Spotting Opportunities to Boost Productivity for Small Businesses

Spotting Opportunities to Boost Productivity for Small Businesses 597 375 Morris County Economic Development Corporation (MCEDC)

Spotting Opportunities to Boost Productivity for Small Businesses


MSMEs are vital for growth and jobs, but struggle with productivity. The route to higher productivity lies in creating a win-win economic fabric for all companies.

At a glance

  • Micro-, small, and medium-size enterprises (MSMEs) form the backbone of economies. Across the 16 countries we examine, MSMEs account for two-thirds of business employment in advanced economies—and almost four-fifths in emerging economies—as well as half of all value added. They also power dynamism and will play an important role in preserving competitiveness in an era of shifting global production.
  • Boosting MSME productivity relative to large companies could yield significant value. Small business productivity is only half that of large companies, and less in emerging economies. Raising MSMEs to top-quartile levels relative to large companies is equivalent to 5 percent of GDP in advanced economies and 10 percent in emerging economies.
  • Capturing this value requires a fine-grained view. Relative productivity of MSMEs and large companies varies widely across subsector and country. For example, in virtually all countries, eight subsectors out of 24 drive more than 60 percent of the value of narrowing the productivity gap in manufacturing, but the top ones vary by country.
  • A win-win economic fabric can improve productivity for both MSMEs and large enterprises. MSME and large company productivity move in tandem in most subsectors, indicating spillovers if the right conditions are created. For example, automotive MSMEs have gained operational proficiency through systematic interactions with productive original equipment manufacturers, and small software developers have benefited from talent and capital ecosystems seeded by larger companies.
  • All stakeholders have a role to play in developing granular productivity strategies. In subsectors where both small and large companies lag, infrastructure and policy improvements can target both together. Where MSMEs struggle but large enterprises outperform, building networks among them helps. Even where both large and small companies do well, strengthening their interactions could boost productivity.

MSMEs fuel economy-wide production and jobs

MSMEs create enormous value for economies around the world. They account for roughly half of global GDP. That share varies significantly among economies (Exhibit 1). In Portugal, Israel, Indonesia, Italy, and Kenya (ordered by decreasing share of value added), the share is larger than 60 percent. In the United States, Nigeria, and India, it is less than 40 percent.

They are also significant employers, accounting for roughly 40 percent of all employment and 70 percent of employment in the business sector, which we define as excluding the farm, government, and finance sectors. That share is as high as 96 percent in Kenya, where MSMEs account for half of all employment.

MSMEs create enormous value for economies around the world.

The business sector plays a larger role in advanced economies. But within the business sector, MSMEs have a greater impact in emerging economies, employing four-fifths of all workers, compared with two-thirds in advanced economies.

MSMEs are also meaningful job creators.6 In advanced economies, one 2013 study suggested, they contributed more than half of net job growth in businesses.7 In the United States, for example, SMEs have accounted for two out of every three jobs added in the past 25 years.8 In emerging economies, MSMEs created seven out of ten new formal jobs over the past decade.9

MSMEs play a crucial role in production across sectors, but their contribution is more significant in some (Exhibit 2). While there are differences among countries, MSMEs tend to contribute the majority of the value added in four sectors—accommodation and food, construction, professional services, and trade. Although they contribute only about 45 percent of value added in the manufacturing sector, they are the second-largest contributor to small business value after the trade sector. Across all sectors, MSMEs also employ at least half of all business workers.

MSMEs can boost national productivity while staying small or by fueling larger companies

In emerging economies, the MSMEs that are so vital to sustaining livelihoods are heavily skewed toward microenterprises. In India, Kenya, and Nigeria, microenterprises employ more than 90 percent of MSME workers, of whom some 90 percent are self-employed own-account workers and contributing family members. They face challenges of particularly low productivity.

Despite their central role in economies across the world, MSMEs are only about half as productive as large companies, and narrowing that gap could create significant value. Yet somewhat unexpectedly, this gap is by no means monolithic: relative productivity performance varies enormously across countries and sectors, and even within the same sector among countries.

Considering the broad sectors of our sample advanced economies, the MSME productivity ratio, averaged across economies, ranges from 49 percent in ICT to 104 percent in the administrative services sector. In other words, MSMEs in the ICT sector face the largest gap in productivity relative to large companies in ICT, while MSMEs in administrative services tend to outperform their large peers in productivity. Country-level differences within each sector are greatest in mining and utilities, and smallest in manufacturing and ICT.

To move the needle beyond broad-brush solutions, we need to look in detail at variations in relative MSME productivity performance to identify specific opportunities to achieve potential additional value. Consistent with MGI’s micro-to-macro analytical approach, we have looked at MSME productivity through a microscope, homing in on 68 level-two subsectors and 219 level-three subsectors. See the technical appendix for details of each of the 16 countries in our sample.

Because the business needs and hurdles to creating value are somewhat different in each subsector, solutions need to be tailored to local business and industrial contexts.

Take US construction as an example. This sector has one of the highest potentials for adding value because MSMEs perform poorly on productivity relative to large companies, at 46 percent against the top-quartile level of 60 percent in Germany. Large companies in the building construction subsector tend to concentrate on residential and nonresidential construction projects that typically involve larger projects, greater standardization, modular construction methods, and advanced technology and equipment—all of which help to boost productivity.

However, MSMEs in the building construction subsector tend to focus on small-scale residential construction and refurbishments. They are subject to comprehensive building codes, regulations, and standards governed by local and state laws—factors that make it challenging for MSMEs to achieve higher productivity. This degree of stratification is not present in all countries in this sector. In the United Kingdom, for example, construction MSMEs receive incentives to participate in projects similar to those undertaken by large companies and are much more productive, relative to large companies, than their counterparts in the United States. Residential construction MSMEs in the United States could potentially diversify by becoming subcontractors to major players, helping them tap into potential additional value.

Additional Steps to Productivity

  • Taking a granular and tailored approach
  • Boosting access to technology, finance, and new markets
  • Boost Value Chain competencies
  • Encourage MSME collaboration

For the full article, please visit McKinsey Insights.