David Lehr

The Missing Middle

Business GapEvery few weeks, members of the Silicon Valley Microfinance Network (SVMN) converge in the San Francisco Bay Area to learn about microfinance, microcredit, and related finance and economic topics. The last session, Fueling the Growth of Small and Medium Enterprises (SMES), was led and hosted by Google.org members Linda Segre and Swati Mylavarapu, who outlined why SMEs are so important and their plans on stimulating SME growth in developing economies.

In most economies, small and medium enterprises, generally employing between 10 and 250 workers, are the drivers of new job creation, innovation, and overall economic growth.? The World Bank estimates that SMEs contribute an average 51.5 percent of GDP in high income countries-but only 15.6 percent in low income countries. By contrast, the “informal” micro-enterprise sector accounts for an average 47.2 percent of GDP in low income countries, but just 13 percent in high income countries.?Low-income countries typically have very large numbers of informal micro-enterprises and may also have a handful of larger firms-possibly ventures created by foreign investment, or family-controlled conglomerates built up over generations.

But they typically suffer from a “missing middle,” with few SMEs in between, held back by perverse regulatory climates and poor access to inputs.? Large businesses usually have access to formal, bank-based credit and capital markets, while households and micro-entrepreneurs have access to micro-loans. This leaves a massive economic gap in small and medium-sized enterprises. A critical missing ingredient for their formation is a lack of capital.

Google.org wants to bridge this gap
and help drive institutional capital to the SME sector via an information exchange and investment platform. Their goal is to reduce transaction costs and increase overall liquidity in this sector by making the markets for SME investment more transparent.? This should make both investments and investment exits easier and more profitable.? Critical pieces of their approach include identifying and piloting investment models that can profitably match SMEs to finance and the development of commercial models for delivering the accounting and audit services.? Google.org also plans to expand the community focused on this segment by creating baseline data and stimulating new thinking on SME development.

With Google’s expertise in platform development and creating information flow, I have no doubt that they will have a strong impact on improving capital access and lowering transactions costs to serve the SME sector.? Though an overall lack of management skill still exists in many of these countries, closing the capital gap should also reduce one of the main reasons talented individuals leave their home countries and seek economic opportunity elsewhere.

For those or you living in or passing through the Bay Area, the next event is on October 23rd, 2008, titled “Sustainably Supporting Self-Reliance” and featuring guest speaker Vikram Akula, Founder & CEO of SKS Microfinance.