Small and Medium-Sized Enterprises (5-250 employees) initiate a massive portion of jobs, more specifically in industrialized economies. This is an acknowledged fact, but several critical debates are still in place regarding the role these small firms play in certain countries. Are they a crucial engine for employment generation in these types of economies as well? Recent studies have concluded that SMEs potentially generate employment in developed countries. (Pilgrim, 2017); Therefore, we seek to look into the topic in more detail to find the conclusion for both developing and developed nations. Without a doubt, a good organization must support all firms’ growth. Still, it is essential to beard the fact that SMEs are prone to several challenges: including limited access, limited capital, regulatory action burden, the disadvantage of the higher cost of relative expansion. We shall look into it all.
SMEs are the backbone of European economies, as they represent 99 out of every 100 companies in Europe; they contain two-thirds of the workers, and; SMEs’ contribution to the EU economies are, on average, 58 cents per euro. In the majority, SMEs are in five main sectors, including manufacturing, construction, business services, hospitality, and trading. Economic conditions have a significant influence on SMEs. In the recent past, employment in the EU economies increased significantly; 85 percent of that employment-generated growth pertained to SMEs’ change and were registered as employment increases in the SMEs and small businesses. The share, 85 percent, is merely higher than the overall average that SMEs generate, which is 67 percent, since 2010. This shows that the SMEs’ employment share has enhanced over time, indicating that the size class’s economic relevance has also increased. More than a decade ago, it was argued that developed economies are shifting from managed economies to entrepreneurial economies (1). The shift’s primary and fundamental factor was the enhanced and emerging role of small businesses and enterprises in the entrepreneurial economy.
SMEs generate more jobs than large organizations and companies. The statement is primarily correct if provided with accurate data. In the last decade, SMEs showed a higher employment growth rate of more than one percent, contrary to 0.5 percent of large organizations. Job creation by small businesses and enterprises is more elevated than proportionate to its employees’ share in countries like the EU. Employment development, a favorable one, can be witnessed in several sectors in distinctive industries. An exception, an obvious one, is the trade sector, where the employment rate enhanced by 0.8 percent per annum, whereas large enterprises in the industry grew by almost 2.2 percent. All the other sectors witnessed a massively high growth for SMEs and small businesses. The increase for large enterprises in the trade sector was due to the number of large trade companies increased significantly. More specifically, in areas like sales, motor vehicles, repair, and maintenance. The previous decade was neutral for businesses, the financial crisis of 2009 distorted the pattern, but onwards it got back to its pace. The number of jobs in the non-financial sector decreased drastically, even for SMEs as well. The reason was that after the crisis, numerous large enterprises beard significant losses and removed employees that they were registered as small and medium-sized enterprises, so the record showed that SMEs were hit more severely as well. Some would argue that employees in the SME sector were hit harder, contrary to the large enterprises. The number of jobs in the SMEs deteriorated by an average of 2.4 percent, contrary to the 1 percent in the large enterprise sector.
Moreover, within SMEs, there are exceptional levels. Micro and small enterprises witnessed the highest growth rate. Micro enterprises generate almost 58 percent of the total employment in the EU economies. In these economies, the average employment growth was 0.9 percent. Large enterprises were 0.5 percent, whereas medium-sized enterprises were 0.7 percent, even though job growth was below the average, yet the small enterprises contributed above the average par value. Simultaneously, the micro-enterprises contributed above-average to employment growth, with a rate of 1.3 percent per year. In numerous countries, micro-enterprises play a fundamentally critical role. But in some countries, the case is contrary; for instance, in Malta and the Czech Republic, employment of micro-enterprises decrease. As in both countries, job growth is more tilted towards small and medium-sized enterprises rather than micro-enterprises.
In terms of creating jobs, companies’ birth and rebirth is a critical part and has a crucial role to play as well. Statistics show that only half of the newly born companies survive after five, resulting in massive job creation and, eventually, job destruction. In the last decade, most employment was generated by SMEs that were more than five-years-old, The SMEs had total gross employment of more than 21 million. Simultaneously, fr companies that were less than five years old have a total gross of 20.7 million. Several newborn companies enhance in the first five years of existence, compensating for losses due to the decrease in newly born companies. Combining all the effects, almost 85 percent of jobs created during this period still exist after five years. This potentially shows the critical role that companies’ birth; an engine of growth of jobs creation. Total net employment growth in the previous decade was 7.8 million. For newly born companies, it was 17.5 million, whereas the jobs created by enterprises that did not survive were 8.9 million.
