The role of SMEs is quite substantial in many countries, especially in emerging and developing countries.
SMEs account for a large share of total employment, job creation, and GDP in many emerging economies. Now, this is really important, especially if we take into account that 600 million jobs will be needed in the next 15 years to absorb a growing global workforce, mainly in Asia and Sub-Saharan Africa.
New jobs boost living standards and foster social cohesion in a country. Therefore, SMEs are one of the main factors of economic growth and social peace. Without a robust and healthy SME sector, this cannot be achieved.
Let’s take the example of South Korea: While the country is associated with giants like Samsung, Hyundai, and LG, SMEs in Korea account for more than 80% of total employment and about 50% of total value added.
SMEs also played a large role in the transformation of Korea into a high-income industrialized country during the last quarter of the 20th century. Not surprisingly, SMEs are always high on the agenda of the Korean government.
Of course, we should not conclude that all SMEs are drivers of growth and job creators. SMEs can differ greatly in their role in the economy. A lot depends on the skills of individual entrepreneurs, their attitude, and willingness and ability to grow their business.
But on the whole, SMEs play an important role in many economies, and on average they contribute more to employment in low income countries than in high income countries.
Since it is well established that SMEs play an important role in many economies, how about SME financing?
Well, the first thing to note is that SMEs do need external funding. Of course, all enterprises start small, and at the early stage in their development they use primarily internal funds – the owners, their families, or even friends.
But eventually, in order to grow, SMEs will need external funding. They need external finance to grow, invest, and acquire new technology to increase productivity. Without financing, they may not be able to expand to compete in regional and global markets, or even establish business linkages with larger firms and position themselves in value chains.