Friday, July 01, 2005
An Analysis of the Principles and Practices of SME Policy
By: Paul Holden.
Written under ADB RETA 6075; Contract number COCS/03-472. 2004
Most countries as well as international and bilateral aid agencies have specific policies to assist small and medium sized enterprises (SMEs). They are viewed as creators of jobs, a fount of entrepreneurship, and an essential part of the growth equation. A substantial amount of resources go to promoting and assisting SMEs. Special agencies exist in many countries for the sole purpose of promoting and assisting small businesses. In many countries, they receive special policy treatment, in forms such as tax breaks, preferential financing, assistance schemes, and export promotion support. More recently, business registration and business development services have become common. Many countries are also trying other programs in the areas of technology. But is this attention warranted? Could it be that some governments, through SME assistance, are attempting to compensate for the very imperfections they create? Are aid agencies focusing on SME policies because they are easier to implement than more general systemic reform? And if special assistance is warranted, how should such policies be structured and under what circumstances are SMEs best served by policies directed specifically at them?
The first part of the Handbook, discusses systematically and analytically the answers to these questions. As it is important for those involved in the application of these policies to have some idea of where their efforts might best be focused and where more general policies could be more effective. Examining the problems of small businesses provides insight into larger problems faced by the private sector. In economies where entrepreneurship is rewarded, firms grow from small to medium to large. In economies where the business environment is deficient, small firms tend not to grow and there are very few small formal firms. Such economies are usually characterized by large informal sectors at one end of the firm size spectrum, and a small number of dominant large firms at the other. In many, there is a “missing middle” of small and medium sized enterprises. The aim of this Handbook is to assist SME policy makers develop and implement policies that encourage SMEs as well as improve the business environment more generally.
Written under ADB RETA 6075; Contract number COCS/03-472. 2004
Most countries as well as international and bilateral aid agencies have specific policies to assist small and medium sized enterprises (SMEs). They are viewed as creators of jobs, a fount of entrepreneurship, and an essential part of the growth equation. A substantial amount of resources go to promoting and assisting SMEs. Special agencies exist in many countries for the sole purpose of promoting and assisting small businesses. In many countries, they receive special policy treatment, in forms such as tax breaks, preferential financing, assistance schemes, and export promotion support. More recently, business registration and business development services have become common. Many countries are also trying other programs in the areas of technology. But is this attention warranted? Could it be that some governments, through SME assistance, are attempting to compensate for the very imperfections they create? Are aid agencies focusing on SME policies because they are easier to implement than more general systemic reform? And if special assistance is warranted, how should such policies be structured and under what circumstances are SMEs best served by policies directed specifically at them?
The first part of the Handbook, discusses systematically and analytically the answers to these questions. As it is important for those involved in the application of these policies to have some idea of where their efforts might best be focused and where more general policies could be more effective. Examining the problems of small businesses provides insight into larger problems faced by the private sector. In economies where entrepreneurship is rewarded, firms grow from small to medium to large. In economies where the business environment is deficient, small firms tend not to grow and there are very few small formal firms. Such economies are usually characterized by large informal sectors at one end of the firm size spectrum, and a small number of dominant large firms at the other. In many, there is a “missing middle” of small and medium sized enterprises. The aim of this Handbook is to assist SME policy makers develop and implement policies that encourage SMEs as well as improve the business environment more generally.