Germany has a reputation for supporting the middle market

Mid-market enterprises play a vital role in economies around the world by creating jobs and driving trade, according to new research by Oxford Economics for HSBC. Countries such as Germany have a reputation for providing a supportive environment for their “Mittelstand”, broadly defined as businesses with a turnover of between USD50 million and USD500 million.

But in many other countries the middle market has been overlooked. In the UK, for example, it has been described in the media as “neglected”, a “Cinderella sector” and the “squeezed middle”.

To understand what kind of support would best enable mid-market firms to achieve their full potential, it is first vital to understand them.

The average turnover of mid-market enterprises (MMEs), their number of employees and their productivity vary significantly around the world. The US has 50,000 MMEs, for example, more than any other nation – but they employ fewer than 20 million people, compared with 70 million working in MMEs in China.

The US has 50,000 MMEs, more than any other nation – but they employ fewer than 20 million people

The mid-market sector also varies significantly in terms of composition. Business services, wholesale and retail, account for more than half of Hong Kong’s MMEs. Around one in five MMEs in Saudi Arabia is involved in mining and utilities. More than a third of China’s MMEs are manufacturers.

There is one characteristic, however, that MMEs share, no matter where they are based. It is not a measure of turnover or the number of people employed, but a reflection of their stage of development as a business. They reach a point where, having grown successfully for some time, they have to change the way they do things if they want to grow further. To progress, they must evolve.

Some aspire to move from the national to the regional stage. Others aim to progress from being disruptive new entrants to sector leaders. Some have mastered a particular product or technology, and seek to branch out into new fields.

As they change the way they do things, they encounter challenges they have never faced before.

Take going international. Some mid-market enterprises reach the point where there is no more market share to capture in their home country, but they have no experience of doing business overseas. Which market should they target? How can they set up overseas? Do they want a subsidiary, a distribution centre, a sales office or a production site?

A significant proportion of the mid-market is made up of privately owned firms. In many cases their founders are product experts. As turnover increases, there may come a point when a lack of professional financial skills begins to constrain performance. Businesses might look to hire an experienced treasurer or CEO. The bigger the turnover, the more likely that professionals will be needed in other functions including strategy, policy, communications and marketing.

Most MMEs have grown with the support of bank lending, but may want to diversify their funding mix, attracting capital from sources other than banks. With interest rates in many countries at low levels relative to historical averages, private equity, insurance companies and pension funds are in search of yield.

If mid-market enterprises feel neglected or overlooked, then this is a missed opportunity. We should celebrate them. Understanding their characteristics, the choices and the challenges they face is the first step towards helping them flourish and grow.

Note

Hidden Impact: the vital role of Mid-Market Enterprises is an independent report published by Oxford Economics for HSBC in March 2015. It defines an MME as an enterprise that had recorded earnings of between USD50 million and USD500 million in 2012 US dollars and exchange rates. It estimated the size and composition of the mid-market in 15 countries and territories (Brazil, Canada, China, France, Germany, Hong Kong, India, Mexico, Poland, Saudi Arabia, Singapore, Turkey, the United Arab Emirates, the United Kingdom and the United States) using a combination of publicly available and modelled data.

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