October 25th, 2019

Micro, Small, and Medium Enterprises: Diamonds in the Rough

Micro, small, and medium enterprises (MicSMEs), commonplace throughout the developing world, face significant obstacles towards integration in the global economy. From inadequate logistics and transportation to ineffective organizational structures to unavailable capital and financial services, incorporating MicSMEs into the globalized world presents a difficult challenge indeed.

However, this is not a challenge that investors should shy away from. SMEs make up 90% of businesses in Latin America, and their role in the development of emerging markets is crucial. As these markets evolve, MicSMEs will benefit from infrastructure development, improved access to technology and capital, deeper knowledge of best practices (especially in the F&A sector), and modernized corporate structures.

One of the most imposing challenges faced by Latin American MicSMEs is the lack of access to technology. Small farmers rely on traditional techniques and their wits alone to solve technical problems. With the introduction of agricultural technology, small farmers will be able to monitor their crops and soil more effectively, conserve resources, and increase yields.

One of the key components of MicSME strategy is the reduction of the significant production gap displayed by MicSMEs in Latin America. Despite making up 60% of formal productive employment in the region, SMEs account for only 25% of total production value. To solve this problem, MicSMEs must access higher levels of human capital, explore markets with more differentiated products, and make inroads into value-added production. Institutional capital can make all of these goals a reality – assuming adequately precise targeting and management.

Also, poor infrastructure in many Latin American regions prohibits MicSMEs in the agricultural sector from accessing markets other than those in the immediate vicinity. With improved access to markets, MicSMEs could target more profitable markets, such as those in Europe and the United States, or simply regional urban centers. Often located in isolated, inaccessible areas, MicSMEs will benefit greatly as infrastructure improves.

Progress is certainly being made. A survey by the same organization showed that 90% of Latin American banks have implemented an SME strategy, up from 66% in 2008. Institutional lenders are quickly realizing the potential, or perhaps the necessity, of investing in platforms that can provide SMEs access to capital. Marketplace, or peer-to-peer lending, as well as microlending, have made great strides in financing MicSMEs, and around $12 billion has been lent to more than 10 million low-income clients since the early 1970’s

Incorporating MicSMEs into the global economy won’t be easy. The financing gap for SMEs in Latin America stands at as much as $250 billion, according to estimates from the Inter-American Development Bank. However, MicSMEs have a critical role to play in the development of emerging markets, and numerous financial institutions are hard at work on bringing MicSMEs into the fold. As the developing world continues to progress, MicSMEs have nowhere to go but up.