Why we shouldn’t overlook the impact of SMEs on local and global economies

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Julia Devos, Head, New Champions Community, World Economic Forum, Zishu Chen, Content Curator, New Champions, World Economic Forum Beijing

• The contribution that small and medium-sized enterprises (SMEs) make in driving positive social, environmental and economic change is often ignored.
• Yet, the impact of SMEs on local and global economies is disproportionate when compared to their size.
• Here, we highlight several SMEs who have used tenacity and speed to adapt to succeed.

The contribution that small and medium-sized enterprises (SMEs) make in driving positive social, environmental and economic change is often ignored. Yet, these businesses play significant roles in shaping the growth, innovation and sustainability of our local, regional and global economies.

Evidence proves that SMEs contribute more than their fair share to their nation’s wealth. SMEs represent roughly 90% of all firms and are responsible for 50% of employment worldwide, as well as up to 40% of GDP in emerging markets, according to The World Bank.

Drilling down into national figures, the McKinsey report, Beyond financials: Helping SMEs thrive, found that in Canada midsize companies constitute 1.6% of all firms, yet contribute 12% of GDP. While in Malaysia, midsize companies represent 2% of all firms, yet contribute about 40% of the country’s GDP. The impact of those smaller companies is disproportionate.

The challenges faced by SMEs

While these figures are exciting, they mask the struggles that SMEs have to overcome. They often face stiff competition, increasingly on a global scale, which is partly responsible for their high failure rates; they have limited resources, which means that they can’t always build strong supply chains; and often can’t invest in technologies that could help them save time and money.

The opportunities afforded to SMEs

Those SMEs that manage to navigate these obstacles, however, are often better positioned to grab fleeting opportunities than their larger competitors. Being small and agile means that they can quickly adapt to economic change and grab opportunities as they arise. This is because they have fewer, and more direct, channels of communication between leaders and those on the ground, so they can make decisions fast. A recent World Economic Forum discussion in The New Champion Dialogues, Championing the Entrepreneurship Agenda, highlighted several SMEs who had used tenacity and speed to adapt to succeed.

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What is the World Economic Forum doing about digital trade?

What is the World Economic Forum doing about digital trade?

The Fourth Industrial Revolution – driven by rapid technological change and digitalization – has already had a profound impact on global trade, economic growth and social progress. Cross-border e-commerce has generated trillions of dollars in economic activity continues to accelerate and the ability of data to move across borders underpins new business models, boosting global GDP by 10% in the last decade alone.

The application of emerging technologies in trade looks to increase efficiency and inclusivity in global trade by enabling more small and medium enterprises (SMEs) to repeat its benefits and by closing the economic gap between developed and developing countries.

However, digital trade barriers including outdated regulations and fragmented governance of emerging technologies could potentially hamper these gains. We are leading the charge to apply 4IR technologies to make international trade more inclusive and efficient, ranging from enabling e-commerce and digital payments to designing norms and trade policies around emerging technologies (‘TradeTech’).

Tapping into agility

Betta Maggio, CEO of air purifying company U-Earth, revealed how her company quickly pivoted to address the challenges of COVID-19. “COVID-19 made people understand that the air around us can be dangerous and, unlike what you eat or drink, it’s harder to control the air you breathe. As we are very flexible, we react much faster than larger companies. In 30 days we developed, tested, filed a patent design and bought to market a mask, our U-mask, which was available worldwide via our e-commerce facility. To achieve this, we kept the core competencies in-house like research and marketing, but everything else, including customer service and logistics, we outsourced to those that were more skilled in those areas.”

The ability to innovate in different ways

The ability to innovate differently to the tech giants it competes with is Mozilla‘s USP, says Mitchell Baker, CEO of the non-profit open-source internet technology developer. “We do things that don’t make sense for the giants. For example, one of the big innovations in our Firefox brand was in the production method. We took open source technical production methods known to geeks and turned them mainstream to create open source. Open source was crazy for the giants, but a method that made sense for us, which was really innovative.”

Focusing on a niche for sustainable growth

The niche of cross-industry innovation is a key factor in making Perfect World an industry leader, shares its CEO, Robert Xiao Hong. Perfect World specialises in the metaverse, gaming and TV and movie production. When COVID-19 hit, it promoted its games as a way of seeing places in virtual reality that couldn’t be experienced for real. “People must go to the Forbidden City to see the real Forbidden City, but we showed them that they can still experience it through our game,” says Xiao Hong. “I think that as long as the products we make are good, people will use them and we will reap what we harvest, whether that is through goodwill or revenue.”

Solving challenges builds resilience

Those SMEs that do overcome major challenges can build on resilience to grow, adds Chen Xiaohua, Founder and CEO of Daojia, which uses digital technology to transform China’s home service industry. “The pandemic accelerated the speed of our digitalisation,” he says. “It made our online training and video interviews more popular. It made mature entrepreneurs like us become more resilient and now we are more willing to accept challenges.”

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Jumping on digital transformation

Many forward-thinking SMEs have demonstrated how quickly they can adapt and take advantage of digital innovation, often for the common good. Frustrated with the lack of action on climate change, Maggio created a metaverse called ESG Verse to enable U-Earth to engage with the next generation. “We use this to make them understand that technology can help us become more sustainable,” she says. “The idea is to have all of us moving in one direction, to save our planet and the human race.” Being a virtual global space, the metaverse makes it easier for all SMEs to cross borders and expand their client bases.

Blendhub is literally crossing borders to provide sustainable food in its global hubs. Founder Henrik Stamm Kristensen reimagines the food supply chain and addresses food inequalities by concentrating on local and visible consumption. “We are working on creating transparent global supply chains all the way from the sea to the mouth. When we localise food production for any given recipe and perhaps create a bread mix in India, or in Colombia, we remove 20 to 50% of the cost, because we remove things that are not adding value to the consumer logistic.”

Pivoting towards sustainability

We will see an increasing drive from SMEs to give back, says Helle Bank Jorgensen, CEO and Founder of board ESG and climate training programme provider Competent Boards. Speaking at another World Economic Forum discussion, Adapting to Evolving ESG Requirements, she highlighted how keen young business leaders are to be educated in ESG and climate change, spurred on by investors and other stakeholders who expect board directors to be ESG and climate competent. But they mustn’t just talk the talk, they must act too, she says: “They need to go beyond compliance and make implementations and listen more to their stakeholders. It’s not just about being educated in ESG, it’s also about showing how they are implementing ESG.”

To conclude, by embracing the benefits of being relatively small and nimble, becoming early adopters of technology and showing a willingness to support the greater social and environmental good, SMEs and mid-sized companies have opportunities to shape the future local and global agendas. It is also up to all of us to help them flourish.

The World Economic Forum’s New Champions Community, a group of mid-sized companies championing new models, emerging technologies and sustainable growth strategies, focuses on becoming ready for the future.

The Forum has developed a self-assessment tool for SMEs and mid-sized companies. Use this tool to find out more about your company’s future readiness. It will provide you with a custom Future Readiness Profile. This is designed to help identify your company’s strengths and potential gaps in terms of future readiness and to benchmark you against your peers.

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