SME & Large

Companies impact on
economy
 SMEs play a very critical role in the world
economy by contributing to the
employment scenario along with the input
and output. There are certain points to be
The role of understood here. As per a report
published in 2015, approximately 600
SMEs in job million jobs would be required worldwide
creation over the next 15 years. Predominantly,
most of the formal jobs that are available
in developing markets are created by the
SMEs. That is almost four out of five jobs
available in the market.
 Despite playing a vital role in the
development of the economy, it is
observed that around 50% of the SMEs
The role of lack access to finance or capital
investment. At any given point of time, the
SMEs in job formal SMEs create around 33% of the
creation national income and 45% of the total
employment in developing countries.
When we include the informal SMEs in the
list, the numbers rise even higher.
 • SMEs are usually categorised by the number of
workers employed, sales turnover and the capital
employed. In other words, the number of
employees and asset value classifies an SME.
Different countries have different criteria for
classification. For instance, in Canada, businesses
with less than 500 employees are categorised as an
SME. In Germany, the upper threshold is 250
employees, in New Zealand it is 19 employees, while
in the European Union the upper limit is 250
Size of SME employees for medium- and 50 employees for
small-sized companies. In the United Kingdom, as
per the Companies Act of 1985, to be categorised as
an SME the turnover should not be more than £5.6
million and employee count should not be more
than 50. However, efforts are on towards employing
a common definition of the SMEs that would be
accepted across the globe. In Turkey the maximum
is 250 employees or 40 Million Turkish lira in
revenue
 Advantages
• SMEs have the remarkable ability to fuel economic
growth. They create many new job opportunities, drive
the bandwagon of innovation and expand the tax base.
• SMEs also increase the competition amongst the peers
and heat up the market scenario. This continuous
struggle for supremacy brings out the best in a business.
This triggers a win-win situation for both provider and
the consumer. Moreover, this increases the aggregate
productivity as well as economy-wide efficiency.
• In recent years, SMEs have registered a higher growth
rate as compared to the global industrial sector. The
chief advantage of the SME sector is its potential to
generate employment at low capital expenditure.
Advantages
• The economic growth in many Asian countries such as
Korea, Taiwan and Japan is directly proportional to the
spurt in SME activities. SMEs play a very significant role
in the rapid industrialisation and development of China,
where approximately 99% of the total business ventures
are SMEs. These SMEs together produce around 60% of
the total industrial output and approximately 40% of the
total profits and taxes achieved by the various industries
in China. Again, various SMEs in the US generate more
than half of the gross domestic products.
• SMEs act as a cushion against recession by adapting and
innovating as per the changing circumstances. There is a
big connection between the various levels of poverty,
hunger and economic well-being of the society and the
general condition of various SMEs in the country.
Advantages
• In almost every country, the SMEs are a large
proportion of all businesses in the country. In most
developing and developed economies, over 90% of
SMEs improve the employment rate. In fact, when big
industries downsize and cut down jobs, SMEs keep
developing and creating more jobs.
• SMEs adapt fast to the dynamic business world by
switching on to e-commerce and online transaction of
goods and services. The advancement in technology
has not only eased out the process of selling and
buying, it has helped the entrepreneurs to cut cost on
advertising and marketing too. The various e-
commerce platforms make life easy for SMEs.
Advantages

