The Role of SMEs in Economic Development

The number of large, medium or small enterprises depends on the structure of that economy.

Cost per unit of product

Output (Q)

Optimal size (Qo)

Figure 1.2: Optimal scale for producing a product

A survey of businesses in Bangladesh, the Philippines and Indonesia by Richard Hooley and Muzaffer Ahmad concluded that: “

In the food industry, it is evident that in Bangladesh, large enterprises are the most efficient, and productivity increases proportionally with the size of the enterprise. In Indonesia, the survey results are similar, with large enterprises being the most efficient, but medium enterprises being less efficient than small enterprises. In the Philippines, small enterprises in the food industry are the most efficient, followed by large enterprises, and the least efficient are medium enterprises [49. p.39].

In cases where the size structure of enterprises in an economy is not optimally distributed, that is, there are too many large-scale enterprises or too many small-scale enterprises, the use of the resources of this economy is inefficient. For example, in cases where there are too many large enterprises, the

This firm will have to spread its resources to produce all kinds of products, including many products that small firms will produce more efficiently. Conversely, if there are too few large firms, it will lead to a monopoly in some markets, in order to maximize profits, these firms will produce less than the optimal level that consumers are willing to pay. This situation will lead to the country having to import more, increasing the balance of payments deficit and as a result, social welfare will not be maximized.

The theory of industrial organization has shown that factors of natural resources, technology, policies and institutions determine the structure of industrial production and the optimal scale of manufacturing firms in a country [43]. For example, some countries with abundant natural resources will have a comparative advantage in producing a product that uses that resource and will therefore organize the production of that product efficiently on a large scale; while other countries have a comparative advantage in producing a different product most efficiently on a small scale. Similarly, countries that are open to international trade will have a larger optimal scale of production than countries that are less internationally integrated [53. p.2].

It can be said that the number of each type of enterprise: small-medium-large in each country will depend on the division of labor, the specialization of the country's economy towards heavy industry or light industry. The number of SMEs in countries specializing in heavy industry will be relatively larger than in countries specializing in light industry. In general, the existence of SMEs alongside large enterprises is absolutely necessary, it ensures the effective allocation of the country's resources as well as the operation of the economy. The problem is how the State needs to combine the exploitation of economies of scale with the advantages of small-scale production.

In his study titled “ Small Enterprises and Industrialisation Policy in Africa: Some Arguments ” Bert Helmsing developed the concept of “flexible production systems” as a new basis for industrialization in which enterprises play an important role. “Flexible production systems” can be developed by groups of small enterprises or

led by a large enterprise followed by small enterprises, but it is fundamentally different from a large-scale production system in the following three aspects: (i) The level of use of specialized equipment, (ii) The level of standardization of products, (iii) The length of the production line. A flexible production system is characterized by the use of common equipment. These equipment can be quickly converted and programmed to produce different specialized products [36. p.34]. Thus, it can be said that the structure of an economy is not only a matter of the number of small and large enterprises, but more importantly, the connection and coordination of production and business between large enterprises and small enterprises and between enterprises in the same group.

1.2.3. Role and characteristics of SMEs

1.2.3.1. The role of SMEs in economic development

Through a long historical development process, SMEs in countries are considered an important driving force in terms of politics, society and economy. Scholars studying SMEs have demonstrated the particularly important role of SMEs, the most basic of which is that this business sector (i) Creates many jobs, increases income for workers and thereby contributes to the implementation of national goals on sustainable development, (ii) Contributes to the restructuring of the economy towards dynamism and efficiency, (iii) Contributes to the production capacity and economic growth of countries, (iv) Contributes to the construction of a complete market economy institution.

