Small and Medium Enterprises and Economic Development

1. Small and Medium Enterprises and Economic Development Asli Demirguc-KuntDecember 4, 2002 New Technologies for Small- and Medium-Size Enterprise FinanceWashington, DC THE WORLD BANK

2. 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 THE WORLD BANK

3. 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 THE WORLD BANK

4. 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) THE WORLD BANK

5. SMEs share in employment and GDP Share (percent) 60 40 Employment GDP 20 0 Low income Middle income High income THE WORLD BANK

6. Informal sector’s share in employment and GDP Share (percent) 60 GDP Employ-ment 40 20 0 Low income Middle income High income THE WORLD BANK

7. Firm size and share in GDP GDP share (percent) 100 Residual 80 60 Informal 40 20 SME 0 Low income Middle income High income THE WORLD BANK

8. SMEs and policy Black market premium Govexpend Financial development Education Inflation Trade a a a b b SME250 0.37 -0.50 0.07 -0.30 -0.35 0.51 a a b a SMEOFF 0.34 -0.45 0.05 -0.07 -0.24 0.51 a a a INFORMAL_GDP -0.67 0.17 -0.53 -0.07 0.09 -0.42 THE WORLD BANK

9. SMEs, regulations and institutions Entry regulations Quality of institutions NPROC DURATION COST PRIGHTS REGN KK a a c a a SME250 -0.27 -0.24 -0.39 0.59 0.54 0.64 a a b c a a SMEOFF -0.28 -0.22 -0.37 0.58 0.45 0.56 a a b b a a INFORMAL_GDP 0.34 0.28 0.38 -0.52 -0.59 -0.74 THE WORLD BANK

10. SMEs and growth obstacles Anti-competitive policies Taxes and regulation Political instability Infrastructure Organized crime Inflation Corruption Exchange rate Financing Street crime Judiciary a c a b SME250 -0.47 -0.34 -0.14 -0.40 -0.18 -0.14 -0.22 0.02 -0.29 0.04 -0.03 b a SMEOFF -0.41 -0.30 -0.13 -0.34 -0.17 -0.08 -0.12 0.07 -0.22 -0.01 -0.03 a a a a a a a a b a 0.38 0.69 0.57 0.46 0.54 0.73 0.82 0.07 0.75 0.44 0.76 INFORMAL_GDP THE WORLD BANK

11. SMEs and historical factors Ethnic fractionalization Legal origin Religion Settler mortality French Germany Catholic Muslim Socialist Other U.K. Protestant b b a a a b a SME250 -0.67 -0.69 0.37 -0.31 0.03 -0.25 -0.19 0.31 0.20 -0.36 b a a c b b a c SMEOFF -0.50 -0.32 0.22 -0.23 0.15 -0.21 0.01 0.21 0.27 -0.45 a c a a a 0.85 0.50 0.07 0.37 -0.36 0.02 -0.02 0.24 -0.21 0.05 INFORMAL_GDP THE WORLD BANK

12. SMEs, growth, development and poverty GDP CAP POOR INCOME GDP GROWTH a b a SME250 0.73 0.43 0.37 a a a SMEOFF 0.65 0.44 0.37 a a a INFORMAL_GDP -0.41 -0.66 -0.65 THE WORLD BANK

13. 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 THE WORLD BANK

14. …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…) THE WORLD BANK