Nevertheless, the position created by newly born small companies were highly beneficial and compensated for more than just loss of job caused by the death of a company in any class. In the previous decade, positions in young small companies, older than five years, increased by 1 percent on average in all sectors. But, there exists an individual difference among the specific sectors. Jobs in newly born enterprises decreased potentially in business services and trade. In all other sectors, jobs increased significantly; the highest job creation growth was witnessed in the wholesale trading sector. In certain countries, newly born companies have seen an increase in job creation. These countries included EU economies, more specifically Hungary and Belgium; however, freshly taken enterprises in certain countries showed a decline, such as in Poland and the Czech Republic. If SMEs shrink at an early stage, the chance of death is significantly higher; such enterprises are not included in the figure we have discussed above. Young enterprises have less chance of survival than the older ones; however, when young enterprises when do survive, their growth rate of job creation is significantly high. This pertains to the fact that fast-growing companies are mostly young enterprises. Within the SMEs, the newly born accounts for the most considerable job creation growth in the previous decade. With newly born responsible for 17.5 percent, the young one showed jobs creation growth of 0.2 percent, on average all over the EU economies.
Moreover, Small and Medium-sized Enterprises (SMEs) make up almost 70 percent of the Jobs in the Organization for Economic Co-operation and Development (OECD) economies (SMEs: EMPLOYMENT, 2016). More specifically, Italy and Japan have the largest share, while the United States (U.S.) has the smallest share. SMEs account for a disproportionately significant percentage of new jobs in these countries, portraying a strong employment record, specifically in the U.S. and the Netherlands. Specific evidence points toward the criticality of age, instead of size, and that young firms generate more jobs than their employment share. But, less than one-half of startups run for more than five years, while only a fraction of those startups grow into high-growth firms, which makes a potent contribution to creating jobs. A high job creates employment security problem surety; small-scale initiatives are more often reluctant to notify their employees. These small-scale firms seek to invest less in employees’ training and depend on external recruitment agencies/constants for enhancing competence. Comparable data on SMEs that is relevant and international is increasing; statistical institutions are putting more effort into expanding their data collection and publication. Yet, international comparability is weak because of divergent size-class definitions and classification of sectors. To avail relevant policy analysis, the governments of OECD economies must improve their collection and keeping of data without creating further obstacles for companies via excessive paperwork burden.
Moreover, almost 30 to 60 percent of the total SMEs are termed as “innovative,” among these are 10 percent, which is considered “tech-based.” Innovative SMEs are more driven by the market instead of driven by research; additionally, they give a more abrupt response to new opportunities than large firms. They have a crucial role in developing new markets and getting them pioneered. Initiatives for enhancing technology diffusion have moved from a supply-focused to increasing SMEs’ capacity to acquire technology.
Numerous researches have focused on the contribution of SMEs to employment, job creation, and economic growth. Small businesses and SMEs are regarded as the triumph of large enterprises and the primary driver of job creation and employment (OECD, 2017). The study of (Andersson, 2011) demonstrated the impact of SMEs on employment, using data for regions in Sweden. The authors said that the sector where SMEs operate is crucial, and the positive impact on employment is evident in the same industry in which the SME operates. The effect on work is either negative or positive depending on the industry; as the authors demonstrated, SMEs in the tech sector and services start-up has an inverse employment impact on other sectors. SMEs contribute significantly to job creation, and this view was researched by (Haltiwanger, 2013), they used longitudinal data and incorporated enterprises’ age to check the impact that SMEs have on job creation in the US. The authors concluded that SMEs do create more jobs. However, the study of (Neumark, 2011) demonstrated that the size of the enterprise is negatively related to job creation, more specifically in the manufacturing and services sector. This put a big question on the importance of enterprise size impact on employment generation. This question was researched by (Lawless, 2014) and concluded that job creation capacity varies with enterprise size; stating that smaller companies provide the primary source of employment. However, the age-driving factor is very crucial, and that young companies are more dynamic than older ones. Furthermore, (Heyman, 2018) studied the relationship between innovation and job creation growth. The research was based on quantile regression and concluded that newly born enterprises gain more perks from innovation activity in terms of job creation growth and related factors, but the innovation activity is more portrayed as risky contrary to that of mature companies. Moreover, (Classen, 2014) demonstrated that there exists a potential difference in innovation among SMEs of family and non-family SMEs; such that family SMEs invest more in innovation projects contrary to non-family SMEs, but they have lower productivity of labor.
Moreover, (Botric, 2012) demonstrated the vitality of entrepreneurship as a crucial way out of unemployment and lack of jobs. While (De Kok, 2011) exemplified that employees of SMEs receive low wages compared to employees working in large companies. The reasons pertain to several factors: economies of scale, large capital investment by big companies, human capital skills, access to advanced technology, massive financial resources by large enterprises, all of these allow large enterprises to pay higher wages in order to avoid risk and lack of skill/potential in the work they do.
