Best practice policies for small and medium-sized enterprises (SMEs)
This article provides an informative summary of the valuable insights gained from the application of policies in five key areas, namely financing, business environment, technology, management capabilities, and access to markets, which can be utilized to aid in future decision-making processes.
Financing
The major function of the government in financing SMEs is to minimize the risk and cost of private equity finance. The public sector should strengthen and promote the development of the private-capital industry by enhancing the skills of individuals involved in this task and working in harmony with it. Excessive public interference might hinder or slow down the progress of private financial intermediation. Furthermore, the effectiveness of incentives induced by the government is a subject of heated debate. Advocates of financial incentives by the government argue that investors are attracted to relatively risky projects that would not otherwise have been undertaken. However, critics contend that the government’s incentives attract unsuitable players into the private equity market, resulting in poor performance and a bad reputation for the entire industry.
The government can take direct measures and policies to encourage and support the provision of risk capital, such as development banks, loan guarantee schemes, fiscal incentives, regulations governing the treatment of innovations, rules regulating investment by insurance companies and pension funds in equity classes, taxation and regulation of stock options, the provision of loans at preferential rates, and the direct provision of risk capital for particular classes of investment as a catalyst for private financing. Indirect measures, such as market support and regulation, training, communication, support for R&D, and privatization, can also be used to promote structural and supportive policies in this regard.
The development of SMEs is critical to the growth and sustainability of economies. The government’s role in financing SMEs cannot be overemphasized, especially in developing countries where access to finance is a significant challenge. Effective government financing policies can assist SMEs in overcoming the barriers to accessing finance, particularly at the early stages of their operations, where the risks are often high. Furthermore, government financing can help SMEs to expand their operations, increase their competitiveness, create job opportunities, and contribute significantly to the economy’s growth. Therefore, the government must establish a conducive environment for SME growth.
The impediments that hinder the provision of bank credit to small and medium-sized enterprises (SMEs)
“Traditional” bankers generally lack the necessary tools and expertise to effectively address the unique challenges and risks associated with financing the early stages of new enterprises, unlike venture capitalists who are better equipped for such ventures. Banks’ credit assessments are primarily based on a company’s past performance, future cash flow projections, and the value of collateral. As a result, banks are better suited to lending to established small- and medium-sized enterprises (SMEs) than to new ones. This creates a disadvantage for smaller borrowers seeking financing from banks because the costs associated with credit assessments remain fixed. In response, banks have been exploring ways to improve their SME credit assessment skills in order to better price credit risks and assess creditworthiness. Data on the interest rates paid by SMEs suggests that financial intermediaries outside the US face greater challenges when it comes to assessing and pricing credit risks.
Loan guarantee arrangements and schemes
To address the challenges associated with borrowing, several member countries of the Group of Seven (G7), including Canada, France, and the United Kingdom, have implemented loan guarantee programs. Under such schemes, a portion of the loan is secured by the state, thereby limiting the financial institution’s loss in the event of a default to a percentage of the amount at risk. Consequently, borrowers are charged a higher fee than they would under standard agreements, as an additional premium is paid to the government to offset projected losses. Nonetheless, small and medium-sized enterprises (SMEs) can still secure financing from financial institutions without requiring collateral. The following table provides an overview of the financing terms for Canada, France, and the United Kingdom. Overall, these loan guarantee programs offer a means of supporting SMEs’ access to credit, while also mitigating the risks facing financial institutions.
Table 1: Showcases the conditions of a loan guarantee.
