S  M  Es
What are SMEs?

- Hari Srinivas
The acronym, "SME" refers to small to medium-sized business.

While a broad generic definition can be taken for SMEs, note that some countries have a very specific definition for what types of enterprises can be called an "SME". For example, the European Commission1 defines an SME as "An enterprise which employs less than 250 people; has an annual turnover of less than 50m and/or balance sheet assets of less than 43m; and has no more than 25% of its capital or voting rights owned by a larger firm or public body".

SMEs are defined by three keywords - small, single and local:

  • Small - SMEs are small in nature - either in terms of number of (a) employees - 10 persons for 'small' to 200 persons for 'medium', depending on the country's laws, (b) capital and assets - limited working capital and assets and (c) turnover - the overall turnover of the enterprise is small, compared to larger businesses.

  • Single - Most SMEs have a single owner who could also be the sole employee. While this may predominantly be the case, definitions set 250 to 500 employees as the limit for enterprises to be called an SME. The 'single' also refers to single products produced or service provided.

  • Local - SMEs are essentially local in nature - their market is usually localized to the area where they are located (same city, district or state); or may be 'local' in the sense that they operate from a place of residence - also called SOHO [Small Office Home Office]

SMEs are socially and economically important - they represent 99% of an estimated 23 million enterprises in the EU and provide around 75 million jobs representing two-thirds of all employment. SMEs contribute up to 80% of employment in some industrial sectors, such as textiles, construction or furniture 2.
There are, of course, exceptions to the above. For example, SMEs while having a small output, can have a global market for its product/service or SMEs may produce more than one product or provide service.

SMEs are not limited to any particular type of industry or service, and can include small manufacturing facilities, small processing units, trading companies, export-import companies, distribution, retailing, rental, service company, etc.

A key factor that distinguishes an SME from enterprises in the "Informal Sector" 3 is the fact that they are legally registered companies/businesses.

Another related term that is sometimes used interchangeably with SME is that of a 'microenterprise'. Variations of the definition of a microenterprise is quite similar to an SME.

  1. COMMISSION RECOMMENDATION of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises [notified under document number C(2003) 1422] (Text with EEA relevance) (2003/361/EC) (May 20, 2003).
  2. International Finance Corporation, Micro, Small, and Medium Enterprises: A Collection of Published Data (17 May 2005)
  3. For a more detailed discussion on the characteristics and definitions of the informal sector, see GDRC's programme on the Informal Sector

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Contact: Hari Srinivas - hsrinivas@gdrc.org