14 Jun The Missing Middle
Small and medium enterprises (SMEs) play an important role in the development of a country: they form the backbone of modern economies and are crucial engines for development in their role as seedbeds of innovation, efficient producers and employers of labour. SMEs have a propensity to employ more labour–intensive production processes than large enterprises; consequently, they contribute significantly to the provision of productive employment opportunities, the generation of income and the reduction of poverty. Economists believe that economic development is advanced through the increase of SMEs because such proliferation increases employment opportunities. According to an OECD1 report, SMEs account for more than 95 percent of manufacturing enterprises and an even higher share of many service industries in OECD countries. In most of these countries, SMEs generate two-thirds of private sector employment and are the principal creator of new jobs. This is, however, not the case in most developing countries; developing countries have a large number of microenterprises and some large firms, but far fewer small and medium enterprises. In high-income countries, SMEs account for over 50 percent of GDP and over 60 percent of employment, but in low-income countries they account for less than half of that: 30 percent of employment and 17 percent of GDP. This SME gap between the numbers in the high and low income countries is called The Missing Middle.
To have a firm understanding of The Missing Middle it is essential for one to be familiar with the definitions of and differences between microenterprises, small enterprises, medium enterprises and large enterprises. The definition of the aforementioned enterprises differs from country to country, although they can be defined along the following lines: number of employees, assets and annual sales.
The Missing Middle
A number of reasons have been identified to be responsible for the low number of SMEs in low income countries, some of which include: poor infrastructure, small local markets and underdeveloped regional integration, weak legal and regulatory environments for businesses, low business acumen and limited access to financing. Access to financing remains one of the key contributors to The Missing Middle in developing countries. According to the World Bank’s “World Business Environment Survey” (WBES) which involved more than 10,000 firms from 80 countries, SMEs worldwide on average named financing constraints as the second most severe obstacle to their growth; however firms in Central and Eastern Europe, the former Soviet Union, and Africa were most likely to cite finance as their most severe constraint.
“The Missing Middle” can be said to be the financing gap in emerging markets that lies above micro-finance and below traditional institutional financing. This occurs because SMEs are too large to secure funds from micro-finance institutions and too small for mainstream private equity or commercial banks. Commercial banks in emerging markets typically view SMEs as high-risk investments which make it a challenge to get loans. Banks find it difficult to adequately assess the risks involved in transacting with