2.8. Is it any correlation
between Small and medium enterprises, business environment and
Growth?
Efforts targeted at the SME sector are often based on the
premises that SMEs are the engine of growth, but market imperfections and
institutional weaknesses impede their growth. Skeptics question the efficacy of
this policy and point to empirical evidence either in favor of large firms or
of a size-blind policy approach. While many country-level and microeconomic
studies have assessed the importance of SMEs in the economic development and
industrialization process (Snodgrass and Biggs, 1996), Beck, Demirguc-Kunt and
Levine (2005a) provide the first cross-country evidence on the links between
SMEs, economic growth, and poverty alleviation, using a new database compiled
by Ayyagari, Beck and Demirguc-Kunt (2003).
Cross-country regressions of GDP per capita growth on SMEs
share in manufacturing employment show a strong positive relationship over the
1990s, even after controlling for an array of other country characteristics
that can account for differences in growth across countries.
Instrumental variable regressions that explicitly control for
reverse causation and simultaneity bias, however, erode the significance of the
relationship between SMEs and economic growth.
The regressions do not necessarily lead to the conclusion that
SMEs do not foster economic growth. Rather, they fail to reject confidently the
hypothesis that SMEs do not exert a causal impact on GDP per capita growth.
This finding is consistent with the view that a large SME sector is a
characteristic of fast-growing economies, but not a cause of their rapid
growth. Beck, Demirguc-Kunt and Levine (2005a) also do not find any evidence
for any association of a large SME sector with faster income growth of the
lowest income quintile and faster rates of poverty reduction.
While to our best knowledge there is no robust cross-country
evidence on the relationship between the business environment and economic
growth, industry-level, firm level and survey evidence consistently show a
positive association of a competitive business environment with entry,
entrepreneurship and investment. Klapper, Leaven and Rajan (2006) show that one
channel through which the business environment affects economic development is
the entry of new firms.
By using firm-level survey data for 52 countries,
Demirguc-Kunt, Love and Maksimovic (2012) show that one of the reasons for this
variation in the likelihood of incorporating is the fact that incorporated
firms face lower obstacles to their growth in countries with better developed
financial sectors and efficient legal systems, strong shareholder and creditor
rights, low regulatory burdens and corporate taxes and efficient bankruptcy
processes.
Corporations report fewer financing, legal and regulatory
obstacles than unincorporated firms and this advantage is greater in countries
with more developed institutions and favorable business environments. Further,
they find some evidence of higher growth of incorporated businesses in
countries with good financial and legal institutions.
Using survey data from interviews with entrepreneurs and
non-entrepreneurs in seven cities across Russia, Djankov et al. (2004) provide
further evidence for the importance of the business environment for the
decision of becoming an entrepreneur. They find that in addition to many
personal characteristics the perception of corruption and government officials'
attitude towards entrepreneurship affects the decision to become an
entrepreneur.
Similarly, Johnson et al. (2002) find that entrepreneurs in
transition economies are more likely to reinvest their profits if they feel
more secure about property right protection in their country, while Cull and Xu
(2005) find that Chinese entrepreneurs are more likely to reinvest their
profits if they are more confident in the system of property rights protection
and have easier access to credit, with this effect being stronger for small
firms.
Are different dimensions of the business environment equally
important? Using firm level survey data on the business environment across 80
countries, Ayyagari, Demirguc-Kunt and Maksimovic (2005) investigate the impact
of access to finance, property right protection, provision of infrastructure,
inefficient regulation and taxation, and broader governance features such as
corruption, macroeconomic and political stability on firm growth.
They show that finance, crime and political instability are
the only obstacles that have a direct impact on firm growth and finance is the
most robust one among those. Together, these results suggest that it is
important to have a competitive business environment that allows for the entry
of new and innovative entrepreneurs resulting in the Schumpeterian process of
«creative destruction» rather than simply having a large SME sector,
which might be characterized by a large number of small enterprises that are
neither able to grow nor to exit.
Indeed, a large, but stagnant SME sector may be a by-product
of a poor business environment itself. Furthermore, the existing evidence
suggests that access to finance plays a very important role in the overall
business environment, potentially constraining both firm entry and growth
(Thorsten Beck and Asli Demirguc-Kunt , February 2006)
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