Report: Increasing Small Business Productivity Is an Overlooked Economic Opportunity

Lack of capital, training and more could be holding back smaller companies. Here’s how to help them level up. 

Small businesses are only half as productive as larger companies, but improving their productivity could equal 5% to 10% in gross domestic product (GDP), according to a new study from the McKinsey Global Institute. 

Smaller companies can create tremendous value for their home nations — by allowing larger businesses to focus on higher-value activities, for example — but they may struggle to grow because they lack access to capital, international markets, technology or training. 

McKinsey looked at 16 countries, including 10 advanced economies and six emerging ones, that represent more than 50% of global GDP. Productivity was measured by the value of the goods or services that each worker produced. 

“Many MSMEs (micro, small and medium-size enterprises) grow rapidly into large companies, adding to the vibrancy and dynamism of the economies in which they operate,” the report’s authors wrote. 

“They promote innovation and competition among companies, encouraging all businesses to continually improve their products, services and processes, which, in turn, can enhance overall economy-wide productivity and dynamism.”

Business leaders and policymakers need to pay attention to MSMEs because of their potential impact: 

• They’re responsible for nearly 80% of business employment in emerging economies and two-thirds in advanced ones.
• They represent more than 90% of all companies.
• They generate about half of the global GDP.

Productivity varied widely from country to country and by the state of the economy. Advanced economies’ small businesses were 60% as productive as their larger businesses. On average, MSMEs in emerging countries — which may lack access to necessary resources — were 29% as productive. 

How can small business productivity be improved? 

It was hard for researchers to recommend one-size-fits-all solutions because different sectors in different countries required a tailored solution. But generally, they found that the following strategies held promise. 

Large companies can help by:

• Using their reputations to help smaller businesses access capital — a lack of capital was one of the top obstacles to productivity improvement. Access to capital is a perennial concern for many suppliers, as demonstrated by the most recent C2FO Working Capital Survey.  
• Assisting smaller businesses with technology, R&D and workforce development.

To fortify their suppliers financially, hundreds of global companies used C2FO Early Pay to provide roughly $73 billion in early payment on those suppliers’ invoices last year. This increased the suppliers’ cash flow, helping them continue to pay their bills and invest in themselves. 

According to McKinsey, policymakers can help MSMEs by:

• Providing training on how to sell their goods and services in international markets. 
• Offering programs designed to build up smaller companies’ technology access and management skills. 
• Building up financial infrastructure to help smaller companies — for example, a database that helps build a longer credit history for younger, smaller companies.

India has created a national platform, the Trade Receivables Discounting System (TReDS), for financing and discounting companies’ receivables. Earlier in 2024, C2FO launched C2treds, India’s first national MSME financing platform launched by a US-based fintech. It is part of the larger TReDS initiative. 

Examples of productivity initiatives around the world

The study found several real-life examples of productivity interventions that produced impressive results. 

In Japan, large automotive manufacturers were so integrated with their suppliers that the larger companies’ best management practices “trickled down” to the smaller companies. The larger companies also assist with technology, training and financing.

Smaller construction companies in the UK have benefited from a series of policies that enforced faster payment times on government-funded construction projects. This ensured those companies could quickly access capital and avoid shortfalls in liquidity. 

Italy has a large and fragmented marketplace of wine producers, but they are highly productive because the country has invested in “Made in Italy” branding and marketing that helps its products command higher prices in the international markets. 

Smaller companies can also improve their productivity if they locate in regions with healthy industry “ecosystems,” like Silicon Valley in the US. Those areas have lenders and investors that understand the dominant regional industry and may be more willing to support smaller companies. Because of the presence of multiple large employers, the local talent pool is usually deeper and better skilled. 

The bottom line on small business productivity

Small businesses drive the economies of most countries, but they’re not performing as well as they could. Larger companies and governments can help them reach their potential with better policies and targeted partnerships. If they do, it could help the overall GDP grow. 

If you’re a supplier that needs access to working capital, check and see if any of your customers offer early payment through C2FO’s industry-leading solution — you might be able to quickly boost your cash flow. Or if you’re a buyer that wants to strengthen your supply chain, learn more about our enterprise solutions here.