1. Small and medium-sized enterprises (SMEs) are the growth engine of many economies, but it can be a challenge for them to expand internationally and integrate into global value chains.
2. SMEs account for around 99% of companies and 70% of all jobs in OECD countries, and they contribute more than 50% of gross domestic product in high-income countries worldwide, according to a 2022 McKinsey report titled Beyond financials: Helping small and medium-sized enterprises thrive.
3. UN research from 2022 on the effect of the fourth industrial revolution on SMEs finds that major barriers to international expansion include an inability to benefit from economies of scale as easily, greater difficulty in accessing financial resources, and a higher likelihood of being burdened by bureaucracy and poor infrastructure.
4. The pandemic hit SMEs hard, setting back export growth. In mid-2020, McKinsey analysis found that 45% of small businesses were facing supply chain disruptions, which hindered their ability to export products and integrate into global value chains.
5. Advanced technologies such as artificial intelligence, data analytics, blockchain and automation are crucial in helping SMEs grow, ultimately claiming space in global value chains and further bolstering the economies of their host countries. However, the adoption of such advanced technologies often requires substantial financial investment and expertise, posing a challenge for SMEs with limited resources. Recognising this barrier, government support becomes paramount in facilitating SMEs’ access to these transformative technologies. Through funding initiatives, training programmes and strategic partnerships, governments can empower SMEs to harness the benefits of cutting-edge tools, fostering innovation and propelling international expansion.
6. Using South Korea as a case study, the UN research shows that compared with large companies, the South Korean SMEs that adopted Industry 4.0 technologies such as digital tools were more likely to invest and expand overseas.
IDENTIFYING AND PRIORITIZING SME SUBSEGMENTS
1. SMEs typically fall into one of six categories: early-stage innovative start-ups, established successful start-ups, growing medium-size companies, stagnant or struggling medium-size companies, locally focused small businesses, and informal microbusinesses.
2. While it is important to consider the totality of all SME subsegment needs, we believe that SME-development agencies should focus their limited resources on those with the highest potential for impact, with programs tailored to their specific situations.
3. Medium-size companies are often priority subsegments. According to our analysis, even though medium-size enterprises make up only 2 percent of all companies, they account for about 30 percent of GDP and employment in most countries.
4. This can vary by country, of course. A country such as India, for instance, has a low urbanization rate, with hundreds of millions of people employed in the informal sector or in small businesses in rural areas. It is difficult to neglect these segments in India; however, a highly urbanized country with a lower level of informality could have a more targeted approach and focus only on innovative start-ups and medium-size companies.
5. A country’s economic-development strategy should therefore guide the prioritization. For example, if export growth is a priority, medium-size companies operating in tradable goods and services could take precedence. While such ranking can be difficult, scattering resources among too many recipients may severely diminish their impact.
GETTING SMES BACK ON TRACK WITH GOVERNMENT SUPPORT
1. Access to digital tools can enable small companies to scale their business internationally and reach new markets. To support SMEs during the pandemic, governments in Ireland, Japan, Malaysia, Singapore, South Korea, Spain and beyond rolled out grant and loan programmes. Subsidised access to digital tools was also available to help small companies move online, according to a blog post from Yale’s Program on Financial Stability titled Governments Encourage SMEs to Adopt New Technology.
2. What began as a lifeline during the pandemic is continuing today as SMEs realise the full potential of adopting digital tools, but with small budgets common, government support via funding and other programmes is critical.
3. One example is the United Arab Emirates’ National SME Programme, established in 2014. It relaunched in 2022 with new services to help accelerate SMEs’ growth in the wake of the Covid-19 pandemic.
PRODUCTIVITY
1. Sluggish productivity growth is one of the biggest threats to overall economic growth in developed and developing economies alike, with serious implications for citizens’ well-being such as lower income growth, increased inequality, and challenges with loan repayment.
2. In recent years, productivity growth has stalled in many places; a 2018 McKinsey Global Institute (MGI) study of seven Organisation for Economic Co-operation and Development (OECD) countries found a drop in average productivity growth, from 2.4 percent per year between 2000 and 2004 to 0.5 percent per year between 2010 and 2014.
3. Small and medium-size enterprises (SMEs) contribute to the productivity problem. Within the same sector or within countries of similar size, the productivity gap between large companies and SMEs can vary by a factor of two or more. In construction, for example, McKinsey research found that the productivity gap between SMEs and large companies is 26 percent in France, 41 percent in Germany, and 54 percent in Italy. In the food-services and accommodation sector, the gap is smaller for Italy, at 29 percent, compared with 39 percent for France and 41 percent for Germany.
4. These productivity differences reach 60 percent in Turkey and 80 percent in Greece in many sectors. And a large share of the world’s population works for an SME—between 50 percent and 90 percent of the labor force, depending on the country.
5. Improving the productivity of SMEs is therefore a worthwhile endeavor. Indeed, SMEs can spur a country’s growth for two reasons. First, integrating proven practices and technologies is faster and safer than testing new ones, and SMEs have a large adoption gap to close. In the same way that emerging markets can grow faster than high-income markets by adopting tested technologies, SMEs can grow faster than large companies by adopting the proven technologies and practices of larger enterprises.
6. Second, start-ups, which are a critical subsegment of SMEs, have become important sources of innovation. Because they are unhindered by legacy systems and outdated strategies, new market entrants are often able to rethink established practices and cut through traditional industry boundaries.
7. Halving the global productivity gap between SMEs and large companies would amount to about $15 trillion in corresponding value added, or roughly 7 percent of global GDP.2 Governments around the world can and are helping close this gap through ten approaches tailored to meet SMEs’ most pressing needs.
THE NEED FOR A THRIVING ECOSYSTEM OF SMALL AND MEDIUM-SIZE ENTERPRISES
1. When enabled by a business-friendly environment and open markets, large companies can thrive; meanwhile, SMEs have a broad range of unmet needs. The limited size of many SMEs means they have difficulty accessing capabilities and resources that would make them more productive, including talented individuals with the latest knowledge of technology, finance, and managerial practices.
2. Furthermore, many SMEs are young enterprises, which, when combined with their small scale, makes them a weaker counterpart for many standard market players, not only in terms of funding access but also for customers who might perceive small suppliers as too risky. Nonstandard market players such as crowdfunding platforms and venture-capital funds are still in the early stage of development in many OECD countries and often cannot fulfill the needs of SMEs.
3. Given the challenges facing SMEs and the size of the opportunity, most G-20 countries have created a national agency fully or primarily focused on supporting their growth.3 However, operating these government agencies is challenging for the same reasons that markets have struggled to meet SMEs’ needs: their small scale and diversity of circumstances.
4. Governments and nongovernmental organizations (NGOs) seeking to serve SMEs’ unmet needs would benefit from two actions: first, understanding and improving the SME ecosystem and second, pursuing a targeted approach to serving various SME subsegments.
5. Specifically, they should focus on promoting three characteristics of a healthy and well-performing SME ecosystem: boosting the business confidence of SMEs, enabling the growth of SMEs—in general and for high performers—and increasing the competitiveness of SMEs.
6. Establishing these three characteristics requires a segmented execution approach. It is therefore important that government agencies design their menu of services after identifying the subsegments prevalent in their country and the differences in their needs. We have identified ten approaches that are used across the world to help meet these needs.
Source:
https://www.investmentmonitor.ai/sponsored/unlocking-global-frontiers-strategies-for-sme-international-growth/
https://www.mckinsey.com/industries/public-sector/our-insights/unlocking-growth-in-small-and-medium-size-enterprises