SMEs are often considered the largest employment and income generating sector in the economy, especially in developing economies. According to the report at the OECD Istanbul Conference in 2004, SMEs create over 65% of jobs in high-income countries. SMEs and informal sector enterprises contribute over 70% of the total workforce in low-income countries and over 95% of jobs in middle-income countries [45, p.15]. Specifically, in the United States, SMEs account for 99% of the total number of businesses operating in the economy, of which small businesses contribute over 50% of the total workforce, creating two-thirds of new jobs each year. In the UK, SMEs employ about 12 million workers, or about 55% of the total workforce.

total number of employees working for the private sector. In Japan, the small business sector with 99.3% of the total number of enterprises has created 80.6% of total employment in the economy [37. p.6]. With the ability to create many jobs, increase income for workers, SMEs are always considered an important economic driving force to reduce the gap in living standards between social classes, eliminate hunger and reduce poverty in rural areas, thereby solving social problems, contributing to the implementation of national goals on sustainable development.

Table 1.4: Contribution of SME sector to total industrial output

Unit: %

Year

1970	1980	1990
Indonesia		23	30
Japan		52	52
Korea	34	33	44
Philippines		24	27
Singapore	19	18	19
Taiwan	37	46	39

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Source: APEC, [35. p. 41].

The second important role of SMEs is to contribute to the economic restructuring in a dynamic and effective direction. One of the important arguments of scholars when supporting and encouraging the development of SMEs is:

SMEs promote competition and entrepreneurship and thus SME development generates huge benefits in terms of improving overall efficiency, innovation and growth of gross labor productivity of the economy. Thus, direct government support for SMEs will help the country to exploit the benefits of competition and entrepreneurship [51. p.2].

Regarding the contribution to the overall productive capacity of countries, according to the Report at the OECD Conference on SMEs, Istanbul in 2004, SMEs contribute over 55% of GDP in high-income countries, over 60% of GDP in low-income countries and about 70% of total GDP for middle-income countries [45, p.15]. Specifically, SMEs in the UK annually generate about 1,000 billion pounds in revenue contributing to the economy. In India, industrial enterprises

Small scale also plays a very important role in the growth of the economy with more than 40% of the total value added in the country's industrial production [37. p.6].

According to research by the Asia-Pacific Economic Forum, in recent decades, SMEs have contributed increasingly to the activities of member economies of this organization. Table 1.4 shows that in the 1990s, the SME sector in countries such as Indonesia and South Korea had significant growth, especially the proportion of this economic sector's contribution to the total industrial output of the economy.

In addition to the above important meanings, the development of SMEs also contributes to building a complete market economy institution. Due to the characteristics of small-scale production and business activities, SMEs play an important role in breaking the monopoly of large-scale state-owned enterprises, bringing the market back to a balanced trend through their wide participation in both the "supply" and "demand" forces of the market. In addition, with their creative characteristics and ability to discover niche markets, the activities of SMEs also make the structure of allocating economic resources of the country operate better according to the market mechanism and therefore, more effectively. With a large number of newly established enterprises, starting new business activities and an equal number of enterprises ending ineffective business activities, the SME sector always maintains a dynamic driving force for the economy while allowing for the easy elimination of ineffective enterprises, contributing to maintaining the balance of supply and demand for goods and services in the market continuously and sustainably.

1.2.3.2. Advantages and disadvantages of the SME sector

The general characteristics of the SME sector have been analyzed by many scholars in various research works through the analysis of its strengths and weaknesses in the economy. In general, the research results are quite consistent in their assessment of the strengths and weaknesses of SMEs.

In terms of advantages, compared to large enterprises, SMEs are considered to be a business sector with (i) high dynamism, (ii) abundant creativity, (iii) comparative advantages in competition in many fields.

The pressure of business and the independent environment has made dynamism the nature of SMEs. Due to their small scale, when having to change the production structure and labor structure, SMEs encounter less difficulties than large enterprises. Old machinery and technology can be easily sold to replace them with new production lines to produce new products, which is much more difficult for large enterprises to do, it always requires large costs and a long time to do. According to data from OECD member countries, SMEs are a business sector with much higher flexibility and dynamism than large-scale enterprises. "The number of newly established and closed enterprises each year in all economies is very large. Data from 9 European member countries show that each year, about 12% to 19% of non-agricultural enterprises enter and exit the market. The number of newly established SMEs is almost equivalent to the number of enterprises closing down" [46. p.21].

