The Promise of SMEs: Unlocking Potential through People
The promise of small businesses in boosting productivity and GDP has been consistently talked about by policymakers and governments. Amidst the turbulence in public markets, it is becoming increasingly more relevant as investors are recognising the long-term growth potential of small businesses. Their contribution is potentially even more important amid the beginnings of a reconfiguration of global trade patterns. Such shifts are unlikely to translate into a meaningful long-term realignment without a competitive network of SMEs supporting and complementing large companies.
The State of Small Businesses
SMEs are key players in national economies around the world. Representing 99% of all businesses, generating about 60% of employment and between 50% and 60% of value added in the OECD area [7], they can play a major role in delivering growth that is more inclusive and whose benefits are shared more broadly.
In this context, governments are increasingly focusing on the growth journey of SMEs to enable conditions for post-entry growth, growth of small firms into mid-size ones and the scaling up of mid-size companies and seeking to better target and tailor their SME and entrepreneurship policies. In the UK, 99% of all businesses are SMEs and 6 out of 10 working people are employed by small businesses, and they generate more than half of the business turnover of the UK economy. According to the UK Office for National Statistics [8], recent movements in productivity since the pandemic suggest the underlying weakness in UK productivity growth remains.
SMEs are immensely varied. They range from a self-employed individual to a microenterprise with one to nine employees, to a small enterprise with up to 50 employees, to a medium-size furniture manufacturing company or software business employing up to 250 people. Whilst post-pandemic there have been positive signs for early entrepreneurial activity, fear of failure is now on the rise which impacts potential entrepreneurs setting up businesses in the first place, as well as plans to scale and create jobs in early-stage businesses. One in three entrepreneurs across 73% of global economies do not expect to employ anyone else but themselves in five years’ time [3]. In a report on UK growth-related behaviours over the 2020-2023 period, only 14.5% of firms surveyed achieved sustained growth over all these four years. Around half of these businesses (49.3%) that said they had expectations of employment growth in 2022 achieved this in 2023[4].
So how can we unlock the people potential within small businesses to boost productivity and drive sustainable growth?
Unlocking Potential: Talent
Talent acquisition and retention was one of the three main challenges among smaller companies’ decision-makers, according to the 2022 World Economic Forum report on future readiness for SMEs. While large and small companies are grappling with their talent management strategies, the stakes are often higher for SMEs and mid-sized companies as they rely heavily on a smaller number of employees to keep things moving and struggle to recover when key employees resign. The post-pandemic trends of the ‘Great Resignation’, ‘Quiet Quitting’, and the ‘Great Reset’ magnify talent concerns.
Recent research has highlighted the unique characteristics of SMEs and the impact on the relationship with their employees. The following are key considerations in developing a talent strategy that unlocks the potential through people by leveraging these unique characteristics.
1. While SMEs have historically struggled to compete with larger corporations for talent, a shift of focus towards the subjective dimensions of work, such as meaningful work, fulfilment, sense of purpose and closeness to decision-making can make SMEs stand out.
2. The need for adaptable employees who are willing to take on responsibilities outside a formalised job description can be used to the SMEs advantage. Research has found that SMEs that seek the right employee-company fit have more hiring success than those focused on filling a job description perfectly.
3. SMEs have less formalised human resources practices; however, informality can be used as an advantage. Studies have so far highlighted that prioritising employee engagement, commitment, decision-making involvement and responsibility levels are generally more important in the SME context than directing employee behaviour through oftentimes costly incentives and rewards.
Unlocking Potential: Transitions
Almost one in five large companies scaled up from being SMEs since 2000 but there is variation among countries. While in emerging economies 90% of workers are employed in micro-enterprises in richer economies only about 50% of workers are still employed in micro-enterprises [6]. Micro-enterprises tend to lag in productivity compared to the rest of the SMEs and larger companies.
According to the UK’s Enterprise Research Centre 2024 report (ERC) on the state of small businesses, only a small proportion of the 1.28 million private sector enterprises achieved key transitions. Of the 325,811 start-ups registered in 2020, only 47 per cent survived to 2023, and of these only 2 per cent (3,049) managed to achieve £1m turnover after three years – a proportion that has remained constant over the UK in the last decade.
