SMEs are key to strengthening productivity and delivering more inclusive growth. The role played by SMEs in our economies and societies is very significant. In most cases crucial. In OECD countries, SMEs represent approximately 99% of all firms. They provide the main source of employment, accounting for about 60% of jobs in the manufacturing sector and 75% in services, and generating between 50% and 60% of value added on average. In emerging economies, SMEs contribute up to 45% of total employment and 33% of GDP.
New and small firms are often dynamic and innovative. In Europe, SMEs account for about 20% of patents in biotechnology-related fields. More than two thirds of the national productivity champions in Europe - the most productive firms in their country and industry - are SMEs. This share exceeds 80% in knowledge-intensive services.
A healthy SME sector is a vital ingredient for inclusive growth, creating jobs across regions and sectors, including for the low-skilled. SMEs provide opportunities for skills development and help support their employees’ access to health care and social services. SME’s are also a powerful tool against the curse of informality.
However, the SME picture is mixed and challenging. Across the OECD, the level of productivity in micro enterprises is about half that of larger SMEs, which is lower than that of larger companies. The productivity gap has also widened since the global crisis, particularly in the manufacturing sector, exacerbating income and social inequalities.
SMEs are also disproportionately affected by regulatory uncertainty, complexity and inconsistency. Regulatory and tax compliance generate costs, sometimes excessive costs, which leads to informality. Thus, small businesses looking to expand or move into higher value added activities may feel that it’s not worth their while. This then generates a “low productivity / high-informality trap.”
Many SMEs also struggle to access finance. Our 2018 OECD Scoreboard on Financing SMEs and Entrepreneurs, which we just presented with Minister Guajardo, reports that in the United Kingdom in 2016, new lending to SMEs fell by -4.1% year on year. In the Netherlands, the drop was -17.1%. Latin America is facing similar challenges. According to last year’s OECD Latin American Economic Outlook, SMEs in the region receive only 12% of total credit, while SMEs in OECD countries receive 25% of total credit. In fact, one-third of small businesses in Latin America identify access to finance as a serious restriction.
At a time when the global economy is still underperforming, enabling SMEs to innovate and scale up is essential to boost aggregate productivity and foster more inclusive and sustainable growth. However, this will depend to a large extent on the ability of SMEs to ride the wave of digitalisation.
Too many SMEs are missing the opportunities of digitalisation and globalisation
If you are not riding the digital wave, sooner or later you are going to get stranded, probably without a paddle. Digitalisation is “globalisation on steroids.” It’s driving rapid change on an unprecedented global scale. This revolution brings great opportunities for SMEs. Digital technologies facilitate the emergence of "born global" small firms and offer new opportunities for established SMEs to scale up, enhance productivity and become global players.
However, digitalisation also brings great challenges. Many SMEs are struggling to convert the potential of digital into better access to markets and stronger productivity. In OECD countries, only 20% of SMEs are engaged in e commerce sales, compared to 40% of larger enterprises. To enable SMEs to catch up, investments in skills, organisational change, process innovation, new systems and business models are needed to spur the adoption and effective use of digital technologies.
Global Value Chains are also bringing new opportunities for SMEs to participate in the global economy. However, participation remains uneven across the SME population. Across OECD countries, on average 15% of micro-enterprises engage in international trade, compared to 60% of small enterprises and 80% of medium-sized enterprises. SMEs are also more affected by trade restrictions than large firms. For instance, for the cross-border export of services, an average level of trade restrictiveness means an additional 12% tariff for SMEs, relative to large firms.
The OECD is set to become the cathedral of SMEs
The OECD is working to help governments support SMEs to overcome these challenges, harness the digital revolution and make small businesses become big players in the global economy. The idea of producing an OECD Strategy for SMEs is under discussion. We should have one. In fact, we should have developed one long time ago. So, let’s catch up. We have the ambition to become the cathedral of SMEs! The “go to” place about SME policies.
So, How are we, at the OECD, addressing the challenges mentioned above and which way do we propose to go?
First, to start up, develop and grow, SMEs are more dependent than large companies on the business ecosystem. The 2017 OECD report on the SME business environment - Small, Medium, Strong - provides a comprehensive framework for SMEs to flourish and it provides policymakers with a means to benchmark the effectiveness of their policies.
Second, access to finance is essential for entrepreneurs to create and grow their businesses. The 2018 OECD Scoreboard on Financing SMEs and Entrepreneurs that I mentioned before shows that while credit conditions for SMEs have been improving, bank lending remains weak in many countries. The OECD is encouraging countries to step up their efforts. I am delighted that Mexico, our host country, has risen to the challenge and is devoting so much attention to supporting SMEs. The credit guarantee scheme and other measures taken by the National Institute of Entrepreneurs (INADEM) have likely contributed to the year-on-year expansion – around 14% – of the outstanding stock of SME loans between 2012 and 2015 in Mexico. As part of efforts to foster high-growth SMEs which depend less on debt, 40 public-private venture capital funds have been established.
The OECD is supporting all countries to step up their efforts to increase financing for SMEs, including through new standards such as the G20/OECD High-Level Principles on SME Financing. The Principles apply to diverse circumstances and different economic, social and regulatory environments. They provide broad guidelines for the development of cross-cutting policy strategies, efforts to benchmark policies and the assessment of current initiatives on SME financing at the local, national and international levels.
Third, the Organisation is also blazing a trail to help SMEs adapt and flourish in the age of digitalisation. Making the digital revolution work for SMEs is a key part of the OECD’s Going Digital project. This project is tackling a wide range of factors from complementary investments in knowledge-based capital, including data, organisational capital and process innovation; to sound competition and firm dynamics; as well as finance, taxation and regulation.
Fourth and last, but not least, skills: skilling, reskilling, upskilling. There is evidence that SMEs have higher skills deficiencies than large firms and that SME training efforts are on average significantly weaker per employee than in larger firms. To address skills shortages, more focus must be placed on entrepreneurship competencies, management and workforce skills, and on the promotion of financial education policies for SMEs and entrepreneurs.
The OECD’s work on The Missing Entrepreneurs demonstrates that entrepreneurship can be a powerful vector for upward mobility. Fully tapping the talent that flourishes in different parts of society, including young people, women, seniors, migrants, ethnic minorities and the disabled, can help increase both economic growth and social inclusion.
The economist E.F. Schumacher, author of the ground-breaking 1973 book, Small Is Beautiful: A Study of Economics As If People Mattered, once said that “Eagles come in all shapes and sizes, but you will recognize them chiefly by their attitudes.” Let’s be inspired by the attitudes of our entrepreneurs and SME leaders. By the innovation, the passion and the determination that make SMEs the backbone and so often the high-flyers of our economies and societies.
By Angel Gurría