Importance of Growth of SMEs

The criterion used to define an enterprise as an SME varies across countries. Some quantitative criterion used are:

● Total number of employees in an enterprise
● Annual volume of turnover
● The total of the assets in the enterprise balance
● The degree of independence of the enterprise

Among these, the number of employees and the volume of turnover are the most widely used, to demarcate between Small, Medium and micro enterprises.

Growth of SMEs and its corresponding growth numbers, in an economy, is important for the following reasons:

1. Nursery for large conglomerates: Every large conglomerate started out as an SME. In today’s era, there is no consensus on the kind of jobs / industries that would survive into the future. The only way to prepare for the unseen future is to encourage every kind of enterprise.

2. Generating Employment: According to World Bank, 600 million jobs would be needed in the next 15 years to accommodate the burgeoning global workforce. To accomplish this ambitious target, SMEs need to be encouraged as they are the ones that create 4 out of every 5 new jobs in the formal sector.

3. Helps in leveling out Income discrepancies: Developing economies face gaping inequalities with respect to Income. The development of SMEs helps in bridging this gap when they invest in an economy, create much needed jobs, introduce / develop relevant technology leading to overall advancement.

4. Lower Associative Cost: The cost of creating a job in an SME is lower than that in a large corporation. Also, developing products and services in the SME sector is cheaper due to lower incidental expenses, higher productivity / relatively better quality, due to the presence of the owner on the premises.

5. Maintain balance in the economy: Higher number of SMEs in a country leads to a more balanced growth of the economy. In addition to ensuring the participation of local people / communities, it further offsets the propensity of monopolies from controlling the market.

6. Pioneer of Innovation: For SMEs, their small size, is an advantage. It enables them to discern the new trends in their industry and embrace those trends by making changes quickly. This ensures, not just their survival but may turn out to be the foundation of a new sector altogether.

Even large corporations, with strong research departments, may not have the flexibility boasted by SMEs in incorporating innovations. Large enterprises generally channel all their energies towards improving existing products and services, while SMEs, for their survival, tend to adapt quickly as per the requirements of the market. The innovation, thus devised by an SME, tends to augur well for the economy as a whole.

7.Resilience: SMEs can also be more resilient, than larger corporations, when faced with harsh economic conditions. They could withstand the downturns and be better placed to recover earlier from such crisis.

8.Stimulates competitiveness: SMEs, owing to easy incorporation, stimulate competition with respect to price, quality, and design. This ensures resource allocation to the most befitting and economical product / service and the availability of the same to the consumers.

9.Promotes Ripple Effect: Success of SMEs in a certain industry spreads around by creating opportunities in various other industries in the economy, thus creating a ripple effect.

10.Encourages Efficiency in an economy: Many large enterprises sub-contract some parts of their production process / services to SMEs. This enables the large corporations to concentrate on their most efficient and effective operations.

11.Increase in Government income from taxation: The growth of SMEs in the formal sector of an economy has the potential to increase government revenues.

The Government revenues could be augmented via all these routes, subject to local laws:
● Taxation on the profits of SMEs
● Stimulation of indirect taxes
● Any additional taxation income like capital gains tax

This also strengthens the case to draw the innumerable SMEs in the informal sector to the formal sector.

An interesting ratio we can consider is the number of MSMEs per 1000 persons. According to the IFC (International Finance Corporation) report of 2010, globally, there are 31 MSMEs to every 1000 persons. It is noted that an economy with a bigger per capita income has higher number of registered companies for 1000 persons. Some examples are as follows:

Country Companies per 1000 persons
Brunei Darussalam 122
Indonesia Paraguay
Czech Republic 85
Ecuador 84

This underlines the importance of SMEs to an economy.
The role SMEs play in the growth of a developing economy is known and well-accepted. But they play an equally important role in developed and established markets.Many of the developed markets, like the US, Europe, Japan, are experiencing slow / negative growth. In such a bleak economic climate, SMEs seem like the harbingers of much needed stimulation. As per European Commission survey conducted in 2012, in the period from 2002 to 2010, 85% of the jobs in the EU region were created by SMEs.

No wonder, SMEs are rightly called the engines of growth for an economy.

divya shetty

Divya Poonja is an Engineering graduate withe a masters in Finance. She has worked for more than 5 years in the Financial Services industry. She enjoys freelance writing.

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