Whether looking to successfully scale and grow or increase productivity and remain competitive, the labour-intensive and resource-poor nature of SMEs requires an effective response in unlocking the people potential during transitions. This can boost organisational resilience whilst increasing the chances of survival and building the ability to effectively respond to future shocks and disruptions.
Research so far has highlighted the following key considerations during transitions [2,5,11]:
1. Identify and address the ‘expertise gap’ by developing a support eco-system and investing in targeted policies and programmes that build the confidence and capability of entrepreneurs and business owners to scale their businesses and contribute to job creation.
2. Build in resilience by ensuring that the capabilities embodied by the Founder, CEO, or Business owner, are spread across the organization and become institutionalized through management, human resources (HR) practices and the broader company culture.
3. There is recent evidence [2] that an appropriate combination of even routine HR practices aligned with key outcomes can address difficult issues in response to trigger events, and can then lead to more progressive practices that drive business development and growth.
Unlocking Potential: Technology
SMEs and mid-sized companies recognize that keeping up with technological and innovation demands is important, with 25% citing this as a top challenge, according to the 2022 World Economic Forum report on future readiness for SMEs. However, they tend to lag on adoption compared to larger peers.
The relevant and appropriate use of AI technologies can enhance the human capability within small businesses and unlock potential. Digitalisation and adoption of digital infrastructure can transform processes and reinforce the agility at the heart of small businesses.
Whilst this remains an underexplored area, evidence so far indicates that there is still considerable lack of awareness and uncertainty about how important artificial intelligence (AI) will become to new businesses in the next three years. According to the 2024 Global Entrepreneurship Monitor, fewer than three in 10 of those starting new businesses see AI as “very important” in the next three years.
A promise yet unfulfilled.
Small businesses are the backbone of the global economy, but inhabit a complex universe of external shocks, competing priorities and a constantly changing external environment.
Despite their tremendous collective impact, many owners and executives of these smaller businesses must often choose to prioritize their immediate survival instead of being able to invest in business services and capabilities that can pay off in the longer term.
A combination of awareness, targeted support and investment can support their ability to attract, retain and develop people to unlock the potential within, and build the resilience needed for their continued survival and our continued prosperity.
Resources
Atkinson, C., Lupton, B., Kynighou, A., & Antcliff, V. (2022). Small firms, owner managers and (strategic?) human resource management. Human Resource Management Journal, 32(2), 449–469. https://doi.org/10.1111/1748-8583.12406
2. International Labour Organization, The Power of Small: Unlocking the Potential of SMEs, 2021.
3. GEM (Global Entrepreneurship Monitor) (2025). Global Entrepreneurship Monitor 2024/2025 Global Report: Entrepreneurship Reality Check. London: GEM.
4. Enterprise Research Centre, 2024. The State of Small Business Britain: A Manifesto for Growth and Productivity, Enterprise Research Centre. United Kingdom. https://www.enterpriseresearch.ac.uk/our-work/publications/
5. Heneman, Robert L. et al., “Human Resource Management Practices in Small and Medium-Sized Enterprises: Unanswered Questions and Future Research Perspectives”, Entrepreneurship Theory and Practice, vol. 25, issue 1, 2000, pp. 11-26.
6. McKinsey Global Institute (2024). A microscope on small businesses: Spotting opportunities to boost productivity.
7. OECD. (2019). Strengthening SMEs and Entrepreneurship for Productivity and Growth. OECD Publishing.
8. ONS (2019). Productivity Flash Estimate and Overview, UK.
9. Organisation for Economic Co-operation and Development (OECD), One Year of SME and Entrepreneurship Policy Responses to COVID-19: Lessons learned to “build back better”, 2021.
10. Organisation for Economic Co-operation and Development (OECD), The Digital Transformation of SMEs, 2022.
11. Percy, C., Strategic Staff Management in SMEs to Support Lifelong Learning: A Literature Review, International Labour Organization, 2018.
12. World Economic Forum, Future of Readiness of SMEs and Mid-Sized companies: A year on, 2022.
13. World Economic Forum, Future Readiness of SMEs: Mobilizing the SME Sector to Drive Widespread Sustainability and Prosperity, 2021.