Executive Summary
SMEs are key players in national economies around the world. Representing 99% of all businesses, generating about 60% of employment and between 50% and 60% of value added in the OECD area, they can play a major role in delivering growth that is more inclusive and whose benefits are shared more broadly. This is particularly relevant at a time when many countries face the challenges of low growth and productivity, along with rising or persistently high inequality. As important drivers of innovation, SMEs are also instrumental to ensure that economies and societies adapt to major transformations, such as digitalisation, globalisation, ageing and environmental pressures. To enhance the contributions of SMEs, policy should work to address the inefficiencies and barriers that may be holding back entrepreneurship and the development of small businesses, and ease SMEs’ access to resources that are strategic in a global and digitalised economy, such as financing, skills and innovation networks.
SMEs create jobs across different geographic areas and sectors, employing broad segments of the labour force. In addition, entrepreneurial opportunities represent an important vector for economic and social participation and upward mobility, by allowing disadvantaged groups, including young people, women, seniors, migrants, ethnic minorities and the disabled, to participate in the economy. These populations typically face specific barriers to business creation. Increasing entrepreneurship among these groups and improving the quality of their business start-ups can increase participation in the labour market and boost productivity.
At the same time, SMEs are a dynamic population, which is very diverse in terms of age, size, business model, performance, and the profile and aspirations of entrepreneurs. Their composition varies widely across countries and sectors, which is reflected in their diverse contributions to innovation, productivity, quality job creation and growth. This diversity has implications for how policies are crafted and requires a deeper understanding of the SME population, based on more comprehensive data.
SMEs that grow can have a considerable impact on employment creation, innovation, and the competitiveness of national and sub-national economies, as well as contribute to raising wage and income levels. Firms with different characteristics and sectors of activity can experience growth at various moments in their life cycle. At the same time, sustained growth is usually a transitory phase in the life of a firm, influenced by many factors, including entrepreneurs’ skills and ambitions. In this context, governments are increasingly focusing on the growth journey of SMEs to enable conditions for post-entry growth, growth of small firms into mid-size ones and the scaling up of mid-size companies, and seeking to better target and tailor their SME and entrepreneurship policies.
Some SMEs are at the productivity frontier and amongst the most innovative firms, jumpstarting new industries. These firms can exploit technological or commercial opportunities that have been overlooked by larger companies, and enable the commercialisation of knowledge generated by research organisations. Start-ups are a key source of radical and disruptive innovations, especially in sectors such as software, nanotechnology, biotechnology and clean technologies, including through increased competitive pressure they put on incumbent firms. More broadly, SMEs are often an essential channel for the diffusion and adaptation of innovations to different contexts. The contribution of SMEs to innovation has increased in recent decades. Enterprise innovation is often the outcome of collaborative efforts in which businesses interact and exchange knowledge and information with other partners as part of broader innovation systems. This shift towards an ‘open innovation’ paradigm, also in part facilitated by the digital transition, has reduced the need for innovation-related capital investments and eased participation in innovative activities by SMEs. It however requires SMEs to strengthen their capacity to tap into and participate in innovation networks, and policies can play an important role in this regard.
Access to the appropriate forms of finance is a key condition to enable small businesses to start up, develop and grow. Although SMEs’ access to bank lending has largely recovered since the financial crisis, market failures and structural challenges remain, including information asymmetries, high transaction costs in servicing SMEs, and lack of financial skills and knowledge among small business owners. Policies that help broaden the range of financing instruments available to SMEs and entrepreneurs can increase SMEs’ resilience to changing conditions in credit markets and improve their contribution to economic growth. The G20/OECD High-Level Principles on SME Financing advocate a holistic policy approach to addressing SME financing gaps, with a need to take into account both demand-side (e.g. lack of financial skills, disadvantageous tax treatment) and supply-side barriers (e.g. opacity of the SME market).
In addition, a sound business environment and a well-functioning entrepreneurial “eco-system” for business, including at the local level, is essential for countries and regions to spur SME development. Start-ups and SMEs are typically more dependent than large companies on their business environment. Due to internal constraints, they are more vulnerable to market failures, policy inefficiencies and inconsistencies, which may result from the interaction of regulatory and policy approaches across different areas. Appropriate institutional and regulatory settings, as well as enabling conditions to access markets and resources, are therefore indispensable to incentivise risk-taking and experimentation by entrepreneurs and ensure that business growth potential can be realised. A transparent regulatory environment, efficient bankruptcy regulation and judicial systems are essential to support the growth of start-ups and SMEs, especially in innovative, high-risk sectors, as well as to foster participation of SMEs in a globalised and digital economy, and further policy efforts are needed in these areas.
