Small and medium-sized enterprises key to global industrial growth

Small and medium-sized enterprises (SMEs) drive economic growth and employment, accounting for an average of 33% of GDP and 45% of the workforce in high-income countries, and over 60% of GDP and 70% of employment in developing economies. Their rise has been crucial to economic diversification and resilience, particularly in countries vulnerable to commodity price fluctuations. SMEs have also been at the forefront of innovation, taking advantage of their size and agility to respond to technological and commercial opportunities. However, they also face obstacles, such as disproportionately high tax burdens, skills and capacity gaps, and credit and trade barriers – many of which have been put in sharper relief amid the economic disruption of Covid-19 under way in early 2020.

Challenges

The World Bank estimates that 600m workers will enter the global workforce over the next 15 years, mainly in Asia and sub-Saharan Africa. Of this total, SMEs are expected to create four out of five new jobs. However, as noted in a 2018 OECD report, most SMEs either fail in the first years of activity or remain very small. Regulatory constraints, high tax burdens, limited capacity to tender for large government contracts and difficulties tapping into global trade markets are some of the challenges SMEs often face in developing economies. According to estimates by the SME Finance Forum, a research unit affiliated with the World Bank’s International Finance Corporation, the finance gap for SMEs widened from $1trn in 2011 to $5.2trn in 2018, and some 60m, or 40%, of SMEs in developing countries have unmet financing needs. This is often caused by supply- and demand-side knowledge asymmetries: banks have difficulty assessing the creditworthiness of SMEs, which discourages lending to these firms, and SMEs often refrain from applying as they believe their applications will be denied.

Financial Backing

A number of initiatives are focusing on closing the funding gap and providing formal banking services to small businesses. According to a 2018 World Bank report, 70% of SMEs do not use external financing from commercial financial institutions. SMEs in Asia Pacific have the largest financing gap, followed by Latin America and sub-Saharan Africa. Some governments have taken steps to address funding shortfalls in recent years by creating sovereign wealth funds for SMEs, reforming tax systems to foster small business growth or incentivising commercial lenders to extend credit lines to these types of businesses, among other measures. For example, Nigeria’s Bank of Industry has extended N500bn ($1.6bn) to local businesses between 2016-18, a significant part of which has gone to SMEs. Egypt set aside LE30bn ($1.7bn) in loans in 2018 alone, with this expected to increase to LE50bn ($2.8bn) in 2019. The Central Bank of Egypt has also directed commercial banks to increase the number of loans awarded to SMEs to 20% of their total portfolio.

Trade

Small businesses are under-represented in global trade across both developed and developing economies, and only 10-25% of industrial SMEs export their products compared to 90% of large companies, according to a 2018 OECD report. Special economic zones, or free zones, offering infrastructure, streamlined business registration processes, tax incentives and access to trade networks are a solution that has been trialled by some governments. Across the UAE’s total of 50 free zones, SMEs also benefit from faster and cheaper registration processes and waivers on corporate tax. The Dubai Multi Commodities Centre, the largest free zone in the UAE, is home to 15,000 businesses, of which 70% are SMEs.

Skills Incubators

Skills shortages, particularly managerial input and digital know-how, often hold back SME growth. In this regard, some governments are supporting SMEs through incubators or targeted assistance to adopt automation, digitalisation and robotisation. In 2018 the World Bank announced a project with Kenya’s government to provide $50m in entrepreneurial and managerial skills investment for 2400 SMEs.