SMEs often engage in various economic activities across different sectors and industries. The specific activities and functions of SMEs can vary widely depending on the nature of the business. SMEs play a crucial role in driving innovation, fostering entrepreneurship, stimulating local economies, and contributing to job creation and economic growth. According to the International Labour Organization (ILO), SMEs have a crucial impact on employment generation by being responsible for most formal job opportunities in developing nations, accounting for approximately two-thirds of such jobs. In low-income countries, their contribution is even more significant, reaching up to 80 percent of formal employment (Berrios & Pilgrim, 2013).

1. Employment Generation: 

SMEs have a higher labor-to-output ratio compared to larger enterprises. This means they employ more people per unit of output or revenue they generate. Unlike larger corporations that rely heavily on automation and capital-intensive processes, SMEs often require significant human labor to run their operations. As SMEs grow and expand their business, they tend to hire additional staff to meet the increased demand for their products or services. This includes both skilled and unskilled workers across various functions such as production, sales, marketing, administration, and customer service. Moreover, SMEs often have a closer connection with their employees compared to larger corporations. This can result in a more inclusive work environment, fostering loyalty and commitment among the workforce.

2. Local and Regional Focus:

SMEs are typically deeply rooted in local communities and operate on a smaller scale. They serve local or regional markets, which allows them to create jobs within their immediate surroundings. By providing employment opportunities locally, SMEs contribute to the reduction of unemployment rates in their communities. This, in turn, can lead to improved living standards, increased purchasing power, and a stronger local economy. SMEs often have a better understanding of local market needs and preferences. They can tailor their products or services to cater to local tastes, cultural nuances, and specific demands, creating a competitive advantage over larger enterprises.

3. Diverse Workforce:

SMEs offer employment opportunities to a diverse range of individuals. They often provide entry-level positions, making them more accessible to individuals with limited work experience or recent graduates. Additionally, SMEs can be more inclusive in their hiring practices, offering opportunities to individuals from marginalized groups, such as women, minorities, or individuals with disabilities (Ahmed & Sahar, 2013). This can contribute to social and economic empowerment by providing avenues for equal participation in the workforce. SMEs may also provide training and skill development programs to their employees, enhancing their capabilities and employability. This investment in human capital can have long-term benefits for both the individuals and the economy.

4. Entrepreneurship and Self-employment:

SMEs play a crucial role in fostering entrepreneurship and self-employment. They provide a platform for individuals to start their businesses and become self-employed. SMEs often have lower barriers to entry compared to larger corporations. They require relatively less capital investment and offer opportunities for individuals to turn their ideas into viable businesses, creating jobs for themselves and potentially for others as they grow. By encouraging entrepreneurship, SMEs contribute to economic dynamism and innovation. They bring new ideas, products, and services to the market, stimulating competition and driving job creation in emerging sectors.

5. Supporting Industries:

SMEs create indirect employment opportunities through their supply chains. As SMEs grow and expand, they increase their demand for goods and services from other businesses (Ahmed & Sahar, 2013). SMEs rely on suppliers and service providers for various needs such as raw materials, components, equipment, logistics, marketing, and IT services. This increased demand from SMEs leads to job creation in related industries and sectors that support the operations of SMEs. For example, a growing SME in the manufacturing sector may source raw materials from local suppliers, employ logistics companies for transportation, and collaborate with marketing agencies for promotional activities. All these activities generate employment opportunities in the supporting industries.

Written by: Khorn Socheata, Junior Researcher at ASIP.

Reference

Ahmed, R., & Sahar, N. (2013). SME contributions to employment, job creation, and growth in the Arab World. Open Knowledge Repository Beta. http://hdl.handle.net/10986/16897

Berrios, M., & Pilgrim, M. (2013). SMEs and job creation: Is small still beautiful? ILO. https://www.ilo.org/beirut/media-centre/comment-analysis/WCMS_218252/lang--en/index.htm

Small business, job creation and growth: Facts, obstacles, and best practices. (n.d.). OECD. https://www.oecd.org/cfe/smes/2090740.pdf