Regional overview of SMEs
Regional overview of SMEs
A fundamental aspect of Latin American SMEs is how extremely diverse they are. Some microenterprises were born out of an individual person’s need for self-employment. Such businesses often operate informally and have low human capital, difficulty in accessing external financial resources, very little internationalisation, and work activities with very few technical requirements. At the opposite end of the spectrum are high-growth SMEs, known as “gazelle companies”, which are much more dynamic in terms of sales revenue and job creation and which exploit market opportunities through efficient, innovative business management. Therefore, the concept of company size conceals what is in fact a very diverse reality for this type of production unit.
One of the defining characteristics of Latin American SMEs is that they are highly diverse, ranging from those set up out of a need for self-employment and subsistence to those able to exploit market opportunities through efficient, innovative management.
The diverse nature of SMEs conditions how policies geared towards them are designed. Because the concept of an SME covers such a vast array of different types of businesses, a one-size-fits-all approach to policy making is not advisable. In addition to having different growth potentials for productivity and employment, SMEs of different types are usually confronted with very disparate obstacles. For some, most of the obstacles are internal constraints on the company (for instance, the limited capacity of the entrepreneur), while for others they are the result of an unfavourable external environment for the sector, production chain or cluster, or even an unfavourable macroeconomic environment.
Among Latin American countries there are at least two different definitions of an SME. One is based on the number of employees in the firm, and the other uses sales revenue to determine the economic size of production units. The first definition ignores what are usually major differences among sectors (and among branches within each sector), often resulting in SMEs’ contribution to the economy being overestimated.2 However, this is the criterion used in national statistics departments, which often provide the data available in these countries, while the policy-making bodies define company sizes based on the sales-revenue criterion.
Despite these difficulties in comparing data between one country and another, there are certain general patterns in the relative productivity and distribution of firms by size among the region’s SMEs. Latin American SMEs’ relative productivity levels are, on average, below those recorded in selected OECD countries. For example, the national productivity levels of small firms relative to large firms range from 16% to 36% in Latin America, but from 63% to 75% in Europe (Figure 2.1). The discrepancies in productivity affect the wage gap (Table 2.1), which has major consequences for income distribution and inequality in the region.
The productivity of small firms relative to large firms in Latin America ranges from 16% to 36%, compared with relative productivites of 63% to 75% in Europe.
Figure 2.1. Relative productivity in selected Latin American and OECD countries
Table 2.1. Wage gaps relative to large firms, 2006 (as percentages)
Differences in productivity among businesses are closely related to the production structure and how jobs are distributed across sectors. In 2008, over 70% of workers in the region were employed in low-productivity sectors, such as agriculture, construction, retail and personal services; 20% were employed in medium-productivity sectors, such as industry and transport; and 8% were employed in high-productivity sectors, such as mining, finance and energy (ECLAC, 2010).
In the distribution of firms by size in Latin America, as in OECD countries, about 99% of firms are SMEs. This underlines the importance of SMEs in production and their potential as agents of structural change. Because they are so numerous in the production fabric, any industrial policy and structural change must take into account the variety of characteristics, peculiarities and dynamics of SMEs (Table 2).
In 2008, out of every hundred Latin American workers, 8 worked in high-productivity sectors (mining, energy, finance), 20 worked in medium-productivity sectors (industry and transport) and over 70 worked in low-productivity sectors (agriculture, construction, commerce and services).
Table 2.2. Proportion of firms by size in selected Latin American and OECD countries (as percentages)
Jobs in microenterprises are mainly in retail and in some low value-added services; small firms’ employees work mainly in retail and, to a lesser extent, the manufacturing sector, and in construction in some countries. In medium-sized firms, meanwhile, in several countries manufacturing is the sector that employs most people, but retail is also relatively important. In large firms, manufacturing and certain higher value-added services (telecommunications and financial intermediation) provide most employment.
This distribution of employment varies somewhat depending on the shape of each country’s production structure. For instance, in countries with less industrial development, commerce can be important for employment and for large firms and in some countries is as large as or larger than the industrial sector. For large firms, telecommunications and financial intermediation services can have a greater impact on smaller economies that are more highly specialised in these sectors.
In all countries in the region, smaller firms, especially micro and small enterprises, operate in the least productive sectors of the economy. These sectors have low entry barriers, and little need and few incentives to work in conjunction with other firms (to create networks or clusters). Consequently, they also have less chance of generating externalities to increase their specialisation (and that of the workforce), their propensity to innovate and their productivity.
Another aspect of the productive environment of Latin American SMEs is its low level of internationalisation (Table 2.3). A huge constraint for these companies to access foreign markets is the structure of the region’s exports. Exports focus mainly on natural resources and their derivatives, an area dominated by large firms because of the heavy investment it requires, which leaves little space for the involvement of small and medium-sized firms. Furthermore, this composition of regional exports feeds the heterogeneity of the Latin American production structure because it does not encourage SMEs to access more innovative processes through a stimulus to export. Also, the low internationalisation of SMEs means that many of them supply only the domestic market. These companies thus become highly dependent on the macroeconomic conditions of the domestic economy (Peres and Stumpo, 2002). It is therefore not surprising that during highly volatile economic cycles the mortality rate of firms is inversely correlated to their size and the entry rate of new firms contracts more among smaller, formal firms (Castillo et al., 2004; Crespi, 2003).
Table 2.3. Proportion of exports by company size (as percentages)
According to a comparison of firms’ entry and survival rates between Argentina, Brazil, Colombia and Mexico and European countries, there are huge differences in the business dynamics (Bartelsman et al., 2004). Mexico has higher entry rates than Argentina, Brazil and most European countries. However, the survival rate of Mexican SMEs is lower than in other countries in the region, indicating a business environment in which entry is easy but medium-term survival is more difficult. Although there is no detailed analysis of these dynamics in all Latin American countries, it is important to remind ourselves that the region’s diversity shows how important the production environment is in determining SMEs’ performance.
During highly volatile economic cycles the mortality rate of firms is inversely correlated to their size and the entry rate of new firms contracts more among smaller, formal firms.