Small and Medium-Sized Enterprises and SME Exchanges
Small and medium-sized enterprises (SMEs) play a vital role in generating economic growth in the world’s economies. In developing countries, SMEs play a significant part in creating jobs, building thriving private sectors, and diversifying economies. Based on enterprise survey data collected from 99 developing economies for the 2006-10 period, a World Bank study found that SMEs with 250 employees or fewer accounted for 86% of the jobs in the median country in the study.
Despite their economic importance, however, SMEs struggle with access to finance. While this is true in many countries—across advanced, emerging, and developing economies—it is particularly pronounced in economies with less developed financial sectors. The IFC estimates the finance gap for formal SMEs in developing countries to be around US$1 trillion. The financial crisis and regulatory responses have compounded this problem. Under new Basel III capital requirements and banking regulations, for example, SMEs can find access to bank finance even more difficult and expensive.
In the more challenging post-global financial crisis period, policymakers and donors have increasingly emphasized the importance of expanding SMEs’ financial access to non-bank sources of funding, including public equity financing. This has taken a variety of forms including, for example, promoting the creation of dedicated SME exchanges.
In the past few decades, an increasing number of stock exchanges worldwide have set up specialized SME boards or market segments with the intention of expanding SMEs’ financial access (among other reasons). Many of these boards encourage listings by having different entry standards than the main board, streamlining the listing process and reducing the associated costs.
Few studies have comprehensively examined the effectiveness of equity markets, and SME exchanges specifically, in meeting the financial and other listing motives of SMEs, especially from the perspective of SMEs themselves. The World Federation of Exchanges (WFE) and the Milken Institute Center for Financial Markets (CFM) both recently published new research findings examining how and why SMEs access stock exchanges, as well as the role of stock exchanges in financing SMEs. Although the specific focus areas of our two organizations differed somewhat, the two studies have large areas of overlap and complementarity. The WFE and the Milken Institute fielded an almost identical, jointly developed survey questionnaire targeting listed and unlisted companies across Jamaica, South Africa, and India (Institute focus countries) and South Africa, Canada, China, Nigeria, and Mexico (WFE focus countries). The Milken Institute also surveyed senior stock exchange managers while the WFE surveyed retail and institutional investors and market intermediaries in their respective focus markets.
This report builds on the individual reports by consolidating the main findings across nearly the full set of countries covered in the original reports6 and highlighting points of commonality and difference. By assembling a large, combined dataset for listed and unlisted companies in Canada, China, India, Jamaica, and South Africa, we are able to enhance our analysis of the results. Finally, the report selectively discusses some of the specific findings from the original reports where these perspectives augment our combined nd- ings and conclusions.
In this joint report, we address the following questions:
- Why do SMEs list, and where?
- Does listing help SMEs access nance? If so, how?
- Would listed firms list again?
- What keeps unlisted firms away?
- How could listing be made more accessible?
We acknowledge at the outset that geographic and market-specific conditions limit, in some instances, the ability to aggregate results. We address this by reporting cross-border points of commonality where they exist, while simultaneously highlighting geographically-specific results.