Working Paper: Unleashing the Full Potential of SMEs: Beyond Financing
Posted on Sunday, July 27, 2014
A strong SME sector can be the major source of job creation and growth in an economy. It rests, however, on creating and maintaining a strong, supportive ecosystem, which is ultimately a question of governance.
Amid global risks of a slow, jobless recovery, promoting the development of small and medium sized enterprises (SMEs) is a critical policy objective because they are major contributors to GDP, job creation, poverty reduction and market innovation.
Globally, SMEs account for over 60 per cent of GDP and more than 90 per cent of employment.
Contrary to expectations, most micro and small enterprises operate in the services sector, whereas the more visibly successful SMEs in the manufacturing sector are medium-sized.
SME growth is hindered not just by a lack of financing, but also by serious non-financial constraints, such as insufficient skills and technology, high transaction costs, poorly defined property rights, inadequate market access and poor coordination of government SME support.
Asia needs to adopt a more integrated approach to promoting SME development, combining measures to improve access to finance with initiatives to tackle other constraints. Public and private sector stakeholders need to work together (both top-down and bottom-up) to develop a supportive and dynamic ecosystem that draws on public-private sector support mechanisms to enable SMEs to thrive. Talent development and effective use of technology are key.
Globally and regionally, there are examples of successful SME development initiatives in many countries from which different Asian stakeholders can learn, including:
Determine explicitly the overall approach to SME development and the respective roles of government, business and the education sector.
Streamline SME support through a one-stop agency for SME development (simplified procedures, innovation, technology and specialized support services, especially for SMEs expanding overseas).
Invest in and support public-private development of consistent information standards and systems (e.g., accounting standards, SME credit bureau, marketing database) to improve information base.
As needed, play an enabling and regulating role in the creation of integrated payments and trading platforms for SMEs
Offer both equity and debt financing options.
Take advantage of supply chain finance to improve credit availability.
Facilitate SME access to bank credit via standardized and simplified loan procedures and improved risk assessment that take advantage of all available information.
Develop new business models by leveraging on new technologies.
Establish a dedicated exchange for SMEs to raise funds via capital markets.
Invest in up-front financial literacy and education for new SME customers.
Business sector and chambers of commerce:
Promote research and development, skills upgrading/apprenticeship programs.
Improve understanding of how to link with global supply chains.
Support internationalization of SMEs.
Working with business schools, use e-learning to spread management and technology faster to SMEs.
Provide SMEs with mentoring and guidance on marketing and distribution.
Educational sector and academia:
Design curricula, vocational training and apprenticeship programs to develop individuals with the right skill sets for SMEs.
Take part in periodic joint review and feedback work on the effectiveness of SME programs for innovation, job creation, exports and national competitiveness.
The views expressed in this report are those of the author and do not necessarily reflect those of the Fung Global Institute. The author is solely responsible for any errors or omissions.