How Big is a Small Firm?

Updated: Nov 18, 2020

“If you wish to converse with me, define your terms.” –Voltaire

Discussions of small firms and their role in economies and financial services ecosystems are clouded by a lack of definitional consistency. The terms “micro,” “small,” “medium,” “SME,” and “MSME” are commonly used in research and policy but in such a loose and varied way across organizations and countries that saying that something is “about SMEs” hardly conveys much useful information.

For instance, in the microfinance community, “microenterprise” is used to describe the informal jobs that microfinance borrowers create for themselves, like fruit seller or rickshaw driver. Many countries define “microenterprise” as extending from these self-employment jobs up to firms with 10 employees. In developed countries, a sharp distinction is usually made in national statistics between “employer firms” and “non-employer firms,” with the latter including sole proprietorships and partnerships. The term “medium” is equally pliable: while the IFC considers a medium firm one with 50 to 300 employees, for example, the US Small Business Administration includes in this category firms in some industries with up to 2,500 employees.

There are also many ways that size can be measured. Number of employees is the most common measure, perhaps because it is the most easily tallied in the absence of detailed and accurate data about revenue, profits, assets, or loans. Number of employees is also the measure we will rely upon, at least in identifying our initial sample, for the same reason. (The question of how precisely to define an employee is equally fraught with nuance—must an employee be paid in cash or do in-kind payments count; how to think about part-time vs full-time; what about seasonal workers; do you count relatives or not, and if so which ones; etc— and will be the subject of another blog post.)

With that as prelude, here is a quick guide to how we will define our terms in this project, and why we’ve chosen these definitions.

For this project we are using the term “small firm,” which we define as those firms that have hired workers, but have not yet hired professional managers (in the sense that there is an employee whose only job is managing other employees). We theorize these firms will have between 1 and 20 non-family employees. In the low and middle income countries where we’ll conduct our study, existing descriptive statistics are limited but suggest that firms of this size likely employ poor workers and are owned by households that are at least near-poor. The majority of these firms are “unbanked” in the sense that they do not have mobile money accounts or formal banking relationships associated with the firm (but may have some relationships via the owner).

Smaller than the small firm, true to our roots in microfinance, we define the “microenterprise” as an owner-run firm with no non-family employees. These firms are often funded by microcredit, nearly all are informal, and are often run out of the home.

And larger than the small firm, we define the “medium firm” as one that has grown large enough to hire a professional manager.

We’ve chosen to focus this project on small firms for many reasons, which we’ll explore in more detail in our next post. Part of the story that’s related most closely to the topic of this post, though, is that we’ve seen the microfinance sector focused on finding ways to help microfinance borrowers grow and move up into the next tier, hoping that will be the push that increases profits, and allows the firm to raise wages, hire more employees, and boost quality of life for owners and workers.

But this theory of change doesn’t take into account descriptive data that shows that the next tier up—what we are calling small firms—is also a very tough place to be a business owner, where the average firm doesn’t grow much and is not very profitable. So once a microenterprise has proven hardy enough to make the leap from a one-person shop and hired a handful of workers, will they just stall out there? What is stopping them from continuing to grow, increasing productivity and profits? These are the types of questions we’ll hope to address in the coming months and years with the small firm diaries.

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