Impact of small business on economy and industries

Impact of Small Businesses on the Economy and Industries

Recent years have highlighted the impact of small businesses on the economy and industries. The technological innovations and the startup explosion are some of the major growth drivers behind the budding of various small businesses. They provide services to large organizations and traditional incumbents. In this article, the readers can get an idea of how small businesses are helping the economic growth of the country.

Small businesses, commonly known and MSMEs (micro, small and medium enterprises) or SMEs (small and medium enterprises) have been unanimously accepted as the vital engines of the economic growth. The impact of small businesses on the economy and industries is seen to have a very crucial role in the construction of society which is free from poverty. They provide ample employment opportunities to the population hailing from different social strata. Small businesses but also ensure cash flow across the society and industrial sectors.

Small businesses are the seeds of the private sectors, and also the source of technological innovations and diversification. They cater to larger organizations and develop their own activities and product lines. SMEs or MSMEs are usually categorised by the number of employees working in the organization, sales turnover, capital investment etc. In other words, the number of people working in the company and the asset value classifies the organization.

How small businesses fuel economic growth?

Small businesses, like MSMEs or SMEs and even gigs, occupy a prestigious position in the world. Both the developed and developing nations emphasise on small businesses as they can change the socio-economic conditions of the country for the better. Small businesses are seen as the major fuel for optimizing employment opportunities at low investment costs and alleviate poverty in the long run. The extensive employment opportunities are not just limited to the rural and metro cities, but also semi-urban areas. This will result in an equal pace of improvements in both urban and rural centres. Social polarization can be eradicated by the successful functioning of small businesses.

Many small businesses thrive on the utilization of the local resources that requires simple technology. Small businesses also help in solving the problem of income disparity. Both skilled and semi-skilled resources are used by small businesses as the basis for expansion. Small businesses have created employment opportunities for income generation and participation in economic activities for people falling under lower-income and rural brackets. Domains like trading, services, technology and agriculture have witnessed a growth of small businesses.

What are the funding opportunities for small businesses?

The effective financing reforms of small businesses should incorporate regulatory reforms, strategies to create a friendly business environment, guarantee extensions to local banks to entice them to lend in local currencies, creation of equity funds suitable for small businesses, financial incentives for partnerships etc. Small businesses can be negatively affected by the changes in the financial institutions (like banks) during the time of economic crisis.

In many countries, diverse innovations and technological advances have induced the urgency of extensive restructuring in the financial sectors. Several commercial banks have engaged in acquisitions and mergers. This has led to the removal of the small credit institutions form the picture, and the introduction of complex financial conglomerates. Mergers and acquisitions have given access to the previously isolated markets. This is possible due to the blurring of the geographical barriers and reduced market segmentation.

Small business can be funded in two primary ways, firstly internal financing and secondly external financing. Internal financing refers to getting money from personal savings, friends, relatives etc. External financing refers to receiving the fund from financial institutions like banks. The two noted variants of external financing can be debt financing and equity financing. Some instances of debt financing include overdrafts, loans, leasing, hire and purchase arrangements, letters of credit etc. In the case of equity financing, the banker or the investor will possess the right of ownership in the business. The equity participant may be part of the management of the business.  

How are the small businesses affecting the evolving economies and industries?

The three primary ways in which the small businesses like SMEs or MSMEs are positively affecting the evolving economies and industries are:

  • Encouraging innovations and technological incorporations
  • Creating new job opportunities
  • Enhancing financial independence

Small businesses give people the opportunity to gain financial independence. This desire has buoyed the rise of gig ecosystem, freelancer contractor economy. Being one’s own boss can be challenging and exhaustive, but it has got its own perks as well. Owning a business can definitely be empowering.

An article by Dennis Danheiser titled “Life Stories: Small Business Edition“ talks about the role each small business owner has in fueling the American dream. Dennis writes, ‘The opportunity to pursue your passion is exciting, but there are many challenges along the way – money and time management, hiring the right people, and marketing, just to name a few.’”

Sometimes, small businesses are born out of big, innovative and creative ideas that no one has imagined. Stories of Microsoft, Apple, Disney etc will show us how small organizations can expand into popular multinational brands within a course of time. Each of the owners had their innovative ideas in which they believed.

Several gigs have germinated in recent times that provide services to the large organizations and business conglomerates. The large organizations onboard experts and freelancers for project execution. The projects can be long term or short term. The experts are selected based on their expertise relevant to the project. There are many online platforms, like Vedak, that help the large organizations get connected to the required professionals for timely project execution. Small businesses often hire freelancers for definite projects.

Industries like Banking, automotive, logistics are often outsourcing the workload to small businesses and independent resources like freelancers, consultants etc. Small businesses are often equipped with advanced technological tools. This often allows them to have an upper hand on the traditional incumbents.

What are some of the advantages that small businesses have on the economy and industries?

  • Small businesses can fuel economic growth, create job opportunities and expand the tax base.
  • Small businesses increase competition in the market landscape and bring out the best in business.
  • Budding entrepreneurs bring forth innovation, skills and ideas.
  • Small businesses play a crucial role in rapid industrialization and developments.
  • During the recession and economic crisis, small businesses can innovate and adapt faster to the changing situations.
  • Small businesses use eCommerce and online transactions of goods and service extensively.
  • The small businesses thrive in a growing economy, on one hand. On the other hand, the development of economies and industries ensure the growth of more number of small businesses.


India is the country with the highest young population, eager to test their skills in setting up businesses. Small businesses have positive effects on the growth of the economy and industries. Entrepreneurs and soloprenuers are thriving in the changing market landscape. The small businesses are unlocking their growth potential, thus accelerating the development of economy and industries.

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