France Canada United Kingdom
% of loan guaranteed 65 90 70-85
Interest rate premium 0.6 1.75 1.5
The lessons derived from loan guarantee schemes in general suggest that in order to achieve success, specific criteria ought to be clearly defined. Such criteria encompass minimizing dead-weight, which entails the state’s desire to ensure that its funds are not utilized by banks as a replacement for their own loans. Additionally, job creation is a critical factor to consider, as the state may want to be certain that the scheme generates wider economic benefits, such as creating additional job opportunities. Another important aspect is developing banking expertise, whereby the guarantee scheme may encourage banks to lend more based on the project’s quality and less on the availability of collateral. If private sector banks can enhance their expertise and discern good projects from bad ones, this will result in increased lending to small firms by banks from their own resources. Moreover, the speed of decisions plays a significant part in the implementation of any guarantee scheme. It is vital to ensure that SMEs can access the guarantee without significantly adding to the time required to decide on loan applications, as SMEs typically require speedy decisions. Additionally, it is essential to incorporate transparency in the evaluation process to ensure that the guarantee scheme’s benefits are distributed equitably. Finally, it is worth noting that the guarantee scheme should be designed to complement rather than replace existing support measures, such as training and technical assistance, for small businesses.
Financing the seed and start-up stages of investment
In Canada and the United States, acquiring early-stage venture capital is comparably effortless. However, for locations outside of North America, generating early-stage funds can be more challenging. Consequently, the focus shifts toward later-stage investments. Several countries have established subsidiaries through commercial banks for the provision of venture capital; nevertheless, their involvement appears to be more prominent in later stages of investment. This suggests a need for further research into the global venture capital industry, particularly in terms of early-stage funding.
The participation of institutional investors in the realm of venture financing is a matter of great significance.
The preference of institutional investors is to opt for later-stage investments that are larger in size as opposed to early-stage investments that are relatively small. The increase in capital inflow to the private equity market in the United States has been driven by a combination of factors such as the evolution of the limited partnership model, favorable changes in regulations (permitting pension funds to invest in private equity), and changes in the tax code. Limited partnerships provide over 75 per cent of venture capital, with pension funds responsible for the majority of total financial commitments. While there is a growing trend of raising private equity through limited partnerships outside the United States, many countries that are members of the Organization for Economic Co-operation and Development (OECD) still prohibit pension funds from investing in the private equity market.
The significance of exit strategies cannot be overstated.
Efficient means of exit such as trade sales, initial public offerings and repurchases are of utmost importance for the flourishing of the venture-capital industry. In North America, the most common method of exit is through selling to portfolio investors, whereas Europe relies heavily on trade sales and buy-ins/buy-outs. However, the limited scope of exiting through sales to portfolio investors poses a significant challenge to the complete growth of the European venture-capital industry. Hence, there is a need to explore and implement alternative exit strategies to overcome this challenge.
Second-tier markets
Second-tier and private equity markets play a significant role in the growth and development of small and medium-sized enterprises (SMEs). In the United States and Japan, second-tier markets for initial public offerings have emerged as efficient exit mechanisms. Meanwhile, other countries have been grappling with the limitations of existing exit vehicles, leading to the creation of new parallel markets, particularly in Western Europe. These new markets have proven to be more successful than previous European experiments. As such, they have gained traction and continue to evolve as an alternative option for SMEs seeking to raise capital and exit their investments. It is clear that the development of second-tier and private equity markets has contributed to the overall health and prosperity of the SME ecosystem.
Informal venture capital
The formal venture-capital sector has been the focus of attention for policymakers, but the conditions for informal venture capital provided by private individuals or business angels cannot be ignored. These individuals are believed to provide significantly more equity to private business than the formal sector. The experience from Canada and the United States suggest that stimulating the informal venture-capital sector could be achieved by improving networking services to enhance the flow of information between investors and investees, as well as by using the taxation system to incentivize wealthy individuals to invest in private businesses. These measures could help to promote the growth of small and medium-sized enterprises, which are vital for economic development.
The role of taxation
Taxation has been known to have a more significant impact on small businesses compared to their larger counterparts. As such, it is essential to consider ways to reduce this disparity. The question of whether assistance to small businesses is best delivered through the tax system is a valid one that requires careful consideration. Economic arguments for aiding small businesses suggest that certain types of firms should receive help, such as those in dynamic sectors of the economy or those experiencing difficulties in raising funds. However, it is rare for any tax paid by small businesses to align precisely with the target group, be it personal income tax, corporation tax, general consumption taxes, or taxes on the owners of small businesses. This lack of precise targeting in tax-based measures must be weighed against the advantages of using existing administrative machinery. A critical question that arises is whether the tax system is a suitable vehicle for removing obstacles to SMEs in a cost-effective manner. Several areas can potentially benefit from the tax system, such as limiting the cost disadvantages faced by small businesses in complying with tax legislation, encouraging the creation of new small businesses, and ensuring the continuation of small businesses when control passes from the founder of the firm to another person. However, it is crucial to investigate thoroughly whether the tax system is the most appropriate tool to achieve these policy aims. In conclusion, while it may be desirable to provide assistance to small businesses, it is essential to evaluate carefully whether the tax system is the best method of delivery and whether it can effectively achieve its intended objectives.
