Small and medium enterprises: Seizing the potential

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“Small is beautiful.” It is not unusual these days to apply this much quoted observation to the needs of small and medium enterprises. Indeed, SMEs are now very much in the public policy limelight, and when you consider that they account for over 95% of enterprises and 60%-70% of employment in OECD countries, it is easy to see why.

Entrepreneurship, research and development, innovation, job creation: the role of smaller firms cannot be underestimated. But nor can the challenges they face, particularly in a world where markets are globalising and large-scale enterprises dominate so much policy time. Yet, if governments focused more on SMEs, so much could be achieved.

The ability of smaller firms to create jobs is clearly a major attraction for governments in the short term, but by encouraging more SMEs to flourish, we can realise other economic and social objectives too, like expanding worker skills or even alleviating pockets of local poverty in inner cities or declining regions. Boosting women’s entrepreneurship, which is undeveloped throughout the OECD area, is another attraction, since this can help raise female participation in the workforce as well as spur productivity. And that means stronger growth for everyone.

The OECD has played a leading role in bringing the importance of SMEs into the public policy spotlight. We launched the Bologna Process in 2000, and are now looking forward to building on this work in Turkey in June 2004 (see article by Ali Coskun, "Motors of Innovation and Development").

We strongly believe that, with the right policies and frameworks, SMEs have a huge role to play. Countless firms enter and exit the market every year. While differences in the birth rates of firms are not very significant from country to country, young firms seem more likely to grow in the United States than in most European countries. The causes of this disparity owe much to the business climate, as well as to institutional and administrative differences, costs, and so on.

What can governments do? Overall, they must work to deliver a general business environment that is conducive to entrepreneurship, firm creation and to the rapid growth of innovative firms. This calls for sound fiscal and monetary policies, and structural reform to allow labour and product markets to function smoothly. That may mean taking action in areas like taxation, competition, financial markets and, of course, bankruptcy rules. It is crucial to ask early on if these policies dampen or enhance enterprise creation and respond to the needs of SMEs.

Regulatory and administrative costs can obviously impinge on entrepreneurial activity, dampen investment and R&D, and stunt firm growth. They can put firms out of business by absorbing too much time and resources. Even difficult exit conditions that make it costly for firms to wind down, such as lengthy creditor claims on assets or heavy redundancy rules, can discourage start-ups at the very outset.

Culture is another important factor for building an entrepreneurial society, influencing career preferences and shaping attitudes to risk-taking and reward. Governments have a role to play, via formal education and training (including lifelong learning), and fostering entrepreneurial attitudes.

With such an array of challenges, it is not surprising that SME participation in international markets lags significantly behind that of larger firms, whose command of resources and global reach can be significant. Some great innovations have come from SMEs, particularly in technological fields, but these often owe much to larger networks. Many entrepreneurs are seizing these opportunities and, indeed, global market access has become a strategic necessity. More could be done to help them, and in more complete ways – not just with marketing, but by providing easy access to information in such areas as tax, regulatory frameworks, trade rules, and other legal and advisory services. Helping them to gain access to finance is also important. Indeed, financing is frequently a major hurdle to overcome on the way to setting up and staying in business, with access to risk capital in particular being especially problematic in many countries.

There may be infrastructure issues governments could address, like expanding broadband and secure servers, since despite some success stories, SMEs in general have been slower than large firms to take to e-business. One reason is vulnerability to absorbing costs if transactions go wrong. Also, assuming there are e-solutions to their problems, SMEs frequently cannot afford or find qualified e-business staff. These major impediments for smaller firms simply lengthen the usual list of problems relating to trust, transaction security and, crucially, concerns about violations of intellectual property rights.

Only when the regulatory infrastructure throughout the entire system is worked out will SMEs be able to take full advantage of e-business. For instance, a low-cost online dispute resolution (ODR) mechanism among firms, and between firms and consumers, may be worth considering, and a concrete SME-related proposal will be presented to ministers for discussion.

The agenda

These are just some of the concrete issues that will be on the agenda for discussion at Istanbul. It will be part of an ongoing dialogue, also involving entrepreneurs themselves. The OECD Bologna Process membership now numbers 57 non-OECD countries, so we have a great opportunity to address these challenges head-on. A broad agenda based on reform and improving regulatory “quality” is needed and the June conference is expected to culminate in the adoption of an Istanbul Ministerial Declaration, in which governments reaffirm their commitment to SMEs and entrepreneurship through a range of policy actions addressing these problems.

Foremost among our goals is how to foster the role of SMEs for development. Indeed we must consider how SMEs might play a more vigorous role within international strategies, like the Doha Development Agenda, the Monterrey Consensus, the OECD Action for a Shared Development Agenda and the G8 Africa Plan of Action. Clearly, SMEs could make a valuable contribution to our efforts to meet the Millennium Development Goals.

These many challenges demand lucid decision-making, and so a key area we need to reinforce is the quality and amount of data we collect. Building databases and indicators is an endless, yet vital, task for understanding SMEs more thoroughly, checking progress and comparing situations between countries.

Expectations are high as we prepare for Istanbul. Apart from the ministerial, there will be a business symposium, and a special women entrepreneurship programme and workshop to exploit to the full. An Action Plan could be forged from this hub of high-level exchanges and activity. In short, we must take advantage of the Istanbul conference, not as a talk shop, but as a golden opportunity to show that small is indeed beautiful and that we are serious about building a more responsible and inclusive globalisation.


OECD (2003), OECD Small and Medium Enterprise Outlook, Paris.

OECD (2003), “Smart, as well as beautiful: the Bologna Process”, OECD Observer No 238, July 2003, Paris.

©OECD Observer No 243, May 2004

Economic data

GDP growth: -9.8% Q2/Q1 2020 2020
Consumer price inflation: 1.3% Sep 2020 annual
Trade (G20): -17.7% exp, -16.7% imp, Q2/Q1 2020
Unemployment: 7.3% Sep 2020
Last update: 10 Nov 2020

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