What types of SMEs are most likely to create jobs?
Small and medium-sized enterprises (SMEs) provide two-thirds of jobs in the EU, and some have the potential to create more, with the right support and business environment. The SME population is vast – comprising over 20 million businesses – and diverse, and not all contribute equally to employment growth. One-person enterprises, for instance, are less likely to create additional jobs than other types of SME. On the other hand, born globals – start-ups that from inception engage intensively in international trade – are particularly dynamic job creators.
Features of job-creating SMEs
A bundle of factors determines whether an SME creates jobs, some relating to the company itself, others to the economic and institutional environment in which it operates. The individual internal and external elements are at least partly interrelated and hence can influence each other. The strength of the influence and whether it is a driver or an obstacle depends on the individual company and the framework conditions in which it operates.
Job-creating SMEs tend to:
- be young, no more than five years in existence;
- be innovative in the products they produce, the services they offer or the processes they use;
- operate internationally;
- be based in urban areas;
- be competitive and perform well due to sufficient market demand for their products or services;
- have an active growth strategy and the necessary company structure and resources to implement it;
- have good management skills and resources;
- have sufficient access to finance and apply diversified funding strategies;
- be attractive to potential employees in spite of competition from other companies;
- be run by an owner–manager who is motivated to grow the business and willing to take a certain level of risk.
As well as having the right internal mix of job-creation drivers, SMEs need a supportive external context, including:
- a macroeconomic environment that generates sufficient demand;
- a level of competition from large multinationals and the shadow economy that the SME can handle;
- business and labour legislation that is not onerous;
- bearable labour costs and taxation;
- a positive image of entrepreneurship, where the possibility of failure is accepted and second chances are granted;
- effective public administration and public support structures;
- access to external finance (not limited to bank credit);
- a labour market with workers possessing the necessary skills.
The combination of such a wide range of factors that determine the job creation potential of SMEs highlights the need for comprehensive public support packages. At the same time, the diversity of these businesses demands tailor-made measures for the various SME types to suit their characteristics and needs.
For further detail on the employment potential of SMEs, read the report Job creation in SMEs: ERM annual report 2015.