Small, and Medium Enterprises; Definition, and Characteristics

Definition of SMEs

Many developing countries are characterized by what we call Small and Medium Enterprises, known by its popular acronym as SMEs. SMEs have a great contribution to the economic development of many developing countries. Thus, there have been several efforts in trying to come up with a single definition of SME but in vain. To date, there is no single SMEs definition all over the world. Different countries like the United States of America, the European Union countries, and international organizations like the World Bank cracked hard to have a harmonized definition of a small and or medium enterprise but unsuccessful.

 Some denominators commonly found include investment in machinery, number of employees, and turnover. Instead, experts use countrywide agreed denominators to define what SMEs mean. Every country has its acceptable standard for the definition.  For the USA and Europe, small companies have less than 50 employees, and medium-sized companies have less than 250 employees. However, in the United Republic of Tanzania, the Ministry of Industry and Trade adopted its Trade policy of 2003 and defined SMEs using the number of employees and investment in machinery. In the context of Tanzania, therefore, SMEs refer to any non-farm economic activity established for profit that has employees between 4 and 99 and has capital investment in the machinery between 5 Million shillings and 800 million shillings. More details on specific categories’ definitions are as reflected in the table below.

Business SizeNumber of EmployeesInvestment in Machinery In Tanzania Shilling’ Millions
Micro BusinessesBetween 1 to 4Less than 5
Small BusinessesBetween 5 to 49Between 5 to 200
Medium BusinessesBetween 50 to 99Greater than 200.0 and up to 800
Large Businesses100 and aboveGreater than 800

Characteristics of SMEs

Most SMEs are characterized by sole proprietorship and partnership. The presented few Characteristics reflect both positive (Strengths) and Negative characteristics (constraints).

Positive Characteristics SMEs

  • Low startup Capital provides flexibility at the time of starting the business
  • Flexibility in decision making
  • Portability due to the size of the business.
  • Small Team of employees
  • Easy management controls.
  • Legal liability not considered (hence simplicity in taxation)

Negative Characteristics (Constratints)

  • Mostly Single/ Sole Proprietorship, thus limited skills.
  • Lower Revenue and profitability
  • Limited access to Capital,
  • Limited possibility of business diversification.
  • Small Market area
  • Available in limited locations
  • Limited business relationship