How can we build back better for small businesses in emerging economies?
Pathways to success post-COVID-19
By Kanika Joshi and Morchan Karthick
Micro, Small and Medium Enterprises (MSMEs) play a vital role in supporting and sustaining livelihoods, contributing to vibrant economies worldwide, especially in developing countries. Ravaged by the ongoing COVID-19 pandemic, the MSME sector is particularly vulnerable due to fewer assets, lack of liquid cash, reduced demand, disrupted supply chains, as well as lower levels of productivity. Global support for small businesses in response to COVID-19 have so far focused on debt financing, employment support, taxes, and business costs. Meanwhile, majority of MSMEs in emerging economies are still struggling with access to formal finance. On UN MSME day, we explore the best practices for MSMEs to rebound and expand after the pandemic.
MSMEs: A global overview
The United Nations passed a resolution in 2017 to observe June 27 as MSME Day. MSMEs across the world play a crucial role in generating employment, accounting for around 60% of total employment, contributing to the economic transformation of nations with an aggregate Gross Domestic Product value of 50%. While the definition of MSMEs varies across countries, common parameters to classify the sector are based on:
- Number of persons employed;
- Investment in plant and machinery;
- Annual turnovers.
As per the International Council for Small Business, 90% of all firms across the world can be classified as formal or informal MSMEs. It has been estimated that 600 million jobs will be needed by 2030 to absorb the growing global workforce, making MSME development a high priority for governments around the world. In emerging markets, most formal jobs, around 7 in 10, are generated by this sector.
Despite clear contributions and pathways to growth, MSMEs face challenges, such as access to finance, paucity of data, negligible support in skilling and lack of connections/linkages with the digital economy, as a result of which, they remain underserved or underbanked, which have been exacerbated by the COVID-19 pandemic.
Despite its key role in achieving socio-economic growth, the MSME sector continues to be an untapped high-growth sector globally.
Technology and innovation driving MSMEs globally
MSMEs play a critical role in the wider industry ecosystem, driving innovation and sustainability, while lifting communities out of poverty. They are the primary source of income for poor and marginalised groups, contributing positively to all 17 UN Sustainable Development Goals (SDGs). According to an OECD report, MSMEs will play a leading role in meeting most of the economic related goals of the SDGs.
MSME entrepreneurs possess immense knowledge of innovative solutions for product and process development. Adoption of latest technologies and innovative solutions helps MSMEs improve their productivity and produce better products, giving an edge to their competitiveness. Realising this, many countries, such as China and Singapore, have developed national innovation strategies to strengthen MSMEs in areas of infrastructure, innovation clusters and technological resources. The following are examples of successful strategies adopted by countries leading the world in MSME development:
Germany: Mittelstand powering the country through the lockdown
MSMEs in Germany, also known as German Mittelstand, play an indispensable role in making the country a global leader in manufacturing. Almost all (99%) of the enterprises in Germany fall into the MSME category. In response to the COVID-19 crisis in Europe, Germany implemented strict lockdown measures for nine weeks. This had a big impact on the economy, including the German Mittelstand. But according to a recent survey by Mckinsey, 77% of the surveyed enterprises had a positive outlook on the future. The distinct characteristics of the German Mittelstand, such as long-term focus, innovation, and flexible working models, are the reasons for optimism amidst this crisis.
Digital businesses have been the main long-term strategy for German enterprises, with 68% of enterprises currently building new digital businesses. These digitization efforts will not only help them wade through the current crisis, but give a competitive advantage in the long-term. German enterprises are champions of innovation, with about 54% of MSMEs having introduced new products or processes to the market in the last two years.
China: The roaring dragon of the East
In the case of China, the strategic position of MSMEs gained prominence at the beginning of the 21st century. The policy initiatives of the Chinese Government started with a focus on the legal status, protection of rights and interests, and the financing market construction of small businesses. They also launched policies to improve the infrastructure of quality inspection and accreditation for millions of MSMEs. These services, offered free of charge, built competitiveness of MSMEs through improved compliance with international standards, a necessary requirement to access the global value chain. In recent years “Mass Entrepreneurship and Innovation” have been the keywords defining the development/rise of MSMEs in China.
The COVID-19 outbreak had a significant impact on MSMEs in China, with 85% of China’s small businesses estimated to go bankrupt within three months without any financial support. Relief to MSMEs has been the focal point of policy responses to the pandemic from the Chinese Government, which launched nearly 600 policies supporting MSMEs within the first 10 days of Chinese New Year, shortly after a lockdown was imposed on Wuhan in Hubei Province, China. With strong government support and significant digital presence, MSMEs are expected to bounce back and be the backbone of Chinese economy again.
Learnings for emerging economies
With the sector assuming greater importance, the three main game-changers for MSMEs are innovation, policy support and digital uptake.
1. Innovation in product and business practices
MSMEs often lack innovation commitment, due to low wages and manpower shortage in the Global South. The central role of innovation is to support long-term survival of products and businesses. This requires MSMEs to develop, build on, and expand ideas. It is important to understand what motivates or enables individual innovative behavior to occur, as these are mostly related to enterprise owners. MSMEs should brainstorm and develop products and services that are customized and personalized for their customers’ needs and preferences. The Government of India recently launched a portal for innovative MSME ideas where MSMEs can discuss ideas with potential funders such as venture capitalists.
2. Providing an enabling environment with policy support
Promoting an enabling environment for MSMEs will be crucial to the future of work of small businesses. As a starting point, it is essential to understand the challenges faced by MSMEs as well as institutional mechanisms, laws and regulations at work. Governments need to interact with a range of actors, from education institutions to financial institutions, innovators to customers, among others, to build inclusive infrastructures and set up policy coordination across different participants. Designing an appropriate regulatory environment for FinTech is one such way. The Government of Kenya was supportive of MPesa which enabled businesses of all sizes to grow, leading to a financial revolution in the country.
3. Digital uptake and technology
E-commerce is merely a website away and it opens doors to a global customer base. MSMEs need to cultivate a digital mindset. It should be looked upon as an opportunity, keeping in mind that their business needs require adequate logistics to handle digital commerce. A great example is Alibaba Group led by Jack Ma, which enabled businesses to transform the way they market, sell and operate, thereby improving their resilience during the pandemic.
All emerging economies need to provide jobs and sustainable income to people at the bottom of the pyramid, in order for them to become a developed economy. Structural reforms are required in the areas of enabling policies, promotion of innovation development, and technological resources, so as to turn MSMEs into the main driving force of economic development.
We believe that this pathway to success has been assisting emerging economies to take steps in the right direction — and can make them more resilient as they build back after COVID-19.
All pictures/images in the article are captured/created by the authors.
About the authors
Kanika is an international development practitioner with a multi-sectoral understanding of working with nonprofits across the global south, she is deeply passionate about youth empowerment, women in MSMEs, entrepreneurship and anything SDGs. She loves to leverage qualitative research for understanding grassroot realities. Currently, she works as a Research Manager with LEAD at Krea University and contributes to the efforts of UN SDSN Youth as a Senior Advisor.
M.P. Karthick is an Evaluation and Data Analytics expert with more than 8 years of research and consulting experience in Asia and Africa. He has conducted multi-country research and evaluation programs to assess various government schemes. He has worked across multiple sectors including MSME & Entrepreneurship, Digital Financial Services, Inclusive Finance and Public Health. He is a street footballer and writes data blogs. Currently, he works as a Data Scientist with LEAD at Krea University.
