The Role of SMEs in Economic Development:
International Experience and Perspective
Colombo, October 13, 2014
Dr. P. S. Srinivas, Practice Manager, Asia
Trade & Competitiveness Global Practice
World Bank Group
Developing countries need jobs and growth…….and SMEs
are big part of the solution
and SMEs are part of the solution
200
million
people are
unemployed
globally
600 million
new jobs needed
in next 15 years to
absorb new
entrants
99.8% of
enterprises
in developing
countries are
SMEs
37% of GDP
is accounted for
by SMEs
80%
of all jobs are in
SMEs
24% of
exports are
generated by
SMEs
2
2
SMEs and jobs
Employment Shares across countries
by Size and Age*
Share of
Formal
Jobs
Creation
of
Formal
Jobs
Informal
Jobs
• 50% of all formal jobs in developing countries
are in small firms ….and SMEs contribute 2/3
• The importance of SMEs for jobs is greater in low
income countries (LICs)
• SMEs create 86% of new formal jobs , a number
that rises to 95% in low income countries
• Older SMEs (>10 years) provide almost ¼ of jobs
• An extra 60% of jobs are in the informal sector
which is mostly micro; but has some small firms
that could grow if constraints are solved.
*Source: Small vs. Young Firms Across the World: Contribution to Employment, Job Creation and Growth, World Bank Policy Research Working Paper #5631, April 2011 by M.
Ayyagari, A. Demirguc-Kunt and V. Maksimovic; Based on WBG Enterprise Surveys
3
Many different kinds of SMEs…..but all critical to economic
development
Improving the ability of SMEs to become more
productive and create more jobs is key to
achieving many governments’ objectives of
eliminating poverty and reducing inequality
•
Informal sector correlated with low
productivity, and poverty
•
Many large firms employ more highly
educated professional staff so may not create
opportunities across society
•
For unemployed people, informally employed
or underemployed, SMEs represent a key
path to prosperity
•
At the same time, most SMEs face an uneven
playing field which stunts their potential to
grow
4
The composition of the SME sector changes as country
income rises
SME Share of Formal Employment , Informal Sector
and Entry Density* (Entry/1000 pop.)
•
As country income levels increase:
•
Informality declines
•
SME “churn” increases with active entry
and exit
•
SME productivity increases
•
Large firms grow their share of
employment
•
There are fewer binding constraints to
growth due to improvement in
Institutions
* Small vs. Young Firms Across the World: Contribution to Employment, Job Creation and Growth, World Bank Policy Research Working
Paper #5631, April 2011 by M. Ayyagari, A. Demirguc-Kunt and V. Maksimovic
5
SMEs are predominantly involved in low-added activities
across a large selection of industries
6
SME Productivity
• SME labor productivity is low
SME Labor Productivity (US$’000) Thailand
SME Labor Productivity (US$’000)
%
60
53
50
36
40
31
30
20
10
14
9
13
0
Source: Economic Intelligence Center 2012
7
7
Competitive sectors register more high growth firms
Competition encourages firms to innovate and renew technologies
Rubber
Wood
Elect.
Equipment
Apparel
Paper
Textile
Tobacco
Petroleum
Communication
Equipment
Vehicle
Office
Equipment
Source: World Bank
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SMEs vs. Young firms – Focus on promoting entrepreneurship
Entrepreneurship is the creation and growth of new firms. Young firms create more employment and are
more productive.
Colombia – Young firms create most
jobs regardless of size
Indonesia – Start up companies are more
productive1 relative to incumbents
Productivity of startups relative to incumbents
Panel B: All the Establishments
Employment created
.6
.4
.2
0
Size of firm
-.2
rgeAge of
firm
(years)
small
0 to 4
0-4
medium
5 to 9
5-9
10 to 14
10-14
15+
15+
Productivity of start-ups
surpasses incumbents in year
three after onset of firm – no
evidence that these are
concentrated in specific areas.
large
All
All
Source: Javorcik, Fritani and Iacovone (2012)
Source: Eslava and Haltiwanger (2013); Data Timeframe (1993-2009)
1: Total factor productivity
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Summary…….. rationale for public policy
1
They represent all but 0.2 % of enterprises, account for nearly 80 percent of jobs, but for only
37% of GDP and 24% of exports.
