Allow me to share views on SME development originally written by my former colleagues at Small Business Corp., Charles Belgica and Odette Baua.
The advocates of SME development are often asked why they believe SMEs to be the vehicle for national social and economic development. “Why SME development when SMEs are only 8 percent of the total number of enterprises in the country? Why not focus on micro enterprises which represent 90 percent of all enterprises?”
The immediate answer that comes to mind is that this situation shows that most of our micro- enterprises do not develop to become SMEs. Either they are not sustainable and their growth peters out, or they remain a micro-enterprise forever. This is the reason the country does not have many global brands and businesses in the international market place.
The situation calls for efforts in incubating micros to become SMEs, and SMEs to eventually become large enterprises. Clearly, the gap in our development efforts is bringing micro enterprises to the next level of development which is becoming an SME. Hence, the need to focus on SME development starting with the graduating micros.
By their very nature, SMEs have characteristics that enable them to be catalysts for development. Their growth will pull people up out of poverty and ultimately uplift standards of living.
SMEs are More Stable
Even as we recognize that most businesses start from being micro, it is our best option that we invest or finance SMEs. First, is that unlike micro-enterprises, SMEs are at a level that is more stable and resilient having passed through the start-up stage and having paid the “tuition fees” for beginning enterprises. The entrepreneur running the SME is also more experienced having survived the early years of the enterprise. So it is theoretically less risky for the lender to finance SMEs, it being with more permanence and stability than micro enterprises.
Assisting SMEs has more impact than smaller enterprises. As SMEs grow so do allied businesses along its value chain. For example, in a manufacturing enterprise, from product design to procurement of raw materials, packaging and marketing will have various businesses either in the form of services or material inputs that are benefited by an SME’s growth. As the volume of production grow, so does the levels of contribution of the businesses in the value chain. So in effect, the development of an SME positively contributes to the growth of other SMEs as well.
Sustainable and Alive
A typical SME grows at an average of 10 percent per year. And a really good SME may grow at a faster rate. Regardless of their rate of growth, the fact is SMEs are “alive” and grow. For lenders this is a good thing because they can grow their loan portfolio as SMEs grow. The lender’s relationship with SMEs is sustainable as the business with SMEs grows over the years until they become big enterprises.
Because they grow and have a multiplier effect, they are good job creators. Yes, SMEs actually provide jobs for people within the community they are located. As they grow they create jobs not only within itself but also in the value chain.
At the macro level, in India for example, recovery in job losses during the recession was led by SMEs as they showed steady growth in job creation, creating about one million jobs per year. Overall, SMEs provides 40 percent of all jobs in India.
In Canada, a developed country, SMEs create about 100,000 jobs annually. In China SMEs provide 80 percent of jobs. In the Philippines, more than 60 percent of jobs are provided by SMEs.
Contributes to Economic Production
SMEs also contribute significantly to the country’s GDP. In the Philippines value added to GDP is about 37 percent. SMEs in our neighboring countries have value added to GDP which are much higher than those of Philippine SMEs. Japan for instance has more than 50 percent, China 45.4 percent, South Korea 46.5 percent, and Thailand 40 percent. The value added from SMEs in the case of the Philippines can still be significantly improved.
Germinate New Industries
Big business especially in developed societies originates from SMEs. And so did precursors of new industries. Japan which has a number of top global brands started many of these products in business incubation centers as SMEs. In the early 20th century, even large corporations such as Toyota, Honda and Sony started out as small backstreet factories.
Historically, manufacturing, in its earliest form, was carried out by artisans with assistants. These were small workshops usually based at home that did work on special projects. Usually, these artisans form guilds, which protected their “industry.” Furthermore before the industrial revolution most manufacturing were located in the rural areas which were household-based. These were technically SMEs, but the term was still unknown then.
The point here is that SMEs have the potential to germinate and bloom into new industries and the revitalization of SMEs can promote competition in the marketplace, creating new industries and becoming the motive force behind economic restructuring.
In more contemporary times, we see garage-based workshops which later became Microsoft, e-bay, Amazon, and spurred the dot.com era. There are numerous other examples of success stories of SMEs becoming big. Here are some of them aside from those already mentioned: Apple, Disney, HP, Amazon, Dell, Starbucks, Mattel, Harley Davidson, e-Bay, and many more.
Can stabilize society (inclusive growth)
Given the benefits of a robust and vibrant economy with a strong SME sector as its backbone, the social and economic life of people will be at par with those of the more developed societies of the world.
A strong SME sector will be able to stabilize developing societies. As providers of jobs, maker of new industries, contributors to economic growth, stable, growing and having the ability to spread wealth among the people, SMEs by themselves are able to stabilize societies.
Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. With an AIM-MBM and a Harvard-MPA, he is a part-time faculty of the Ramon V. del Rosario College of Business, De La Salle University.
The views expressed herein are his own and does not necessarily reflect the opinion of his office as well as the faculty and administration of DLSU.