Businesses are also more likely to incorporate in countries with better-developed financial sectors and efficient legal systems. Similarly, individuals are more likely to become entrepreneurs and they are more likely to reinvest their profits if the institutional environment is favorable.
Innovative lending technologies can help in the short term
Although developing institutions and building a more enabling business environment are key to improving firm entry and performance, and particularly that of smaller firms, institution building is a long term process, fraught with many challenges.
In the interim, innovative lending technologies hold promise. These can provide market-friendly ways of relaxing the constraints of the SMEs. Some technologies, such as factoring are particularly promising in the interim, since they rely on institutions to a lesser extent. However, others such as credit-scoring and leasing can also be useful for relaxing the financing constraints of SMEs and their use would improve with development of institutions over time.
“Foreign institutions have an important role to play in facilitating the adoption of these technologies, whereas public banks have been less useful in the past,” says Demirgüç-Kunt.
Thorsten Beck is a Senior Financial Economist in the Finance Team of the Development Research Group of the World Bank. He has published articles about the impact of financial development and structure on economic growth, the determinants of financial development, and the link between international trade and financial development. His recent research has focused on the effects of bank concentration and competitiveness, access to financial services, and the impediments to growth that SMEs face. His country experience, both in operational and research work, includes Bangladesh, Bolivia, Brazil, Cameroon, Guinea, Kenya, Madagascar, Mozambique, Russia, Rwanda and Uganda. He holds a Ph.D. in economics from the University of Virginia and a M.A. degree from the University of Tubingen in Germany. He also studied at the University of Kansas and the Universidad de Costa Rica.
Asli Demirgüç-Kunt holds the joint appointment of Senior Research Manager in Finance, in the World Bank's Development Economics Research Group, and Senior Adviser, Operations and Policy Department in the Bank's Financial Sector Vice Presidency. After joining the Bank in 1989 as a Young Economist, she has been in different parts of the Bank, working on external finance and domestic financial sector issues. Her research interests include how financial development contributes to economic growth and poverty reduction; and how best to improve the stability, efficiency and reach of the financial systems around the world. She has published widely in academic journals. Prior to coming to the Bank, she was an Economist at the Federal Reserve Bank of Cleveland. She holds a Ph.D. and M.A. in economics from the Ohio State University.
Ayyagari, Meghana, Beck, Thorsten, and Demirgüç-Kunt, Asli. 2006. Small and Medium Enterprises Across the Globe, Small Business Economics, forthcoming.
Beck, Thorsten, Demirgüç-Kunt, Asli, 2006. Small and Medium-Size Enterprises:
Access to Finance as a Growth Constraint, Journal of Banking and Finance, forthcoming.
Beck, Thorsten, Demirgüç-Kunt, Asli, Laeven, Luc and Maksimovic, Vojislav. 2006. The Determinants of Financing Obstacles, Journal of International Money and Finance, forthcoming.
Beck, Thorsten, Demirgüç-Kunt, Asli and Maksimovic, Vojislav. 2006. Financing Patterns Around the World: Are Small Firms Different?, World Bank Mimeo.
Beck, Thorsten, Demirgüç-Kunt, Asli and Levine, Ross. 2005. SMEs, Growth, and Poverty: Cross-Country Evidence, Journal of Economic Growth 10,197-227.
Beck, Thorsten, Demirgüç-Kunt, Asli and Maksimovic, Vojislav. 2005. Financial and Legal Constraints to Firm Growth: Does Firm Size Matter? Journal of Finance 60, 137- 177.
Beck, Thorsten, Demirgüç-Kunt, Asli and Maksimovic, Vojislav. 2005. Financial and Legal Institutions and Firm Size, Journal of Banking and Finance, forthcoming.
Beck, Thorsten, Demirgüç-Kunt, Asli, Laeven, Luc and Levine, Ross. 2006. Finance, Firm Size and Growth, World Bank mimeo.
Berger, Allen and Udell, Greg. 2006. A More Complete Conceptual Framework for SME Financing, Journal of Banking and Finance, forthcoming.
Biggs, Tyler and Sha, Manju Kedia. 2006. African SMEs, Networks, and Manufacturing Performance, Journal of Banking and Finance, forthcoming.
Cull, Robert, Lance, Davis, Lamoreaux, Naomi, and Rosenthal, Jean-Laurent. 2006. Historical Financing of SMEs, Journal of Banking and Finance, forthcoming.
Demirgüç-Kunt, Asli, Love, Inessa and Maksimovic, Vojislav. 2006. Business Environment and the Incorporation Decision, Journal of Banking and Finance, forthcoming.
Djankov, Simeon, Miguel, Edward, Qian, Yingyi, Roland, Gerard and Zhuravskaya, Ekaterina. 2004. Who are Russia’s Entrepreneurs?, World Bank mimeo.
Klapper, Leora. 2006. The Role of Reverse Factoring in Supplier Financing of Small and Medium Sized Enterprises, Journal of Banking and Finance, forthcoming.
Klapper, Leora, Laeven, Leora and Rajan, Raghuram, 2006, Barriers to Entrepreneurship, Journal of Financial Economics, forthcoming.