SMEs in Mexico need to be more competitive to face the new times

A significant amount of employment in these organizations is informal. There are approximately 4.2 million MSMEs in Mexico; some have difficulty accessing credit and lack access to technology and training.

SMEs in Mexico need to be more competitive to face the new times
SMEs: Mexico has approximately 4.5 million organizations of this type. Photos: UNAM

Micro, small and medium-sized enterprises (commonly known as MSMEs) account for more than two-thirds of all employees worldwide and generate the majority of new jobs. Despite this, they face significant challenges in terms of working conditions, productivity, and the level of informality of their activities.

According to the International Labor Organization (ILO), these organizations generally have fewer than 250 employees. In many countries, more than 90 percent of the total number of micro, small and medium-sized enterprises, and a large number of them are microenterprises, with fewer than 10 workers.

The activity of MSMEs, added to that of self-employed workers, accounts for 70 percent of global employment. Mexico, explains Gerardo González Chávez, researcher at UNAM's Institute of Economic Research, is no exception. Based on the National Occupation and Employment Survey (April 2022), the economically active population (EAP) was 59.5 million, with a participation rate of 60.1 percent.

Of these, 23 million 580 thousand 375 people were employed in micro-businesses; 8 million 375 thousand 351 in small establishments; and 5 million 762 thousand 520 in medium-sized establishments.

According to the ILO, MSMEs are engines of economic growth and social development. Most of the nations of the Organization for Economic Cooperation and Development represent more than 50 percent of the gross domestic product, a rate that reaches up to 70 percent, according to some global estimates. In addition, they tend to hire those who have the least opportunity to find work: young people, the elderly, and the least qualified.

MSMEs have been the main generators of jobs, but also -according to INEGI data- are the most precarious, since six out of every 10 workers employed in them are excluded from social security, which means that the jobs they generate are informal, with low wages and do not meet the requirements defined by the ILO to be classified as decent jobs.

The ILO estimates that 60 percent of the employed workforce is in the informal economy, for reasons of cost and competition in the world market. In addition, close to 40 percent of the formal jobs reported by the Social Security are temporary or without benefits -as reported by promoters, supervisors, and salesmen, among others-, that is, informal jobs hired by formal companies and performed within their facilities.

The characteristics that identify informal establishments are: they have five or fewer employees; they do not pay employer contributions to social security systems or other social benefits; they are not part of a company with several establishments; they do not have expenses for accounting services to manage their accounts, legal or administrative, or for commercial, marketing, and related services, and they do not use an accounting system, among others.

Of the total number of establishments owned by women, 78.4 percent are informal, in which 65.2 percent of the employed personnel work and contribute 50.6 percent of the value-added; meanwhile, the formal ones, which represent 21.6 percent, concentrated 34.8 percent of employed people and contributed 49.4 percent of the gross census value added (Economic Censuses 2019).

Micro, small and medium-sized enterprises face different challenges.
Micro, small and medium-sized enterprises face different challenges.

SMEs in Mexico at risk of disappearing

Mexico has approximately 4.5 million organizations of this type. Since the health emergency, says the university professor, this sector was affected; "a large number of companies that were already many years old could not overcome the pandemic, while a large number of businesses related to new technologies and platforms emerged".

There has been an important growth in transportation and food or product delivery companies, but they remain in what is considered an informal economy. For example, a cab service driver via platform must work 12 to 13 hours a day to deliver 25 percent of his profit to the company, cover his expenses and cope with the debt of a car on credit. "This strengthens informality and takes away the possibility of the decent work that the ILO talks about. It is necessary to regulate these activities", emphasizes the specialist.

It must also be said that numerous MSMEs, especially in the commercial and service areas, emerge by the thousands throughout the year, "but just as they are born, they die". Approximately 70 percent do not survive the first year, and almost 10 percent last up to five years.

The COVID-19 crisis has taught us that the pandemic and containment measures do not affect everyone in the same way. Within the private sector, micro, small and medium-sized enterprises, especially those led by women, youth, ethnic minorities, and migrants, suffered the most.

A survey by the International Trade Centre on the impact of the disease among organizations in 136 countries showed that almost 62 percent of small businesses run by women have been significantly affected by the crisis, compared to just over half of those headed by men. In addition, women-owned businesses were 27 percent more likely not to survive the health emergency, according to the UN.

In Mexico, women workers are mainly employed in micro and small and medium-sized companies, but they work informally, lacking benefits and earning lower salaries. A significant number, for example, are engaged in commerce because they must spend time at home and caring for their children, in a double workday.

They "try to meet the need for a higher income as purchasing power has fallen by about 75 percent in the neoliberal period".

Micro, small and medium-sized enterprises face different challenges, for example, only a limited number of them have access to credit; and those that do have access to credit usually have higher interest rates than those charged to large companies.

A significant number remain in the informal sector for different reasons: difficulties in complying with the requirements of the contracting company, limitations on the payment of formal workers, lack of incorporation into the tax system, scarce possibilities to document their payment capacity, and be subject to credit (particularly in micro-businesses), aspects that place them in a condition of instability.

In MSMEs, the application of innovation and technological development is low and most lack institutional support; on the contrary, they are faced with survival or regularization due to the burden of the tax system and labor costs in social benefits.

In many cases, they are suppliers, contractors, or part of the distribution chain of large companies, but the quality is required of them, which is why they must make investments to be competitive and, in certain situations, they must reduce costs through salaries and benefits for their workers.

With the signing of the Treaty between Mexico, the United States, and Canada, the need to equalize wages in the three countries has been pointed out, but the gap is enormous. The average wage in Mexico is four dollars an hour; 19 in the United States and 22 in Canada.

"Our country should pay more, at least double, but that makes the workforce more expensive. Canadians are already using manufacturing robots, which puts jobs at risk; it's even more attractive to employ people here," he says.

Other challenges are access to technology and training. "Many old businesses could not survive in recent years, but those that were emerging were strengthened with the use of new technologies. It is no longer about sales in fixed locations, but about the distribution of products through the Internet," González Chávez concludes.