SpotNomics

Great Economic Thinkers

Richard H. Thaler

SMEs contribution to GDP

Small and Medium Sized Enterprises SME

Levels of Internationalisation

SMEs in Malta

Richard H. Thaler is the 2017 recipient of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioural econom-ics. Thaler studies behavioural economics and finance as well as the psychology of de-cision-making which lies in the gap between economics and psychology. He is the director of the Center for Decision Research, and is the co-director (with Robert Shiller) of the Behavioral Economics Project at the Nation-al Bureau of Economic Research. Thaler is the co-author (with Cass R. Sun-stein) of the global best seller Nudge (2008). In 2015 he published Misbehaving: The Mak-ing of Behavioral Economics. He has pub-lished numerous articles in prominent jour-nals such as the American Economics Re-view, the Journal of Finance and the Journal of Political Economy. Thaler is a member of the American Acade-my of Arts and Sciences, a Fellow of the American Finance Association and the Econ-ometrics Society, and in 2015 served as the President of the American Economic Associ-ation. Thaler attended Case Western Reserve Uni-versity where he received a bachelor's degree in 1967. Soon after, he attended the Universi-ty of Rochester where he received a master's degree in 1970 and a PhD in 1974. He joined the Chicago Booth faculty in 1995. ___________________________________________ https://www.chicagobooth.edu/faculty/directory/t/richard-h-thaler

Small and Medium Sized Enterprises (SMEs)

Small and medium-sized enterprises (SMEs) are defined as all entities engaged

in an economic activity, irrespective of their legal form with fewer than 250

employees and which are independent of larger companies. This includes, in

particular, self-employed persons and family businesses engaged in craft or

other activities, and partnerships or associations regularly engaged in an eco-

nomic activity.

There are three types of SME: Micro enterprises are defined as enterprises

which employ fewer than 10 persons and whose annual turnover and/or annual

balance sheet total does not exceed EUR 2 million.. Small enterprises have

between 10 and 49 employees and whose annual turnover and/or annual bal-

ance sheet total does not exceed EUR 10 million. Medium-sized enterprises

have between 50 and 249 employees and which have an annual turnover not

exceeding EUR 50 million, and/or an annual balance sheet total not exceeding

EUR 43 million.

SMEs, by number, dominate the world business stage. Although precise, up-to-

date data are difficult to obtain, estimates suggest that more than 95% of enter-

prises across the world are SMEs, accounting for approximately 60% of private

sector employment. In Europe, there are 23 million small and medium sized

enterprises (SMEs), accounting for over 98% of businesses. They have provid-

ed two thirds of the total private employment and around 80% of new jobs

created over the past years. In Malta, SMEs number almost 30,000 enterprises,

accounting 99% share of all enterprises in Malta. While almost 88,500 persons

are employed in SMEs, or 76.3% of the employed, SMEs contribute Euro 3

billion or 64.5% of all value added. Japan has the highest proportion of SMEs

among the industrialised countries, accounting for more than 99% of total en-

terprises. India, according to its Ministry of Micro, Small and Medium Enter-

prises, had 13 million SMEs in 2008, equivalent to 80% of all the country’s

businesses. In South Africa, it is estimated that 91% of the formal business

entities are SMEs.

The contribution made by SMEs does vary widely between countries and re-

gions. Nevertheless, although they play particularly key roles in high-income

countries, SMEs are also important to low-income countries, making signifi-

cant contributions to both GDP and employment. They are also major contribu-

tors to innovation in economies, partly through collaboration with the larger

corporate sector. SMEs that become embedded in the supply chains of larger

businesses can be spurred on to improve their own human and technological

capital, thus improving their own productivity and performance.

SMEs contribution to GDP

When combining the data for those countries for which reasonably good data are available, SMEs account for 52% of private

sector value added, which provides a reasonable estimate for the sector’s global economic contribution. The contribution of

SMEs to economic fundamentals nonetheless varies substantially across countries: from 16% of GDP in low-income countries

(where the sector is typically large but informal) to 51% of GDP in high-income countries. History and legal tradition can also

play a very important role. For instance, former Soviet countries tend to have disproportionately small SME sectors, even when

controlling for per capita income. According to the Australian government (2011), SMEs contributed around 60% of Australia’s

industrial value added in 2009–10. In OECD economies, over 95% of firms are SMEs and micro-enterprises, accounting for

some 55% of GDP. In developing countries, by contrast, over 90% of all firms outside the agricultural sector are SMEs or mi-

cro-enterprises. These firms produce a considerable part of GDP. In Morocco, for example, 93% of industrial firms are SMEs,

accounting for 38% of the production, 33% of investment and 30% of exports. The contribution of SMEs is considerably higher

in South Africa. The estimated 91% of the formal business entities in South Africa that are SMEs contribute 52–57% to GDP.

