Public Sector Practice

Setting up small and

medium-size enterprises
for restart and recovery
Small and medium-size enterprises are a critical engine for the global
economy. In the wake of the pandemic, governments can take four
actions to maximize the impact of existing support measures.

by Abdulaziz Albaz, Tarek Mansour, Tarek Rida, and Jörg Schubert

© v_alex/Getty Images

June 2020
 Governments’ economic responses to the COVID- in Organisation for Economic Co-operation and
19 pandemic have included an array of measures Development (OECD) countries, more than half
to help people and businesses weather the storm. of SMEs already face severe losses in revenues,
Small and medium-size enterprises (SMEs) are in an with many having only a few months of reserves. In
especially difficult position. Plunging demand has Portugal, 37 percent of SMEs reported a more than
forced them to lay off workers, and many don’t have 50 percent drop in production.2 At the start of the
the financial resources to survive in this climate. In outbreak, two-thirds of SMEs in China reported
many countries, up to one-third of SMEs could go having enough cash to cover fixed costs for no
bust within three months of when the pandemic more than two months. In the United States, an
began in their countries.1 But their viability will be average small business has only 27 days of cash
critical to any postcrisis recovery: SMEs account for flow. This combination of factors puts SMEs in
two-thirds of global employment and half of global a vulnerable position, and many are at risk of a
GDP. A failure to protect them could put the entire permanent closure.
global economy at risk.
Inflexible supply chains and operations
Since the onset of the pandemic, governments have SME management teams don’t have the bandwidth
implemented a sizable number of programs aimed that large companies have in core functional areas
at addressing the needs of SMEs. The overarching to manage commercial pressures and respond to
goal has been to provide business owners with the pandemic. This lack of capacity manifests itself
critical funds and support in the immediate term. in an inability to quickly adapt their supply chain
These actions are critical, but to maximize their and production processes. SMEs frequently source
impact, policy makers could consider four additional inputs from supply chains that have become longer,
actions: easing SME access to government support, more complex, and more global. The pandemic
enabling the support ecosystem through an has disrupted these supply chains, leaving many
‘SME nerve center,’ sharpening focus on building SMEs without the materials they need to maintain
sustainability and resilience, and replanning for the operations. In addition, measures meant to slow
next normal. the disease’s spread have also disrupted SME
production processes. Factory floors of small
SMEs have the potential to be an economic and enterprises are not designed for physical distancing,
employment engine after the crisis, but an effective and the companies typically do not have the
government response now will be critical. The expertise and resources to quickly reconfigure their
prospects of an eventual recovery depend on it. operations.

Disproportional SME representation in hardest-

Why SMEs are more vulnerable to hit sectors
the crisis According to our analysis, some industry sectors
While all companies have had to quickly adapt will be hit harder than others in the crisis and
to disruption and greater uncertainty, SMEs are will take longer to recover due to long-term
particularly susceptible. Three factors increase the demand and supply disruptions. These sectors,
potential fallout from the crisis for SMEs compared which include retail, hospitality, food service,
with larger companies. entertainment services, and construction, have an
overrepresentation of SMEs due to the local nature
Plunging demand and liquidity challenges of the demand and lower barriers to entry. For
Demand has declined dramatically since the example, in the OECD, 60 to 70 percent of SMEs
onset of the pandemic. According to 15 surveys do business in these sectors, making SMEs more
affected by the crisis.

