Small Businesses to Power the Economies of Today & Tomorrow

Lately, Mckinsey presented a microscopic view on the productivity of small businesses in emerging economies.

As we know, MSMEs are omnipresent and play vital economic roles across 16 countries, and account for two-thirds of business employment in advanced economies. Raising MSMEs to top-quartile levels relative to large companies is equivalent to 5 percent of GDP in advanced economies and 10 percent in emerging economies like India.

Given the fact that MSMEs create enormous value for economies around the world. They account for roughly half of global GDP. That share varies significantly among economies. In Portugal, Israel, Indonesia, Italy, and Kenya (ordered by decreasing share of value added), the share is larger than 60 percent. In the United States, Nigeria, and India, it is less than 40 percent.

The report says that MSMEs in India contribute 30 per cent to the overall business value added (Rs 40 per cent in manufacturing, professional services, and ICT), as opposed to 49 per cent in emerging economies.         

They are also significant employers, accounting for roughly 40 percent of all employment and 70 percent of employment in the business sector, which we define as excluding the farm, government, and finance sectors. Whilst according to a report released by the McKinsey Global Institute (MGI). MSME contributes to 62 per cent to employment in India, as opposed to 77 per cent in other emerging economies.

In emerging economies, the MSMEs are so vital to sustaining livelihoods and are heavily skewed toward microenterprises, says Mckinsey. In India, Kenya, and Nigeria, microenterprises employ more than 90 percent of MSME workers, of whom some 90 percent are self-employed own-account workers and contributing family members.

No MSME operates in isolation. Its prospects are influenced by its interactions with other enterprises, and these interactions can be mutually beneficial: a win-win situation for both small and large businesses,” says Anu Madgavkar, Partner at McKinsey Global Institute and author of the report.

The report also emphasizes that narrowing the productivity gap could contribute to approximately 10.5 per cent of India’s GDP, primarily from subsectors such as computer programming & information services, telecom, broadcasting, accounting, architecture & engineering, manufacturing of basic metals, chemicals, electrical and electronics, auto, and components.

Nevertheless the employment dynamic differs in wealthier economies. A significant portion of employment has transitioned from microenterprises to small and medium-sized enterprises or even larger corporations. In these advanced economies, as they progress up the income ladder, more MSMEs tend to scale up into larger enterprises, get acquired, merge with them, or exit via creative destruction. Consequently, the contribution of large businesses to the national output of the wealthiest economies increases relative to that of small firms,” the report explains.