Business environment
Legislation is often seen by small and medium-sized enterprises (SMEs) as being drafted to serve the interests of lawmakers, administrators, and enforcers rather than seeking the most cost-effective means of fulfilling legal requirements. However, there are five potential initiatives that could help strike a balance between regulation and the interests of those, particularly SMEs, that must comply with the regulations.
First, new regulations should be systematically scrutinized. Those proposing legislative change should be required to clearly justify any new procedures. Economic side effects, such as differential compliance costs according to firm size, should be estimated and quantified. This approach could help ensure that new regulations are necessary and proportionate.
Second, a Business Impact System could be implemented to ensure the audit and monitoring of new legislation along the lines of an Environmental Impact Assessment. This would require decision-makers to consider the potential impact of legislation on businesses, including SMEs, before enacting it.
Third, some countries, such as Canada, seek to eliminate existing regulations where compliance costs exceed the benefits. The Enterprise and Deregulation Unit in the United Kingdom has also been successful in eliminating much unnecessary legislation. This approach could help reduce the regulatory burden on SMEs.
Fourth, the government of the Netherlands has sought to introduce legislation that exists only for a fixed period of time – the so-called “sunsetting principle.” This approach would force politicians to debate the value of legislation and enable regulated firms to make their case for amendments. If, at the end of its lifespan, it is felt necessary to re-introduce the legislation, a specific case must be made, rather than allowing legislation to continue by default.
Fifth and finally, greater use should be made of information technology. Increased use of information technology creates opportunities for reducing bureaucratic burdens on SMEs. For example, enterprises could be given a single number for use in all their dealings with the government. This would avoid the duplication of information to a variety of government departments such as taxation, business registration, or employment agencies. However, it is important to note that while wider adoption of electronic data interchange (EDI) would be particularly helpful to smaller enterprises, it is precisely these firms that are the least likely to have access to expertise in this area. Therefore, they run the risk of being significantly and increasingly disadvantaged. Policymakers should be mindful of this potential unintended consequence.
In conclusion, these five initiatives could help reduce the regulatory burden on SMEs while ensuring that regulations are necessary and proportionate. Policymakers should consider implementing these initiatives to balance the need for regulation with the interests of those complying with the regulations, particularly SMEs.
Technology
Governments must be mindful of the diverse requirements of different types of firms when they take action to eliminate impediments to firm-level learning of best-practice technology and innovation management. Furthermore, such actions should not result in the displacement of private initiatives in the service sector. Table 2 provides examples of recent endeavors in OECD countries. Based on the experience of OECD countries, it is apparent that technology diffusion initiatives and services can be enhanced through the adoption of best practices, whether at the overall policy level, the program level, or the service delivery level. An OECD report published recently describes several trends in OECD technology diffusion programs, which also demonstrate emerging agreement on best practices at a general level. These trends include the use of targeted interventions, the adoption of peer-learning platforms, and the establishment of partnerships between stakeholders, among others.
Technology diffusion programmes play a crucial role in promoting innovation and enhancing the competitiveness of firms. To ensure the effectiveness of these programmes, it is important to take steps to ensure the quality of service providers, the appropriate training of consultants, and the effectiveness of local delivery systems. This can be achieved through merit-based competition and ongoing external review of center performance, as is done among the numerous centres of the Manufacturing Extension Partnership in the United States. Similarly, the Austrian MINT programme has been successful in promoting the effective training of consultants to work with firms in developing strategic upgrade plans.
