Fueling Sustainable Growth & Development Through Supply Chain Finance

Role of Small and Medium Businesses in Economy and Development

Small and medium enterprises (SMEs) are the backbone of economies and societies. They play a crucial role in a country’s overall production and are core to sustainable socioeconomic development. All over the world, there is growing evidence of the significant impact of SMEs in both developed and developing countries.

Small and medium-sized businesses are important contributors to employment creation, value creation, poverty alleviation and income generation. They represent about 90 percent of registered businesses worldwide, contributing to more than 50 percent of employment globally (World Bank1). In Organization for Economic Cooperation and Development (OECD) member countries, SMEs are the predominant form of enterprise, accounting for approximately 99 percent of all firms and about 70 percent of jobs on average, and are major contributors to value creation, generating between 50 percent and 60 percent of value added on average (Figure 1).

SMEs are the main sources of jobs in the business sector

According to the World Trade Organization2, which draws its finding from empirical studies and data sources, and the European Commission, the median GDP contribution of small and medium-sized businesses is 45 percent (55 percent in developed countries, 35 percent in developing countries). SMEs also feature prominently in the UN Sustainable Development Goals, which encourage the growth of these businesses in order to promote inclusive and sustainable growth, full and productive employment, and reputable work for all.


COVID-19 – The Impact on Global Economy and Small and Medium-Sized Businesses

The global economic crisis caused by the COVID-19 pandemic has made it more crucial than ever to support SMEs. It’s just not a matter of economic growth but of economic survival, recovery and building a solid foundation of sustained growth. The COVID-19 crisis has exposed the fragility of our interconnected global world, crippling the world economy with serious demand and supply shocks. In the U.S. alone, GDP fell by 4.8 percent in the first quarter of 2020, and by 32.9 percent in the second quarter. Global growth is projected at – 4.9 percent in 2020, much worse than during the 2008–09 financial crisis (International Monetary Fund, Figure 23).

These are all gut-wrenching numbers, and there is no easy way around them. As per 40 SME surveys done worldwide by the OECD4 between February and May 2020, more than half of SMEs are already facing severe losses in revenues. This is further corroborated by recent JPMorgan Chase Institute research5 that shows 50 percent of small businesses are operating with fewer than 15 cash buffer days, and only 40 percent of firms have more than three weeks cash buffer.

Access to capital and the high cost of borrowing are challenges for SMEs even in a regularly functioning economy. Unprecedented monetary and fiscal measures to resume production, ease financial pressure and boost market confidence are being implemented, but are they enough? Governments and development banks need to proactively implement novel solutions for recovering from this unique crisis in tandem with traditional stimulus packages that could supplement the regrowth of small and medium-sized businesses and economies.

3 https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
4 http://www.oecd.org/coronavirus/policy-responses/coronavirus-covid-19-sme-policy-responses-04440101/
5 https://institute.jpmorganchase.com/institute/research/small-business/small-business-cash-liquidity-in-25-metro-areas

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