1
Coronavirus (COVID-19): SME policy responses, OECD, oecd.org.
2
Coronavirus (COVID-19): SME policy responses, OECD.

2 Setting up small and medium-size enterprises for restart and recovery

Why protecting SMEs is important constantly evolving, and certain governments are
In nearly every community, SMEs are a critical part considering additional support for SMEs.
of the economy: they are not only employers but also
customers to larger companies across the supply Despite the effort, the effectiveness of government
chain. Their survival and ability to restart operations support to date has been limited by the following
quickly will be a bellwether for the economy as a three important elements:
whole.
Constrained support capacity and complex
Sizable impact on unemployment administrative procedures
SMEs account for 45 percent of total employment in Complex procedures and lack of capacity hinder
emerging countries and about 70 percent in OECD efforts to support SMEs. In many governments, the
countries. The sudden, dramatic loss of demand rollout of SME support programs has been subject
severely affects the ability of SMEs to function, and to glitches and other delays that slowed the approval
the resulting shutdown increases unemployment. process, last-minute changes in application
In the United States, 50 percent of all SMEs and 78 procedures, and ambiguity about eligibility criteria
percent of small businesses (those with revenues to receive support.
of less than $20 million) have laid off employees
recently, leading to record-breaking unemployment Lack of integrated approach and coordination
rates. Now more than ever, SMEs need comprehensive
support based on a coherent strategy. However,
Long-term systemic risk the SME support ecosystem tends to be complex:
A failure to protect SMEs will have a ripple effect it includes policy makers, banks, public- and
on the broader economy and put the speed of any private-sector technical-assistance providers,
recovery at risk. First, as individuals face loss of nongovernmental organizations, and international
income and elevated uncertainty, the reduction in donors. Currently, the majority of governments are
spending and consumption will have a compounding unable to mobilize this ecosystem because they lack
effect on large companies. Similarly, the crisis a single dedicated orchestrator to ensure that all
is likely to call into question regional economic- efforts are oriented toward the same goals.
development efforts. Smaller towns rely heavily on
SMEs for employment and economic activity and A focus on short-term survival rather than
could face significant hardship and migration if small future growth
businesses were to close down. Government responses have concentrated on
helping SMEs survive the crisis. Nearly all measures
introduced by governments aim at improving liquidity
Obstacles to a more effective through postponement of payments, value transfer
pandemic response to businesses (for example, payroll support and
To address immediate disruptions, governments reduction in government fees), and balance-sheet
have announced unprecedented stimulus packages. support (for example, loan-guarantee programs).
Our analysis catalogued more than 1,300 stimulus
measures in 51 countries approaching $11 trillion Fewer initiatives tackle the longer-term challenges
dollars. These measures earmarked a portion that SMEs will face in adapting to the postpandemic
for SMEs, with a focus on providing direct and landscape if demand has yet to recover when the
immediate cash relief (for example, government government stimulus runs out. Thus, helping SMEs
fee waivers and cash transfers to firms) as well as ride out the pandemic is critical, but it’s not enough:
longer-term balance-sheet support (such as credit- they need help envisioning a next normal for doing
guarantee programs). Approaches to support are business. They need a long-term plan for restart and

Setting up small and medium-size enterprises for restart and recovery 3

 recovery focused on exceeding, not just returning to, dedicated section on their website with information
their precrisis performance. for businesses about available support measures
and set up an SME hotline.

Four actions to elevate impact of Once informed of the most relevant support,
existing measures SMEs need fast and easy access to services.
The scope of the pandemic and the resulting For example, loans, grants, and guarantees that
economic fallout have led many government require elaborate applications can be deterrents,
officials to question whether their response to especially for the smallest enterprises, which don’t
date is sufficient to protect SMEs and provide the have the staff or resources to dedicate to lengthy
foundation for a recovery. The goal is to get the submission processes. By easing administrative
greatest possible impact from existing efforts and processes, governments can increase SME
set up SMEs for a stronger recovery after the crisis. participation in assistance programs. For example,
the German state of Bavaria offered immediate aid
In our experience, four actions are critical. The of €5,000 to €30,000 to affected SMEs. Similarly,
first two focus on the immediate response to the Business Development Bank of Canada
the pandemic, the last two on how SMEs can (BDC) offered a small-business loan of up to CA
emerge stronger. $100,000 that can be obtained online within 48
hours from time of approval.3
Ease SME access to support
To increase SMEs’ participation in response Orchestrate and focus the support ecosystem
measures, policy makers should work directly with through an ‘SME nerve center’
them, helping them identify the right assistance SMEs now need comprehensive support. To
programs, navigate application processes, and maximize the impact of government response
secure assistance. Countries that have successfully measures, governments should create an ‘SME
carried out such interventions have established nerve center’ to serve as a single orchestrator,
a single, integrated point of contact for SMEs. activate the full ecosystem, and ensure that all
For example, the Australian government built a efforts are aligned with the overarching goals.

3
Coronavirus (COVID-19): SME policy responses, OECD.

The scope of the pandemic and the

resulting economic fallout have led
many government officials to question
whether their response to date is
sufficient to protect SMEs and provide
the foundation for a recovery.