In addition to quality control, technology diffusion programmes should also focus on meeting the changing technical needs of companies by starting with a focus on customers and users. The Fraunhofer Society in Germany has been successful in promoting technology development and diffusion through a network of 46 research institutes mainly through demand-led contract research projects between firms and the research institutes.
Moreover, technology diffusion programmes should promote a general awareness of the value of innovation among management and stimulate demand for technical and organizational change within firms. Earlier schemes such as the Business Development Using New Technology (BUNT) Programme in Norway focused on developing the problem-solving capacities of firms and their organizational ability to incorporate technology. The Integrated Production Innovation (IPI) programme in Austria and the Managing Integration of New Technology (MINT) programme are based on the approaches used in BUNT. In Ireland, the National Technology Audit Programme (NTAP) provides an analysis of a company’s operations in relation to technology, human resources, and management to identify opportunities for enhancing profitability.
Finally, technology diffusion programmes can support the evaluation of technology needs in firms and make recommendations for upgrading managerial systems. For instance, Germany’s Production 2000 programme supports the evaluation of technology needs in firms, particularly for information and communications technologies, and includes recommendations for upgrading managerial systems. In summary, promoting innovation and enhancing the competitiveness of firms requires a comprehensive approach that focuses on quality control, meeting customer needs, and upgrading the innovative capacity of firms.
Table 2 showcases the endeavors of the government in promoting technological and innovation management within the context of Small and Medium Enterprises (SMEs).
Benchmarking firms’ performance Diagnostic of firms’ managerial and organizational capabilities
Overall diagnostic Thematic diagnostic (e.g. quality, IT) Focus on innovation management
Government monitors innovation performance, evaluates innovation capacity and screens firms’ needs Innovation Surveys (CIS, national initiatives) FORBAIT proactive mentoring (Ireland) Pilot SESSI survey (France) DTI report on “How The Best UK Companies Are Winning”
Government provides benchmarking or diagnostic services DTI Benchmarking service (United Kingdom)
Government encourages and coordinates private initiatives PBS service (United States) FRAM programme (Norway) MINT programme (Austria)
IMTs programme (European Union)
MEP (United States)
Government facilitates access to private service providers STATEGIS (Canada) Benchmarking Information Service (Australia) Business Links (United Kingdom)
Private initiatives Consultants and consulting firms
Source: OECD Secretariat.
Integrating technology diffusion programs with national innovation systems is crucial, and the programs should be designed to build on existing inter-relationships within the system. In order to achieve this, greater coherence is needed between program design, such as targets, objectives, and modes of support, and service delivery. Germany’s network-based strategy, for example, emphasizes the importance of bridging institutions and partnerships to promote information flows, new technology diffusion, and commercialization. Additionally, incentives are offered to foster coordination and networking within regional technology infrastructures. Similarly, in the Netherlands, Innovation Centers (ICNs) serve as intermediaries between firms and sources of knowledge, both public and private. ICN counsellors advise firms and refer them to public research institutions, commercial suppliers of knowledge, and private consultants. The Manufacturing Extension Partnership (MEP) program in the United States provides links and referrals to other public institutions, such as federal laboratories, the Environmental Protection Agency, or the Small Business Administration, in order to build on existing local, state, and national resources.
Evaluation and assessment are crucial aspects of technology diffusion programs, and such programs should have effective mechanisms for assessment in order to guide and improve their operation and management on a continuing basis. Unfortunately, evaluation is currently the Achilles heel of technology diffusion policy in OECD countries, particularly when it comes to relating specific objectives to broader policy goals. There are a variety of methodological, operational, and program impact issues that are related to evaluating technology diffusion and that could benefit from cross-national comparison. The OECD work on best practices in technology and innovation policy and the European Commission’s European Innovation Monitoring System (EIMS) respond to this need by documenting and comparing the efficiency of similar programs across different countries. It is therefore essential that technology diffusion programs are developed in such a way as to promote effective evaluation and assessment, in order to ensure their ongoing success and the continued improvement of innovation policy.
