SMEs do not have a common or global definition (Liberto, 2019). Rather, the definition of SMEs varies across different continents and countries due to different country classifications and economic make-up (Motter & Santos, 2017). Da Silva (2020) state that the definition of SMEs globally also differs between governments, agencies, and various other public and private bodies. Hence, the United Nations and European Commesion have accepted various and different definitions of SMEs throughout the global (Lessidrenska, 2019). Furthermore, the criteria that determine an SME varies, as in some countries the definition is based solely on the size of the labour force, while in others the definition incorporates financial variables, such as turnover and/or assets, and can even vary across industries (Ward, 2020). Muriithi’s (2017)
examination of the various definitions of SMEs across countries, thus, indicates that establishing a common definition will take some time.
An overview of different definitions of SMEs, as presented by different agencies, organisations, and countries is presented in the following subsections. In particular, this overview refers to definitions from the following: 1) International Finance Corporation (IFC) and Multilateral Investment Guarantees (MIG), 2)World Bank Group, 3) European Union (EU), and 4) South Africa. These noted references provide regulatory criteria for defining SMEs (Prouska & Psychogios, 2019; Wang, 2016).
2.2.1 International Finance Corporation and Multilateral Investment Guarantees Agency
As seen in Table 2.1, the IFC and MIGA both use a common standard definition for SMES:
…an enterprise qualifies as a micro, small or medium enterprise if it meets two of the three criteria of the IFF MSME definition (employees, assets and sales) or if the loan to it falls within the relevant MSME loan size proxy (World Bank Group. 2019, p4).
Table 2.1: IFC/MIGA SME Definitions and Proxies
Indicators Micro Small Medium
Employees <10 10 < 49 50 < 300
Total assets and
annual sales < R1m R3m < R45m R45< R200m
Organisation loan
size <R150k <R3m <R15m
Source: IFC (2020)
2.2.2 World Bank Group (WBG)
The World Bank Group’s (2019) definition of SMEs is similar to the IFC and MIGA definition.
Specifically, the World Bank Group defines SMEs according to three sub-categories (Kwofie
& Tetteh, 2020; Zavatta, 2008):
• Micro-enterprises: up to 10 employees; total assets/annual sales of up to R1,5 million;
turnover in excess of R6 million; tangible assets in excess of R3 million.
• Small enterprises: between 10 and 50 employees; total assets/annual sales between R1,5 million and R45 million.
• Medium-sized enterprises: between 50 and 300 employees; total assets/annual sales between us R45 million and R200 million.
2.2.3 European Union
In the EU, the main factors that determine whether or not an enterprise is an SME are 1) staff headcount and either 2) turnover or balance sheet total (European Commission, 2015). EU Member States believe that having a common definition of an SME helps to improve the sustainability and effectiveness of SME policies (European Commission, 2015). Conversely, however, a lack of a common definition can lead to the application of unequal policies and, thereby, distort competition throughout the EU Member States (Prenaj & Ismajli, 2018).
The legislation and legal infrastructure, thus, need to be harmonised first, in order to promote the improvement of sustainability and effectiveness of SME policies (Prenaj & Ismajli, 2018).
Therefore, the practise of finding a common definition is asserted as aiding in unification, regardless of where SMEs in Member States operate, and ensuring that SMEs will be equal and competitive in the market (Prenaj & Ismajli, 2018). The EU definition is also concerned with the standard used to define SMEs throughout the world (European Commission, 2015).
Thus, the European Commission’s (2015) final report on the evolution of the definition of SMEs attempted to determine the criteria for fully defining an ‘enterprise’.
Specifically, the criteria adopted for defining an enterprise includes 1) the number of employees, 2) annual turnover, and 3) annual balance sheet amounts (Farran & Fawaz, 2018).
In the EU definition, then, an enterprise can be determined by whether it is a micro-, small-, or medium-sized business and by comparing its data with the three noted criteria; however, it does not mean that SMEs suddenly change status if they exceed one of the three parameters (European Commission, in Prenaj & Ismajli, 2018). The definition of SMEs according to the EU standards (Nugent & Rhinard, 2015) is presented in Table 2.2.