2
Most are in low value added activities, and in services, despite SME policies in almost all
countries
3
They are generally less productive than larger companies and most remain small, over time
4
Only a small portion (1 percentile in most Asian countries) grow and account for the bulk
of value added and jobs. Most remain small over time
5
Rate of informality is high.
6
SMEs face different constraints compared to large firms. Suffer more than large firms
from weaknesses in the investment climate, lack of access to finance, and lack of
leverage with government
7
Constraints vary by stages of development of SMEs
10
Typical approach to SME Programs
1
Well intentioned Governments want to remove constraints but in most cases end up
“throwing money at the problem”
2
Too many programs, too many implementing agencies, no or inadequate M&E,
limited adaptation of programs based on evidence
3
Focus on incentives, tax breaks, subsidies, reserve sectors
4
5
6
Fiscal incentives – reduced tax rates, tax holidays, investment tax credits, VAT
exemptions, lower import duties
SME-specific bank branches, SME bank lending targets, interest rate subsidies,
credit-guarantee schemes
Input subsidies, typically in agriculture
Effectiveness? Efficiency? Are policies achieving desired results? Can we do better?
How?
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Instead….an alternate approach
1
Take a strategic, comprehensive, demand-driven approach. Be ready to change and
adapt.
2
Focus on addressing market imperfections, market failures, and information
asymmetries --- help create markets , avoid having “permanent” programs. Reduce
fiscal burden caused by ineffective programs
3
SME strategy should be about facilitating entrepreneurship and enabling small firms
to grow
4
Strategy should be evidence-based with a strong built-in M&E component and
flexible as realities change and outcomes are evaluated
5
Only a handful of high impact programs/platforms needed each led by a single
agency that would coordinate with others
12
Sources of market failures and information asymmetries
High
Transaction
Costs
Lack of
Information
Small Scale
Operations
•
•
•
•
•
•
•
Inefficient
Markets
•
Due to their small scale, the cost of working with SMEs can be high. This
is a key cause of bank and corporate reluctance to work with SMEs.
Identifying efficient ways of transacting with SMEs is critical to leveling
the playing field for SMEs.
SMEs are less likely to have transparent information on past performance
and current operations, which increases the perception of riskiness
SMEs need solutions that increase transparency, governance and data
through partnerships and technology.
SMEs are typically too small to have a high level of specialization in
operations or management. Limited innovation.
SMEs need more efficient access to skills, technology and markets that
are relevant to the specific needs to their business and their sector.
In inefficient markets, banks and corporates have alternative to working
with SMEs where there is not a lot of competition so rents can be high
Identifying opportunities and demonstrating success in the SME space
can help markets respond better to SME opportunities
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SME Sector Strategy – Life-cycle approach or Staged Development
Globally, countries are recognizing that SME needs are largely influenced by the stage of development
SME Needs
SME Needs
•Talent retention
•Cost structure
optimization
•New product
development / product
adaptation
•Market knowledge
SME Needs
Stages of SME Lifecycle
SME Needs
•Market knowledge
•Global & local market
access
•Marketing and
promotion support
•Ease of regulation
•Talent acquisition
5
Exit / Expand
•Seed funding
•Ease of entity registration
and related licensing
•Product incubation and
commercialization support
4
Growth
SME Needs
1
Seed
The SME decides
on further
expansion or
exiting business
Stability
3
•Motivation to start new
enterprise
•Ease of divesture
procedures
•Ease of M&A
regulations and
procedures
2
Start-up
The SME exists
legally
The SME embarks
on begins entry into
new markets and
products
The SME
acquires loyal
customer base
and has stable
product base
SME sector needs change as
per the different stages of the
development lifecycle
The SME is only a
thought or idea
Time
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Take an ecosystem approach to SME development strategy
•
•
•
Reliable and low-cost power and water supply
Well constructed and maintained roads, railways and ports
A modern telecommunications backbone
•
•
•
•
A regulatory regime that provides a level field for SMEs
A stable and fair system for contract enforcement
An educated workforce with access to skills and knowledge
A national innovation system
•
•
•
Deep financial systems, financial infrastructure and regulation
A range of savings, credit and insurance products for SMEs
Growth capital for high-growth SMEs
•
•
•
Efficient and reliable access to good quality inputs
Modern technology & logistics to improve productivity
