By Dr Teodorina Lessidrenska, Consultant, World Bank
Recent studies show that small and medium enterprises (SMEs) account for an overwhelming majority of private sector business and economic activity in both developed and developing countries. Given the role of micro-, small- and medium-sized enterprises (MSMEs)1 in the global economy, it is essential to understand their importance and potential contribution to the Sustainable Development Goals (SDGs)2.
MSMEs play an important role in most national economies, particularly in developing countries. Formal MSMEs contribute up to 45% of total employment and up to 33% of Gross Domestic Product (GDP) in emerging market economies. These numbers would be significantly higher when informal MSMEs are included.
MSMEs are major creators of jobs. In emerging markets, 4 out of 5 new positions in the formal sector were created by MSMEs, which is about 90% of total employment. The World Bank reports that 600 million jobs will be needed in the next 15 years to absorb the growing global workforce, mainly in Asia and sub-Saharan Africa.
MSMEs are particularly important for poverty reduction, especially in rural areas and amongst women and other socially disadvantaged groups. Because of their role and place in national economies, MSMEs are taking a lead in helping to meet most of the economic-related SDGs, including promoting inclusive and sustainable economic growth, increasing employment opportunities and decent work especially for the poor, advancing sustainable industrialisation and innovation, and creating a positive push for a higher quality of life, better education and good health for all.
In short, MSMEs are crucial to the Leaving No One Behind principle that is central to the 2030 Agenda.5
Given MSME contributions to achieving the SDGs, the Addis Ababa Action Agenda on Financing for Development underlined the importance of MSMEs to job creation and innovation for sustainable development in developing countries. That agenda also advocates for national governments, financial institutions and development banks to support MSME growth by providing a conducive regulatory framework, innovative financing solutions and systematic entrepreneurship training programmes.
In Singapore6, for example, more than 100 000 SMEs, which account for 70% of the country’s total SMEs, use business support programmes organised by the governmental enterprise development agency and centres. It is becoming increasingly important for governments to allocate the necessary resources, services and funding to worthy MSMEs and start-ups. Equally important is providing these MSMEs and start-ups with a platform to share and transfer knowledge across the business ecosystem, not only with each other but also with the investors, research centres and other stakeholders upon which they will ultimately depend.
According to the World Bank, incubators and business accelerators are emerging rapidly across Francophone Africa to support a new generation of young entrepreneurs. Initiatives like Afric’innov, Orange4Development and SPRINT hope to ignite a flourishing MSME sector that is so badly needed to create jobs and generate private sector-led, long-term economic and social development across the continent.
One of the many aspects of MSME development is the concept of social entrepreneurship. Indeed, using business to solve major social and environmental problems is gaining traction in East Africa and parts of West Africa, particularly in agriculture and telecommunications. It embodies the entrepreneurial spirit, long-established already in the West African tradition of market women and in modern examples of successful entrepreneurs as seen with M-Pesa (M for mobile, pesa for money in Swahili) and the social enterprise Esoko that offers apps to train and support farmers in monitoring production, increasing yield and expanding their marketing.
Even with a heightened global commitment to their growth, MSMEs still face multiple challenges, including limited access to finance, a lack of capacity and knowledge, particularly regarding business development, and insufficient marketing and strategic management skills. A report by Intellecap, analysing over 400 enterprises across East Africa, found that around half have not achieved break-even. The report concludes that investments of USD 100 000 to 500 000 are critical for the growth of these enterprises, but demand for such investments outstrips supply.
Unleashing the potential of MSMEs for the SDGs requires transforming policies as well as systemic changes in the way financial markets and institutions operate. This would reduce the constraints MSMEs face in accessing financial resources and catalyse the growth of informal MSMEs into formal ones. And the impact from this would be multiple and far-reaching, unlocking more sources of capital, fueling additional economic growth and generating further employment opportunities.
1. According to the IFC, in general, MSMEs are defined by as follows – micro enterprises: 1–9 employees; small: 10–49 employees; and medium: 50–249 employees. However, in the majority of countries, this definition differs from the local definitions not only by number of employees, but also by inclusion of other variables such as turnaround and assets.
2. The 2030 Agenda for Sustainable Development adopted in 2015 has established Sustainable Development Goals (SDGs) and targets demonstrating the joint commitment of Member States to free humanity from poverty, secure a healthy and sustainable planet, and to build peace and inclusive societies that promote prosperity and dignity for all.
4. OECD, 2017. Unlocking the potential of SMES for the SDGs https://oecd-development-matters.org/2017/04/03/unlocking-the-potential-of-smes-for-the-sdgs
5. By endorsing the 2030 Agenda, all countries pledged that “no one will be left behind. Recognizing that the dignity of the human person is fundamental, we wish to see the Goals and targets met for all nations and for all segments of society. And we will endeavor to reach the furthest behind first”.
6. Y. Sato. Development of Small and Medium Enterprises in the ASEAN Economies www.jcie.org/japan/j/pdf/pub/publst/1451/9_sato.pdf
This blog is part of a special series exploring subjects at the core of the Human-Centred Business Model (HCBM). The HCMB seeks to develop an innovative – human-centred – business model
based on a common, holistic and integrated set of economic, social, environmental and ethical rights-based principles. Read more about the HCBM here, and check out an event about it here
The HCBM project originated in 2015 within the World Bank’s Global Forum on Law, Justice and Development and is now based at the OECD’s Development Centre.