Creativity is also a huge advantage of SMEs, although the investment rate for research and development in this sector is always lower than that of large enterprises. International experience shows that most multinational companies and economic groups, big names in the world such as Honda, Apple, etc. have grown up from SMEs. It can be said that SMEs are "incubators" for business ideas, new innovations in production, and are places to train and develop management skills, organizational experience, etc., thereby creating large enterprises and corporations that can compete in the global market later. In the United States, small businesses contribute over 50% of the country's new inventions and initiatives. Meanwhile, SMEs in the UK annually contribute up to 88% of the total number of enterprises applying new technology or improving products [37, p.6].

In terms of comparative advantage in competition, due to the ability to make good use of local resources, closely following the needs and tastes of consumers, the SME sector has created for itself a competitive advantage in many market segments. The harshness of competition always requires any SME to always be ready to change to suit new trends and new market needs.

On the contrary, due to their small-scale nature, SMEs often have the following basic limitations: First, limited access to basic resources such as capital and land. Second, weak management skills and unskilled labor force. Third, technology.

Fourth, limitations in building business connections and accessing domestic and international markets.

SMEs always lack capital for business investment, while accessing official credit sources often faces many difficulties due to the lack of collateral when borrowing capital, and the inability to build convincing business plans to be able to get loans. According to the Report at the OECD Conference on SMEs in Istanbul in 2004 [45. p.33], SMEs assess capital issues, especially medium and long-term capital, as the biggest obstacle to the investment and development of these enterprises.

Another major limitation of SMEs is the poor management level, conducting production and business mainly based on personal or family experience. In reality, the experience and knowledge of SME owners are often quite limited, to the point that many businesses do not have enough capacity to make business plans, production investment plans, market access strategies, along with weak competitiveness, so they miss opportunities to develop production and business, even leading to the end of existence. Regarding the labor force, the quality of labor of SMEs is often not high due to the fact that the operating profits of small businesses are very low, allowing them to only use cheap and untrained labor. On the part of workers, if they are well trained or skilled, they always look for jobs in large enterprises, very rarely do they choose to work for SMEs even in cases where income is the same.

Regarding the market, SMEs often lack information about input markets as well as product consumption markets; especially export markets. The ability of SMEs to organize their own distribution and marketing channels is also very limited due to difficulties in capital potential, human resources as well as market development experience.

In developing countries, most SMEs have outdated science and technology and technical equipment, leading to low quality of products and services and weak competitiveness . The reason why SMEs only use low technology levels is because the capital resources of these enterprises are very limited, along with the use of a lot of labor to replace machinery and production lines.

Technology is an important barrier for SMEs to invest in upgrading technology levels or researching and developing new products (R&D).

1.3. THE BASIC ROLE OF THE STATE IN DEVELOPING SMALL AND MEDIUM ENTERPRISES

Despite their important roles in the economic development of each country as analyzed in Section 1.2, the SME sector always faces serious difficulties and limitations. In order for SMEs to make the best contribution to the economy and effectively participate in solving social problems, the State needs to intervene to support the development of this important business sector. To support the development of SMEs, the first thing the State can do is to create a favorable environment for all business activities, including SMEs. In addition, one of the basic economic functions of the State is the function of adjusting the economic structure, thereby creating many business opportunities and investment motivation for businesses. The above two functions of the State have the effect of promoting the overall development of the business community of each country. However, the limitation in the scale of SMEs requires the State to implement specific policy tools to support SMEs to overcome their internal difficulties in order to develop. Thus, it can be said that the basic role of the State in developing SMEs can include the following three basic contents: (i) Developing a favorable business environment for enterprises; (ii) Performing well the function of structural adjustment, creating many business opportunities and investment motivation for SMEs; (iii) Implementing well the programs to support SMEs to overcome internal difficulties in order to develop.

1.3.1. Developing a favorable business environment for enterprises

1.3.1.1. Performing well the macro function to create stability and sustainability of the economy

Economic stability is considered a primary responsibility of the government in modern economies. The economic and political stability of the country, including the State's policies on the private economy, plays a decisive role in determining the level of risk of investments in fixed assets. The State's function of stabilizing the economy involves limiting the fluctuations of the business cycle to

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