The recent McKinsey Global Institute report, “A microscope on small businesses”, reveals that micro, small, and medium-size enterprises (MSMEs) account for two-thirds of business employment in advanced economies, and almost four-fifths in emerging economies. They also contribute half of all value added Services. The data set of MSMEs and large companies covers 12 broad sectors, 68 level-two subsectors, and more than 200 level-three subsectors for 16 countries that account for more than half of global GDP.
In this group (listed by per capita GDP in 2021 in purchasing power parity terms) are ten advanced economies: The United States, Germany, Australia, the United Kingdom, Italy, Israel, Japan, Spain, Poland, and Portugal; and six emerging economies: Mexico, Brazil, Indonesia, India, Nigeria, and Kenya.
Key Findings:
- Micro-, small, and medium-size enterprises (MSMEs) form the backbone of economies. Across the 16 countries in the study, MSMEs accounted for two-thirds of business employment in advanced economies and almost four-fifths in emerging economies as well as half of all value added value services. They also play a critical role in preserving competitiveness in an era of shifting global production.
- Boosting MSME productivity relative to large companies could yield significant value. Small business productivity was found to be only half that of large companies, and less in emerging economies. Raising MSMEs to top-quartile levels relative to large companies would be the equivalent to 5% growth in GDP in advanced economies and 10% in emerging economies.
- Capturing this value requires a fine-grained view. Relative productivity of MSMEs and large companies varies widely across subsector and country. For example, in virtually all countries, eight subsectors out of 24 drive more than 60 percent of the value of narrowing the productivity gap in manufacturing, but the top ones vary by country.
- A win-win economic fabric can improve productivity for both MSMEs and large enterprises. MSME and large company productivity regularly move in tandem in most subsectors, indicating spill-overs if the right conditions are created. For example, automotive MSMEs have gained operational proficiency through systematic interactions with productive original equipment manufacturers, and small software developers have benefited from talent and capital ecosystems seeded by larger companies.
- All stakeholders have a role to play in developing granular productivity strategies. In subsectors where both small and large companies lag, infrastructure and policy improvements can target both together. Where MSMEs struggle but large enterprises outperform, building networks among them assists in growing productivity across the sector. Even where both large and small companies do well, strengthening their interactions could help boost productivity.
Larger scale is generally associated with higher productivity. Yet being small has its advantages, too. Small businesses can be a vehicle for individuals to channel their entrepreneurial ambitions as well as for people who simply own and run a business for a living. They shape our social fabric and day-to-day life in important ways and are trusted by citizens.
Small businesses are however often disproportionately affected by lack of public infrastructure, such as reliable logistics networks, access to basic utilities like uninterrupted power supply, and the availability of High Speed Internet. While large businesses mostly have the ability to establish their operations in areas with robust infrastructure. They are also able to develop their own infrastructure, such as Solar power generation and building their own last-mile connectivity. While this enabler is critical for MSMEs overall, it is difficult to differentiate at the sector level.
The visual images below summarizes the key findings for Kenya.
