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Small and Medium Enterprises and
Economic Development
Asli Demirguc-Kunt
December 4, 2002
New Technologies for Small- and
Medium-Size Enterprise Finance
Washington, DC
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SMEs are high on the agenda of
policymakers
– but there is little systematic cross-country
analysis to support our policies.
– one of the reasons for this is the lack of
consistent data on SMEs across countries
– New research in DECRG (Beck and
Demirguc-Kunt) has started to address these
issues
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SMEs are expected to boost efficiency and
growth and lead to economic development
because…
– Engine of job creation
– Seedbed for innovation and entrepreneurship
– New entry, competition and flexibility
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Data
• A uniform definition of SMEs across
countries (250 employees/official)
• Include the size of the informal sector
• Cover a large number of countries (54/76)
Ayyagari, Beck, Demirguc-Kunt (2002)
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SMEs share in employment and GDP
Share (percent)
60
40
20
0
Employment
GDP
Low income
Middle income
High income
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Informal sector’s share in employment
and GDP
Share (percent)
60
40
Employment
GDP
20
0
Low income
Middle income
High income
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Firm size and share in GDP
GDP share (percent)
100
80
Residual
60
40
Informal
20
SME
0
Low income
Middle income
High income
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SMEs and policy
Education
SME250
0.37
a
a
SMEOFF
0.34
INFORMAL_GDP
-0.67
a
Inflation
-0.50
-0.45
0.17
a
a
Gov
expend
Trade
Black
Financial
market
premium development
a
0.07
-0.30 b
-0.35 b
0.51
0.05
-0.07
-0.24
b
0.51
a
-0.07
0.09
-0.42
a
-0.53
a
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SMEs, regulations and institutions
Entry regulations
NPROC DURATION
SME250
-0.27
SMEOFF
-0.28
INFORMAL_GDP
0.34
-0.24
b
b
-0.22
0.28
c
c
b
Quality of institutions
COST
a
-0.39
-0.37
0.38
a
a
PRIGHTS REGN
0.59
0.58
a
a
a
-0.52
KK
0.54
a
0.64
0.45
a
0.56
-0.59
a
-0.74
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a
a
a
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INFORMAL
_GDP
a
b
0.38
a
0.69
a
0.57
a
0.46
-0.14
-0.22
0.02 -0.29
0.04
-0.03
-0.17
-0.08
-0.12
0.07 -0.22 -0.01
-0.03
a
0.54
a
0.73
a
0.82
0.07
Corruption
-0.18
Taxes and
regulation
Inflation
b
-0.13 -0.34
Anti-competitive
policies
-0.41 -0.30
Judiciary
SMEOFF
a
-0.14 -0.40
Organized
crime
-0.47 -0.34
Street
crime
b
SME250
Exchange
rate
a
Political
instability
Financing
Infrastructure
SMEs and growth obstacles
c
a
0.75
a
0.44
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a
0.76
10
Ethnic
fractionalization
Settler
mortality
SMEs and historical factors
Catholic Muslim Protestant Other
SME250
-0.67 a -0.69
a
SMEOFF
-0.50 a -0.32
a
INFORMAL_GDP
0.85 a
0.50
Legal origin
Religion
a
0.37
0.22
0.07
a
c
b
-0.31
b
-0.23
a
0.37
b
U.K.
French Germany Socialist
-0.19
0.31
b
0.03
-0.25
0.15
-0.21
0.01
0.21 c
0.02
-0.02
0.24
-0.36
b
a
c
0.20
0.27
b
-0.21
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-0.36
-0.45
a
a
0.05
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SMEs, growth, development and poverty
GDP GROWTH
SME250
0.73
SMEOFF
0.65
INFORMAL_GDP
a
a
-0.41
a
GDP CAP
0.43
0.44
a
a
-0.66
a
POOR INCOME
0.37
0.37
b
a
-0.65
a
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Main conclusions…
• As income increases firms migrate from the
informal to formal sector and SMEs share
in employment and income increases
• SMEs play an important role in promoting
growth and development, including for the
poor
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…Main conclusions
• But SMEs are more likely to be able to
play this role in countries with
– better financial development and low
financing constraints
– good policies (low inflation, distortions,
entry regulations, high level of education)
– good institutions (control of corruption,
rule of law, property rights…)
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