Economic Progress

How small companies can change the world

Arancha González Laya
Executive Director, International Trade Centre
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Economic Progress

The global economy is slowing down. Downside risks are rising amid the slowest growth rates since the worst of the financial crisis.

Meanwhile, what growth there has been in recent years has been skewed disproportionately to the relatively wealthy, leading to rising inequality and social tension. After decades of targeting high growth, governments’ focus has shifted to better quality growth. Inclusive growth is the new holy grail.

At the United Nations last month, the world’s governments pledged to grow in a manner that is rapid, equitably distributed and environmentally sustainable. A tall order – but an indispensable one for meeting the new UN Global Goals to eradicate extreme poverty by 2030, expand opportunities for all, and protect our planet. The goals adopted in New York wisely recognised the potential of small and medium enterprises (SMEs) to foster growth and inclusiveness.

Small companies, big impact

New research from the International Trade Centre (ITC), the joint agency of the United Nations and the World Trade Organization, makes a compelling case for small and mid-sized firms as the missing link to inclusive growth. Our SME Competitiveness Outlook, released this week, aims to provide annual guidance on where best to concentrate efforts to boost countries’ SME sectors.

Jobs are the main channel through which people share in – or are left out of – economic growth. And SMEs, formally registered or otherwise, account for nearly 70 percent of global employment.

Large companies everywhere tend to be more productive than small ones. But the gap in productivity is far wider in developing countries. Low productivity in turn means lower wages and worse working conditions. This productivity gap has a silver lining: there is a lot of room to improve.

Improving SME productivity translates into more and better paying jobs, distributed across less fortunate sections of the economy. SMEs able to “internationalise”, whether by exporting or importing directly or selling to firms that do, register particularly high productivity, wage, and employment gains. Boosting the competitiveness of SMEs thus means working for inclusive growth.

Obstacles to growth

Figuring out how best to do so isn’t easy. Many different factors hold SMEs back. In some countries, tax policies dis-incentivise growth. In others, access to finance dries up the moment businesses become too big for micro-lenders. Intermittent electricity and spotty internet access often render them uncompetitive. Expensive transportation and long customs delays can frustrate attempts to operate across borders.

Sometimes the problems lie more with the firms themselves: they might lack skilled managers and staff, fail to understand market opportunities, or struggle to meet international health and safety standards. Even internationalising is no cure-all: smaller firms might struggle to move up from the most basic supply chain tasks, thus missing out on the biggest gains.

The SME Competitiveness Outlook helps us understand the country-specific constraints most relevant to business success by breaking them down into three key pillars: the ability of SMEs to connect, compete and change. It systematically analyses these determinants of SME competitiveness at the level of companies, their immediate business environment, and national policy.

Problems at any one of these levels can be fatal to international competitiveness. For instance, the ability of a country’s SME sector to supply quality goods in a timely and cost-effective manner is a function of firms’ own abilities, but also of the existence of a system to certify that their products meet international standards, as well as macro-level considerations like swift customs procedures. Similarly, smaller companies’ ability to absorb knowledge and adapt to changing market forces is shaped at multiple levels, from internet penetration rates to access to finance.

The findings will help governments and their partners identify which weaknesses are most harmful to SMEs, in turn paving the way for well-targeted reforms. After all, why invest heavily in expensive telecommunications infrastructure when what companies really need are bank accounts?

Good companies, bad environment

Among the lessons to emerge from the report is that across developing country regions, smaller firms vastly underperform larger ones in terms of using the internet to connect to customers. In landlocked developing countries, geographical barriers to markets are unnecessarily accompanied by virtual ones: their e-connectivity rates are among the world’s lowest.

Another insight is that capable, entrepreneurial firms can be dragged down by a bad business and policy environment. In terms of firm-level capabilities alone, smaller companies in Latin America and the Caribbean are leaders, outperforming their peers in other developing countries. Mid-sized firms in the region compare favourably to the global average. But Latin American SMEs are scarcely more competitive than their counterparts in the Middle East and North Africa, due to constraints in the business environment. Meanwhile, governments in South Asia and the Pacific region may want to take a closer look at firms themselves.

Macro-level problems cannot be fixed overnight. Quicker wins may be achievable at the local and sector levels, particularly through the public agencies and industry associations that play a critical role in helping SMEs connect to international trade and investment.

Even when the global economy was thriving, growth eluded too many countries and too many people. There are no easy answers for achieving growth that is both sustained and sustainable. But we now know a bit more about making it inclusive.

Author: Arancha González is the Executive Director of the International Trade Centre

Image: Nuno Carvalho, 34, CEO of The Portuguese Bakery, clears tables on a terrace at one of its outlets in Lisbon December 21, 2012. REUTERS/Rafael Marchante

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