Critical motors of growth and job creation: How the rest of the world views SMEs

"We seek to strengthen US-EU cooperation to enhance the participation of SMEs in trade between the United States and the European Union."

This official announcement on the website of the US Trade Representative (USTR) office demonstrates how the world's number one economy values its small businesses.

Both the US and the EU acknowledge small and medium enterprises as the backbone of their economies. Millions of small manufacturers in Europe and the United States produce some 30% of goods exported from both markets. Even then, the US and EU want to move further under the Transatlantic Trade and Investment Partnership (T-TIP) to help SMEs support jobs and businesses on both sides.

Major Asian economies like China, Japan, South Korea, and European countries like Germany, along with peers in the club of highly industrialised nations — OECD (Organisation for Economic Co-operation and Development), recognise SMEs as critical motors of growth and job creation.

An analysis of contributions of SMEs in jobs and economies worldwide shows that economic growth is closely linked to the development of SMEs, which create jobs and feed bigger industries which share a very small portion of employment.

Developing countries in Asia are also focusing their attention on the development of small businesses to ride to the next level. Indonesia, Vietnam are among them.

But here in Bangladesh, SMEs are still left to struggle on their own to survive and grow.

Even after several reviews, the very definition of SMEs still remains ambiguous, creating hassles for small entrepreneurs while approaching banks for loans or authorities for registration. An SME policy is there, but still remains mostly unimplemented with only a year left before it expires.

Various incentives offered by the government did not help small entrepreneurs much to pull away from the pandemic-induced devastation. Rather, they are now confronted with fresh challenges, one worse than the other.

Shabab Leather founder Maksuda Khatun is worried about where to sell her stockpile of products worth around Tk1 crore as demand falls.

Her business was severely affected by the Covid-19 closures. Now, it is the Russia-Ukraine war.

"Since the start of the war, the price of raw materials has almost doubled, increasing our production costs," the entrepreneur lamented as The Business Standard approached her ahead of the International SME Day 2023.

The day was observed ceremonially on 27 June in Bangladesh too, with pledges to make ways easier for SMEs repeated. But these small manufacturers, employers and manufacturers remain neglected. Unlike big business lobbies, the SME associations and even the government's SME Foundation failed to make their voices heard during the annual budget preparation.

But the opposite is happening in developed countries.

The US and EU, whose SMEs provide over half of all jobs and two-thirds of all private sector jobs respectively, now look to promote those small ventures with tariff rebate and relaxed rules under a new trade deal. 

"The Transatlantic Trade and Investment Partnership will create new opportunities in both the United States and the EU. These opportunities will be especially valuable for SMEs, given that trade barriers tend to disproportionately burden smaller firms, which have fewer resources to overcome them than larger firms,"reads a USTR document.

Since 99% of European and US companies – over 20 million companies in the European Union and 28 million in the United States – are SMEs, they figure prominently in trade policy making.

The 99:1 ratio is common in composition of small and big companies in most other industrialised countries including Germany, where SMEs account for more than half of our economic output and almost 60% of jobs. SMEs, also known as the 'Mittelstand' in Germany, are the country's strongest driver of innovation and technology, which is behind the success of the 'Made in Germany' trademark worldwide.

In Japan, SMEs represent an impressive 99.7% of all businesses and employ approximately 70% of the country's workforce. Recognising the essential role of SMEs, the Japanese government has established policies and programmes to support SMEs' growth and development as SMEs account for 69% of the private sector labour force.

Apart from spending billions in the Safety Net Loan Scheme — crisis response cash grants after Covid-19 — Japan announced a special $4.1 billion subsidy package for SMEs to help them adopt IT solutions and develop e-commerce sales channels.

SMEs are regarded as the backbone of China's economy as they contribute over 60% to the total GDP, 50% of tax income, 79% of job creation and 68% of exports. The People's Bank of China reduced refinancing rates and set up special low-cost refinancing funds multiple times to support SMEs.

Tax cuts and financial incentives bring about five million new SMEs every year in China.

SMEs are even more vibrant in South Korea, accounting for 99.9% of all domestic enterprises and providing more than 80% of all jobs in the nation. In terms of value-added, Korean SMEs generate over 60% of all business sector GDP.

These data show how SMEs created the backbone of these economies and are still driving their growth and employment.

However, there is not updated acceptable official data on SMEs, their contribution in GDP or employment in Bangladesh.

Some figures are cited in relevant official documents with no reference to sources. It is said that about 7.8 million cottage, micro, small and medium enterprises employ nearly 21 million manpower directly and indirectly. The contribution of SMEs to the economy is about 28%, which the government's SME policy aims to increase to 32% by 2024.

The World Bank says nearly 10 million SMEs are contributing to 23% of the GDP, 80% of jobs in the industries sector, and 25% of the total labour force in Bangladesh. The global bank, which ran a number of schemes to support small businesses, says MSMEs are the backbone of non-farm job creation in Bangladesh.

Despite the absence of consistent data over time, the World Bank draws some useful conclusions from the 2013 Government Economic Census and the Enterprise Survey which counts a staggering 7.8 million enterprises, of which almost 89% belong to the cottage and microenterprise segment, and 11% to the small enterprise segment. 

Some 99% of all non-farm enterprises fall into the micro and small segments, providing employment to 20.3 million. "As such, this makes them the largest source of employment apart from agriculture — and a key contributor to poverty reduction. The MSME sector overall provides 86% of total employment outside of agriculture and the public sector," it says.

Worldwide, small and medium enterprises have a common abbreviated name — SMEs. In Bangladesh, their abbreviations vary: sometimes SMEs, sometimes MSMEs or CMSMEs representing cottage, micro, small and medium enterprises. There are policies and schemes too, but those have made little change in their real situation so far.