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The power of small: Unlocking the potential of SMEs

THE POWER OF SMALL: UNLOCKING THE POTENTIAL OF SMES

Micro-, small and medium-sized enterprises (commonly abbreviated to SMEs) are responsible for more than two thirds of all jobs worldwide. They also account for the majority of new job creation.

But despite providing a huge share of global employment, SMEs still face major challenges when it comes to working conditions, productivity and informality.

Explore this InfoStory to find out how the ILO is supporting SMEs to reach their full potential and securing a better future of work for everyone.

The power of small

Small and medium-sized enterprises – or SMEs – typically have fewer than 250 employees. In many countries, more than 90% of all enterprises can be classed as SMEs, and a large share of those can be classed as micro firms, with fewer than ten employees.

While they may be small individually, new ILO data show that micro- and small enterprises, together with own account workers, account for a staggering 70% of employment worldwide

As we work to achieve the UN Sustainable Development Goals and the ILO’s Decent Work Agenda, we cannot afford to ignore the potential of SMEs and the challenges they face.

Engines of development

Across all countries, SMEs do more than create employment: they are also engines of economic growth and social development. In most OECD countries, SMEs contribute more than 50% of GDP, and some global estimates put this figure as high as 70%. This contribution varies across sectors, and is particularly high in the service industry, where SMEs account for 60% or more of GDP in nearly all OECD countries.

SMEs are also more likely to hire from groups with lower chances of finding employment such as young people, older workers and less-skilled workers.

Understanding the challenge

SMEs are crucial to the future of work, not just for employment creation and economic growth, but also to drive innovation and competition in markets. But large enterprises can invest more in training and equipment, pay higher wages and offer better working conditions, and so outmatch SMEs when it comes to productivity and quality of employment.

In developing countries, this productivity gap leads to low income generation, informality and poor growth performance. To close the gap, we must first understand the problems faced by SMEs, both from the perspective of employers and employees, and in context of broader challenges facing the world of work.

The employers' perspective

Running a small business can be challenging even in favourable conditions. But when the business environment is stacked against you, productivity and innovation suffer as a result. Our research shows the biggest challenges for employers include:

Regulatory environment

Needlessly complex and unpredictable rules, regulations and support structures create barriers for small firms and impede their growth.

Access to finance

SMEs frequently face higher transaction costs and interest rates than large enterprises, limiting their ability to obtain external financing.

Skills shortages

SMEs suffer skill shortages, both at managerial and workforce levels. Lack of resources, knowledge and fear of poaching mean that are SMEs are less likely to invest in workforce training.

Access to infrastructure

Small firms often cannot access basic infrastructure, such as clean water, roads and electricity. They are also often excluded from business and employer networks and do not have the resources to make use of new digital technologies.

The workers' perspective

SMEs score lower on most aspects of employment quality when compared to larger enterprises. For their employees, the biggest challenges include:

Lower wages

In European countries, wages in SMEs are 20-30% lower than the national average. Findings are similar for Japan and the United States. In addition, the gender wage gap between male- and female-owned SMEs persists globally.

Lack of social security

In many low and middle-income countries, small firms are not required to contribute to social security coverage due to a low number of employees. In addition, many SMEs operate in the informal economy and so do not provide any social security to their workers.

Poor occupational safety and health

Research finds that work environments are more hazardous in small enterprises than in large ones. In Europe, 82% of all occupational injuries and 90% of all fatal accidents occur in SMEs.

Weaker industrial relations

Industrial relations and collective bargaining play an important role in improving employment security and working conditions. However, in SMEs trade union membership is low and company-level collective bargaining is often non-existent.

The big picture

The world of work is in a phase of major upheaval, and many challenges both old and new are hitting SMEs particularly hard. But with the right perspective, a challenge can become an opportunity.

The ILO’s human-centred agenda for the future of work gives us the key to channel disruption into positive change.

Going green

Environmental sustainability cannot be achieved without SMEs. In addition to their impact on the environment, they also hold the key to designing local solutions to climate change. But for many small enterprises, the process of “greening” the business is limited by additional costs and lower awareness.

By raising awareness about the benefits of going green and equipping small enterprises with the skills they need to get there, we can achieve a just transition to environmentally sustainable future.

Women’s entrepreneurship

Women own and lead up to one third of all businesses operating in the formal economy worldwide, and millions more run small informal enterprises in developing economies.

Women continue to pursue entrepreneurship and succeed in business in spite of the barriers they face, including discrimination and harassment at work, the lion’s share of domestic responsibilities, and of course a persistent gender pay gap. Imagine what they could achieve on a level playing field.

The informal economy

The majority of SMEs are also informal enterprises, which provide livelihoods for 60% of the world’s workers. Unfortunately, informal employment is typically characterized by low pay, poor working conditions and a lack of social security.

Productivity also tends to be low, and these enterprises often cannot access finance and markets, reinforcing their informal status. By creating paths to formality and sustained productivity growth, we can create more and better jobs, improve public services by broadening the tax base, and create an overall culture of good citizenship and compliance with labour laws.

The digital economy

Rapid digital development is a major disruptive factor across all sectors and industries. For SMEs, digital technologies can potentially enhance management practices, improve market intelligence and create virtual access to regional and global value chains.

However, many SMEs lack the skills and resources to capitalize on this opportunity. By supporting SMEs in the transition to digital, we can ensure that small businesses can benefit from the full potential of new technologies while simultaneously ensuring that digital adoption does not compromise decent work.

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Helping SMEs flourish

The ILO has a long legacy of helping SMEs flourish by providing training at all levels, supporting entrepreneurship, fostering an enabling environment and creating market access for vulnerable populations.

Learn more about our programmes:

Strengthening value chains

No business exists in a vacuum. A value chain describes how value is created by the enterprises, activities and other actors needed to bring a product from the initial idea to its final market.

The ILO takes a systemic approach to value chain development, by identifying and removing underlying causes of market underperformance to create benefits for actors at every point in the chain.

Strengthening value chains increases profits and productivity for SMEs, which allows them to create more and better jobs in their communities. In turn, this approach ensures sustainable growth and greater benefits for the poor.

The ripple effect

The ILO is championing a human-centred vision for the future of work. This means reaffirming that labour is not a commodity and keeping the rights, needs and aspirations of people at the heart of every programme and policy.

By supporting SMEs to meet and overcome the many challenges they face, the ILO is improving the livelihoods of the people who run them, those who work for them, and everyone who relies on the products or services they provide. Supporting SMES creates far-reaching ripples of positive effects for families, communities and countries.

The future is small, the future is beautiful

Leaving SMEs behind is not an option. The 2030 Agenda for Sustainable Development certainly cannot be achieved without them. Given their global prevalence, and their huge importance to social, economic and environmental development, the future of work will be bleak if we do not support SMEs to unlock their full potential.

But once we start taking big steps to support small enterprises, the future looks bright and beautiful indeed.

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