OECD: SMEs drive job growth but should invest more in skills, innovation and tech to boost wages, productivity

Small and medium-sized enterprises (SMEs) have been a significant driver of employment growth in recent years, mainly through the creation of new firms, including in high-growth sectors such as information and communication technologies (ICT), according to the new OECD SME and Entrepreneurship Outlook, which gathers 36 OECD country profiles. However, the report also notes that most SME job creation has been in sectors with below average productivity levels, and that SMEs typically pay employees around 20 percent less than large firms.

While SMEs are more engaged in new organisational or marketing practices than large firms, and sometimes more innovative in developing new products and processes, many continue to struggle disproportionately to navigate the increasing complexity in technologies and markets, the report shows.

“We need a fundamental rethinking of SME and entrepreneurship policies to improve business conditions and access to resources. This will enable workers to have higher wages and greater productivity, as smaller employers harness major trends like digitalisation,” said OECD Secretary-General Angel Gurría, launching the report at the annual OECD Forum. “We need a renewed policy and measurement agenda to understand how countries, regions and cities can capitalise on their many diverse small businesses as drivers for inclusive and sustainable growth.”

The first edition of the OECD SME and Entrepreneurship Outlook report illustrates that SMEs are more dependent on the business ecosystem and the policy environment than large companies, and identifies a number of key challenges:

• While the wage gap is smaller for exporting SMEs, trade barriers are disproportionately large, and recent trade tensions may further hamper their ability to benefit from globalisation.
• SMEs struggle to combine different types of innovation, and continue to face size-related barriers in accessing strategic resources, such as skills, finance, and knowledge. A quarter of SMEs in the EU reported a lack of skilled staff or experienced managers as their most important problem and, in most OECD countries, less than a quarter of small firms provided ICT training in 2018.
• Digital transformation provides scope for productivity growth but large adoption gaps exist compared to larger firms. For example, half as many small firms in the OECD invested in cloud computing services in 2016.

According to the report, governments have been proactive in their efforts to improve framework conditions and address size-related barriers for SMEs. In the OECD area, governments are focused on accelerating innovation diffusion to SMEs; ensuring SMEs keep pace with the digital transformation; engaging SMEs in upskilling; scaling-up innovation networks and MNE-SME linkages; and levelling the playing field in product markets, public procurement and ‘lead’ innovative markets. Small businesses are also benefiting from the strengthening of e-government services and from reforms undertaken in OECD countries aiming to lower administrative and tax burdens and enforce smart regulation.

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Despite these efforts, the OECD found that the complexity of regulatory procedures remains a major obstacle for SMEs and entrepreneurs. Furthermore, the pace of structural reform has slowed in recent years and progress remains uneven in areas that are key for business creation and SME investment, such as insolvency regimes, civil justice and enforcement of competition laws.

The report argues for more efficient governance and more coherent arrangements across national and subnational levels, regions and cities. It also calls for fostering international peer learning and enhanced monitoring and evaluation capacity.