SMEs as Engines for Job Creation and the Conditions that enable this

Dean Broomhead

Policy Brief: SMEs as Engines for Job Creation and the Conditions that enable this

Small and medium sized enterprises (SMEs) play a pivotal role in modern society, globally.  Whilst it is accepted that they generate a large share of jobs in the developed nations[1], a debate exists as to the structure and importance of SMEs in the developing world. Job creation and employment are important goals for the International Labour Organisation (ILO), as set out in one of the ILO’s four strategic objectives; ‘Formulation of international policies and programmes to promote basic human rights, improve working and living conditions, and enhance employment opportunities’[2]. The ILO is clear however, that job creation, needs to lead to decent work, with access to all aspects set out in the constitution, including collective bargaining and social dialogue.

SMEs can play an important role in providing employment and therefore empowering the poor and providing assets (both financial and human) to enhance poverty reduction. There is a widely held view, however, that due to their often short life span, SMEs do not generate many jobs. Yet according to a study undertaken by the ILO this is not true: 50 per cent of total employment creation comes from enterprises with less than 100 employees.[3] The report also notes that “Many of the small enterprises in developing countries are informal firms of micro size with a low productivity that are born out of necessity and operate in crowded market segments with low entry barriers.”[4] For this reason, whilst we see the necessity for job creation and decent work throughout the world, the process under which governments achieve this may be very different. However, the ILO does much to support the work of SMEs internationally and to promote decent work, wherever possible.

Recent studies have suggested that small firms tend to grow at a faster rate than large ones. Furthermore, newly created firms grow extremely fast in their first years of activity. One particular debated characteristic of SMEs is the willingness to risk-take. Whilst this may not be particularly relevant in all industries and states, a greater willingness to take risk and invest leads to positive job growth. De Kok et al. (2011) found that innovative firms in Europe experience higher employment growth rates, when controlling for country and workforce characteristics. It can also be argued that SMEs play a far superior role in developing young employees and providing a greater training platform for young people to nurture skills. SMEs are key, “acting as a seed bed for the development of entrepreneurial talent.[5]” Finally SMEs are known to enhance competition, hence generating external benefits in relation to economy-wide efficiency, innovation, and aggregate growth.

However, the regulatory environment they operate within influences the performance and employment-creating potential of SMEs and this varies considerably across ILO member countries.  This very point was debated at the ILO Governing Body Meeting on the 24th of March 2015 where the employers’ representative noted that the time required to set up, register, commence operating and develop a business plays a key role in developing SMEs and encouraging business growth. The employers’ representative urged the need to consider how bureaucracy affects businesses and growth.  Some studies have suggested that overly burdensome regulations can inhibit job creation and are a much greater burden to SMEs when compared to larger firms. “Complying with regulation places a disproportionate burden on small and medium-sized businesses in terms of cost, time and resources”[6]. This is furthered by Broughton, who argues, “Current employment law and regulation deters small businesses from taking on more employees,”[7] This claim is, however, questionable. Kitching claims that whilst regulation can have this effect, small to medium size enterprises can benefit also. “Regulation can impact upon small businesses directly and indirectly, and both constrain and enable and motivate business owners to act.”[8]  In addition, SMEs require more support than larger firms as they face greater challenges with financial matters. Not only is it more difficult to access finance but it is also more difficult for them to exploit economies of scales in production. It is immensely important for nations to deal with these issues as poorly designed regulatory frameworks can potentially hinder growth and constrain employment growth.

It is for these reasons that the ILO undertakes much work to support and sustain the growth of SMEs. The ILO has a dedicated business unit tasked with managing a variety of issues related to growth and sustainability of these important businesses. The unit performs a diverse set of tasks, from responding to countries that request assistance on policies to aid the development of SMEs, to offering training packages to existing small to medium size enterprises in any ILO member country. As tripartism is a fundamental belief for the ILO, they are able to offer assistance to all workers, employers and governments where necessary. This unique approach enables the ILO to handle more complex issues and cause greater change in the states requiring aid. Previous examples of assistance include Palestine, where the ILO successfully devised an assessment tool to aid Palestine in assessing the factors inhibiting SMEs. From this Palestine was able to launch a policy framework for the development of micro, small and medium-sized enterprises (MSMEs). In addition, the ILO has released the Start & Improve Your Business (SIYB) programme. This has had a positive impact globally, however China has been exemplary, using these tools to initiate training to encourage entrepreneurship amongst young people. Given the changing nature of employment, particularly youth unemployment in Europe, which has been exacerbated by the global financial crisis, the significance of the role of SMEs is clear.  With the provisions and encouragement of the ILO, it is to be hoped that all member countries will be able to encourage and enable SMEs to offer decent employment.

[1] SMEs make up 99.9% of the total number of businesses in the UK

[2] ILO Missions and objectives – Accessed:–en/index.htm

[3] , [4] “Is Small Still Beautiful? Literature Review of Recent Empirical Evidence on the Contribution of SMEs to Employment Creation”- ILO Report – Authors: Jan de Kok; Claudia Deijl; Christi Veldhuis-Van-Essen

[5]Is Small Still Beautiful? Literature Review of Recent Empirical Evidence on the Contribution of SMEs to Employment Creation”- ILO Report – Authors: Jan de Kok; Claudia Deijl; Christi Veldhuis-Van-Essen

[6] CBI Regulations – Business issues and SMEs.

[7] Broughton, N. – Flexible labour markets: what do SMEs actually want?

[8] Kitching. J,-  “A burden on business? Reviewing the evidence base on regulation and small-business performance”- 2006


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