Government support for SMEs – why one size definitely doesn’t fit all

Conventional wisdom on supporting entrepreneurship is that governments should support start-ups and small businesses to spur job creation and economic growth.

The rationale here is based on the premise that small firms make up the highest number of companies in any given nation, so they are therefore the biggest providers of jobs.

But the reality is that the majority of small firms actually do not grow. In fact they fail, and in doing so can destroy employment opportunities.

Nevertheless, the argument goes that by ensuring that start-ups and small firms survive, you increase the likelihood that some of them will become high-growth firms or ‘gazelles’ which in turn will grow into the behemoths (the billion-dollar ‘unicorns’) of the future, tackling unemployment by increasing the supply of stable wage paying jobs.

This is not to mention the other spin-off ‘perks’, such as retaining skilled labourers, productivity improvements and product and service innovation.

With this in mind governments typically support SMEs through a number of mechanisms geared towards ensuring their survival and driving the creation of more high-growth firms.

One size fits all?

But applying this conventional approach typically only works in developed economies – the USA, Europe, Singapore, Japan (and now also the UAE) are classic examples. Applying it elsewhere – in South America, Africa, SE Asia, or Saudi Arabia, for example – is problematic. This is because it is based on principles and dynamics relevant to economies that have large established firms and developed stock exchanges where a large proportion of the “gazelles” are listed.

The situation in many developing and third-tier countries is entirely different. Take the case of Africa, for example, there is no question that there are some outlier countries like South Africa, Egypt, and Nigeria. They have economies that are sufficiently developed with well-functioning stock markets.

But most African countries have relatively small stock exchanges dominated by large global or Pan African multinationals, mining, finance, and energy companies. In these countries, many large firms are typically much smaller than in other regions of the world. Crucially a large proportion of these firms are still run and managed by an enigmatic entrepreneur or family and are often not listed. These business leaders may often build a series of large-scale but essentially off-radar businesses, and are classic ‘portfolio entrepreneurs’.

Evidence shows that firms of this type have some very noticeable effects on their local economies. They are more productive than small and medium firms; they tend typically to invest in more up to date technology; they survive longer and grow faster than their small and medium firm counterparts. But they are nonetheless not true publicly-listed entities and may lack many of the governance and regulatory criteria that we might well expect in large corporates in a developed market setting.

This model tends to be very much the case when we look at South American nations such as Argentina and Brazil – or eastward towards Malaysia and Indonesia.

Opportunity and portfolio growth

None of this is to criticize what growing businesses in these markets can achieve – different does not equal worse, or faulty. In some cases, quite the opposite.

These business portfolios can actually represent a highly effective investment vehicle with which to access the plethora of opportunities within African, South American and Asian markets. They also allow successful entrepreneurs to strategically move and exploit scarce capital as well as resources to take advantage of short-term opportunities. These sometimes arise due to changes in regulatory and policy environments.

This strategic nimbleness is often essential. It allows entrepreneurs to take advantage of opportunities that arise for short periods of time and that have limited potential in terms of scale and scope. It also allows them to hedge against the instability of government policy and challenges in the business and political environment.

We may also find in these markets that portfolio entrepreneurs quickly set up new companies then close, scale them down or freeze them. They then reinvest profits in creating new companies to exploit different opportunities.

Where’s the policy?

Portfolio entrepreneurs manage a large number of the developing world’s fastest-growing and most influential businesses. But African, South American and Asain governments typically focus on start-ups, micro, and small firms. Policy focusing on these multiple business owners is almost non-existent.

This is baffling, considering the particular nature of these portfolio entrepreneurs:

  • They tend to employ large numbers of people in stable wage employment.
  • They tend to start the first-of-a-kind businesses in their countries. They are more innovative than their counterparts and export more.
  • They survive longer and are better at adapting to their local business environments due to the advantages they have in terms of financial and human resources.
  • They have advantages in knowledge creation, networks, and identifying opportunities; and
  • They are estimated to represent a large proportion of the entire private sector in many countries when looking at the output (forthcoming).

Policy, where it exists, is typically focused on a bottom-up approach with the aim of creating a supply of small firms.

But what about doing things differently? What about focusing on a top-down approach? This would focus on helping existing high-growth firms to continue growing and in doing so creating opportunities on the other side of the supply chain for smaller firms.

This would require identifying privately created business groups owned by successful large-scale portfolio entrepreneurs that are critical to national economic health. Create the conditions, without directly assisting the individual entrepreneurs, and by doing so drive the creation and supply of smaller firms, top-down.

State-sponsored capitalism or state-encouraged entrepreneurship?

If we think about it, this is a similar approach to that followed by the Japanese, Koreans and lately the Chinese in the way they support the Keiretsu, the Chaebol and the Chinese-state owned and privately owned business groups, as a policy for economic development.

Why not focus policy on identifying the privately owned and high-growth business groups created by experienced portfolio entrepreneurs that are critical to national economic health. Create the conditions – without directly assisting these entrepreneurs – needed for these portfolios and high-growth firms to flourish and by doing so drive the creation and supply of smaller firms, top-down.

This would seem to be the best way to unleash and harness the power of the developing world’s mega-SMEs: but that multi-billion dollar resource can’t be accessed while we stick to our ‘one size fits all’ mindset.

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