Small and medium scale enterprises (SMEs’) of the world
From large firms, the focus of business analysts has today shifted to Small and Medium scale Enterprises (SMEs’). The growing importance of SMEs’ has also been the result of increasing economic contribution. Statistics provide that SMEs’ account for more than 95% of enterprises across the world and they provide approximately 60% of the private sector employment globally (Ayyagari et al. 2011). Japan has the highest numbers of SMEs’ in the world; around 99% of the businesses are SMEs’ (EIU 2010) whereas in India, the proportion of SMEs’ was 80% in 2008 as provided by the Ministry of Micro, Small and Medium Enterprises (Ghatak 2010). In the European Union of 25 countries, the SMEs’ account for 99% of all enterprises and are a provider of 75 million jobs (European Commission, 2005). But till date there is ignorance upon the basic facts related to the SMEs’.
Understanding the definition of SME
It might come as a surprise for many that despite millions of researches on SMEs’, there is no standard definition for the this term. The definition of small and medium-scale enterprises is different in different countries. These differences in the definitions are on account of factors like the number of employees, total sales, organizational resources, and net investment level (Ayyagari, et al., 2003). The definition provided by the International Federation of Accountants (IFAC) clarifies the same. IFAC defines SMEs’ as;
“the entities considered to be of a small and medium size by reference to quantitative (for example assets, turnover/employees) and/or qualitative characteristics (for example, concentration of ownership and management on a small number of individuals). What constitutes an SME differs depending on the country” (IFAC, 2010).
SMEs’ in India as compared to European nations
In India, the SMEs’ are categorized as manufacturing units and service units and different criteria work for them. In the manufacturing industry, a small enterprise is the one with an investment in plan and equipment of more than Rs. 25 lakhs. But this investment must not exceed Rs. 5 crore whereas a medium enterprise is the one with an investment in plan and equipment of more than Rs. 5 crore but not exceeding Rs. 10 crore. In the services industry, small enterprise is the one with investment in equipment of more than Rs. 10 lakh but not exceeding Rs. 2 crore whereas a medium enterprise is the one with an investment in equipment is more than Rs. 2 crore but not exceeding Rs. 5 crore (RBI, 2014). In the European Union, the definition of SMEs’ is that it should not employ more than 250 persons and should not have an annual turnover exceeding 50 million euro and/or an annual balance sheet total not exceeding 43 million euro (European Commission, 2005). The following table reveals the differences in the definitions of SMEs’ in different countries.
Another interesting fact about SMEs’ with regards to their contribution to the economy of a country is that the contribution differs in low-income and high-income countries. In the low-income countries, the SMEs’ contribute around 16% of the Gross Domestic Product (GDP); whereas in high-income countries, the SMEs’ contribute as high as 51% of the GDP (Ayyagari, et al., 2003).
SMEs’ are competing on a global scale
However, despite these differences, there is no doubt that SMEs’ play significant role in a country’s economy and it is a booming area across the world. Witnessing the growing trend of internationalization, even SMEs’ today have started looking out for ways to enhance their scale of operations beyond the national boundaries, especially through the internet (Vickery, et al., 2004).
- Ayyagari, M., Beck, T. & Demirgüç-Kunt, A. (2003). “Small and Medium Enterprises Across the Globe: A New Database.” Vol. 3127, World Bank Publications.
- Ayyagari, M., Demirgüç-Kunt, A. & Maksimovic, V. (2011). “Small vs. Young Firms Across The World – Contribution to Employment, Job Creation, and Growth.” Policy Research Working Paper, 5631, The World Bank Development Research Group.
- European Commission. (2005). “The New SME Definition.” Enterprise and Industry Publications. Retrieved from: http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_user_guide_en.pdf [Accessed on May 19, 2014].
- IFAC. (2010). “The Role of Small And Medium Practices in Providing Business Support to Small-And Medium-Sized Enterprises.” Information Paper. New York: Small and Medium Practices Committee International Federation of Accountants.
- Reserve Bank of India. (2014). “Micro, Small and Medium Enterprises.” Retrieved from: http://www.rbi.org.in/scripts/FAQView.aspx?Id=84 [Accessed on May 20, 2014].
- Underhill Corporate Solutions. (2011). “Literature Review on Small and Medium Enterprises: Access to Credit and Support in South Africa.” Retrieved from: www.ncr.org.za/pdfs/Literature%20Review%20on%20SME%20Access%20to%20Credit%20in%20South%20Africa_Final%20Report_NCR_Dec%202011.pdf [Accessed on May 19, 2014].
- Vickery, G., Sakai, K., Lee, I., & Sim, H (2004). “ICT, E-BUSINESS AND SMEs.” Organisation for Economic Co-Operation and Development Retrieved from: http://www.oecd.org/internet/ieconomy/34228733.pdf [Accessed on May 20, 2014].