Small and medium-size enterprises: overcoming growth constraints. Policy Research Working Paper

Abstract: This paper discusses recent research that uses new country-level and firm-level databases to assess the developmental impact of SMEs and to explore their growth obstacles and policies to overcome them. First, cross-country research using a new database on the role of SMEs in manufacturing sheds doubt on a causal link between SMEs and economic development and poverty alleviation. Second, there is evidence of a positive role of a competitive business environment- low entry barriers, effective property rights protection and ready access to finance- on entry, entrepreneurship, productivity and economic development. Third, there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance. Fourth, financial and institutional development helps alleviate SMEs ’ growth constraints and increase their access to external finance, thus leveling the playing field with large enterprises. Finally, the paper discusses the importance of the legal and information environment and of specific financing tools such as leasing and factoring for SME credit availability