SMEs Development

Small and Medium Enterprises (SMEs) account for over 95% of enterprises, 60-70% of employment and 55% of the gross domestic product and are essential to strengthening productivity and delivering more inclusive growth.

Even though there is a wide acknowledgement of SMEs importance to national economies, they yet face already identified roadblocks such as informality, low productivity and scarce access to finance that need to be addressed with a fresh impetus.

While SMEs heterogeneity in terms of their diversity, ecosystem and life cycle need to be properly considered, policy makers should focus on advancing concrete actions for each of SMEs’ stages of development: creation, survival and growth. When grouped around their stage of growth, it quickly becomes apparent that SMEs face common barriers that therefore should be tackled comprehensively.

In order to foster SMEs generation, G20 leaders should focus on ensuring a necessary competitive and stable economic environment to start their business and thrive.

Entrepreneurship is at the core of the SMEs formation, their survival and growth. Governments should aim at promoting entrepreneurship skills through education and training broadening the funding alternatives and financial assistance and introducing special entrepreneurship programs that may, for instance, temporarily reduce tax burden.

Equally relevant is the fact that SMEs need to develop capabilities to attract and maintain talent. Even if this is an issue transversal issue is common to enterprises of all sizes, SMEs often find this task particularly troublesome due to a lack of resources, that typically tied to their ability to compete with larger firms in terms of salaries, recruitment and on the job training opportunities.

The B20 also encourages the development of clusters and innovation networks to provide SMEs with an alternative way of sharing knowledge and best practices. Cooperation between different stakeholders -namely industries, research institutions, and universities- can improve SMEs’ productivity, competitiveness and foster innovation.

Across all stages of their life cycle, SMEs require access to sources of financing to start-up, survive and grow. SMEs’ “financing gap” is increasingly becoming one of the main challenges to development, particularly in developing countries. Since SMEs are often the most vulnerable link in national economies, financial inclusion should be at the center of any SMEs policy.  While bank lending is the most common source of external financing for SMEs, other forms of funding should be considered. Public-private investment to reduce the risk of business failure or crowd funding could be some of the alternative financial instruments to be encouraged. In addition, enhancing financial literacy of SMEs simplifying capital market procedures and lowering the accessibility cost structure especially for the unbanked, is key.

Similarly, institutional and regulatory settings are fundamental to ensure that all businesses compete on a level playing field. As complex regulatory frameworks inflict higher burden for small enterprises than larger businesses, tailored policies that advance regulation simplification schemes should also be implemented.  Increasing tax burdens and high administrative costs impacts negatively is on job creation reduction and/or rises informality. Administrative simplification, regulatory coherence and reduction of tributary weight is necessary for SMEs to scale up. An effective regulatory framework can help SMEs to improve their productivity and competitiveness, inclusion in global value chains becoming a part of the global economy.

Internationalization offers opportunities to SMEs expansion as it allows firms to specialize and benefit from knowledge spillovers from participation in global value chain. In order take full advantage of internationalization potential, G20 leaders should promote SMEs upscaling by investing in skill development, management organization and processes. In this respect digital economy offers new opportunities for SMES inclusion

Digital transformation also opens new opportunities for SMEs scaling up, reducing the cost of access to skill, talent, enhancing recruitment and knowledge partners through new communication channels and by enabling disruptive ways for business models to succeed, typically referring to e-commerce platforms. Furthermore, the use of digital tools grants SMEs access to global value chains and international markets.

Finally, a large number of SMEs have not been able to take advantage of the benefits of the digital economy. Adoption of digital technologies has not been equal between SMEs and larger firms. To narrow this gap, policies should target not only connectivity and digital infrastructure, but access to digital-enabled platforms, e-commerce and mobile applications.

The B20 SMEs Cross-Thematic Group is confident that the implementation of the recommended actions will allow for SMEs to deliver valuable contributions towards inclusive growth sustainable economic development.