Management capabilities
Subsidized consultancy and training services
There is a widely accepted agreement that the competitiveness of a small and medium-sized enterprise (SME) is significantly influenced by the quality of its owner/manager. In this context, quality refers to the human capital of the individual, which is shaped by a combination of formal education, training, and experiential learning. It is worth noting that the formal educational qualifications of individuals managing smaller enterprises are generally inferior to those managing larger enterprises in most Organization for Economic Co-operation and Development (OECD) countries. Additionally, the probability that a worker or manager receives formal training is significantly lower in small businesses compared to larger ones. Several governments in the Group of Seven (G7) have implemented various measures to improve the quality of SME owner/managers. One way is through encouraging and subsidizing training, while another is by providing access to subsidized advisory and consultancy services. The nature of these services varies widely across different G7 countries. Japan has the most extensive assistance program, which includes a highly developed system of advisory services and SME colleges. The colleges offer formal training courses, which can last up to 12 months and are certified by the Ministry of International Trade and Industry (MITI). In 1993 alone, more than 11,000 people participated in short- and long-term training programs in Japan. Until 1994, the United Kingdom had a consultancy initiative that subsidized SMEs for up to 15 days of employing external consultants in marketing, quality, design, and other areas. The consultant’s role was to produce a development plan in collaboration with the SME, which the SME would then implement after the consultant’s departure. One of the most intriguing initiatives is implemented under Italian Law 44, introduced in 1986. The scheme aims to develop managerial expertise among young entrepreneurs up to 30 years of age in Southern Italy. Law 44 requires simultaneous provision of training, technical assistance, and financial incentives to such enterprises. Each young entrepreneur must have a mentor, usually a manufacturing or consulting firm, who develops the young partner’s entrepreneurial capabilities while helping the enterprise achieve its goals. Although the scheme is costly to implement, the survival rates for these businesses are significantly higher than those of businesses established by young individuals in the less prosperous areas of Southern Italy.
Subsidy schemes aimed at improving the skill base of small and medium-sized enterprises (SMEs) must take into account various factors to effectively meet their objectives. Firstly, the government’s criteria for the success of such schemes should be specified, as the take-up and overall penetration rate are highly sensitive to the level of subsidy provided by the government. However, it should be noted that penetration rates cannot serve as a perfect indicator of the satisfaction and value of the scheme as far as SMEs are concerned.
Secondly, the situation after the removal of the subsidy must be considered. For instance, in both the French and UK schemes, external consultants are employed at a subsidy rate of 50% for up to about 15 days. One way to gauge SME satisfaction with the services received is to see whether the consultant is still employed once the subsidy is removed. Unfortunately, there is no benchmark to calibrate success, such as whether the consultant is employed for a further ten days in 50% of cases.
Thirdly, it is important to ask SMEs themselves for their views. Almost all such initiatives seek the opinions of SME owners/trainees. These usually report high levels of satisfaction with the training provided. However, it is more difficult to link training provision to enhanced firm performance in terms of business survival and/or growth.
Moreover, the level of subsidy provided by the government is crucial in determining the success of the scheme. A higher subsidy can lead to higher take-up and penetration rates, but it can also be costly for the government. On the other hand, a lower subsidy may not attract enough SMEs to the scheme.
Furthermore, the design of the scheme should take into account the specific needs and characteristics of SMEs. For example, training programmes should be flexible and tailored to the needs of individual SMEs.
In addition, the availability and quality of trainers and training institutions should be considered. The scheme should ensure that there are enough trainers and institutions that can deliver high-quality training to SMEs.
Moreover, the scheme should be easily accessible to SMEs. This means that the application process should be simple and straightforward, and the scheme should be well publicized.
In terms of monitoring and evaluation, the scheme should have clear and measurable objectives, and the progress towards these objectives should be regularly monitored and evaluated.
Furthermore, the scheme should be sustainable in the long run. This means that it should be able to continue even after the initial funding period.
Additionally, the scheme should consider the potential negative effects of the subsidy, such as the crowding out of private investment in training.
Furthermore, the scheme should be consistent with other government policies and initiatives. For example, it should be aligned with the government’s overall strategy for SME development.