• SMEs play a vital role in being service providers and

traders to the primary industry.
• SMEs also produce the finished goods as well as
services.
• SMEs contribute heavily to the development of various
sectors such as manufacturing, agriculture and ICT
services.
• There is a reciprocal relationship between an SME and
the economy. Development in economy ensures the
creation of more SMEs. The creation of more SMEs
ensures a boost in the economy.
Disadvantages
• Although the employment generated by SMEs is huge, they
sometimes turn out to be temporary in nature. This is
because quite a number of SMEs die out before they cross
the five-year threshold. This results in further
unemployment.
• SMEs have been criticised in the past for their staggering
rate of bankruptcy. If the product or services offered by
SMEs do not sell, they go out of business very soon.
• Sometimes in order to survive and be in the race, SMEs
flood the market with cheap products and services.
Although such produce can temporarily replace the original
product it often cannot survive the competition. This
completely ruins the brand image and the value of the
aspiring SME.
Disadvantages
• Moreover, SMEs lack the basic capital needed for
establishing as well as expanding beyond a certain
limit.
• SMEs depend on innovation in order to survive.
However, the continuous pressure to innovate and
create new options results in uncertainty and
confusion. Nevertheless, innovation remains the best
option for an SME to survive.
• SMEs need a supportive and encouraging environment
in order to survive. Political instability, as well as
stringent rules and regulations, laid down by the
government restricts their creation and development.
Disadvantages
• There could be numerous odd things that could go
wrong due to a single decision. That is why covering
one’s business with risk insurance is necessary.
However, the shoestring budget at which an SME
operates means they fail to buy a risk insurance for the
business.
• SMEs also face taxation issues, if the government does
not pay much attention to creating entrepreneur-
friendly policies.
• Finding suitable employee for a particular job remains
a big challenge for SMEs. Experienced people are
either too expensive for an SME to afford or do not
want to take the risk of working for a small business.
CONCLUSION

• Thus SMEs have both pros and cons. It is only with

precision and care that the government can
encourage entrepreneurship by creating business-
friendly policies and easy financing options. Liberal
policies encourage prospective entrepreneurs to take
the plunge and create value for themselves as well as
society in the end.
• In the long term, SMEs can produce a substantial rise
in income, opportunities and the overall GDP. If the
business environment is conducive and supportive to
new businesses, they will not only generate more
employment but also create a variety of products
and services for the consumer to choose.
 • Bigger corporations are more productive,
they pay higher wages, enjoy higher
profits, and are more successful in
international markets, said the report by
Large Enterprises European Firms in a Global Economy
(EFIGE), an EU-funded project.
• Therefore, a country's economic
performance can be linked to its number
of big corporations,
 • Bigger corporations are more productive,
they pay higher wages, enjoy higher
profits, and are more successful in
international markets, said the report by
Large Enterprises European Firms in a Global Economy
(EFIGE), an EU-funded project.
• Therefore, a country's economic
performance can be linked to its number
of big corporations,
Impact on national economy
• Differences in the firm size profile of different European countries are
dramatic, according to EFIGE. Companies in Spain and Italy are, for
example, on average 40% smaller than those in Germany.
• The low-average firm size translates into a chronic lack of large firms.
In Spain and Italy a mere 5% of manufacturing firms have more than
250 employees, compared to a much higher 11% in Germany. The
average firm size in Spain and Italy is, respectively, 49.3 and 42.7
employees, compared to 76.4 on average in Germany.
Trade – R&D
• The exporting firms are also found to be larger and do more research
and development (R&D).
• barriers to R&D and trade are the main culprits that slow down firm
growth. Countries that face higher trade costs provide fewer
opportunities for businesses to become large. And a relative absence
of R&D spending puts a break on firm growth, leading to a size
distribution skewed towards smaller firms
• Trade and innovation are not independent, but interact in significant
ways. For example, a reduction in trade costs tends to stimulate
innovation as it allows firms to become larger. This makes it easier for
the firm to bear the fixed costs of R&D.
Trade – R&D
• For example, if trade was to be ignored, then the model would
predict that both Spain and Italy have high innovation costs. But
once trade is introduced, the model finds that the large proportion of
small firms in Italy is mainly due to high innovation costs, whereas in
Spain it is due to a combination of high trade and high innovation
costs.
• If Italy wants to reduce the barriers to business growth, the country
should mainly focus on promoting innovation. In Spain the emphasis
should also be on cutting trade costs and improving access to
international markets.