Small and medium enterprises (SMEs) make a substantial contribution to economic activity, job creation, and economic growth in all countries. In developed economies, they account for approximately 50–60 percent of gross domestic product (GDP) and 60 percent of jobs. SMEs’ contributions in some developing economies can approximate these numbers, while elsewhere their contribution is more minor. Governments facing a challenge of stimulating job creation, diversification, and other economic goals frequently turn to SME policy and programs to bring about these changes.
However, the category of “SMEs” captures a very heterogeneous universe of companies. Not all SMEs have the desire or ability to grow, and they face a range of different markets, systems, and capabilities failures. They have potentially different policy needs and economic impacts depending on their size, their age and capacity for growth. Most SMEs do not grow significantly after their establishment, and a large proportion actually fail in their first few years of operation. Although most SMEs are not going to be drivers of economic growth, improving their efficiency can have a positive economic benefit because SMEs provide a substantial baseload of economic activity and employment.
A much smaller proportion of SMEs can and will grow, but it is very difficult to identify in advance which firms will grow. Given this, it is useful to have a framework for characterizing types of SMEs. This recent World Bank paper presents a typology for categorizing firms and their growth orientations:
New or young firms:
- New subsistence micro-businesses, which are unlikely to ever grow
- New, competency-based micro, small, and medium enterprises (MSMEs), whose growth trajectory depends on the capabilities within the business and market conditions
- Start-ups, which are engineered to grow quickly and significantly.
- Micro-businesses, which generally have little potential for growth, but this can vary
- Established SMEs, which most likely do not have growth aspirations but may develop them
- Established, growth-focused SMEs, which generally have growth intent and grow through new products and market entry, through mergers and acquisitions, or a combination