Large Companies Key to Improved MSME Productivity

It's no secret how important micro, small and medium-sized enterprises (MSMEs) are to Mexico's economy. A recent study by the McKinsey Global Institute estimates that these companies contribute 54% of gross domestic product (GDP) and represent more than 70% of jobs in the business economy. To put it in perspective, when compared with other economies, small businesses in our country contribute more to GDP from business sectors than those of other developing economies, such as Brazil, Nigeria, and India, and a similar share to those of advanced economies, such as Spain and Japan. 

Many MSMEs grow rapidly into large companies too, adding to the vibrancy and dynamism of the economies in which they operate. They promote an innovative and competitive environment, encouraging all businesses to continually improve their products, services, and processes, which, in turn, can enhance overall economy-wide productivity and dynamism.

They also play a fundamental role in different sectors, although their contribution is more significant in some. In our country, more than half the value in retail and wholesale trade, professional services, accommodation and food, construction and transportation sectors are generated by these companies. From the perspective of job creation, the manufacturing sector also stands out. 

Despite the importance of MSMEs in Mexico and globally, these companies struggle for productivity compared with large companies. If the productivity gap is narrowed, it could mean significant value creation for these businesses and for the economy. To put this gap in context, at the global level it is almost 50%, similar to that of Mexico with 53%, and which contrasts with the average of other emerging economies with a 71% productivity gap. Narrowing this productivity gap is equivalent to 3.7% of GDP for Mexico, similar to the potential value for advanced economies (5%), and lower than that of emerging economies (10%). 

This potential varies by country due to different underlying economic conditions. It depends on the structure of the industry in each business domain, as well as the specific nature of the existing bottlenecks to growth and the extent to which they are addressed to achieve the optimal economic structure. Mexico would see this growth mainly from industries such as mining, manufacturing of food products, beverages and automotives, retail trade, and civil engineering. 

How to Achieve This Growth Potential?

No MSME operates in a vacuum. Their growth prospects are shaped by their interactions with other companies. These interactions can be mutually beneficial, creating a "win-win" situation for small and large businesses. This is demonstrated by MSMEs that operate as a business-to-business (B2B) company. 

These B2B companies interact closely with other, often larger, companies as part of their supply chains. Globally, B2B companies are more productive and have a narrower productivity gap with large companies than business-to-customer (B2C) MSMEs. The outperformance of B2B MSMEs can be attributed both to a selection bias, as enterprise customers have higher expectations of their suppliers, and to the fact that these smaller companies can benefit from lessons learned from working with larger companies. 

Also, these gaps between B2B and B2C MSMEs reflect different levels of business competencies to some extent. Our analysis of the World Bank Enterprise Survey indicates that B2B MSMEs have an edge over B2C counterparts on some of the competencies, such as the following:

• B2B MSMEs have a technology and innovation edge: Globally, B2B MSMEs are 30% more likely than B2C MSMEs to have introduced a process innovation in the past three years. International quality certifications are also 60% more common in B2Bs than in B2Cs, perhaps because they are often a requirement when doing businesses with large corporations.

• B2B MSMEs invest more in building human capital than their B2C counterparts: B2B MSMEs track performance metrics more often and in more detail than B2C MSMEs. They also provide formal training to 60% of their employees, compared with about 35% of B2C MSMEs. 

• B2B MSMEs are more globally connected. B2B MSMEs derive 6% of their revenue from direct exports, almost triple the share for B2C MSMEs. B2B e-commerce platforms that facilitate exports of products between small manufacturers and wholesalers or even offshore software services between companies have become increasingly popular.

Working closely with thriving large companies is one important route to higher MSME productivity, but not the only one. Network effects among small enterprises can help them attain competencies associated with scale. While MSMEs do not have significant market power because they have limited scale, creation of sector-wide infrastructure and boosting interfirm networks and linkages can provide “collective productivity” — the competitive advantage derived from local external economies and joint action — and substitute for direct benefits of scale.

As countries try to reduce concentration and geopolitical risks, they are aiming to realign their global manufacturing and services footprints, but for this to happen, MSMEs need to raise their productivity game. Without MSMEs getting more productive, it’s hard to imagine a meaningful realignment of global production. Industrial policies that aim to create new manufacturing capabilities also need to focus on MSMEs in those specific ecosystems.

In the case of Mexico, some of the high-potential subsectors like manufacturing food and beverages are in domains where the country's large companies are already productive, so creating commercial ties with them would boost MSME development. Other subsectors are in domains where both large and small firms perform poorly. In these cases, investing in infrastructure and capabilities would benefit companies of all sizes. 

Undoubtedly, micro, small and medium-sized enterprises are and will continue to be a fundamental part of the economy in Mexico and in the world. Therefore, leaving behind an adversarial perspective and creating bonds of collaboration between companies of all sizes would generate the greatest possible sustainable and inclusive growth for the economy as whole.