Small and Medium Enterprises, Growth, and Poverty

Book excerpt: Beck, Demirgüç-Kunt, and Levine explore the relationship between the relative size of the small and medium enterprise (SME) sector, economic growth, and poverty using a new database on the share of SME labor in the total manufacturing labor force. Using a sample of 76 countries, they find a strong association between the importance of SMEs and GDP per capita growth. This relationship, however, is not robust to controlling for simultaneity bias. So, while a large SME sector is characteristic of successful economies, the data fail to support the hypothesis that SMEs exert a causal impact on growth. Furthermore, the authors find no evidence that SMEs reduce poverty. Finally, they find qualified evidence that the overall business environment facing both large and small firms--as measured by the ease of firm entry and exit, sound property rights, and contract enforcement--influences economic growth. This paper--a product of Finance, Development Research Group--is part of a larger effort in the group to understand the role of SMEs.