Unlocking growth in small and medium-size enterprises
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.
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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.
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.
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.
Improving SMEs
Improving the productivity of SMEs is therefore a worthwhile endeavour.
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.
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Because they are unhindered by legacy systems and outdated strategies, new market entrants are often able to rethink established practices and cut through traditional industry boundaries.
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
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.
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.
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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.
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.
Our research, analysis, and experience working with SMEs and SME-development agencies suggests that 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.
Characteristics
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.
Establishing these three characteristics requires a segmented execution approach.
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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.
In our experience, 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.
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.
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.
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