Small is beautiful: how SMEs are shaping new economies
Fri 11 May 2012
From the roll out of supermarket chains in China to the building of high speed rail links in India, new and growing economies are investing in manufacturing, infrastructure, transport and energy projects as never before.
While many Western economies are currently measuring growth in static or even minus figures, the world’s newest economies continue to power ahead. GDP growth for India this year is predicted to be around 7%, China over 8% and Brazil 3%.
These economies, and others as far afield as Mexico and Turkey, are experiencing industrial and technological revolutions and their youthful populations are producing innovators and entrepreneurs to match.
Backbone of development
While governments grab the headlines with huge investments in infrastructure, behind the scenes many small and medium sized enterprises (SME) are forming the backbone of economic development, as their governments increasingly recognise.
In India, for example, SMEs are seen as pivotal to the country’s growth story. The number of SMEs is estimated to reach 48 million within the next three years and they already account for 40% of exports. IT exports alone have been growing by around 35% every year for the past 11 years.
India’s rapidly expanding middle-classes provide a growing market for the products of many of these companies, reducing the impact of reduced demand from the West in the face of the economic downturn, as well as encouraging further investment in domestic markets.
Lloyd’s has a 200-year old presence in India, beginning in 1812 with the creation of the first Lloyd’s Agencies in India in Mumbai, Madras and Calcutta which forged relationships with Indian businesses and port officials. Last year, around $180 million of reinsurance business was written to help Indian companies manage their increasingly diverse range of risks.
In China too, the government has made the growth of SMEs an integral part of its future economic development, issuing its first ever national level plan for them last year. This Growth Plan sees SMEs growing 8% every year for the next five years. Given that they already make up 60% of China’s total economic output and create 80% of its jobs, the economic future of China will be shaped by their success.
There are five officially recognised categories of SME in China; industrial, construction, retail and hospitality and given the combination of massive government investment in infrastructure and a growing and increasingly affluent number of middle-class consumers the future for all five is looking promising.
The global economic downturn which, according to estimates by the National Development and Reform Commission (NDRC) saw as many as 67,000 go under, forced those remaining to go through a process of reviewing their business plans and developing more sustainable models.
And, in contrast to the difficult lending environment facing many small businesses in the UK, Chinese banks are increasingly opening up their balance sheets to SMEs where they believe they can realise more profitable returns.
Urbanisation sparks growth
Demographics are also fuelling the expansion of SMEs; the trend towards urbanisation means China will need to build another 40 billion square feet of floor space between now and 2025. New and larger urban centres will require greater supplies of both water and energy and China has correspondingly ambitious goals for delivering renewable energy.
Paul Jardine, Lloyd’s Deputy Chairman and Chief Operating Officer of Catlin Group Limited, who has a partnership with China Re. agrees that the role which SMEs play can only grow: “China’s drive to urbanisation is fuelling huge investment in construction and energy production and supply,” he says.
“From the growth in private ownership to demand for cover for renewable energy prototypes and wind farms, the rise and rise of small and medium enterprises is shaping China’s economic future.”