4 Setting up small and medium-size enterprises for restart and recovery

 Necessary first steps include addressing the Second, SMEs thrive when they are integrated into
interests of different parties, increasing information global value chains. The pandemic has disrupted
accessibility, and matching demand with supply. supply chains and international trade, and SMEs
don’t have the resources to rebuild the broken
In addition, the SME nerve center can act as a connections on their own. As such, putting SME
control tower that closely monitors the uptake and internationalization at the heart of national export
impact of programs and establishes a feedback strategies is critical.
loop. These insights enable policy makers and
SME-support-ecosystem participants to adapt Finally, productivity-enhancement programs will
rapidly and focus their assistance. Currently, most be essential for the survival of SMEs and their
governments are unable to track progress, which ability to compete internationally. While many SMEs
creates blind spots that limit their ability to take have fought through the crisis by, for instance,
corrective action to enhance the effectiveness introducing rapid e-commerce solutions, there’s
of programs. The nerve center also provides ample need for more innovation and digitization
information about SME participation in government to further enhance their economics and assure
support programs at the segment and regional their survival. Governments can accelerate the
levels; these insights are essential to mobilizing the introduction of productivity programs as well as
relevant ecosystem stakeholders. maximize the effectiveness of existing programs by
prioritizing the SMEs most in need (by size, sector,
Sharpen focus on building sustainability and and growth potential) and matching them with the
competitiveness right technology, infrastructure, and capability-
The speed of recovery will depend on the ability of building solutions. The Singapore government
SMEs to return to sustainable operations postcrisis agency Workforce Singapore supports SMEs and
after current stimulus measures run out. Policy employers through multiple programs that aim to
makers should direct their focus to delivering three help businesses adopt lean management practices
foundational interventions that are of highest impact as well as industry 4.0 technologies. This program
and relevance to SMEs: access to local demand, increased the productivity of participating SMEs
support for internationalization, and enhancement by 40 to 70 percent. In Ireland, Local Enterprise
of productivity. Offices in every county will be providing vouchers of
€2,500 to €10,000—with a 50-50 funding match—
First, SMEs’ share in public procurement remains to support business-continuity preparedness,
lower than it should be in many markets. Public innovation, and productivity.
procurement remains the avenue for sustainable
SME development with the most impact, given its Replan for the next normal
share of total demand (for example, 30 percent Policy makers and SME authorities could consider
in OECD countries and more than 50 percent in reassessing their existing strategies and adapting
developing countries). Governments can consider priorities to the current environment. Beyond the
easing administrative burdens that have limited current stimulus response, governments could
SME participation in public procurement to date. explore three areas.⁴
For example, South Korea’s Ministry of SMEs and
Startups has implemented a measure to simplify First, policy makers can prioritize sectors that have
the processes and administrative burden in public been heavily affected but will be quick to recover
procurement by limiting on-site inspections. (for example, maintenance and construction)
Governments in many countries have offered by introducing customized interventions. This
advanced payments for procured goods and approach can help to increase economic activity
services. while continuing to safeguard public health.5

4
Coronavirus (COVID-19): SME policy responses, OECD.
5
Andres Cadena, Felipe Child, Fernando Ferrari-Haines, and Juan Franco, “Restarting national economies during the coronavirus, part two,”
May 11, 2020, McKinsey.com.

Setting up small and medium-size enterprises for restart and recovery 5

 Second, governments could accelerate efforts to Finally, while the governments’ response is focused
support high-performing and innovative companies on supporting the survival of existing SMEs, these
with scale-up potential. According to our analysis, efforts should be complemented with promoting
this category accounts for only 2 to 3 percent of a culture of entrepreneurship aimed at enhancing
SMEs in most countries but generates more than 60 business creation in priority industries, increasing
percent of economic and employment growth. As the number of high-quality jobs, and improving
such, governments could aspire to more than double the socioeconomic resilience and competitiveness
their scale-up density—the share of scale-ups of SMEs.
out of total SMEs—in the medium term. Targeted
and scalable technical-assistance programs and
national platforms that spur product innovation,
technology adoption, digitization, and the creation Governments recognize that SMEs will be a vital
of new business models are essential to increase engine for the postcrisis economic recovery, and
scale-up density. In 2016, BDC established its many have already implemented programs in
scale-up program, Growth Driver Program, to response to the pandemic. But ensuring that aid
support high-growth SMEs to optimize their growth reaches SMEs and makes the desired impact
strategies, financing structure, and internal controls. requires a more comprehensive approach.
Companies enrolled in this program will have Governments that take four targeted actions will
access to BDC internal expertise and its network of accelerate their recovery and set up SMEs for
entrepreneurs. To date, the program has supported sustained success.
more than 140 businesses.

Abdulaziz Albaz is a consultant in McKinsey’s Riyadh office; Tarek Mansour and Jörg Schubert are senior partners in the
Dubai office, where Tarek Rida is an associate partner.

The authors wish to thank Marco Dondi, Ping Wen, and Yassir Zouaoui for their contributions to this article.

Copyright © 2020 McKinsey & Company. All rights reserved.

6 Setting up small and medium-size enterprises for restart and recovery