Is Small Still Beautiful? Literature Review of Recent Empirical Evidence on the Contribution of SMEs to Employment Creation

Design andreas korn visual communication, Dar es Salaam The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office or the Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office or the Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval. Foreword There is vast agreement on the direct link between job creation and poverty reduction, but there is some controversy concerning the question about who creates jobs. A widely spread assumption is that small and medium sized enterprises (SMEs) can play a key role in employment creation. Partly based on observations in industrialized countries, key arguments in favour of SME promotion are that the sector provides most of the jobs, creates most of the new jobs, and has the highest employment growth rates. Other important arguments say that SMEs play an important role in training young people, acting as a seed bed for the development of entrepreneurial talent, enhancing competition and hence generating external benefits on economy-wide efficiency, innovation, and aggregate growth. Any of these stipulations must however bear in mind that the enterprise structure and the characteristics and features of SMEs in developing countries differ strongly from industrialized countries. Many of the small enterprises in developing countries are informal firms of micro size with a low productivity that are born out of necessity and operate in crowded market segments with low entry barriers. These firms are probably not able to perform the social and economic functions outlined above. They may not always be the optimal solution to promote growth and job creation, but may still help to secure livelihoods. The discussion on the role of SMEs in job creation has gained additional relevance in the context of the current global crisis and the low employment creation conditions of the recovery process. Different types of anti-crisis policy measures in the form of pro-SME interventions have been justified on the basis of the important contribution that SMEs can make to confront the crisis and to contribute to post-crisis job creation and renewal of growth challenges. Based on the above mentioned rationale, donor agencies and …