Moreover, the scheme should encourage innovation and creativity among SMEs. This means that it should provide training on new technologies and business models, and support SMEs in implementing innovative ideas.
In conclusion, subsidy schemes aimed at enhancing the skill base of SMEs should consider various factors to ensure their effectiveness. These include specifying the objectives, considering the situation after the removal of the subsidy, asking SMEs themselves, determining the level of subsidy, designing the scheme according to the needs of SMEs, ensuring the availability and quality of trainers and training institutions, and monitoring and evaluating the progress towards the objectives.
Information networks for SMEs
The study on globalization by the OECD emphasized that small and medium-sized enterprises (SMEs) were not as prone to exporting as larger firms, but were nevertheless significantly impacted by the phenomenon of globalization and were beginning to take on a more influential role in the global market. In order for SMEs to take on a leadership position in the market, it was essential that they had access to information not only about their home country, but also about other countries around the world. The G7 study on global marketplaces also underscored the need for SMEs to have access to information about other regions of the world, and stressed the importance of developing electronic commerce. Electronic commerce represents a fundamental shift in trade activities and should not be limited to simply expanding trading on the World Wide Web.
Access to information is a key element of SMEs’ competitive advantage and its importance is expected to grow significantly in the future. Several significant policy issues have arisen from discussions on governments’ initiatives to expand the scope of electronic commerce, with a particular emphasis on SMEs. These include customizing databases to cater to the diverse needs of the SME community. The primary challenge faced by governments in providing information services is reconciling the ability to provide information with the requirements of customers. As such, the challenge is to create a database that is “user-friendly” but does not assume a particular inquiry structure.
Another issue is information overload. Entrepreneurs, who are often constrained by time, may find it difficult to sift through databases to locate relevant information, even if it is available. Additionally, the level of computer literacy may be lower among smaller enterprises, which further exacerbates the issue. Governments and other stakeholders must therefore find ways to address these challenges to ensure that SMEs are able to take full advantage of the benefits of electronic commerce and globalization. In conclusion, SMEs can no longer afford to ignore the importance of globalization and e-commerce, and must be equipped with the necessary tools to take on a more prominent role in the global marketplace.
To tackle the challenges facing public databases, four strategies have been developed. The first approach is to “know your customer”. This involves monitoring the usage of databases and focusing on services that are extensively used while dropping those that are not. Regular surveys are also conducted on the Internet. However, this strategy does not solve the problem of the significant proportion of small and medium-sized enterprises (SMEs) run by individuals who are not computer literate. In response, the information system should focus on groups of intermediaries, such as accountants and consultants, whose role is to interpret the information on behalf of their SME customers. Unfortunately, SMEs are often unwilling to pay for such services when the benefits are not immediately apparent.
The second strategy is access. While there has been close collaboration between Canada and the United States on databases, the extent to which non-nationals can use them remains unclear. Restricting database access to firms located in a particular country may be necessary due to national security issues, and if the information is commercially valuable and established by national taxpayers, taxpaying firms should be the primary beneficiaries.
The third strategy is to avoid interfering with the market mechanism. Although public databases funded by public funds benefit the economy as a whole, providing them may compete with the commercial information industry. Canada and the United States recognize that the state should not directly compete with the private sector, so Canada’s strategy has been to include “hard-to-get information.”
The fourth strategy is subsidization. Pricing for the Canadian databases was based on at least full cost recovery since the firms were able to pay for it themselves, and subsidizing the information provision would undermine the commercial information industry. However, rapidly growing businesses, the target groups using the Canadian databases, provide positive national externalities like increasing competitiveness and creating jobs. Therefore, some public subsidization is justified.
In conclusion, to overcome the challenges facing public databases, strategies such as knowing your customer, providing access, avoiding interference with the market mechanism, and subsidization are necessary. While these strategies are not without their challenges, they present opportunities to enhance the efficiency and competitiveness of the economy as a whole. However, it is important to ensure that these strategies do not undermine the commercial information industry and that the state does not seek to directly compete with the private sector. Ultimately, the goal of these strategies is to provide the necessary information to rapidly growing businesses while also benefiting the economy as a whole.
