Digitization and Sustained Growth in SME’s in Developing Countries

September 24, 2019

SMEs account for between 50% and 60% of value creation in any economy according to the OECD, this can be linked to the impact of the combination of digitalization and globalization which has acted as major channels to enhancing the performance of SMEs.

Digitalization has opened new opportunities for SMEs to innovate and flourish, as they acquire capacity to use and combine emerging digital technologies to transform their business models and work practices. The potential implications for their overall productivity and inclusive growth abound in the marketplace.

Over the years, SMEs have leveraged on digitization to create effective mechanisms to reduce size disadvantages in both local and international trade, for example by reducing the absolute costs associated with office space, transport, high staff cost and border operations.

However, recent economic slowdown and reduction in foreign direct investment will hit SMEs most. These challenges call for innovative and multi-level policy solutions for SMEs by the government that will enable SMEs and entrepreneurs reach their full potential and to build a more resilient, sustainable and inclusive society.

There are a range of views on how to unleash and preserve SMEs and Entrepreneurs’ potentials in developing countries, some of which are:

Enhancing access to diverse financing instruments: Governments should improve their regulatory frameworks and introduce targeted policies to support FinTechs, such as equity crowdfunding and peer-to-peer lending. The government should also awaken the venture capital industry, mainly through public funds and co-investing with private actors.

Infrastructure development: Emphasis should be placed on digital networks, large-scale research and computing infrastructure platforms for technology transfer that contribute to make SMEs’ business environment more innovation oriented.

Smart regulation and simplified business processes: The government should embark on reforms in taxation aiming to lower administrative requirements and delays which will reduce the burden on SMEs and start-ups.

Building a supportive environment for SMEs’ capacity: Scaling up the network between Multi-National enterprises (MNEs) and SMEs beyond financial packages to simplified procedures aiming to attract foreign direct investment into the country.

Improving strong and diverse skills set: The government should create an avenue to consolidate vocational education and training systems while encouraging higher participation. Many SMEs use apprenticeships for cost efficiency, and more than 50% of apprentices work in firms with less than 50 employees.

Finally, developing countries or emerging markets to which Nigeria can be classified are categorized by population, market share and purchasing power parity amongst others. These parameters for the Nigerian market have the potential to attract foreign direct investment if the business climate is conducive in terms of ease of doing business, policy stability, return on investment with regards returns on capital importation, and security. These form some of the significant areas where the government should be seen to focus, and the expectation is that several of the other important parameters (such as infrastructural development) will start to align with the ultimate objective of nation building by attracting its own investments.