Is small still beautiful?

Small and medium-sized enterprises (SMEs) play a key role in job creation, providing two thirds of all formal jobs in developing countries and up to 80 per cent in low income countries.

Mario Berrios and Markus Pilgrim from the ILO’s Small Enterprises Unit.

GENEVA (ILO News) – Small and medium-sized enterprises (five to 250 employees) generate a large share of jobs in industrialized countries. This is a well-documented fact. But there is still an important debate about the role they play in developing countries. Are they also an important engine for job creation in these types of economies?

The International Labour Organization (ILO) and the German Agency for International Cooperation (GIZ) have just published a study analysing the impact of SMEs over job creation and poverty reduction in developing countries, and the results are quite encouraging.

The study – “Is Small Still Beautiful? Literature Review of Recent Empirical Evidence on the Contribution of SMEs to Employment Creation” – examines almost 50 research studies and concludes that SMEs provide two-thirds of all formal jobs in developing countries in Africa, Asia and Latin America, and 80 per cent in low income countries, mainly in Sub-Saharan Africa.

More important than holding the majority of jobs in low income and emerging economies, SMEs make a key contribution to the net creation of jobs, especially smaller and young firms.

There is a widely held view that, due to their shorter life span, SMEs do not generate many jobs, but according to the study, this is not true: 50 per cent of total employment creation comes from enterprises with less than 100 employees.

Job growth not only comes from existing companies but also from newly-created firms, especially those that grow very fast in the first years of activity.

These start-ups amount to a relatively small share of all companies, but it is estimated that they account for quite a large share of the total job creation.

Recent studies show this is indeed the case in developed countries. The research of this book points to a similar conclusion for emerging economies, where small firms tend to grow faster than large ones.

Nevertheless, we are far from fully understanding the way SMEs operate in low income and developing economies. There are key areas where data is missing, for example on micro and informal firms, and on the quality of jobs created in SMEs.

Needless to say good enterprise policies should support growth of all firms – big, medium and small, but it is important to keep in mind that SMEs face specific challenges: difficulty to access finance, greater burden from regulatory frameworks, and cost disadvantage to expand in relation with bigger companies.

We need targeted policies for SMEs, not because they are small but because they are key engines of the real economy and the seedbed for bigger enterprises. Small is still beautiful, as the saying goes, but only if we strive to make it a reality.

In a fast changing market environment, smaller enterprises are and will be key players in shaping the challenging reality of labour markets around the world.