Small and medium sized enterprises: characteristics and role

¶ … Medium Sized Enterprises

Small and Medium-Sized Enterprises (SMEs)

SMEs is the abbreviation of Small and Medium-Sized Enterprises. The exact definition of an SME differs from region to region. In Europe, the European Commission has adopted a definition of SMEs which now provides a clear global framework for funding directed towards micro, small and medium-sized enterprises. The adopted definition is as follows:

Medium-sized enterprises employ fewer than 250 occupied persons and which have either an annual turnover not exceeding 50 million euro (in 1996: 40 million euro), or an annual balance-sheet total not exceeding 43 million euro (in 1996: 27 million euro).

Small enterprises employ fewer than 50 occupied persons. Their annual turnover must not exceed to 10 million (in 1996: 7 million) or an annual balance-sheet total not exceeding to10 million (in 1996: 5 million).

Micro-enterprises employ fewer than 10 occupied persons. Their annual turnover must not exceed to 2 million (previously not defined) or an annual balance-sheet total not exceeding to 2 million (previously not defined).

In a smaller economy like New Zealand, SMEs are defined as companies with no more than 20 employees. However one defines SMEs, they tend to share some characteristics. You won't find them in the top 10% of companies in terms of size. They're often run by an owner-operator and are privately held. Many of them target a niche industry sector. And SMEs have traditionally confined their operations to a regional or country basis.

The definition of an SME distinguished three types of enterprise, according to their relationship with other enterprise in terms of holdings of capital or voting rights or the right to exercise a dominant influence.

Autonomous Enterprises - This is by far the most common type of enterprise. It applies to all enterprises which are not one of the two other types of enterprise (partner or linked). An enterprise is autonomous if it: 1) does not have a holding of 25% or more in another enterprise; 2) is not owned 25% or more by an enterprise or public body or jointly by several linked enterprises or public bodies, with a few exceptions; 3) does not draw up consolidated accounts and is not included in the accounts of an enterprise which draws up consolidated accounts and is thus not a linked enterprise.

Partner Enterprises - This type represents the situation of enterprises which establish major financial partnerships with other enterprises, without the one exercising effective direct or indirect control over the other. Partners are enterprises which are not independent but which are not linked to one another. An enterprise is a partner of another enterprise if: 1) it has a holding of between 25% and less than 50% in the other enterprise; 2) the other enterprise has a holding of between 25% and less than 50% in the applicant enterprise; 3) the applicant enterprise does not draw up consolidated accounts which include the other enterprise, and is not included by consolidation in the accounts of the other enterprise or of an enterprise linked to it.

Linked Enterprises - This type corresponds to the economic situation of enterprises which form a group through the direct or indirect control of the majority of the capital or voting rights (including through agreements or, in certain cases, through individual shareholders), or through the ability to exercise a dominant influence on an enterprise. Such cases are thus less frequent than and very different from the two preceding type.

Importance of SMEs

Small and Medium-Sized Enterprises have become the lifeblood of today's global economy. Moreover, they are the fastest growing segment of major national economies. Small and medium-scale enterprises have become universally important due to their ability to adjust quickly to the vagaries and vicissitudes of the economy, fluctuations of the markets, and financial crises. They promote diversification of economic activities, support sustainable development and make a significant contribution to exports and trade.

SMEs are major employment generators, surpassing larger firms in net job creation. In the European Union alone, smaller firms provide employment for more than 70 million people, representing two-thirds of all EU employment. There are also an estimated 75 million SME worldwide which represent about 99% of all companies.

Problems in SMEs