1. MSMEs create enormous value for economies around the world. They account for roughly half of global GDP. That share varies significantly among economies. In Portugal, Israel, Indonesia, Italy, and Kenya (ordered by decreasing share of value added), the share is larger than 60 percent. In the United States, Nigeria, and India, it is less than 40 percent.
2. They are also significant employers, accounting for roughly 40 percent of all employment and 70 percent of employment in the business sector, which we define as excluding the farm, government, and finance sectors. That share is as high as 96 percent in Kenya, where MSMEs account for half of all employment.
MSMES CREATE ENORMOUS VALUE FOR ECONOMIES AROUND THE WORLD.
1. The business sector plays a larger role in advanced economies. But within the business sector, MSMEs have a greater impact in emerging economies, employing four-fifths of all workers, compared with two-thirds in advanced economies.
2. MSMEs are also meaningful job creators. In advanced economies, one 2013 study suggested, they contributed more than half of net job growth in businesses. In the United States, for example, SMEs have accounted for two out of every three jobs added in the past 25 years. In emerging economies, MSMEs created seven out of ten new formal jobs over the past decade.
3. MSMEs play a crucial role in production across sectors, but their contribution is more significant in some. While there are differences among countries, MSMEs tend to contribute the majority of the value added in four sectors—accommodation and food, construction, professional services, and trade. Although they contribute only about 45 percent of value added in the manufacturing sector, they are the second-largest contributor to small business value after the trade sector. Across all sectors, MSMEs also employ at least half of all business workers.
MSMES DRIVE BUSINESS DYNAMISM
1. Many MSMEs grow rapidly into large companies, adding to the vibrancy and dynamism of the economies in which they operate. They promote innovation and competition among companies, encouraging all businesses to continually improve their products, services, and processes, which, in turn, can enhance overall economy-wide productivity and dynamism.
2. Many large companies of today were MSMEs not long ago. About one in five of today’s very large companies—defined as having a market capitalization of more than $10 billion in the United States and equivalent values in other economies—were MSMEs at some point after 2000 and have since powered their way to large company status.
3. The share of scaled-up companies varies by country, indicating different levels of MSME dynamism. Dynamic MSMEs can stimulate competition among businesses, driving the entire system to become more innovative and efficient, ultimately resulting in increased productivity. Yet overall, rising productivity—crucially, that of large companies—can create new market opportunities and build business capabilities for smaller enterprises, raising the rate of scaling up.
4. Unique factors at the country level can contribute to dynamism. In Australia, high dynamism reflects a resources boom that has expanded growth opportunities for small mining companies. Israel, by contrast, has a small economy, but one of the most technologically advanced in the world. Its dynamism is connected to entrepreneurial ecosystems, a high density of skilled professionals, an ability to tap into global networks, and large-scale lending to MSMEs. Over the past decade, growth in bank credit to SMEs in Israel was higher than to large businesses, at 61 percent versus 16 percent. In India, only about 10 percent of large companies in 2022 were MSMEs at some point after 2000. Indeed, previous MGI research found that India has a “missing middle” of mid-size companies. MSMEs have faced structural barriers, such as the high cost of compliance and finance, that have tended to constrain their growth.
5. Researchers have found that high-growth businesses in advanced economies tend to be younger and intangibles heavy. Enterprises that tend to rely on profits rather than external financing to fund their growth are also more likely to scale up. Our analysis finds that in the information and communications technology (ICT) and mining sectors, one in three enterprises that are large today have grown from being MSMEs in the past two decades. These sectors seem to experience a fast pace of innovation and technological disruption as well as higher rates of investment.
6. MSMEs in the emerging economies in our sample seem to exhibit greater dynamism than in advanced economies in core sectors like construction, utilities, and transportation. Investment in physical infrastructure tends to rise faster in countries that are in the earlier stages of their development. Where such sector growth opportunities have been captured, we see greater business dynamism.
7. Some emerging economies have powered national growth through the manufacturing and trade sectors as well. In a similar analysis of companies founded after 1950, in China—not included in our sample, as noted—the dynamism of the manufacturing and trade sectors is higher than in the advanced economies on average.
MSMES CAN BOOST NATIONAL PRODUCTIVITY WHILE STAYING SMALL OR BY FUELING LARGER COMPANIES
1. In emerging economies, the MSMEs that are so vital to sustaining livelihoods are heavily skewed toward microenterprises. In India, Kenya, and Nigeria, microenterprises employ more than 90 percent of MSME workers, of whom some 90 percent are self-employed own-account workers and contributing family members. They face challenges of particularly low productivity.
2. As these emerging economies climb the income ladder, microenterprises may grow their revenue and productivity, but most tend to stay small or medium size. As a result, MSMEs as a group continue to contribute larger shares to national output, and in that sense, MSMEs directly lift aggregate productivity growth.
3. In richer economies, the dynamic is different. Much of employment has shifted away from microenterprises to small and medium-size companies or even to larger ones. Only about half of all MSME workers are employed in microenterprises. As these advanced economies climb the income ladder, beyond a certain point more MSMEs tend to scale up into larger companies, are taken over and merged into them, or simply exit in the process known as creative destruction. As a result, the contribution of large businesses to the national output of the richest economies rises, relative to that of small companies. As such, MSMEs may not increase their share of economies, but they still contribute to business dynamism.
Source:
https://www.mckinsey.com/mgi/our-research/a-microscope-on-small-businesses-spotting-opportunities-to-boost-productivity
