Small and Medium Enterprises and Economic Development - Coursework Example

It has been found that over the past several years throughout the industrialized countries the extra growth that has been achieved is due to the large growth in SMEs (Barakat, 2001). SMEs constitute the dominant form of business organization, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 60-70% of net job creation in OECD countries. Small businesses are particularly important for bringing innovative products or techniques to the market (OECD, 2006).

SMEs in any country can grow by partnerships between the private and the public sector by the provision of high-quality business support that includes training for the development and improvement of the managerial skills for potential and currently operating SMEs. Furthermore, the government can assess SMEs in selling their products and services domestically as well as on the international front. But the most important factor is financial support. Availability of capital and credit is considered a major stimulant for the development of SMEs in many industrialized nations and especially the developing world.

Besides government, larger and bigger businesses and corporations operating in an economy can help SMEs become more viable business partners by providing training in basic skills such as management, bookkeeping, business planning, marketing, distribution, and quality control. They can assist through technology transfers, direct investment in infrastructure, and the sharing of knowledge. This will make SMEs more competitive and facilitates access to credit.

SMEs as their start-up financing and also operations and working capital needs require greater access to financial services and investment capital. Unlike SMEs big businesses have little difficulty in securing sizeable bank loans and private investments. At the same time, microfinance, consisting of very small loans, tends to benefit individual entrepreneurs. SMEs fall in between and often struggle to obtain credit and loans. Some 90% of entrepreneurs in Latin America are obliged to source much of their financing from personal savings according to Inter-American Development Bank (IDB) estimates, a picture true throughout much of the developing world (World Business Council for sustainable development).

Many financial institutions in the developed and the developing world are reluctant to fund SMEs because of perceived risk and high transaction costs.16 SMEs in the developing world are considered high-risk, as their managers are perceived as lacking managerial expertise, credit history, and/or tangible assets to secure loans. Thus loans to SMEs, when they are able to obtain them, tend to carry higher interest rates and shorter pay-back times.

 Definition of an SME

There is not a single characteristic that is used to define an SME, and thus there is no single definition of SME that can be used as a standard for businesses to qualify as an SME or a large business. Some economists, governments, and analysts define SMEs in terms of their revenue generation capabilities, others see how many people have been employed, more criteria consider the land that is occupied for business operations.

European Union’s indication for a small business is one with a headcount of less than 50 and a microenterprise as one with a maximum of 10 employees; whereas a medium-sized enterprise under European Union’s standard is one that has a maximum of 250 employees.