SMEs, Governments and the Changing Business Environment
Small and medium-sized enterprises (SMEs) have become major components of the global economy and national economies worldwide, representing “about 90% of businesses and more than 50% of employment”, according to the World Bank. [1] Much like large corporations, SMEs face many obstacles in implementing sustainable business behaviours. These obstacles can be very different depending on the size of the business and the environment it operates in.

Considering these difficulties, and the alignment of sustainable business outcomes and government policy objectives, it is logical for governments to take a more active role in encouraging and facilitating sustainable business behaviour in SMEs, through policy-making. Working together, businesses and governments can tackle the new challenges a rapidly changing business environment presents together.

Naturally, governments will be confronted with a series of informational, political and administrative obstacles. However, a shift in corporate philosophy where businesses prioritize social responsibilities as well as profit maximization, may contribute towards receptive private sectors willing to cooperate with governments towards common objectives.

By Steve Lo

Sustainable Business in a Changing Global Economy

Placing business sustainability in the contemporary socio-economic context should be the starting point for understanding the rationale behind government intervention in the private sector.

Business sustainability broadly refers to responsible corporate behaviour with regards to the socio-economic and environmental impacts of business activities. Corporate instruments to actualize enhanced financial and non-financial performance, include developing and taking advantage of technological and managerial innovations.

While large corporations may have the potentially large amount of resources to innovate and adopt sustainable business practices readily without external support, SMEs are more likely to be potentially limited by financial, information, material and expertise constraints, among others, if they are inclined to adopt sustainable business practices. This may be for competitive, performance and regulatory compliance reasons. Governments have the ability to help and encourage SMEs to adopt sustainable business practices, by compensating for the resource and awareness deficits that SMEs face.

Rationale for Government Intervention

There is a sound incentive for governments to actively support SMEs in Governments are in a unique position to foster business sustainability in SMEs and large corporations alike due to their status as rule-makers in the economy – after all, it is governments which help shape the market through laws, regulation, public spending, and general policy-making. As such, government policy intervention could be the most effective and efficient way of advancing the common interests of governments and SMEs.

Existing Government Initiatives and Policies

Business sustainability is not a novel concept, so governments having some framework of approach for its promotion is hardly surprising. Some governments, especially those of countries with developed economies, have already taken measures to promote sustainable business behaviours, although these have not necessarily been targeted, SME-specific policies.

Recent, substantial changes in the global economic landscape, whereby SMEs now compose a much larger piece of the economic pie, mean that existing approaches should be reviewed and modernized, in conjunction with the formulation and enactment of new policies.

A brief review of existing approaches various governments have taken to promote business sustainability will be followed by an overview of the challenges they face in supporting SME business sustainability through policy today, before an evaluation of how governments should approach the issue going forward as they look to play a bigger, more active part in promoting responsible, sustainable business.

Institutions and Information

Broadly observable approaches governments have taken to promote and facilitate sustainable business practices include establishing legal and administrative infrastructure, such as ombudsmen, to provide information and assistance to SMEs; regulatory and financial incentives; and fostering partnerships between SMEs and other public or private actors, along with a general culture in society, that encourage sustainable business behaviour.

Examples of structural assistance to SMEs such as ombudsmen can be found in Canada and Australia. [2] In addition to information provision and legal advice, ombudsmen can also serve as middlemen in fostering cooperation between SMEs, allowing them to reach their sustainability objectives more efficiently and to a greater degree.

Financial incentives for SMEs to adopt greener and more socially progressive practices range from tax breaks, to subsidies, to interest-free loans, which are observable in the U.K. and the EU, as examples. [3] [4]

Regulatory incentives such as green certifications have been either actively set up or otherwise approved by governments in Australia and Hong Kong, among others.[5] [6]

Additional policy actions governments have undertaken include information dissemination and awareness campaigns; public investment in research on sustainable business such as think tanks; improving communication, cooperation and forging relationships between different stakeholders in the economy and sustainable business – NGOs, SMEs, and consumers; as well as partnering with NGOs for business sustainability initiatives. [7] [8]

Measures such as these contribute towards moulding a business and social culture that values and encourages business sustainability, providing positive reinforcement for SMEs.

