The Critical Role of Micro Enterprise in the Canadian and Global EconomyJuly 6, 2017
With the recent release of the government’s international assistance policy and increasing dialogue in the public sphere about economic development in the Canadian Indigenous environment, I’d like to take a moment and focus on what I see as the workhorse of long-term sustainable economic change: small- and medium-sized businesses (or “SMEs”).
I was glad to see the UN designate a recognition date for “MSMEs” (addition of term “micro” to SMEs). Regardless of the size and strength of an economy, there’s no disputing the power of SMEs in driving economic growth and inclusivity.
In reality, of course economic development is complex, and SMEs certainly aren’t the only piece of the sustainability puzzle. However, without a thriving SMEs environment and strong private sector, development can only get so far. We’ve learned this fact from our 50 years of experience in the sector.
SMEs by the Numbers
There’s endless research underscoring the importance of SMEs in the global economy. A simple Google search reveals hundreds of pages of scholarly articles, statistics and data. Here are just some of the statistics that resonate with me:
- Formal SMEs comprise up to 40% of global GDP and up to 60% global employment
– these numbers increase when including estimates for the informal SME sector
- The World Bank estimates there are 365-445 million SMEs around the world
– Only about 20% of those are formal SMEs (the rest are in the informal economy)
– Informal SMEs are disproportionately high in low-income countries
- SMEs account for every two out of three net new jobs worldwide
Given SMEs have such a high contribution to GDP, they easily influence the rate at which an economy can grow, but they also equally influence economic recession. The global financial crisis of 2008 and subsequent recovery years demonstrated on a mass scale how debilitating it can be for any economy when the SME environment is crushed. Around the world, SMEs played – and continue to play – a crucial role in the global rebound and economic health.
The Role of Women in SME Development
As almost any development organization like CESO will attest, women lead the majority of micro- and small- sized enterprises, particularly in developing economies. This “on the ground” knowledge is backed up by endless research. These women-led organizations make up 31-38% of formal SMEs, but certainly as we’ve seen in our program countries, that number grows exponentially when looking at the informal sector.
The importance of empowering women economically is indisputable. For starters, it’s a well-documented fact that women invest up to 90 per cent of their incomes back into their families compared with 35 per cent for men. But that investment doesn’t stop at their families. As these women engage in consumer-oriented activities, they buy goods and services from local micro-, small- or medium-sized businesses (often also women-owned), thus injecting much-needed stimulus into the local community and economy. In turn, those SME owners can then use their predictable income to improve their family’s health and well-being, to contribute to the community’s economy, and so on.
This is the multiplier effect and research shows that this individual- and community-level reinvestment occurs at higher rates when women are economically empowered.
Obstacles: Skills and Financing
Skills development and financing are two barriers faced by SMEs around the world, but are particularly challenging variables in developing environments.
Access to education and training at any stage can make or break an entrepreneurial venture, starting even at developing a subconscious entrepreneurial spirit.
As an example, recently, my son’s grade eight math class participated in an exercise in which the students had to pick an item with scope for additional value to resell at a profit (maximizing the product’s value) to their classmates. The students-turned-entrepreneurs who produced the most profit won a prize. It was a great way to include entrepreneurship and business basics into the curriculum before students are even in high school. Whether or not that puts him on a path to entrepreneurship remains to be seen; the point is, this is just one example of how those ideas and concepts have been introduced and reinforced to young Canadians at an early age in the public school system.
Financing poses another challenge for SMEs. Around 70 per cent of SMEs lack access to credit or capital, and the bulk of those are women-led. SMEs (particularly at the micro-level) don’t always fit into traditional credit systems; they’re typically too small for traditional banking and financing needs are often too big for community- or family-share loan systems. Microfinance systems can offer a transformational means for the SMEs to acquire much-needing financing and (almost disproportionately) serve women-led micro-enterprises.
In Canada, Indigenous entrepreneurs face similar credit and capital barriers, particularly those living on-reserve. Without individual land ownership or even traditional banking access in the more remote communities, entrepreneurs have an extremely difficult time accessing bank loans for their businesses. There are government programs to support Indigenous entrepreneurs, but qualifying for those grants and funding models are often equally difficult.
Moving Forward with Reconciliation and Inclusivity
As an organization working in partnership with Indigenous communities in Canada or globally, we’ve learned over our 50 years dedicated to economic development that building a strong economic infrastructure is fundamental to sustainable change and inclusive growth, including the eradication of poverty. Strengthening the private sector, and specifically, building a thriving SME environment, is one of the ways we do that.
In Canada, focusing on economic development can play another important role. I couldn’t agree more with the National Aboriginal Economic Development Board’s (NAEDB) position that economic development is the foundation for reconciliation. As the NAEDB points out, economic development is the nexus at which multiple groups – government, Indigenous Peoples, the private sector and individuals – can work together to rebuild a long-broken relationship, to level the playing field and to build a stronger, more inclusive Canadian economy. In fact, the NAEDB’s 2016 study showed that if we closed the economic gaps between Indigenous and non-Indigenous Canadians, an additional $27.7 billion could be added annually to Canada’s GDP. Perhaps more importantly, 175,000 fewer Indigenous people would live in poverty, and literally billions would be added in the form of employment income for Indigenous employees – new and current. These are economic outcomes we should all care deeply about.
Wendy Harris is the President and CEO of CESO