COMMENT: Small business, big impact

Why raising micro, small and medium-sized enterprises might avert future backlashes by the poor on the rich

COMMENT | Arancha Gonzalez| The fruits of economic growth are not being shared widely enough. In many advanced economies, the anaemic post-2008 recovery has benefited the relatively rich, while large numbers of households have seen incomes stagnate or decline. In emerging markets, faster growth has lifted many boats – but there too, the biggest gains have gone to the better-off. Today’s political anger in the west might well presage future backlashes elsewhere.

Governments and businesses are aware of the risks, and have placed inclusive growth firmly, if belatedly, on the international policy agenda. The Global Goals for Sustainable Development, adopted by the United Nations in 2015, seek to boost incomes for the bottom 40%, en route to eradicating extreme poverty by 2030.  The G20 and the G7 now routinely call for job-rich growth that raises incomes across the board.

Whether we attain these objectives will depend, to a significant extent, on micro, small and medium-sized enterprises (MSMEs). The reason for this is straightforward. Jobs, and the incomes they provide, are the way most people share – or don’t share – in economic growth. And MSMEs, formally registered or otherwise, account for about 70% of employment and over nine out of every ten businesses around the world. It’s no accident that the UN Global Goals explicitly point to the potential of smaller firms in fostering inclusive growth.

Research by the International Trade Centre explains how MSMEs contribute to broad-based income growth. In all countries, large companies tend to be more productive than small ones. But this productivity gap is especially wide in developing countries. Low productivity for smaller firms translates to lower wages and worse working conditions across large sections of the workforce, particularly for women and young people.

Raising MSME productivity translates into better paying jobs in the segments of society that most need them. And when MSMEs become competitive enough to ‘internationalise’, whether by directly exporting or importing, or selling into local outposts of multinational supply chains, they register particularly high productivity, employment, and wage growth. Young MSMEs that manage to break into international markets are far likelier to survive and expand. If enough companies are involved in trade, rising incomes in these firms in turn put upward pressure on wages in the rest of the economy. Unfortunately, MSMEs are underrepresented in world trade, which in many countries is dominated by a limited number of relatively large firms.

The United Nations recently designated June 27 as Micro, Small and Medium-Sized Enterprises Day. The idea is to shine a spotlight each year on MSMEs’ critical role in achieving sustainable and inclusive growth, and more importantly, on what governments, businesses, and others can do to help MSMEs thrive at home and in the global marketplace. And it is not just in the United Nations context where the footprint of MSMEs is deepening, in the margins of the trade negotiations in the World Trade Organisation, a group of ‘Friends of MSMEs’ has formed to highlight the importance of looking at trade policy through the MSME lens

There’s a lot more for everyone to do. Access to information about export opportunities remains a major bottleneck for MSMEs seeking to export. Standard market studies cost the equivalent of two annual salaries in a typical developing country – negligible for a multinational, but potentially prohibitive for smaller companies. Bringing these costs down should be feasible in the information age.  Legal and banking reforms at home can bolster entrepreneurs by cutting start-up, financing, and bankruptcy costs. Implementing the World Trade Organization’s trade facilitation agreement will speed up customs clearance and make export- and import-related processes easier to navigate.

While many trade regulations are necessary to protect consumer health and safety, ITC analysis shows that the fixed costs they impose weigh disproportionately on the exports of smaller firms. To counter this, governments can encourage the use of international standards, and invest in trade promotion agencies and laboratory testing facilities for international quality certification. Such measures would lower the practical and financial obstacles MSMEs face, far more than their larger competitors, in meeting foreign buyers and complying with their market requirements. Agreeing on some basic international parameters for e-commerce, such as cross-border recognition of electronic signatures and payments, would make it easier for MSMEs to do business internationally over the internet.

Multinational firms can do their part by sharing regulatory compliance costs with their MSME suppliers, in turn broadening their sourcing networks. In addition, they can work to avoid unnecessary duplication in each other’s private standards, thus sparing, say, a Central American coffee producer from having to jump through different sets of hoops for each supermarket chain to which it hopes to sell shade-grown beans. MSMEs themselves can raise their game, investing where possible in training employees and developing internet and email skills.

The factors holding MSMEs back vary from one country to the next, and policymakers’ money and political capital is finite. To help them target reform efforts for maximal impact, ITC’s annual SME Competitiveness Outlook identifies the most serious bottlenecks to MSME performance at the national, local, and corporate levels. This year’s edition, to be published in October, looks at factors behind the bargaining power of MSMEs in multinational production networks, and points to how governments can foster the development of regional value chains.

Growth cannot become inclusive overnight. Human capital and social safety nets take years to build. But making it easier for enterprises of all sizes to grow and trade would help create better jobs for more people. Inclusive growth would encourage political and market stability. After all ‘Small businesses -big impact’.

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Arancha Gonzalez  is the executive Director, International Trade Centre