Why are SMEs important?

Why are Small and Medium Enterprises so important to the economy? The answer comes from many a different direction, and there are several reasons to consider. Some of these reasons may be seen as less clear cut than others, and some will appear to contribute on a much smaller scale, but they all come together to create the overall importance of SMEs.

The first angle which we will approach this question from is that of dependency vs entrepreneurship or enterprising. Large companies foster a sense of dependency; their employees become dependent on what the company provides in the form of processes, systems, career ladders and opportunities.; while innovations do come about in large businesses to quite some extent, they (generally, but with exceptions) less adept at fostering innovation. Employees also get “locked in” to the company, e.g. moving on to a different corporation is less attractive when you’ve spent 10 years climbing a certain career ladder. Granted, being higher up on one ladder will generally allow you to enter at a similar peg on the next, however the sense on depending on these large businesses remains.

Smaller businesses often foster a more open chain of communication with your superiors and/or employer/s, with each employee having a bigger say in designing the processes involved in everything from design to production, thus partaking in innovation.

Further, there are a set of characteristics which summarise SMEs in general, and these are

->SMEs have an advantage when it comes to responding to the market.

->SMEs are often more flexible than larger firms because of the fact that they will often rely more on skilled labour than on highly efficient machinery. While machinery provides the opportunity to create products and services of a more consistent quality at a lower rate, their flexibility is often low – machines are made for a specific purpose, and often only small changes can be made without rebuilding the machines and/or their setup which is both costly and time consuming. With skilled labour, on the other hand, changes can be made quickly and efficiently.

->The above also means that SMEs have the opportunity to realise opportunities in, for example, niches, quicker than a larger corporation.

It is also of utmost importance to remember the role of entrepreneurship which often carries a heavier weight in SMEs than in larger businesses. In particular, when talking about entrepreneurship in this context, I am referring to innovation. It used to be commonplace to believe that larger businesses were more innovative and more likely to bring around change in the market due to their larger market share, R&D finance capabilities, qualified management, specialised equipment and employees, etc. However, statistics and research dating back to the 1980’s has shown the SMEs are, in fact, keeping up with their larger rivals in this field and are often better at using R&D efficiently.

Furthering that note, it has been suggested by Kaplinsky that entrepreneurial employees within large businesses breaking out from their employing organisation to start a new venture based on something they have learned within the larger organisation is an key element to new developments. An example of this can be found within the development of CAD (Computer-Aided Design) technology, which was at first designed for in-house us at businesses such as IBM and wasn’t marketed to other organisations. However, employees who had helped develop these systems saw the opportunity at hand and decided to break loose from their current employers and developed, using the knowledge gained from their prior positions, more generally applicable CAD systems which could be sold to a broader market.

If the whole rant about innovation seems a bit random to you and perhaps as not relevant in answering the question I set out to answer; innovation fosters the creation of new business, the expansion of businesses and in some cases lays the foundation of a completely new market which, in turn, leads to new employment and an increase of GDP.

This brings us to the final argument of the importance of SMEs is that of their contribution to employment and GDP. Out of all the businesses within the EU, a staggering 99% are SMEs and they, in turn, contribute in excess of 50% of all employment and over 60% of private sector turnover. These are certainly not figures to be taken easily, and the importance of the SME sector is rather clear.