Stronger participation by SMEs in global markets creates opportunities to scale up and enhance productivity, by accelerating innovation, facilitating spill-overs of technology and managerial know-how, and broadening and deepening the skillset. International exposure, whether through imports, exports or foreign direct investment (FDI), frequently goes hand in hand with higher productivity and wages. However, in both OECD and non-OECD countries, few SMEs export directly and for those that do, exports typically represent a lower share of trade turnover relative to larger firms. However, SMEs’ indirect contribution to exports in OECD countries, as suppliers to larger domestic firms or multinational companies (MNCs), can represent more than half of total exports in value added terms. Enabling SMEs to become active in GVCs calls for whole-of-government approaches which address the constraints that SMEs face in internationalising, including access to information, skills, technology and finance, as well as trade facilitation and connectivity.
Digitalisation offers new opportunities for SMEs to participate in the global economy, innovate and grow, allowing SMEs to improve market intelligence and access global markets and knowledge networks at relatively low cost. They can also facilitate the emergence of different forms of growth, including “born global” small businesses or firms that achieve scale without an important mass of employees or other tangible assets. Furthermore, Big Data and data analytics provide new opportunities for SMEs to enhance their competitiveness, enabling product and service innovation, improved production processes within the firm, as well as a better understanding of clients and partners’ needs, and the overall business environment. The use of digital technologies can also facilitate SME access to skills and talent, through better job recruitment sites, outsourcing and online task hiring, as well as connection with knowledge partners. Furthermore, technology can facilitate access to a range of financing instruments, with innovative solutions to address information asymmetries and collateral shortages. However, to date, a large number of SMEs have not been able to reap the benefits of the technological transition. While, in most countries, the digital adoption divide with large firms is narrow for simple connectivity and web presence, the gap broadens when considering participation in e-commerce and the adoption of more sophisticated applications. Closing these gaps calls for policies to support the development of appropriate skills and complementary investments in organisational change and innovation.
Demographic change also brings about specific challenges for SMEs, such as skills shortages and business transfer needs. Across OECD countries every year, a significant number of economically sound SMEs disappear from the market as a result of problematic business transfers, with implications for economic growth, employment, innovation and social inclusion. While business transfer is essential for the continuity of firm activity and value creation, it may also represent an opportunity for new entrepreneurs to start a business and for SMEs to rethink their vision and business model, innovate by bringing in up-to-date knowledge, techniques and business methods, and thereby seize new opportunities. A stronger evidence base on business transfer is needed, as is raising awareness of the importance of early succession planning and acquisition opportunities for new entrepreneurs; fostering the development of business transfer markets; taking account of tax consequences on sale or disposal of SMEs; and ensuring an appropriate financing offer to facilitate transfer.
Successful entrepreneurship and business growth also require an expanded skillset to channel the complexities of today’s economies: from commercial (e.g. marketing and serving of new offers), to project management (e.g. logistics, organisations of events), financial (e.g. capital and cash flow management) and strategic thinking skills (e.g. building internal leadership, coordinating sets of actions to fulfil new strategic objectives). This might be particularly challenging for smaller firms and entrepreneurs, and policies that enable SMEs to develop, attract and retain qualified skills, both within and across borders, as well as to upgrade managerial capacities and practices, are therefore essential to boost growth. Workforce skills are also important, especially in small businesses, where a larger proportion of workers than in large companies are involved in the implementation of business innovation on the ‘shop floor’.
Available evidence suggests that there is substantial direct public expenditure on SME and entrepreneurship programmes. In addition, many other policy measures, which target SMEs have important indirect public finance implications through foregone tax revenue. Monitoring and evaluation is therefore essential to assess the economic efficiency of SME and entrepreneurship policies, and inform their design by identifying those programmes and policy features, which lead to desirable outcomes.
The main outcomes of the Ministerial Conference are embodied in the Declaration on Strengthening SMEs and Entrepreneurship for Productivity and Inclusive Growth. It highlights the multidimensional contributions of SMEs and entrepreneurs to inclusive growth, and the need for an enabling and evidence-based policy environment and supportive SME infrastructure to offer opportunities for diverse firms and a level playing field for all enterprises. The Declaration calls on governments to enhance SME participation in the national and global economy and enable SMEs to make the most of the digital transition. It underlines the importance of access to appropriate forms of finance; entrepreneurial opportunities for all segments of the population; entrepreneurship education and training and upskilling of entrepreneurs and workers; and multi-stakeholder dialogue on effective policies. The Declaration also encourages the OECD to consider a number of areas moving forward, including:
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supporting a better understanding of the heterogeneity of SMEs and entrepreneurs, the drivers of business creation and growth and policy implications across countries;
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deepening understanding of the combined effects of structural reforms on the SME business environment and of the role and impact of targeted policies;
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pursuing analysis on entrepreneurship that contributes to social inclusion;
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analysing key levers for enhancing SME contributions to sustainable and inclusive growth; and
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continuing to promote the sharing of best practices and the development of evidence.
This publication contains the documentation of the third OECD SME Ministerial Conference on “Strengthening SMEs and Entrepreneurship for Productivity and Inclusive Growth”, which was hosted by the Mexican Ministry of Economy in Mexico City on 22-23 February 2018.