Table 2.2: Definition of SMEs according to European Union Standards
Enterprise category Micro Small Medium
Employees <10 <50 <250
Turnover and
balance sheet total < R35m <R200m R700m
Source: European Commission (2015) and Prenaj and Ismajli (2018)
It should be noted that the three international agencies and organisations detailed in the preceding subsections all provide criteria for defining SMEs in developed countries. The figures from these definitions have, thus, been converted into South Africa rands as a means to indicate relevance for the current study. The way South Africa defines SMEs is, furthermore, presented in the following subsection.
2.2.4 Defining small- and medium-sized enterprises in South Africa
Various definitions of SMEs can be categorised according to two sets of measures, namely
‘theoretical’ and ‘operational’, across most studies (i.e., quantitative and qualitative) (Loecher, in Foghani, Mahadi, & Omar, 2017; Myslimi and Kaçani (2016). This two-set categorisation is done in order to minimise the potential controversy generated by differences definitions of SMEs (Myslimi & Kaçani, 2016). As such, the theoretical definitions of SMEs consider qualitative criteria such as autonomy, personal understanding, and financial and/or personal commitment of the owner (Foghani et al., 2017; Myslimi & Kaçani, 2016). The operational definitions, in turn, take into account quantitative criteria such as annual turnover, number of employees, and capital expenditure (Foghani et al., 2017; Myslimi & Kaçani, 2016).
The South African Government Gazette (Department of Small Business Development, 2019) defines SMEs according to quantitative measures (i.e., annual turnover, number of employees, and size or category). The South African SMEs definition differs to other definitions as it classifies SMEs according to different industry and specify the total annual turnover according to enterprise size or class. Table 2.3 shows how an SME is defined, and quantitatively measured, in accordance with the South African Department of Small Business.
Table 2.3: New National Small Enterprise Act thresholds
(Sector, Total Full-time Equivalent of Paid Employees, and Total Annual Turnover)
Sector or sub-sector according to industry classification
Size or class of enterprise
Total number of full-time or equivalent of paid
employees
Total annual turnover
Agriculture Medium 51 – 250 ≤ 35,0 million
Small 11 – 50 ≤ 17,0 million
Sector or sub-sector according to industry classification
Size or class of enterprise
Total number of full-time or equivalent of paid
employees
Total annual turnover
Micro 0 – 10 ≤ 7,0 million
Mining and Quarrying Medium 51 – 250 ≤ 210,0 million
Small 11 – 50 ≤ 50 million
Micro 0 – 10 ≤ 15,0 million
Manufacturing Medium 51 – 250 ≤ 170,0 million
Small 11 – 50 ≤ 50,0 million
Micro 0 – 10 ≤ 10,0 million
Electricity, Gas, and Water Medium 51 – 250 ≤ 180,0 million
Small 11 – 50 ≤ 60,0 million
Micro 0 – 10 ≤ 10,0 million
Construction Medium 51 – 250 ≤ 170,0 million
Small 11 – 50 ≤ 75,0 million
Micro 0 – 10 ≤ 10,0 million
Retail, Motor Trade, and Motor Repair
Medium 51 – 250 ≤ 80,0 million
Small 11 – 50 ≤ 25,0 million
Micro 0 – 10 ≤ 7,5 million
Wholesale Medium 51 – 250 ≤ 220,0 million
Small 11 – 50 ≤ 80,0 million
Micro 0 – 10 ≤ 20,0 million
Catering, Accommodation, and Other Trade
Medium 51 – 250 ≤ 40,0 million
Small 11 – 50 ≤ 15,0 million
50Micro 0 – 10 ≤ 5,0 million
Medium 51 – 250 ≤ 140,0 million
Sector or sub-sector according to industry classification
Size or class of enterprise
Total number of full-time or equivalent of paid
employees
Total annual turnover
Transport, Storage, and Communications
Small 11 – ≤ 45,0 million
Micro 0 – 10 ≤ 7,5 million
Finance and Business Services Medium 51 – 250 ≤ 85,0 million
Small 11 – 50 ≤ 35,0 million
Micro 0 – 10 ≤ 7,5 million
Community, Social and Personal Services
Medium 51 – 250 ≤ 70,0 million
Small 11 – 50 ≤ 22,0 million
Micro 0 – 10 ≤ 5,0 million
Source: Department of Small Business Development (2019)