Exploring Factors Influencing Growth of MSMEs in Factor-Driven and Efficiency-Driven Economies

Introduction

Micro, Small and Medium-sized Enterprises (MSMEs) are organisations with sales, assets, or employees that fall below a specific threshold (Aybar-Arias et al., 2003). An MSME is defined differently in each economy and certain size requirement must be satisfied, as well as the industry. The major criteria that often determine whether an organisation is an MSME or a large-sized organisation is its number of employees, and the consideration of its total sales turnover or entire balance sheet (Aybar-Arias et al., 2003; Decker, Schiefer & Bulander, 2006, August). Around the world, MSMEs are in three distinct stages of economic development: factor-driven, efficiency-driven and innovation-driven economies. Factor-driven and efficiency-driven economies are part of developing or emerging economies, while innovation-driven economies consist of developed economies.

The most important MSMEs are the ones located in the emerging economies of factor-driven and efficiency-driven economies. Many emerging economies have been dealing with structural vulnerabilities such as persisting social and economic disparities, war and forced displacement, falling public trust, climate change consequences, and environmental fragility (Khan, 2000). However, despite attempts to support nurture and vitalise the growth of MSMEs, MSMEs in emerging economies still face various challenges that hinders growth, more so in factor-driven economies. Factor-driven economies are the least developed in the stages of economic development as they are dominated by subsistence agriculture and extraction businesses, with a heavy reliance on unskilled labour and natural resources (Hadidi & Kirby, 2015). MSMEs located in emerging economies are often subjected to more hostile environments compared to their counterparts in developed economies such as the lack of access to micro-finance and underdeveloped educational institutions (Welter et al., 2012). As a result, they are subjected to a high failure rate upon its early years of operations. Thus, growth of MSMEs are important for emerging economies as they are the key to overcoming poverty and a source of innovation and sustainable growth.

The most significant reason as to why MSMEs are important is that they outnumber large corporations by a significant proportion in any given national economy, and thus employs many more people (Lee, 2009). In Chile, an efficiency-driven economy, over 98.5% of organisations are categorised as MSMEs (Tan, 2009). In efficiency-driven Tunisia, self-employed people account for around 28% of total non-farm employment, while organisations with less than 100 employees account for approximately 62% of total employment (Rijkers, Arouri, Freund & Nucifora, 2014). MSMEs in the United States, an innovation-driven economy account for half of all jobs, but only 40% of Gross Domestic Product (GDP) (Berger, 2006). For instance, MSMEs in innovation-drive Australia account for 98% of all enterprises, create one-third of total GDP, and employ 4.7 million people (Ahmad & Seet, 2009).

The most significant benefit of encouraging small-scale industries and MSMEs is that they create jobs without requiring considerable government intervention. Both urban and rural growth are aided by MSMEs. The successful growth of MSMEs will up the ante of economic growth. Economic growth is the most effective tool for eliminating poverty and raising living standards in emerging nations. As a result, both the rate and pattern of growth are important in alleviating poverty. An effective poverty reduction plan must include efforts to encourage rapid and sustained economic growth as a fundamental component. Thus, growth of MSMEs has become one of the major research areas by both traditional and contemporary researchers in the century. Growth of MSMEs is important as MSMEs constitute the main drivers of economic growth, particularly in the emerging economies of factor-driven and efficiency-driven economies. MSMEs represent an estimate of 90% of organisations and more than half of job creation worldwide (Khan, 2000), and the growing global workforce means that growth of MSMEs are often a high priority for governments.