitation, but more simplistically, the report found that just 25 percent of small companies and 40 percent of medium-sized companies in least-developed countries have bank accounts.
The ITC found that SMEs in Latin America, and East and Central Asia are better prepared to compete globally than their peer companies in Asia and sub-Saharan Africa.
SMEs in Latin America in particular were measured as outperforming the global average of developing countries in their ability to compete and connect internationally and adapt to changing conditions of supply and demand. Based on the ITC rankings, the region demonstrates a stronger sense of entrepreneurship compared to other developing countries, but is disadvantaged by a weak business environment.
SMEs in South Asia, meanwhile, are constrained in their ability to compete abroad because of poor quality certifications.
While it doesn’t offer many groundbreaking insights about problems that constrain SME growth, the uniqueness of the ITC’s study is in the granularity of its findings.
Bangladesh, for example, has a budding export industry in the information technology sector. But the ITC report’s findings revealed a very low usage of email among those firms and very few have their own website.
“Anyone reading this report interested in business sustainability will see that the IT export industry in Bangladesh is a huge unexploited market,” Gonzalez said. “The beauty of this report is disaggregating a lot of previously aggregated data at the firm level.”
With SMEs considered a conduit for inclusive growth for the base of the pyramid, disaggregated findings can inform and allow development professionals to target their interventions to where the impact could be greatest.
“In a way, it’s a huge exercise in needs assessment to tap into the ability of SMEs to grow,” said Gonzalez.
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