Definitions of MSMEs

There is no official or universally accepted definition of an MSME. References to employment, annual turnover and size of balance sheet can be used but the most common indication remains the number of employees. The International Labour Organization (ILO), the International Finance Corporation (IFC) and the Eurostat's Structural Business Statistics identify commonly used definitions: micro enterprises can have 1–10 employees; small enterprises have 10–50 employees, while a medium-size enterprise employs 50–200 employees, or even up to 250. From the IFC sample, 83 per cent of all MSMEs were micro enterprises, evidencing the importance of very small businesses worldwide.

The definitions used vary widely among countries, and depend on the phase of their economic development, the size of the country as well as on the prevailing social conditions. Though various measures/criteria are used to define MSMEs - such as number of employees, invested capital, assets, sales volume and production capacity - employment is the most frequently used. In general, an SME is considered to have fewer than 500 employees, though many countries use a lower threshold, say 300 or 100 employees. The Eurostat definition (fewer than 250 employees) is applied in 19 European countries and it is currently the most widely accepted definition. In the Asia-Pacific region, some countries, such as Malaysia, differentiate between manufacturing and services (in this case, services MSMEs are usually defined as smaller than manufacturing SMEs). Often, statistics on MSMEs exclude cottage and micro enterprises; for instance, China distinguishes between township and village enterprises (TVEs)⁶ and MSMEs. Singapore distinguishes between local and overseas MSMEs. Some countries distinguish between autonomous MSMEs and those connected to a large enterprise or group or identify an MSME in terms of management structure. However, regardless of definitional discrepancies, when viewed from a managerial and organizational perspective, MSMEs are distinguished from others by the following characteristics: (a) they are usually independently owned and operated; (b) they are closely controlled by owners/managers who also contribute most, if not all of, the operating capital; and (c) the principal decision-making functions rest with the owners/managers. MSMEs are, therefore, a group of firms, heterogeneous in size and nature, which, when taken together, has a significant direct and indirect participation in the national product as well as in employment absorption and creation. Therefore, MSMEs are also important in terms of equity benefits and distribution of income. Table 1 provides examples of definitions of MSMEs in some advanced countries of the region.

Table 1. Sample of country definitions of MSMEs

Note: exchange rates from www.xe.com from October and November 2021.

The importance of MSMEs to long-term economic growth and stability derives from their size and structure, which, under adequate conditions (i.e., well developed factor markets) allow them the flexibility and ability to confront adverse economic conditions. MSMEs are generally more labour-intensive than large firms and therefore have lower capital costs associated with job creation (though digitalization is rapidly picking-up pace during COVID-19, with greater numbers of MSMEs made of individuals known as digital nomads). Consequently, MSMEs play an important role in fostering income stability, growth, and employment. The development of MSMEs is also important for poverty alleviation, and the promotion of more pluralist societies. According to the data provided by the International Council for Small Business (ICSB), formal and informal Micro-, Small and Medium-sized Enterprises (MSMEs) make up over 90 per cent of all firms and account, on average, for 70 per cent of total employment and 50 per cent of GDP.