What is the impact of Small and Medium Enterprises on economic development and poverty alleviation? While SMEs have been at the center of the policy debate for quite some time, little cross-country analytical work has been undertaken in this area, mostly due to the dearth of consistent cross-country data. New country-level and firm-level databases allow a more rigourous analysis of SME-related questions.
This research has shown:
1. While a larger share of SMEs in manufacturing is correlated with faster economic growth, there is no evidence of causality from SMEs to economic growth or poverty reduction.
2. Smaller firms are more constrained by financial and institutional underdevelopment, while the development of financial and legal institutions helps level the playing field between small and large firms.
The World Bank Group has a substantial portfolio of small and medium-size enterprise (SME) related activities. More than $10 billion in SME support programs were approved in the past years, $1.3 billion alone in 2003. Although developing country policymakers are very interested in assisting the SME sector and the World Bank is often involved in helping design these strategies, there is relatively little systematic research in this area and the rationale for these efforts remains vague.
A recent research project investigated the link between growth, poverty reductions and the SME segment in manufacturing, the determinants of firm size, financing patterns across firms of different sizes, the growth obstacles faced by firms of different sizes and the role of financial development in overcoming these growth constraints. In the context of this project, a unique database on the importance of SMEs in manufacturing across countries was compiled. Finally, innovative techniques to overcome SMEs' financing constraints were explored.
Recently completed Investment Climate Assessments (ICA) for individual developing countries have enabled further work into the issues of growth obstacles and the extent to which they are binding for firms of different sizes. Other work is exploring cross-country determinants of different growth obstacles.
- Aslι Demirgüç-Kunt
L. Colin Xu
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