# **2. UNDERSTANDING MICRO, SMALL AND MEDIUM ENTERPRISES**

This section profiles Chilean SMEs and provides the basis for analysis of the government programs and incentives discussed in subsequent sections. The profile is based on survey statistics, census data and studies and ends with a short discussion of efficiency and productivity, including implications for direct and indirect exports for SMEs.

To highlight business trends, this discussion uses various levels of analysis and terms. The terms “micro business,” “small enterprise” and “medium enterprise” reflect the national definitions explained in Table 2.1 below. The term “broadly defined SMEs” includes micro, small and medium enterprises—but not the self-employed or subsistence micro businesses. This definitional convention allows the discussion to emphasize certain trends detected in the analysis. For instance, a discussion of employment trends should recognize the dominant role of micro businesses in the creation of lower skilled jobs. However, a discussion of export promotion policy should focus on SMEs. National surveys permit this kind of disaggregation and allow for more powerful conclusions.

Chilean SMEs, like those in other countries, have special features and feel the effects of regulations and risk factors quite differently from micro or large firms. Generally speaking, SMEs are family businesses and their management falls directly on the owners (often untrained). SMEs differ from large firms in their effectiveness at strategic planning, but they may also pursue goals that differ from profit maximization, such as market survival, maintaining their jobs and sources of income, or keeping up the family business tradition. Thus, the owner’s outlook (a generational and cultural factor) is especially important in deciding what determines a firm’s development and growth.

As a result, SMEs should be treated as economic agents with unique characteristics, rather than merely “smaller-sized large firms.” Of particular relevance in the comparison between SMEs and large firms are factors that significantly affect their unit costs, interest rates and transaction and logistics costs—all significantly higher for SMEs. This suggests that selective policy interventions could prove instrumental in improving SME productivity. To maximize their impact, these interventions should be aimed at fostering linkages, promoting innovation, advancing training, improving technology and developing new forms of work organization, among other aspects of business development.

Although the number of small and medium enterprises has grown, their share in the economy has fallen. This decline is not the result of structural changes in the Chilean economy. The SME and formally registered micro businesses (not including self-employment or subsistence level firms) account for 77 percent of employment by the private sector and 99 percent of total number of firms. However, SMEs and formally registered micro businesses only generate 23 percent of sales and have an extremely limited direct participation in the dynamic Chilean export sector.

## **A PROFILE OF SMALL AND MEDIUM ENTERPRISES (SMES)**

## **CLASSIFICATION**

Chile’s unique classification system makes international performance comparisons difficult. To classify firms by size, Chile uses the _unidad de fomento (UF),_ which is a precise measure based on an indexed unit of account used to express prices and limit the effects of inflation in budget allocations and contracts. Based on the Chilean definitions, many firms labeled as “micro 8