The universe of small and medium-sized firms is very mixed. In the majority of countries, small and medium-sized enterprises (SMEs) are defined as firms employing between 10 and 250 people. Firms with up to 10 employees are usually referred to as micro firms. There is, however, no commonly agreed definition of what micro firms and SMEs are. They are mixed by nature, ranging from producers of non-tradable services to “born global” suppliers of digital products, highquality artisanal goods or sophisticated instruments.
In the majority of countries, SMEs account for a significant proportion of employment. In a sample of firms from 99 emerging and developing countries (World Bank Enterprise Surveys), SMEs accounted for two-thirds of formal non-agricultural private employment. Similar, although not strictly comparable, evidence has been found for developed countries. In a sample of firms from 17 Organisation for Economic Co-operation and Development (OECD) countries plus Brazil, micro firms and SMEs accounted for 63 per cent of total employment. However, among SMEs, only new productive firms (“gazelles”) significantly contribute to net employment growth rates.
SMEs face challenges in terms of job quality and productivity. In developing countries, there is some evidence that earnings rise with firm size for workers with similar characteristics. In developed economies, conversely, the relationship between wages and firm size is nonlinear within the class of micro firms and SMEs, with micro enterprises paying on average higher wages than small firms. Empirical evidence further shows that jobs in SMEs are less stable and secure than jobs in larger enterprises, and that SMEs are less likely to offer training to their workers than larger firms. In addition, SMEs contribute comparatively less to GDP than to employment, because they are, on average, less productive than large firms.
SMEs can benefit significantly from innovation, and their entry into the market can stimulate innovation in others. Large firms exhibit, on average, faster innovation rates than small firms. Even the oft-made argument that, within the universe of SMEs, start-ups are more innovative than established firms, does not rest on firm empirical evidence. Against this background, there is abundant evidence of the positive impact of innovation for SMEs that engage in it.
The contribution of SMEs to industry dynamics (the process of entry and exit) can have positive aggregate effects on productivity, not only because successful entrants have productivity growth rates that are usually higher than those of incumbents, but also because their entry can foster increased innovation by market incumbents.