Out of 195 countries globally, 152 countries are developing countries, while 43 other countries are categorised as developed. Although the word ‘development’ is progressive, according to the International Monetary Fund (IMF), this categorisation is based on some significant factors, which depend on developing countries’ ability to integrate with the global economy through investment and trade. I cannot overstate the importance of SMEs in the continued existence of large and industrialised economies.
By definition, small medium-scale enterprises are relatively small and have fallen below their country’s specific revenue, asset, and or employment stipulations for large businesses. Examples of small businesses include farming, retail trade, construction, and manufacturing.
However, SMEs are far from the ‘small’ they connote. 90% of businesses across the world are small and medium scale enterprises. They contribute over 50% to the global employment rate while also contributing to the community food system, fashion and textile, design and manufacturing, and all other areas of life.
According to the World Bank, formal SMEs contribute 40% to the developing countries’ Gross Domestic Product (GDP). When this percentage is added to the informal sector’s contribution, the GDP can only be higher. For instance, in Nigeria, the informal sector, characterised by undefined workplaces, unregulated and low or irregular incomes, accounts for over 80% of the population workforce. Likewise, in Rwanda, 90% of the population is engaged in the informal sector. This role closes the gaps in the unemployment rate and reduces the vices of idle hands in the countries.
These SMEs also provide income to salary and wage earners, improving citizens’ standard of living and reducing the poverty rate. As a result, Sustainable Development Goal 8 emphasises small enterprises’ increased access to affordable loans supporting job creation and entrepreneurship.
Apart from SMEs’ addition to developing countries’ GDP and employment rates, small and medium enterprises are also significant drivers of innovation. The financial technology space is littered with innovative startups likewise the informal sectors.
Out of the record-smashing billions of dollars raised by African startups in 2021, fintech startups got the highest, which amounted to 63% out of 100%. This innovativeness is reflected in the sales strategy and processes implemented by these startups, which are disruptive and future-forward.
SMEs are known for their impact on the supply chain. They make resources locally available to large companies for production and export, and they connect the rural and urban areas to the supply chain processes. These facilitate attitude and social change.
The closure of businesses during the Covid-19 Pandemic posed a severe risk to both the formal and informal sectors’ survival. The majority of SMEs rely on daily income, and as a result, they became financially incapacitated during the covid-19, and now, they are still struggling to regain balance post-pandemic.
The problems and challenges faced by small and medium-sized businesses are linked to various economic factors and obstacles that have plagued the country’s economy. They include high unemployment, high poverty incidence, and limited industrialisation capability, among other obstacles and concerns.
Although Nigeria’s economic reform inspires renewed confidence in small and medium-scale enterprises, the government plays a vital role in policies, funding, and empowerment of the SME sector. The government can improve upon this support when they are fully aware of the economic and developmental impact of the small scale Industry.
The development of small and medium scale enterprises in developing nations would reduce money repatriation. SMEs use local raw resources and technology to help realize their goals, and they are essential to ensure diversification and extension of industrial output and achieve developmental objectives.
According to a poll of small company owners, one of the primary reasons small business owners ventured into business is their drive to impact the economy, transcending beyond self financial freedom to include others. To achieve this, small companies give them the freedom to be their bosses and be self-sufficient.
Entrepreneurship allows the business control with no dilution from outside investors, which in itself is prestigious for the operators.
How government can influence the capacity of SMEs to do more
There are different ways the government can optimize the efficiency of SMEs in developing countries. They include implementing macroeconomic policies, such as sustainable legal and regulatory frameworks, good governance, abundant and accessible finance, appropriate infrastructure, supportive education, sufficiently healthy and flexibly skilled labour, capable public and private institutions, and maintaining SMEs’ competitiveness.
The government also needs to optimise the informal SME large pool to properly account for their profits and losses in the country’s GDP. This would also help the government generate more taxes and grow the economy.
Peace and stability are essential for the development of SMEs and the attraction of international investment. The Russian-Ukrainian war and Brexit do not just affect the countries internally; they affect the globe. This example is similar to the terrorist attacks and insecurities embattling Nigeria and some neighbouring countries. According to studies, violence is a significant deterrent to private investment, particularly for international investors. Hence, for SMEs to grow optimally, there must be peace globally in each country. One of the critical steps is the African Continental Free Trade. This would promote Inter-African trade and support SMEs.
Conclusively, the importance of SMEs to each country and the globe is multidimensional. However, to fully maximise these benefits, there must be suitable investments and a developmental system. In essence, each country’s investment in SMEs is proportional to the output and benefit reaped.
Ms. Darlyn Okojie is a committed and results-driven new market business expert with over six years of international experience collaborating and driving business optimization strategy, partnerships, onboarding, sales leads, and conversions. She is a Founder of Rugs and Floors Africa and a Co-Founder at Memo Africa.