As the predominant form of business and employment, small and medium-sized enterprises (SMEs) are main drivers of productivity and key actors for building more inclusive and sustainable growth.

Across the OECD, almost one out of three employees work in a micro firm with less than 10 employees and two out of three in an SME with less than 50 employees. SMEs are majority in service sectors where entry costs and capital intensity are lower, and the scale of production smaller. They dominate some knowledge- and digital-intensive services such as legal, accounting and management services.

After several years of slowdown, the SME engine has started again, as market conditions got more favorable. Enterprise creations are back to, or above, pre-crisis levels in many countries. In the UK, the number of new firms nearly doubled between 2002 and 2017, and it more than doubled in France between 2000 and 2017. The strengthening in business dynamics worldwide has been mainly driven by rising global investments, a rebound in business confidence and good market prospects.

Access to finance is less of an issue for SMEs and entrepreneurs. Although challenges persist for micro-firms, start-ups and innovative ventures, bank credit conditions are accommodative by historical standards, interest rates being particularly low. The supply of alternative sources, such as asset-based and equity funding, has increased rapidly. New Fintech models (e.g. peer-to-peer lending, alternative risk assessment tools, or Initial Coin Offerings) are broadening the range of financial services available for SMEs. China alone raised the equivalent of the Slovak Republic’s GDP through online markets in 2017 (USD 112 billion) and online financing has gone through double (and triple!) digit growth in many countries, contributing to diversifying SME financing (OECD, 2019b).

However, with wages at half-mast, the recovery is not providing its full benefits. Firm creation has been driving job creation since 2010. But most new firms and jobs were created in lower productivity sectors, such as construction or accommodation and food services. Lower productivity has resulted in lower-paid jobs. Between 2010 and 2016, close to 90% of the net new jobs in France, 75% in the US, and 66% in Germany and the UK, were in lower-wage sectors.

And there are signs that the global expansion has peaked and SME market prospects are tightening. The global economic slowdown put a brake on business activities. Rising commercial tensions are hindering trade and foreign investment by multinationals (MNEs), with cascading effects along the global value chains (GVCs). Foreign direct investment (FDI), at its lowest level since 2013, has already decreased by 44% between 2017 and 2018. The fragmentation of production worldwide provides smaller businesses with significant scope to compete in specialized segments of GVCs. In addition, FDI is increasingly targeted towards the acquisition of digital assets, reinforcing the importance of MNE-SME linkages for technology upgrading. As market prospects abroad narrow and investments by multinationals recede, there is less room for SMEs to go global and capture skills, tech and innovation spillovers from trade networks and multinationals. And skills, tech and innovation are precisely what SMEs need to boost wages and performance.

Digitalization opens up new opportunities for SMEs to access global markets and improve performance. Digitalization enables greater supply chain integration, product differentiation and new business models that leverage shorter distance and time to markets, benefiting smaller and more responsive businesses (e.g. Internet of Things, big data analytics, artificial intelligence, 3D printing).

Digital technologies can help reduce fixed costs that weigh disproportionately on smaller firms handling smaller cargos and volumes of production. These include the costs associated with transport and border operations, the costs related to information and communication (e.g. blockchain), the costs related to digital equipment and maintenance (e.g. cloud computing services), or the costs incurred for accessing networks, resources and markets (e.g. digital ‘brokering’ platforms and marketplaces).

Digitalization is also a game changer in public services to SMEs. E-government applications are spreading, from business development services, to license systems, to tax compliance etc. Greater data availability, combined with behavioral insights, is allowing governments to adapt their operations to user preferences, creating room for policy experimentation (e.g. tax compliance by design).

  • In Chile, an Electronic Invoicing System, introduced in 2014, allows business taxpayers to issue and receive invoices that are immediately available to the revenue body. It also provides, free of charge, a simplified and complete accounting system to business users. The Electronic Invoicing System is mandatory for all businesses, but SMEs were granted a transition period to adjust until 2017.
  • Denmark embedded tax-related guidance and functionality in accounting software solutions targeted to small businesses. The Danish Tax Administration collaborated with software developers on a user-friendly bookkeeping guide that was made accessible through third-party software in 2017.

But SMEs must prepare for the digital transition. SMEs lag in digitalization, and the smaller, the less likely to adopt digital-enhanced business practices. SMEs are also less proactive in protecting their data and not as prepared to face cybersecurity threats. This places them at risk of becoming weak nodes in hyper-connected infrastructure systems.

SMEs are also less likely to have the skills for managing their digital transformation and still too few of them engage their employees in ICT training. In addition, SMEs continue to face skilled labor shortages, especially in management, communication and/or problem-solving skills, which are crucial for innovation and technology adoption.

Governments place high policy priority in supporting the SME digital transformation and maintained efforts for levelling the playing field. Bringing together unique data and evidence on SME performance and policies, the first edition of the OECD SME and Entrepreneurship Outlook offers a starting point for future research work and new tools for governments to monitor the business environment of SMEs and entrepreneurs, and develop better SME and entrepreneurship policies.

 

References:

OECD (2019), OECD SME and Entrepreneurship Outlook 2019, OECD Publishing, Paris. https://doi.org/10.1787/34907e9c-en.

Sandrine Kergroach

Senior Economist, OECD Centre for Entrepreneurship, SMEs, Regions and Cities

Sandrine Kergroach is senior economist and project leader at the Organisation for Economic Co-operation and Development (OECD). Sandrine has joined the OECD Centre for Entrepreneurship, SMEs, Regions and Cities in 2017 for developing analytical work on SME business conditions, performance and policies. Building on her experience in the fields of science and innovation policies and the monitoring of policy mixes for innovation, Sandrine coordinates OECD work on SME innovation, digitalization and internationalisation, and the production of the new report on OECD SME and Entrepreneurship Outlook.