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The Importance of Small Businesses to Local Economies

Small businesses have the potential to contribute largely to any economy and can provide a strong foundation for the growth of new industries as well as strengthening existing ones; they are drivers of wealth creation and productivity.

The importance of small businesses to local communities is fixed in buying and selling with friends and neighbors. In some towns and villages, a small business is the only type that can survive while serving a small population. In a big city, small businesses usually offer more diverse inventory or specialize in providing unique customer experiences.

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What are the benefits that small businesses bring to an economy?

  • Poverty Eradication

SMEs are important for poverty reduction; even with their numbers they tend to employ poor and low-income workers who would likely not have been absorbed by the big companies or government agencies. These businesses are sometimes the only source of employment in poor regions and rural areas and SMEs play an important role in developing countries where poverty is most severe.


  • Economic growth

Small businesses are usually in more direct contact with consumers and the general population.  This means they are more familiar with what products and services would best serve the common good. SMEs are important drivers of innovation and competition. The SME sector has remained very innovative and adaptable in order to survive the recent economic state. SMEs account for a major share of industrial production and exports. They are generally more open to trying out new ideas in a shorter time frame; all these contribute majorly to the growth of an economy.

In Kenya, SMEs play a key role in economic development and growth. The informal sector is estimated to constitute 98 percent of business in Kenya, contributing 30 percent of jobs and approximately 3 percent of Kenya’s GDP.

  • Increase Employment growth

The SME sector is the largest provider of employment in most countries, especially of new jobs. In most economies, SMEs occupy the greatest proportion of enterprises. They constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth. They generate opportunities for entrepreneurs and youths who are capable and have the potential to start and grow a business.

  • Creation of competitive pressure

SMEs with high turnover and flexibility play a major role in removing regional and sector imbalances in economies. Easy entry and exit of SMEs make economies more flexible and more competitive. They create competitive pressure because of their actions as secondary aid in the scale back and restructuring of large companies. They are essential for a competitive and efficient market.

  • Keeping money Local

Small businesses generally work hard to keep business local this means working with and supporting fellow small businesses and using as many local goods as possible. This focus helps stimulate local economies and benefits the community as a whole.  Local businesses’ success means more local tax money to the government, which helps improve schools, infrastructure, and other local services.

  • Adaptability

Because of their direct connection to the community, small businesses tend to be more adaptable to changing economic climates. As consumer demands changes, small businesses make adjustments to keep their clientele happy in a way that larger companies cannot. As a result, customer loyalty tends to be much stronger.  In times of economic downturn, many consumers make an effort to continue supporting their local favorites more than larger companies.

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  1. 5 Tips on how diversity on your team will drive business success 
  2. Ways Small Businesses Can Improve Communication in their Business Environment.
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To conclude, most SMEs employ more than 80% of the working population in Kenya and play a central role in its economic and growth strategies. Efforts to make SMEs more competitive can help any developing economy achieve its development objectives by creating more jobs, strengthening sectors, and developing business models that would work.

Mombasa, Kenya.


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