Opportunities to boost small company productivity: Research on micro, small, and midsize companies offers new ideas about how to close the productivity gap

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MSMEs play an outsize and often underappreciated role in the global economy. They account for 90 percent of all businesses and two-thirds of business employment, and they generate half of global value added. And they are often the large companies of tomorrow. One in five large companies today were micro, small, or midsize businesses at some point since 2000.

But, on average, micro, small, and midsize companies have about half the productivity of large companies, and less in emerging economies. In 16 countries studied in the McKinsey Global Institute's new report "A Microscope on Small Businesses: Spotting Opportunities to Boost Productivity," narrowing the productivity gap with large companies is equivalent to 5 percent of GDP in advanced economies and 10 percent in emerging ones.

A compelling finding that emerges from our research is that working with other firms--either small or large companies--tends to boost the productivity of these smaller businesses. In five sectors that account for the largest share of GDP from improving their productivity ratio, business-to-business micro, small, and midsize companies that interact with other companies as suppliers or customers have a 40 percent smaller productivity gap with larger enterprises than business-to-customer businesses of the same size that sell primarily to individuals.

This is not a one-way street. Large companies also benefit from thriving smaller businesses. In two-thirds of the subsectors we looked at in detail, the productivity of smaller companies and large companies goes hand in hand. In manufacturing, the correlation is even stronger at 80 percent of subsectors.

We can see this dynamic at work in many sectors. Take Japan's automotive industry as an example. Here smaller businesses have double the productivity of their counterparts in other advanced economies, and this owes much to their close relationships with the major manufacturers. In a culture of "we are all in this together," Toyota, for instance, has maintained its relationships with some suppliers for 30 years, helping them develop managerial skills, innovate, and even cut costs.

In Australia's construction industry, which has the highest share of public-private partnerships anywhere in the world, large companies tend to actively subcontract work to small ones in a landscape that is remote and beset by climatic extremes. Here, smaller businesses are the second most productive in this sector in the 16 countries studied.

And in the dynamic U.S. software industry, smaller companies are 1.7 times more productive on average than those in the same sector in other advanced economies. They benefit from the talent and capital ecosystems seeded by software giants, who also serve as "reputational anchors" that deliver MSMEs market access and branding.

These findings send a strong message. Solutions lie in weaving a strong fabric of cooperation so that smaller businesses and large companies work together, but also smaller businesses with each other. Japan's Small and Medium Enterprise Agency has shown that small and midsize businesses that have partnered with other small enterprises to implement technology solutions in their operations have 76 percent more sales per employee than those that have not taken this route.

Large companies have a choice. They can opt for an adversarial relationship with smaller companies on the grounds that they could become competitors, or they could recognize that they play a role in spurring innovation and driving efficiency--and they could help them do that better to the benefit of all.

For policymakers who have tended to approach the smaller company productivity problem with measures targeted at smaller companies specifically, additional effort to create an economic fabric that fosters "collective productivity" may well pay dividends. When large companies lead and smaller businesses lag on productivity, policymakers could take action to strengthen networks between the two. Where both large and small companies lag behind their peers, more fundamental steps to improve the economic fabric as a whole may be needed. For instance, solutions could include investing in physical and digital infrastructure, establishing transparent and fair regulatory frameworks that boost competition, reducing trade barriers, and ensuring equal access to financial capital.

This is not a zero-sum game. The broad truth is that both smaller companies and large companies can benefit when they are operating within the right economic fabric: a win-win.

This article originally appeared in Inc.

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