As China switches to a post-industrial economy, SMEs and micro firms must score economic points while government should mainly ensure fairness

China's economy is in a phase of triple impacts: structural adjustment, pre-stimulus digestion and a growth model shift. The economic growth slowdown has lasted for a considerable time. The GDP growth rate was 11.7 percent annually for 2003-2007, 9 percent for 2008-2013 and only 7.7 percent in 2013.

Thanks to the fast growth of exports, urbanization investments and a favorable employment rate, there was rapid growth after China joined the World Trade Organization. But after the subprime mortgage crisis in the West, a turning point came in demand from abroad, the marginal return of government investment and the demographic dividend.

China was forced to change its economic growth model. In this new model, the change in the role of government from a market player to a judge is very important. However, only the prosperity of small and medium-sized enterprises and micro companies can provide new growth momentum for the new model.

These SMEs and micro companies provide a foundation for a healthy national economy and harmonious development. SMEs and micro companies often can provide employment for more than 70 percent of the population and create new jobs at a cost much lower than large enterprises. China's large enterprises need to invest 220,000 yuan ($36,000, 28,800 euros) to create a job, medium-sized enterprises 120,000 yuan and small businesses only 80,000 yuan. SMEs and micro companies created more than half of GDP growth and generated nearly half of taxes. By providing 70 percent of jobs, they reduce fiscal expenditures on social security (such as unemployment insurance).

Further, SMEs and micro companies also are the main source of economic vitality. With economic development, many large enterprises decline and at the same time, many small companies grow to be large enterprises. But many large enterprises maintain their vitality through mergers with and acquisitions of small businesses. With the economic slowdown, the economy will more badly need SMEs and micro companies to absorb the released factors of production from the elimination of old industry.

What's more, SMEs and micro companies are easier to adapt to the needs of post-industrial economic development. For traditional industrialization, scale and standardization of manufacturing are the keys for competitiveness, but for a post-industrial economy, diversification and personalization of service are vital.

For China, SMEs and micro companies have special importance because they play a key role in economic transformation. Since big enterprises in China are mainly state-owned companies and represent an old economic model, SMEs and micro companies will undertake the tasks of economic transformation.

For many coastal cities, their SMEs and micro companies are particularly important in that their economic transformation becomes urgent when their traditional industries move inland. If their SMEs and micro companies aren't prosperous, their economies will face the dangers of a slowdown. In fact, the GDP growth rates of many coastal cities in recent years are often smaller than the national average.

These cities may not have much experience in helping SMEs and micro companies. Among them, Wenzhou may be the best at it, but it still has encountered serious problems, such as the high cost of debt, various business failures and high credit risks.

The economic law for SMEs and micro companies in the post-industrial age is different from the economic law of traditional industrialization.

For traditional industrialization, factories provide mainly standardized products. For such an economy, government planning or mobilization can play a useful role. That is especially so for developing countries, which can design an economic growth route or technological map by consulting the routes used by developed countries.

But after traditional industrialization has finished, intangible services will replace tangible products to become the main driver of consumption. In such an economy, the service sector is much more important than the manufacturing sector. Patents, technology and knowledge become the main targets of production.

In such a post-industrial economy, liberalization and fair play in financial markets, property rights protection and creativity of free labor will be more important than product markets, and government planning will seldom have any positive effect. Government will focus on institutional building or provide public goods such as providing judicial services, information services and property rights protection.

Since SMEs and micro companies are so important and irreplaceable, government also provides special services for SMEs and micro companies. In many developed countries, they set up a special government agency to help SMEs and micro companies in financing, training, etc.

China's SMEs and micro companies need to play an especially important role, given the background of China's economic growth model transformation and transition from traditional industrialization to a post-industrial economy. But the prosperity of SMEs and micro companies will depend on the change of the government's role from market player to market guardian, and the government playing a more positive function to help them. The path to prosperity for SMEs and micro companies also is the same path that leads government to return market freedom and reconstruct market fairness. It seems that there is a long way to go.

The author is a lecturer at the Management School of Shanghai University and a research fellow at China Europe International Business School's Lujiazui International Finance Research Center. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 11/14/2014 page9)