The guiding principle of the United Nations Industrial Development Organization’s (UNIDO’s) approach towards small- and medium-scale enterprises (SMEs) & MSMEs is that they can play a key role in economic growth and equitable development in developing countries.
Their contribution to employment generation, poverty reduction and wider distribution of wealth and opportunities represents a major window of opportunity for most developing countries.
However, the potential role of SMEs is often not realised because of a set of problems commonly related to size. Individual SMEs experience difficulties in achieving economies of scale in the purchase of such inputs as equipment, raw materials, finance and consulting services and are often unable to take advantage of market opportunities that require large production quantities, homogenous standards and regular supply.
Small size is also a constraint on internalisation of functions such as training, market intelligence, logistics and technology innovation, while preventing the achievement of a specialised and effective internal division of labour.
To preserve their narrow profit margins, small scale entrepreneurs in developing countries are often unable to introduce innovative improvements to products and processes and this limits the scope of firms to take advantage of new market opportunities. On a closer observation, however, it is clear that many of these obstacles are the result of SME’s isolation rather than their size. Therefore, closer cooperation among SMEs as well as between SMEs and the institutions in their surrounding environment, holds the key to overcoming them.