The global economy drives SME growth and job creation

Small and medium-sized enterprises (SMEs) play an important role in economic development and job creation. While the general features of this role are understood, there are many features of this that require more research. Of particular interest to countries and regions around the world is the importance of the traded economy –– that part of the economy connected to global markets.

Two new reports present compelling evidence on the relationship between SME growth, job creation and trade in global supply chains.

Last week, the International Labour Organization (ILO) released the latest version of one of its flagship publications, the World Employment and Social Outlook. This year’s report, the World Employment and Social Outlook 2017 deals with Sustainable enterprises and jobs: Formal enterprises and decent work.

Earlier this year, I was commissioned to review a draft of this publication and am pleased these findings are now publicly available. There is a lot of valuable information here and I recommend you read it.

Drawing from primary data and a review of recent secondary study, this report draws on employment estimates from 132 economies to find that firms that sell in global supply chains are more likely to grow, innovate and pay their workers better.

From 2003 to 2017, the SME share of total full-time employees in the formal sector increased by 3.6 per cent, from 31.2 to 34.8 per cent. Furthermore, full-time female permanent employees in the formal sector are more likely to be found in SMEs than in large firms.

Even among smaller firms, such as micro-enterprises, the contribution to employment is considerable. While the data is much more variable across countries, the report claims micro-enterprises (generally, defined as those employing less than five workers), contribute a significant share of employment. In six of a sample of 14 developing economies, formal micro-enterprises account for between 13.8 and 48.7 per cent of permanent employment. In developed economies, micro-enterprises (defined in this instance as having fewer than ten employees) account for more than one-fifth of total employment in most of the economies, rising to 46 per cent in Italy and 59 per cent in Greece. In eight out of 11 countries for which data are available, women have a higher proportion of employment in micro-enterprises than in firms of other sizes.

Although theory suggests that there is no relationship between firm growth and firm size, the evidence is mixed. Some suggest that when a firm’s age is taken into consideration, there is no relationship between firm size and employment growth. Others show that smaller firms grow faster than larger firms, even after controlling for firm age. See my recent post on high-growth gazelles.

More recent evidence shows how smaller and younger businesses experience greater variance in employment growth––they exhibit positive and negative growth alongside changes in aggregate demand. Among growing firms of all sizes, smaller firms are associated with higher positive employment growth. However, they are also greater contributors to job losses among contracting firms.

The World Employment and Social Outlook is particularly interested in SME employment patterns before and after the Global Financial Crisis of 2008.

Among the expanding firms, the relationship between firm size and employment growth is reported as stable across both pre- and post-Crisis periods. Thus, for growing firms, being smaller and younger is robustly associated with higher net employment growth than achieved by larger and older enterprises. However, being smaller and younger is also associated with higher negative employment growth than seen in their large and old counterparts in recent years.

While pre-Crisis SMEs experienced negative employment growth at rates that were not statistically different from those achieved by large firms, post-Crisis SMEs experienced much greater negative employment growth rates. This leads the report to conclude that young and mature enterprises retained their faster rates of employment growth despite the accelerated job destruction in recent years.

Thus, SMEs are important engines of job creation even during times of economic downturn.

There are considerable differences between innovative and non-innovative firms in terms of labour market outcomes. Innovative firms tend to be more productive, create more jobs and hire more female workers. They also employ more skilled workers––meaning they employ more educated workers and offer more on-the-job training.

Finally, the report makes interesting arguments regarding the role of regulatory reform and the business environment. It argues for better policies to improve the access SMEs and young firms have to resources, such as financial services, and to ‘strengthen the business environment for all firms’.

Noting that the ‘economic environment in which firms operate is constantly changing’, the report highlights the role of policies, regulations and institutions in driving these changes, as well as by the behaviour of different economic actors, such as consumers and other firms. Five trends are identified:

  1. The weakening of aggregate demand around the world;
  2. The rise in trade protectionism, which is likely to have contributed to the almost threefold increase in the number of non-tariff barriers imposed globally since 2000;
  3. A strong rise in uncertainty, which has led to firms delaying or impeding their investments;
  4. The decline in investment, which as a share of economic growth has gone down in almost all regions of the world during the past eight years; and
  5. The decline in firms’ access to finance, including trade finance, driven largely by a reduction in the risk appetite of financial institutions.

Recognising this context, the report highlights the importance of doing business in the traded economy. It finds that those SMEs that export and import are more productive than those that do not. This difference is particularly pronounced between exporters and non-exporters. Exporters and importers typically employ a large workforce, which grows with exporting experience. Moreover, exporting and importing firms pay higher wages, which increase on average with the number of years a firm has been active in the export market.

Interestingly, it is also reported that firms that provide inputs into global supply chains are particularly productive exporters. The productivity premium for exporting is driven by supplier firms, which also pay higher wages than other exporters. Firms that contribute to global supply chains by assembling final goods have lower productivity than other exporters, but are not found to pay significantly lower wages. Overall, global supply chains suppliers were found to have a larger workforce on average than other exporters.

Thus, SME engagement in trade boosts productivity.

Another recently released report of relevance is the OECD’s, Entrepreneurship at a Glance 2017. This report finds that most new employer enterprises in OECD economies are created with between one and four employees. The average number of persons employed in employer enterprise start-ups is typically higher in industry than in services, reflecting economies of scale.

The OECD also examined the role of gazelles and found that, while few in numbers, fast-growing firms contribute disproportionally to employment generation. The rate of high-growth enterprises varies significantly across countries and also by sector, reflecting the relative specialisation or comparative advantages of countries in certain activities. However, within countries trends in the evolution of high-growth rates by sector are generally aligned, suggesting that dynamic drivers of high-growth are strongly influenced by the business environment.

The OECD finds that while between 25 and 70 per cent of exporting firms are micro-enterprises (with less than ten employees), they account for only a limited share of total export value. However, micro-enterprises in wholesale and retail trade services play an important role in driving international trade. They comprise around three-quarters of all enterprises in the sector that engage in international trade, and around 15-50 per cent of all imports and exports of the sector. Importantly, the differences in trade participation across size classes and countries ‘highlight important barriers to participation in international trade, particularly for smaller firms, and in turn stress the importance of examining indirect channels of integration into global value chains’.

The ILO report focuses on the role of labour regulation. This has been the topic of substantial debate between agencies over many years. This report notes an increasing trend towards the use of non-standard forms of employment and asks how labour regulation has adapted to this reality. Increasing levels of protection for workers involved in part-time, fixed-term and agency work have been observed not only in various developed economies, but also in some emerging and developing economies.

It is interesting to note the two ‘future of work initiatives’ in this regard, which identify similar concerns: the Future of Work Initiative of the RSA in the UK and The Aspen Institute’s Future of Work Initiative in the USA.

These changes to traditional forms of employment require reforms that allow workers in non-standard forms of work be treated in a proportionate or similar manner as employees with permanent contracts. The debates that have favoured excessive labour market deregulation appear to have gradually shifted away from a simple deregulatory stance on labour. The ILO encourages national and international organisations to recognise the beneficial role of labour regulations when adapted to the particular context of the labour market. Firms that invest in the sustainability of their workforce – through on-the-job training, promoting equity in employment opportunities and securing workers’ protection and rights – as well as investing in other important factors of production, such as innovation and engaging in external markets, can be highly competitive without sacrificing the creation of decent employment.

 

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