Even though globally small and medium sized enterprises (SMEs) are recognised to be instrumental to private sector growth, creation of employment and the driving of innovation, their role still often goes unrecognised. However, the challenging times we live in have refocused the attention of policy makers around the world: The European nations’ 2020 strategy is now fully aimed at competitiveness and growth that is to be achieved mainly through the sustainability of SMEs. Indeed, the small enterprises account for more than 67% of private sector jobs, and for more than 58% of total turnover of the EU. In emerging economies SMEs have no lesser impact in ensuring growth and innovation, however, their sustainability is considerably endangered by the restricted access to financial resources. In this article, Dr. Hischam El Agamy explores what the challenges are that all SMEs face around the world and what they can do to overcome them to take advantage of a global market place.
Who are the SMEs
The definition of what constitutes an SME varies greatly between countries and sometimes institutions. For instance the World Bank defines SMEs as “those enterprises with a maximum of 300 employees, $15 million in annual revenue, and $15 million in assets” while the Inter-American Development Bank describes them as “having a maximum of 100 employees and less than $3 million in revenue”. In Egypt SMEs are enterprises that have more than five and fewer than 50 employees; Vietnam considers SMEs to have between 10 and 300 employees.
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While there are many definitions adopted by different parties, there is more consensus when it comes to the main challenge faced by SMEs around the world: External financing has become increasingly difficult since the economic crises thwarting opportunities for global expansion.
The funding problem
The financial crisis has halved Europe’s growth potential and has also put considerable pressure on emerging economies. For SMEs this means that many investment plans and ideas are not being realised because of the reigning uncertainty, sluggish demand, and, most of all, lack of funding. Conditions have become harder everywhere, and start-ups and small innovative enterprises are the greatest victims of this funding crisis. For example, in low-income countries, on average 43% of businesses with 20 to 99 employees list “access to finance or cost of finance” as a major constraint to current operations (World Bank Enterprise Surveys, 2010). In high-income countries, only 11% of businesses of the same size rate access to finance as a constraint.
While the funding crisis is very real, the financial crisis has also acted as catalyst for SMEs in developed countries for expansion abroad. These SMEs are now looking to the emerging markets for growth. According the Economist Intelligence Unit in a survey of 618 European SMEs in 2011, 58% of SMEs looked to emerging markets to sell their goods, 11% to manufacture their products and 12% to purchase services. This is an interesting change as several years before the crisis they would not have considered these market for their purchasing power. But the play goes both ways: While European SMEs are expanding in emerging markets they are losing market shares in their own economies competing with products exported by SMEs based in emerging economies.
Must-dos’ and -haves’
Clearly there is an unhealthy dynamic at play for SMEs in both developed and emerging economies. For their sustainability SMEs in either situation should invest in:
Firstly, They must differentiate themselves through outstanding operating performance while being efficient to stay competitive in the market. This requires significant investment in technology and people.
Secondly, SMEs have to know how to embrace changes within their organisations by maintaining a committed and motivated workforce. SMEs require a combination of both leadership and management and a creative strategic outlook.
Thirdly, SMEs must have a clear and proactive approach in managing their stakeholders. Efficient management of stakeholders’ relationship can provide SMEs with new business opportunities and also allow them to anticipate risks that could prevent the company growth.
SMEs will continue to play a major role in driving national competitiveness in developed and emerging economies. Despite all the challenges they are facing they will remain critical for their respective economies for job creation and stimulating innovation. Government and large enterprises are advised to create a more supportive climate that helps SMEs to sustain and grow for the good of the economies no matter their state of emergence.
Tharawat Magazine, Issue 23, 2014