There exist underlying challenges with the pricing policy principles in this domain. Optimal market performance is contingent on the consumer’s ability to amass significant information regarding a specific product/service, through repeated purchases and repurchases. Conversely, when the purchaser lacks knowledge about the product/service’s attributes, market efficacy is at its lowest ebb. It follows that the needs of Small and Medium Enterprises (SMEs) are typically reflected in their willingness to pay. Regrettably, SMEs are largely uninformed about the benefits of the product/service, making the market an unreliable means of resource allocation in this context. Therefore, there is a need for the development of alternative methods to optimize pricing policy in this area.
Access to markets
International markets
Almost all of the G7 nations have initiated policies that are aimed at easing the access of small and medium-sized enterprises (SMEs) to international markets. The Japanese philosophy towards this matter is based on non-discriminatory measures that focus on supporting the efforts made by SMEs themselves. The policy is designed to address the disadvantages that SMEs tend to face due to their lack of access to human resources, external markets, and technology. In Japan, Local Industry Promotion Centers (LIPCs) have been established, where groups of SMEs in similar industries in a particular locality collaborate for their mutual benefit. These centers are established by local governments, with finance being provided through long-term low-interest loans from the central government. Overseas promotion is coordinated by JETRO, and Japanese policy is currently seeking to place greater emphasis on promoting imports and enabling Japanese SMEs to become more aware of opportunities for purchasing overseas.
It is important for G7 nations to facilitate the access of SMEs to international markets, as these enterprises play a crucial role in driving economic growth and development. The philosophy in Japan, based on non-discriminatory measures that support the efforts of SMEs themselves, is a commendable approach that other nations could learn from. The policy is designed to address the disadvantages that SMEs experience, such as the lack of access to crucial resources like human resources, external markets, and technology. Through the establishment of Local Industry Promotion Centers, Japan has provided an avenue for SMEs in similar industries to collaborate for their mutual benefit. This is a unique approach that has been successful in Japan, and could be adopted by other nations seeking to support the growth of SMEs. The financing of these centers through long-term low-interest loans from the central government ensures their sustainability, and is a strategy that could be replicated in other countries. Coordinated overseas promotion by JETRO is also an effective way to support SMEs in accessing international markets. Finally, the emphasis on encouraging imports and making Japanese SMEs more aware of overseas purchasing opportunities is a forward-looking policy that could provide long-term benefits to the Japanese economy.
Public procurement
Governments around the world are a significant market for small and medium-sized enterprises (SMEs). The United States government, in particular, is the largest single purchaser in the world. However, despite the potential benefits, SME owners often view government contracts as challenging to secure. This tension arises due to differences in attitudes and cultures. SMEs perceive government as slow and bureaucratic, while from the government’s perspective, small firm suppliers often have poorer administrative and billing procedures than larger firms.
Although it may be cheaper for governments to buy from specific small businesses, it is often administratively simpler to enter into a single contract with a larger firm that can supply a wider range of products. This approach is more efficient than entering into multiple separate contracts with small firms, each offering a narrower range of products. Nonetheless, the United States and other OECD countries, such as Australia, have endeavored to increase the share of government contracts that small firms receive. The US, for instance, has experienced positive outcomes from its “setasides” program, which earmarks funds for small businesses and results in better deals for the government.
Setasides and other targeted programs can also benefit special groups, such as socially disadvantaged individuals or those located in specific areas. However, it is unclear whether setasides serve the interests of the overall economy. “Losses” may accrue to large firms and potentially to the government in terms of additional purchasing costs. Moreover, the small business community may face unfulfilled expectations, which may hinder their growth and development.
Governments worldwide should strive to ensure that their procurement practices are fair, transparent, and efficient. SMEs require access to public procurement markets to support their growth and development, and governments can benefit from their innovations and services. Governments should establish clear guidelines and regulations for procurement processes to ensure fair competition among all firms. Moreover, they should invest in programs that promote the growth of SMEs, such as entrepreneurship training and access to finance. By doing so, they can create a more dynamic and competitive economy, which benefits all stakeholders.