In Ghana, SMEs are even more prominent in the local economy, representing about 92% of Ghanaian businesses and contrib-

uting about 70% to Ghana’s GDP.

When compared with larger businesses, SMEs’ contribution to output tends to be lower per firm because they tend to be more

labour intensive than larger firms and concentrated in service sectors. They therefore typically achieve lower levels of produc-

tivity, though they do contribute significantly to employment. SMEs’ greater labour intensity means that job creation entails

lower capital costs than in larger firms, which is particularly important for developing countries and economies with high unem-

ployment. Moreover, SMEs are generally more common in rural areas than larger businesses. Especially in developing coun-

tries, SMEs thus provide much-needed employment in rural areas. SMEs can in fact become the engines that sustain growth for

long-term development in developing countries. When growth becomes stronger, SMEs gradually assume a key role in industri-

al development and restructuring. They can satisfy the increasing local demand for services, which allows increasing specialisa-

tion, and furthermore support larger enterprises with services and inputs.

Levels of internationalisation

SME internationalisation can take the form of exporting, the creation of partnerships across national borders, and the establishment of

operations in other countries. Data suggest that SMEs contribute between 15% and 50% of a country’s exports, and that between 20%

and 80% of SMEs are active exporters. Focusing on the EU, about 25% of SMEs in the EU-27 are exporters of goods or services; of

these, 50% export beyond the internal market. Some 29% of SMEs import, of which 50% import from beyond the internal market. Far

fewer SMEs are active in foreign direct investment (FDI) – only about 2% of SMEs in the EU-27, and their partner countries are most-

ly other European nations. Except for imports from China, business with other countries in the BRIC grouping (Brazil, Russia, India

and China) is underdeveloped. In fact, BRIC countries make up only about 7–10% of the EU-27 export market.

SMEs also play an important part in sustaining the exports of countries in Asia. In India, for example, for the 10-year period from 1998

to 2008, SMEs accounted for 38–40% of the country’s total exports. In China, SMEs contributed 60% to the country’s exports. Re-

search has also indicated that the global financial crisis did not have a significant impact on Asian SMEs’ bilateral trade. More recent

research on the BRIC countries found that SMEs make up a relatively high percentage of the total number of firms in all these coun-

tries.

Sources: Adapted from http://www.edinburghgroup.org/media/2776/edinburgh_group_research_growing_the_global_economy_through_smes.pdf, EU 2016 SBA Fact Sheet—Malta and http://europa.eu

SMEs in Malta

The data below for 2015 produced by DIW Econ are based on 2008-2013 figures from the Structural Business Statistics Data-

base (Eurostat). The data cover the ‘non-financial business economy’, which includes industry, construction, trade, and services.

The SME share of value added is 80 %, 23 percentage points higher than the EU average. SMEs also provide 81 % of jobs, ex-

ceeding the EU average by 14 percentage points. The Maltese economy was not hit as hard by the financial crisis as other Euro-

pean economies. Since then, SMEs have experienced strong growth, with SME value added exceeding its pre-crisis level by

2010, and growth remaining strong in 2010-2015. SME value added rose by more than 50 % and employment increased by 16

% in that period. One of the sectors driving this growth was real estate, which consists entirely of SMEs. SME value added rose

by 14 % p.a. and employment by 5 % p.a. in 2011- 2015.

Class Size Number of Enterprises Number of Persons Employed Value Added

Malta EU 28 Malta EU 28 Malta Eu 28

Num-

ber Share Share Number Share Share

Billion €

Share Share

SMEs 27,088 99.8% 99.8% 106,125 81.0% 66.8% 3.4 80.4% 57.4%

Large 52 0.2% 0.2% 24,861 19.0% 33.2% 0.8 19.6% 42.6%

Total 27,140 100% 100% 130.986 100% 100% 4.2 100% 100%