How far do governments need to go to support SMEs? Patrick Low, Fellow of Asia Global Institute, weighs in.
A couple of weeks ago the Geneva-based International Trade Centre launched a new annual flagship report. The ITC is a subsidiary of the World Trade Organization and the United Nations Conference on Trade and Development, and was established in the 1960s with a mandate to promote trade.
The ITC is one of the very few agencies connected to the United Nations family that talks directly to business. That alone gives it particular value in a context where its parent organisations and many other inter-governmental institutions do not do enough to connect with the broader stakeholder community.
True to its orientation, the topic of the first report is small and medium sized enterprises, carrying the main title of "SME Competitiveness Outlook 2015." SMEs are a fashionable topic of discussion these days. Forums like APEC devote work programmes to them.
SMEs are prominent in the global economy. According to the report, some 95 per cent of all firms are SMEs. They account for almost 70 per cent of global employment and half of GDP.
But SMEs generally lag in productivity compared to large firms, especially in developing and emerging economies. The gap is reflected in wage levels. This lack of competitiveness generally means a lower level of inclusiveness and has generated what the report refers to as a missing middle of mid-sized firms, particularly in developing countries.
The productivity gap behind this bifurcation needs fixing in order to make the economy more balanced, and firms more competitive. The report is rich in its analysis of these challenges.
Countries use varying size definitions to define SMEs and this hampers international comparisons. The reality is that most firms start small. Often they stay small and struggle with low productivity and low wages. Or they fold. In some cases, however, SMEs stay small from choice and nurture productivity levels comparable to those of larger enterprises.
The report discusses the opportunities that participation in global value chains offer SMEs as a means of specialising and upgrading, but correctly notes that such benefits are by no means guaranteed. It also emphasises the advantages of engaging in international trade in terms of acquiring know-how and learning to compete.
SMEs that operate digitally enjoy the significant advantage of being able to use an internet platform to reach a global customer base with little by way of additional costs to those incurred in a domestic setting.
A particularly useful feature of the report is the methodology it uses to assess competitiveness among SMEs in different regions. A competitiveness grid is developed to look at SMEs in terms of their capacity to compete, to connect and to change. These parameters are analysed both in terms of firm capabilities and the environment in which they operate.
The grid allows for a solid analysis of the multiple factors that hamper small firms. Comparisons across regions are also instructive.
Although the report does not say so, the vast majority of SMEs are services firms. It is easier for firms to stay small in the services sector because capital tends to be more knowledge-based and economies of scale are limited. In most economies services are beset by burdensome regulation to a greater degree than any other sector. The report does not pay enough attention to the services dimension.
On the policy front, an important question is how far governments should go in supporting SMEs, and with what policy instruments. There is some evidence, at least in richer economies, that subsidies and other benefits induce firms to remain small and less competitive. The lesson from that is that rather than subsidising SMEs, governments would do better to focus on the multiplicity of factors, including policy, that hamper firms disproportionately because of their size.
Perhaps the report could have made more of the difference between good and bad policies, but overall it is a useful addition to a growing literature.
A version of this article first appeared in the South China Morning Post on October 28, 2015 as New Research Focuses on Why Growth Tends to Elude Small and Medium Sized Companies.
The views expressed in this article are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.