Furthermore, SMEs are the fundamental contributors to job creation in the Arab region as well (Haltiwanger J. R., 2009). SMEs account for a massive share of companies; almost 80 percent of enterprises in the formal sector are SMEs in the Arab region. Moreover, SMEs generate enormous employment in the region’s private sector, responsible for almost 30 to 40 percent of all remote jobs and nearly six percent of the total work in the area; these include the private sector, public sector, not for profit organizations (Henrekson, 2010). Please note that the statistics vary slightly from one country to another in the Arab region. Most of the oil-based economies are led by SMEs; however, the GCC region is led by large corporations. In GCC countries, SMEs are responsible for roughly 67 percent of the total labor force (Hölzl, 2008) and the numbers are anticipated to increase significantly in the large informal sectors. Moreover, besides being the primary factor of employment generation, they also play a critical role in inclusive growth by addressing gender disparities. Studies in the Arab region have shown that the increase in women entrepreneurs would significantly increase the ratio of women workforce in the area. The reason pertains to the fact that firms owned by women hire more women than firms owned by men, the reason for that varies, including cultural traditions and the framework. Women employees argue that the potential for harassment is low in women-owned firms, contrary to that in men-owned firms. The employment record in SMEs seems massive in the Arab region, but statistically, the percentage of total employment is lower in the area, contrary to other sites. On average, SMEs make up 30 percent of all the private sector employment in the Arab, while in Latin America, the percentage is 41 percent. In OECD countries, the rate is 49 percent, and in South Asia, it is 49.5 percent. The differences lie mostly because of how SMEs are defined in all the areas; distinctively.
Moreover, it is essential to evaluate the enterprises’ growth in the Arab region. The study of (Nasr, 2012), was based on data of 4211 SMEs in the Arab region taken from the World Bank’s survey. The survey was based on the formal sector, and the informal sector was excluded and microenterprises. The authors concluded that service companies have higher employment growth than manufacturing companies, 37 percent for the prior and 10 percent for the latter. Furthermore, the research showed that in the Arab region, SMEs are 29 percent more likely to have a higher growth rate of employment generation than large firms.
Moreover, almost 30 to 60 percent of the total SMEs are termed as “innovative,” among these are 10 percent, which is considered “tech-based.” Innovative SMEs are more driven by the market instead of driven by research; additionally, they give a more abrupt response to new opportunities than large firms. They have a crucial role in developing new markets and getting them pioneered. Initiatives for enhancing technology diffusion have moved from a supply-focused to increasing SMEs’ capacity to acquire technology. Governments are required to minimize uncertainties in the tax, regulation, and macroeconomic circumstances; additionally, they must make specific business framework circumstances that do not affect the ratio of risk-reward and enhance human resource mobility and mobilize the markets for special services. Albeit, these are essential for the whole economy, these actions will provide more perks or a specific value to the SMEs.
A few so-called, full-of-potential and growth SMEs have a crucial role in job creation and enhancing productivity. During the earlier stages, management capabilities are critical to surviving in the market; managers’ decision-making, how they utilize the capital and strategize day-to-day operating significantly impact the start-up’s growth and performance. As the SMEs mature, it requires significant human resource and strategies directed toward innovation. When the firm has completely matured, those strategies shift to R&D, training, and design; more emphasis is directed towards employee hiring and employee training. Additionally, they require a balance to enhance the potential and skills in distinctively unique areas; they are crucial in high-knowledge sectors.
Moreover, women’s SMEs are growing faster than their respective economies, more specifically in the OECD economies. This allows them to capitalize on the skills of educated and trained women, who are more often tied to incorporate advancement as there exists a “glass ceiling.” The exceeding variety in acquiring one’s business gives women a chance to contribute to their family’s income while balancing work-life responsibilities. But, women’s economic potential, more specifically women entrepreneurs, remains casually undeveloped. Hence, computations are required to enhance information and statistics in the field (Karabay, 2015). One of the critical barriers for women is capital access. Women are mostly risk-averse; they borrow less capital than men, which increases their average cost of loans. As earlier discussed, in most countries, women are involved in a family business, which does not provide them any retirement benefits. Spouse-partners too are subject to the added problem. Some countries have a higher percentage of female entrepreneurs’ failure contrary to men; this is because of the type of businesses women tend to choose as there are more operational barriers to it compared to others. While some countries, it is the opposite. Women entrepreneurs tend to hire women workers which not only increases the workforce, it also brings more employment opportunities and reduces gender discrimination which again leads to job creation.
There are certain features that appear in High Growth SMEs; these are as follows:
- Human Resource. Attention and advancement of human resources are fundamentally and strongly linked to growth. Regardless of the sectors, innovators are more prone to high growth than non-innovators. A discussed earlier, at the start, management capabilities are required. As a firm matures, it needs human resource development; HR becomes the key to high-growth and unlocking new potentials. All this adds up to higher employment growth.
- Start-ups that do a successful entry have a higher chance of innovating as slow-growing firms. They put more emphasis on enhancement and expansion strategies to enhance production and eventually generating more jobs in numerous sectors and industries.
- Successful fast-growing firms much emphasized hiring skilled employees as well as give them both sufficient and advanced training. Skilled and well-trained employees are more likely to expand the business, enhanced growth, and bring more opportunities for new workers.