Efficient access to local, national or international buyers
•
If even one part of the ecosystem is not working, SMEs will have
difficulty increasing productivity and growing
Infrastructure
Enabling
Environment
Access to
Finance
Access to
Markets
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Example: The Malaysian SME Masterplan
Constraints to Growth
Innovation & Technology
Market Access
• Limited participation in national
innovation system
• Low product commercialisation
and R&D spending
• Poor technology uptake
• Low bargaining power
• Information barrier for exports
• Limited focus on marketing &
branding
Human Capital Development
• Workforce lacks job readiness
• Low utilization of existing
training
• Non-competitive rewards &
benefits
Legal & Regulatory
Framework
• Ease of obtaining licenses
• Bankruptcy law limits
entrepreneurs
• High cost of tax compliance
Access to Financing
Infrastructure & Security
• Underdeveloped non-banking
• Poor creditworthiness
• Lack of know-how and
resources
• Low and infrequent trade
volume
• Inefficient trade facilitation
system
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New SME Development Framework
Vision
Globally competitive SMEs across all sectors that enhance wealth
creation and contribute to the social well-being
SME Development Framework
Goals
Increase
Business
Formation
Intensify
Formalisation
Raise
Productivity
Expand
Number of High
Growth Firms
Innovation & Technology
Human Capital
Market Access
Legal & Regulatory
Environment
Infrastructure
Access to Financing
Focus Areas
Institutional
Support
Reliable
Database
5. Vision, Goals and Strategy (B)
Monitoring &
Evaluation
Effective
Coordination
Effective
Business
Services
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SME development: A shared responsibility
SME development through
public -private sector partnership
Private Sector
Government
• Facilitator
•Industry associations, chambers
& NGOs to develop SMEs
• Act as catalyst
•Large firms to mentor SMEs
•Participation in design &
implementation of programs
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THANK YOU
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Enabling environment
and Infrastructure
Strengthen operating environments
Power &
Infrastructure
Without power and hard infrastructure such as roads, railways and
ports, SMEs face higher and sometimes insurmountable costs to
doing business.
The burden of over-regulation, taxation, crime and corruption falls
disproportionately on SMEs who typically do not have the
management bandwidth, connections or financial strength that
larger entities do.
Educated
Workforce
Investment
Climate
SMEs depend on the education system to prepare workers and
management for the needs of the modern economy. SMEs have
fewer ways to improve the skill level of their employees.
Efforts to improve the enabling environment need not be targeted at SMEs to have an
important impact on SME growth and productivity
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Access to Finance
Finance: The most common constraint
Link to Jobs
• Finance allows SMEs to growth, invest and become more productive;
and it increases firm start-ups, dynamism and innovation.
• Financial sector deepening, independent of targeted SME programs, is
also strongly and disproportionately correlated with SME growth.
•
The Gap
7-8
25-30
• 30% increase in SME finance required in Emerging Markets, up to
300% in Africa and MENA
• 70% of SMEs have bank accounts ; 23% have loans
• Deeper gaps exist for some products and segments (e.g., leasing,
growth capital)
Constraint
•
•
•
•
Increase
Formal SME
Required
(%)
Credit Gap
100-125
13-16
300-360
270-320
Lack of collateral and skills of entrepreneurs
High transaction costs for banks
Weak credit data and ability to manage risk
Opportunity costs for banks that operate in inefficient markets
5-6
9-11
26-32
To reach the goal of full financial inclusion by 2020, new models
driven by technology and non-bank FIs are needed
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Access to Market
Market linkages
•
SMEs operate across agribusiness, manufacturing and service sectors, with services becoming
more important as economies grow
•
SMEs can only grow and create jobs if they have access to inputs and ready buyers for their
products and services
•
Most SMEs operate in corporate value chains or industry clusters; 1/3 of all economic activity
globally is associated with the 200 largest transnational corporations
•
High-growth companies tend to be SMEs that are involved in trade and utilize more modern
technologies, making them both more productive and greater contributors to job creation
•
Market linkages not only enable the transfer of goods and services, but also facilitate the
introduction of new skills and technologies, and increased efficiencies to SMEs
•
Integration into formal markets also help pull high-potential informal SMEs towards greater
formalization, and can improve SME access to finance
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