Improving SME competitiveness: To target or not to target? What businesses, and how?

Globally, small and medium-sized enterprises (SMEs) make up 95 percent of all businesses, employ 70 percent of the workforce, and are frequently argued to be the “missing link” between growth and inclusiveness. In the words of Anabel Gonzalez, Senior Director of the World Bank Group’s Trade & Competitiveness (T&C) Global Practice, SMEs hold the potential to be “an engine of growth and employment,” but “they face hurdles in competing in domestic and international markets.”
 
Marion Jansen, Chief Economist of the International Trade Centre, shared her insights on this question in April, when she presented ITC’s new SME Competitiveness Outlook at the inaugural event of a new learning series organized by the Investment Climate Applied Research team. Drawing on the input of thought leaders, case studies and detailed country profiles, the report’s framework organizes relevant micro-, meso-, and macro-data from well-known sources (including the Bank Group’s Enterprise Surveys) along three pillars — connect, compete and change — illustrating that advancements in SME competitiveness must cut across three layers: the firm’s own capabilities, the immediate business environment, and the broader national environment (from customs tariffs to the efficiency of government procedures).
 
While it is common knowledge that SMEs are far less internationalized than large firms, the report finds that access to information about export opportunities is the Number One bottleneck that SMEs face. By both mapping out new export markets for a country’s existing exportable products and identifying the top products with diversification potential, the report provides an interesting combination of trade-potential analysis and SME policy guidance.

Indonesia, for example, was found to hold unrealized export potential for tin, rubber and palm oil within the Asia Pacific region, while the SME analysis showed that firm-level constraints were the main factors holding back local SMEs eager to capitalize on these opportunities. Moreover, an analysis of Colombia revealed that the country has not been realizing its full export potential to OECD countries. The main issues for Colombian SMEs appear to be less related to firm-level constraints than related to the general investment climate — in particular, in terms of customs efficiency.

We all know by now that there is a distinction between the majority of small firms in developing countries that fail to expand beyond a few employees (‘survivalists’) and a small group of high-performance firms (‘gazelles’) that experience rapid growth (Nichter & Goldmark, 2009). In fact, in developing countries, the productivity gap between large firms and SMEs is double that observed in developed countries. Closing that gap could yield large payoffs that are more likely to reach the bottom of the income pyramid. The argument is that, because SMEs are, on average, less productive than large firms, employees are paid lower wages. To remedy this situation and help elevate those at the bottom of the pyramid, the development community in the past decade has committed billions of dollars worldwide to support SMEs.



Source: Jansen, M., 2016: “SME Competitiveness Outlook 2015.” Presentation at the World Bank.
 

Yet, at the May 2016 Business Environment Forum, hosted by the T&C Investment Climate practice, Professor Michael Klein gave an interesting presentation that addressed the question, “Does Size Matter?” His talk shed light on whether or not firm size is a special factor in spurring job growth. Ultimately, he argued that it is neither firm size nor the quantity of created jobs that matter: Instead, the key factor is the firm’s potential to create productive and sustainable jobs. Policies aiming to improve SME growth opportunities should address “across-the-board” regulatory obstacles in the business environment (along the lines of the “Doing Business” indicators) that are size-insensitive but that bring disproportionately greater benefits to SMEs.
 
Beyond the enabling environment, “identifying and cultivating high-potential SMEs remains a significant challenge.” For investors and government support programs, as Professor Klein outlined, the question becomes how to place bets on firms with strong growth potential. Having more experienced entrepreneurs, and using market tests linking SMEs to lead firms, to multinationals or to larger domestic firms, seem to be sensible pointers. But there remains a large knowledge gap in understanding the impact of interventions that try to target high-growth businesses in developing countries.

 
References:
 
Fafchamps, M. and Christopher Woodruff. 2016. “Identifying Gazelles: Expert Panels vs. Surveys as a Means to Identify Firms with Rapid Growth Potential.” World Bank Group. Policy Research Working Paper 7647.
 
Gonzalez, A. 2014. “Helping Small Business To Be An Engine of Growth and Employment.” The Trade Post: Making International Trade for Development blog. World Bank Group.
 
Iacovone, Leonardo, Vijaya Ramachandran, and Martin Schmidt. 2014. “Stunted Growth: Why Don’t African Firms Create More Jobs?” World Bank Group.
 
International Trade Centre. 2015. “SME Competitiveness Outlook 2015.” International Trade Centre.
 
International Trade Centre. 2015. “SME Competitiveness Outlook 2015: Executive Summary.” International Trade Centre.
 
ITC News. 2015. “Keynote address by ITC Executive Director Arancha Gonzalez at the W20 official Launch event.” International Trade Centre.
 
McKenzie, D. 2015. “Identifying and Spurring High-Growth Entrepreneurship: Experimental Evidence from a Business Plan Competition.” World Bank Group. Policy Research Working Paper 7391.
 
Nichter, S., & Goldmark, L. (2009). Small firm growth in developing countries. World Development, 37(9), 1453-1464.