A conducive business environment is needed for MSMEs to grow

MSMEs are closely linked to their local business environment and are more vulnerable than large enterprises to policy deficiencies and external market shocks, such as severe economic conditions or changes in economic regulations Sisir Pradhan | The Dollar Business

“Germany is an often cited example of a country with a healthy MSME sector”. Miriam Koreen Deputy Director of the OECD Centre for Entrepreneurship, SMEs and Local Development

The Dollar Business (TDB): How important is the contribution of the MSME sector (largely those in the manufacturing segment) for the world economy as well as world trade? Miriam Koreen (MK): MSMEs form the backbone of the economy in most developed and developing countries, accounting for more than half of all formal employment worldwide and for about 70% of employment and 65% of value added in OECD countries. In manufacturing, their contribution to employment ranges from 37% in the US to 80% in Korea. Around the world, they are on the front lines in the quest for growth and employment, and the fight against social exclusion and poverty. They are crucial engines for raising productivity growth by spurring innovation, and by stimulating stronger competition. When looking at world trade figures, the role of MSMEs may not appear to be prominent, since they typically account for a limited share of exports. However, when taking into account their indirect contribution to trade, particularly through global value chains (GVCs), their role is much greater. Indeed, GVCs are not simply a “big-firm story”. While multinational enterprises are the leading actors, smaller firms are often suppliers of intermediate inputs to exporting firms in their country and participate indirectly in world trade. In fact, the quality of inputs provided by local small suppliers is often crucial for the competitiveness of entire supply chains and larger groups that are directly engaged in fierce global competition. At the same time, in terms of small firms’ involvement in GVCs, wide divergences persist across countries. In ASEAN, for instance, the share of SMEs participating in global production networks, both as direct and indirect exporters, varies from 6.3% in Indonesia, to 46.2% in Malaysia. Those small firms at the forefront of technology or those producing high value added products and services and these are the ones that most frequently succeed in internationalising directly. Meanwhile, those MSMEs whose competitive advantage is based primarily on cost or those specialising in certain types of services that require face-to-face interaction – as generally the case within the manufacturing sector - are more likely to participate in GVCs as domestic suppliers of the export sector. TDB: What are some of the key factors for the growth and success of medium and small scale enterprises? MK: MSMEs are closely linked to their local business environment and are more vulnerable than large enterprises to policy deficiencies and external market shocks, such as severe economic conditions or changes in economic regulations. Indeed, more than half a decade after the onset of the global financial and economic crisis, MSMEs continue to feel its effects in their day to day operations. This higher vulnerability is largely related to their internal resource constraints, which makes it more difficult to navigate uncertain economic and regulatory frameworks, as well as to the constraints in accessing external resources, including finance, knowledge, technology and skills. For example, a biannual survey of SMEs in the euro area conducted by the European Central Bank indicates that finding customers, access to finance, availability of skilled labour, cost of production, competition, and regulation are regularly reported as dominant concerns for small firms. Policy makers thus need to undertake structural reforms to address long-standing market and institutional failures, support MSME development and spur the emergence and expansion of new and dynamic enterprises that will carry forward innovation and job creation A conducive business environment is needed for MSMEs to grow, innovate, and compete internationally. Most firms are (and remain) small, focus on local markets, and lack the scale and financial and managerial capabilities to compete internationally. Compared to their weight in number of enterprises and employment, MSMEs’ contribution to global GDP remains well below 50%, showing that their productivity tends to lag behind the rest of the economy. More specifically, a growing productivity gap can be observed between firms at the technological frontier (mostly large) and the laggards (mostly small), which in turn is related to varying degrees in the use of digital technologies, good managerial practices, innovation, etc. Such problems are frequently more pronounced in developing and emerging economies where many small firms continue to operate in the informal sector. TDB: Which are the countries that have registered a healthy growth of MSME sector in recent years? And what are the major reasons for the growth? MK: Germany is an often cited example of a country with a healthy MSME sector that is particularly successful in integrating GVCs due to, inter alia, well-designed access to finance measures that encourage export activities. A recent study by the OECD shows that Canada has a healthy entrepreneurship ecosystem and sophisticated policy intervention for supporting the MSME sector, with the resources needed for entrepreneurship largely in place, including finance, consultancy and networks, paired with positive framework conditions; and a wide range of support interventions from a mix of organisations (public/ private/ non-profit) and levels of government (federal, regional, local). Overall, it is important to keep in mind that MSMEs tend to be more impacted by the policy “eco-system” than larger companies. In countries where the sector performs well, e.g. in terms of firm or employment creation, innovation, etc., this is usually due to a coherent, and carefully crafted, enabling policy environment. Open trade and investment policies, for instance, are a “sine qua non” for MSMEs to be able to break into regional and global markets, since trade costs – such as red tape, regulatory complexity and opaque clearance processes - fall disproportionally on MSMEs compared to large corporations. Policies that help MSMEs scale up and strengthen their skills are equally important, since their ability to adopt new technologies and innovate, hire a skilled workforce and develop their human capital and management capacities is generally constrained by their small scale. Improving physical infrastructure, reforming governance, and co-ordinating SME support policies better regionally, nationally, and in consultation with the private sector are also key to enhance the business environment for SMEs.

March 25, 2016 | 11:20am IST

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The Dollar Business Bureau - Mar 25, 2016 05:45 IST

A conducive business environment is needed for MSMEs to grow

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