SMEs and Economic Growth

A Small and Medium Enterprise (SME) has different definition, based on which organization is defining it. The World Bank defines an SME as a business enterprise employing less than 300 workers, with an annual turnover and assets of less than $15 million each. The African Development Bank, on the other hand, defines SME as a business entity with less than 50 workers. Norway defines SME as an organization with less than 100 workers, while Vietnam defines it as one with less than 300 workers.

Small and Medium Enterprises (SMEs) provide an important avenue for job creation in any country - developed or developing. For example, in OECD countries, about 60 to 70 percent of all workers work in SMEs, showing that most workers are not employed in public sector or in large enterprises. There is an important link between SMEs and economic growth. Cross-country analysis has shown that growth in SMEs can positively increase economic growth. An analysis from India also shows the positive link between SME growth and GDP growth. A recent World Bank study has shown that giving funds randomly to small businesses in developing countries can increase their size, which can eventually help to improve job prospects and development of poorer countries.

Not surprisingly, a better business environment positively contributes to the growth of SME. However, SMEs face impediments to grow, because of financial constraints. An SME might find it harder than a large firm to raise capital for expansion. Although commercial banks find lending to SMEs as profitable entities to loan funds, much of their loan portfolio is dedicated to larger firms. Developing countries should therefore ensure that they have favorable business policies and ease of raising capital for SMEs. Besides attracting large scale FDI (which may, or may not have the desired economic effect), governments should promote the development of the SMEs. This can help to generate employment, raise incomes and enhance economic growth in the long run.