Small and medium enterprises (SMEs) are vital in driving economic growth, job creation and innovation in most EU member states. They are the backbone of the European economy, making up more than 99% of all European businesses, providing two of three private sector jobs and contributing more than half of the added value created by firms in the EU.
Still, not all SMEs are created equal. The EU distinguishes between different types of SMEs. Micro firms employ fewer than 10 workers and have a turnover of less than €2 million. Small enterprises employ fewer than 50 employees and have a turnover of less than €10 million. Medium businesses employ fewer than 250 employees and have a turnover not exceeding €50 million.
In Malta, SMEs are mainly micro and small enterprises, with a few small businesses. The EU and local business and political culture tend to over-romanticise entrepreneurs and start-ups when they fail to distinguish enough between the potential of different types of SMEs to add value to the economy. Some harbour the notion that real success means starting a company with few resources and becoming an entrepreneur, as this is the only route to prestige and wealth. The start-up mystique partly stems from romantic notions of high risks with high returns, brutal work hours and vicious competition.
Admiring something from a distance is not the same as living it. Many small entrepreneurs claim that they are “excited”, “passionate” and “overjoyed” by what they do. What excites them is making money.
Various market research studies confirm that many owners of micro businesses complain about high stress levels, the lack of a regular pay cheque and the myth of work-life balance. Many are frustrated when they find themselves earning less than they thought.
Micro businesses, especially in retail, catering and domestic services, are undoubtedly important in satisfying the community’s demands. In a small market such as Malta, there is a risk of overinvestment in micro businesses, leading to uneconomic performance, business cannibalism and precarious working conditions for most workers. Understandably, commercial banks’ commitment to financing SMEs only partially applies to these businesses.
Policymakers must focus on picking up the winners in the overcrowded SME world. One key factor distinguishing successful SMEs is their ability to identify and serve a specific niche market. By focusing on a particular customer segment or industry, SMEs can tailor their products or services to meet that market’s unique needs.
Innovation must be the lifeblood of successful SMEs
A hundred fast food outlets in a small town will likely offer the same type of pizzas, hamburgers and pasta dishes to consumers with a busy lifestyle who are mainly loading on calories to get by. This is not what inspired SME entrepreneurs should aim for.
Innovation must be the lifeblood of successful SMEs. Such enterprises often operate in highly competitive markets where staying ahead requires constant innovation and improvement. Successful SMEs invest in research and development, embrace new technologies and foster a culture of innovation within their organisations.
In small countries like ours, they forge strategic partnerships and collaborations to expand their reach, access new markets and tap into additional resources. Rather than trying to kill the competition as some micro businesses try, they partner with complementary businesses, industry associations, or research institutions that can provide access to expertise, distribution channels, funding and shared knowledge. Only in this way can SMEs overcome limitations and achieve accelerated growth, especially in small countries.
In today’s digital age, SMEs must also embrace technology and digital transformation to have a competitive edge. From establishing an online platform to adopting digital marketing strategies and leveraging e-commerce applications, SMEs can reach a broader audience, improve operational efficiency and compete with larger players worldwide.
SMEs must respond to current macro and business trends, which the COVID pandemic has accelerated. This response calls for rethinking previous business models, introducing digitalisation, aiming for internationalisation, and adapting management practices to the new situation we are all facing.
The EU’s Horizon 2020 correctly targeted highly innovative small businesses, demonstrating strong ambition to develop, grow and internationalise, regardless of their sector.
Small countries like Malta have additional challenges in identifying and championing successful SMEs that can add significant economic value. We must continue aiming to involve the private sector in the entrepreneurial discovery process, as this is a crucial criterion for a successful, innovative, resilient specialisation strategy.
With the EU facing changing investment priorities as a result of disruptive geopolitical realities, it is crucial that it sharpens its focus on those small businesses that are prepared for the challenges ahead.