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Understanding SMEs

Understanding SMEs

Small size, big impact.

SMEs – Small and Medium Entreprises are businesses whose personnel numbers fall below certain limits. These limits differ state by state. SMEs drives innovation and competition in many economic sectors.

The importance of the SME sector has changed over time, reflecting the impact of technological change, changing market conditions and rising standards of living.

SMEs constitute the overwhelming majority of firms. Globally, SMEs make up over 95% of all firms, account for approximately 50% of GDP and 60%–70% of total employment, when both formal and informal SMEs are taken into account. This amounts to between 420 million and 510 million SMEs, 310 million of which are in emerging markets.

The overwhelming majority of SMEs in the developing world are micro enterprises with fewer than ten employees. In many economies, the private sector is split into two segments: small – often micro – enterprises on the one hand, and a few very large enterprises on the other hand. This phenomenon is called the ‘missing middle’. Among the explanations for the ‘missing middle’ is the central tenet that small firms have few incentives to growth, because they are adversely affected by taxes and access to finance policies once they are medium-sized.

A balanced firm size distribution stimulates competition within the economy and puts more firms in a position to also compete internationally.


Many different factors hold SMEs back.

Sometimes the problems lie more with the firms themselves: they might lack skilled managers and staff, fail to understand market opportunities, or struggle to meet international health and safety standards. Even internationalising is no cure-all: smaller firms might struggle to move up from the most basic supply chain tasks, thus missing out on the biggest gains.

However, mostly, in great variety of countries the policy and government decisions make businesses unsustainable. Especially, tax policies disincentivise growth. In others, access to finance dries up the moment businesses become too big for micro-lenders. Intermittent electricity and spotty internet access often render them uncompetitive. Expensive transportation and long customs delays can frustrate attempts to operate across borders.



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