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SMEs (Small and Medium Enterprises) Play a Major Role of a Country’s Economy or Development

The important role that small and medium enterprises (SMEs) play in a country’s economy is well-known and widely supported, especially in developed countries. And for a good reason. That is because SMEs account for not only a significant chunk of a country’s total income but also provides jobs to its citizens.

A Case Study: The European Union

Take for example the case of the European Union. As of 2003, 98% of the estimated 19.3 million enterprises within the EU are SMEs, meaning enterprises that have 250 or fewer employees. All in all, these enterprises provided the region with 65 million jobs.

On average, SMEs in the EU are only composed of four employees which already include the manager/owner. In fact, 18 million or 93.2% of these enterprises have only less than 10 employees, enterprises called micro enterprises.

SMEs by far are the largest employers in the EU. In 2003, these enterprises account for 66% of employment in the region. Of this figure, 34% are employed by micro enterprises (less than 10 employees), 19% by small enterprises (10-49 employees), and 13% by medium enterprises (50-250 employees).

Challenges of SMEs in Developing Countries

Unfortunately though, this isn’t the case in most developing countries. The governments and financial institutions in developing countries often fail to appreciate the role of SMEs in the development of their respective countries.

In developing countries, SMEs have more difficult access to finance than their counterparts in developed countries. There are a number of reasons for this. For one, financial institutions and commercial banks tend to prefer lending to government or large businesses. The reason for this is that government and large business are viewed as liquid and thus able to pay back their debts on time and in full.

In contrast, SMEs are viewed as high-risk borrowers considering the high mortality rates of SMEs. And since they are considered high-risk borrowers, high interest rates or short payment periods are imposed upon them, making it nearly impossible for SMEs to borrow money. Aside from that, most SMEs lack the necessary documents that help creditors and lenders assess their potential for success such as business plans, financial statements and accounting records. All of these factors contribute to preventing SMEs in developing countries from getting money in developing and expanding their businesses.

SMEs play a major role in a country’s economy or development. However, this fact is yet to be realized in developing countries where lenders and creditors place their money somewhere else, either in government or big businesses. When these challenges are overcome, only then can these SMEs achieve their full potential in powering the country’s economy and providing employment to its workforce.