IDC (www.idc.com) forecasts total IT spending by small and medium-size businesses (SMBs) to be nearly $602 billion in 2018, an increase of 4.9% over 2017.

With a compound annual growth rate (CAGR) of 4.7% for the 2016-2021 forecast period, spending by businesses with fewer than 1,000 employees on IT hardware, software, and services, including business services, is expected to reach $684 billion on in 2021, notes the research group.

Mid-market firms will account for the largest share of total SMB IT spending even though they are farther along in technology deployment than small businesses. Over two thirds of global SMB IT spending will be driven by firms with 100-999 employees through 2021. Within the mid-market segment, medium-sized businesses (100-499 employees) will spend $229 billion this year, while large businesses (500-999 employees) will spend $182 billion. Both groups will experience similar growth over the forecast period, with CAGRs of 4.8% and 4.6%, respectively. Small businesses (10-99 employees) will see spending growth of 4.7% over the five-year forecast period.

Hardware, software, and IT services will each account for around 30% of total SMB spending in 2018 with business services delivering the remainder. While hardware is currently the largest category of spending, IDC expects it to be overtaken by software in 2019 and IT services in 2021. Software will experience the fastest spending growth over the 2016-2021 forecast with a CAGR of 7.5%, followed by business services with a CAGR of 6.6%.

“SMBs around the world are increasingly interested in investing in resources to improve employee productivity and improve their competitive positions,” said Ray Boggs, vice president, SMB Research at IDC. “While SMBs, especially smaller ones, have immediate tactical needs to sharpen performance, they are also looking to coordinate resources in a meaningful way. For many this will be an important step in their Digital Transformation (DX).”

Devices will be the largest category of technology spending in 2018 with SMBs allocating $115 billion to personal computing devices, peripherals, and mobile phones. Applications will be the second largest spending category at $99 billion, led by investments in enterprise resource management (ERM), content applications, and customer relationship management (CRM).

Content applications and CRM will also see some of the fastest spending growth over the five-year forecast with CAGRs of 10.6% and 10.0%, respectively. Collaborative applications will see the fastest growth at 12.2% CAGR. The next two largest technology categories in 2018 – technology outsourcing and project oriented outsourcing – will support SMB efforts to implement these new investments in pursuit of their DX strategies.

On a geographic basis, the United States will be the largest market with SMB IT spending expected to total $186 billion in 2018. China will be the second largest country with $56 billion in SMB IT spending forecast for this year, followed by Germany ($37 billion), the UK ($36 billion), and Japan ($35 billion). The countries that will see the fastest IT spending growth by SMBs will be Peru (11.7% CAGR), Chile (11.6% CAGR), and Indonesia (11.2%). China and India will also be among the fastest growing countries, each with a five-year CAGR of 7.0%.