Challenges and Obstacles

Challenges governments have faced and will likely face when enacting policy support for sustainable business, stem chiefly from the incredibly diverse socio-economic environments SMEs operate in; the heterogeneity of SMEs themselves; incomplete information about industries, markets and SMEs partially because of the aforementioned factor; and bureaucratic and political barriers.

With regards to the diversity of SMEs and that of the socio-economic environments they operate in, this means that governments cannot expect success with one-size-fits-all policy outlays in promoting sustainable business. They may also not be able to copy previously effective policies, enacted by other governments or themselves, given potentially different socio-economic settings.

Not only do substantial government resources have to be allocated towards policy formulation, they also have to be used to coordinate policies on a national and regional level, which may be especially difficult without dedicated governmental or non-governmental entities to perform these tasks. If these areas are not addressed, the potential consequences are ineffective policy and a large waste of public resources. Governments also struggle to attain complete market information even with dedicated communication channels such as the Small Business Roundtable in the United States, or the Confederation of Europe Business in Europe due to the presence of diverse socio-economic environments present in the modern economy. Therefore, governments face many problems with a top-down, government-led policy-making process to promote SME business sustainability. [9]

An alternate approach may be more effective. Governments can consider educate SMEs on the benefits and importance of sustainable business behaviours to fostering a pro-sustainability culture amongst SMEs, local communities and NGOs. The latter will, in theory, organically manufacture sustainable business initiatives, such as more efficient, socially responsible supply chains, which the government can choose to support and learn from in future policy-making endeavours. The advantage of this approach, which has been effective in Italy, is that these initiatives are sensitive to local socio-economic particulars. Even if the initiatives themselves might not be appropriate or effective, the government still gains information of local and regional economies, for a minimal investment of resources. A policy bridgehead may also be established, in the form of information campaigns and establishing framework for cooperation between different stakeholders. This will allow the government to proceed without further intervention until further down the line in the policy enactment process, if it chooses to intervene at all. [10]

Following this, bureaucratic obstacles in the form of limited government resources, financial, human or otherwise, to take a proactive role in promoting SME business sustainability, especially considering the strain the pandemic has put on all actors in society, may give further credence to a more hands-off approach in encouraging sustainable business.

On a more positive note, there may be reduced political opposition governments face when proposing policy to encourage business sustainability in the current political climate. Firstly, there has been a trend of increased awareness of climate change and general environmental issues in recent years. Additionally, the recent pandemic has highlighted the need for many socio-economic flaws in modern society to be addressed.



To conclude, it is important to recognize that our economy and society has undergone many changes very rapidly, and may continue to do so in the foreseeable future. While this throws challenges at governments and SMEs alike, it also provides opportunities. As businesses and societies begin to value social responsibility from corporations in addition to profit-making, all stakeholders in society have a greater inclination to promote business sustainability. For governments, this could be a prime opportunity to fulfil their policy objectives on the environment and socio-economic issues in a different way to the past.

While individual governments may vary their strategic position on policy intervention, from hands-off to active coordination, and the particulars of individual policy articles may differ, depending on government and stakeholder responsiveness and actual policy effectiveness, the core philosophy should remain the same – positive action to facilitate (remove obstacles), enable (build or help build capacity), empower (provide policy support) and drive (provide strategic guidance) increased business sustainability in SMEs which would otherwise have greater difficultly in doing so by themselves.

This calls for a coherent policy regime with long and short term goals, frequent policy deliberation and dialectic communication between stakeholders, periodic effectiveness reviews, the construction of a high-level dedicated policy and administrative framework to foster and legitimize a culture of sustainable business, and an openness to policy innovation.

Forging closer partnerships between SMEs and governments in the policy-making arena could go a long way in advancing business sustainability in SMEs, and may be the most important innovation of all.



[2] Canadian Ombudsperson for Responsible Enterprise; Australian Small Business and Family Enterprise Ombudsman





[7] Think tanks such as the Stockholm Environment Institute, established by the government of Sweden in 1989

[8] Practices which have been observed in OECD countries:

[9] Different approaches to policy-making processes on sustainable business compared in Italy and the U.K.:

[10] Although government intervention has been suggested to be effective in encouraging impactful technological innovation from corporations –

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Published 19 August 2021