International Economic Development and SMEs

by

Michael Witt, Jack Helmuth, Bryan Halpin, Nicholas Vandeberg

• LAST REVIEWED: 01 March 2023
• LAST MODIFIED: 26 April 2018
• DOI: 10.1093/obo/9780199846740-0141

Introduction

The economic development literature, at one time, was heavily concerned with governmental prescriptions and planning to spur development. With the economic liberalization of numerous economies, such as in eastern and central Europe, India and other parts of Asia, there is a global epiphany surrounding the role of small and medium enterprises (SMEs) in development. The advent of knowledge-based economies is also prominent in the development focus of SMEs, as newly emerging business firms control significant resources. Over the past thirty years, the academic literature has responded to the impact that SMEs have in economic development. The articles reviewed include a variety of business and non-business disciplines, such as business strategy, finance, entrepreneurship, innovation, globalization, and economics. The bibliography addresses the contribution of SMEs to economic development and the entrepreneurial activities, strategies, and policies that help promote these firms. This research tool provides those seeking to learn about or to expand this field of study the opportunity to do so in as few steps as possible—and by providing the most meaningful arguments within this subject matter. The support of the University of Michigan-Flint School of Management is gratefully acknowledged.

Institutional Policy

A large percentage of global and national economies are comprised of small and medium enterprises (SMEs). Therefore, the health of the SME market sector translates to the economic and employment health of the host nation and the global economy. Institutional policy is important for developing competitive advantages for SMEs due to the pressures of globalization and SME specific growth constraints (Wright, et al. 2007). The first problem in establishing effective policy is the fundamental misunderstanding of determinants of SME growth and development. A poor understanding of basic principles leads to misguided research. Misguided research leads to bad institutional policy (Gibb 2000). The dangers of bad SME policy extended past being ineffective, they can be harmful as well (Tambunan 2005). One of the key growth constraints for SMEs is access to finance. The effects of policy gaps in assisting SMEs with the acquisition of financial capital has proven to be harmful (Pissarides 1999). Once effective policy is implemented effectiveness must be measured by assessing how SMEs in the market sector are impacted (Honjo and Harada 2006). In some cases groups of SMEs can be neglected by policy leading to loss of growth potential. This is the case in rural areas in Europe (North and Smallbone 2006).

• Gibb, Allan A. “SME Policy, Academic Research and the Growth of Ignorance, Mythical Concepts, Myths, Assumptions, Rituals and Confusions.” International Small Business Journal 18.3 (2000): 13–35.

  DOI: 10.1177/0266242600183001

  This charming piece skewers many misconceptions related to the growth and development of SMEs. Since these errors can find expression in government action, it is important to understand baseline assumptions and terminology, so as to avoid ineffective policies being adopted.

• Honjo, Yuji, and Nobuyuki Harada. “SME Policy, Financial Structure and Firm Growth: Evidence from Japan.” Small Business Economics 27.4–5 (2006): 289–300.

  DOI: 10.1007/s11187-005-6703-0

  This study employed firm surveys in SMEs in the manufacturing sector to attempt to evaluate the effectiveness of the Creative Business Promotion Law (CBPL), a Japanese effort to stimulate growth. Honjo and Harada found that it was possible to stimulate growth through financial structure and the Creative Business Promotion Law (CBPL), with a more meaningful effect seen in younger SMEs.

• North, David, and David Smallbone. “Developing Entrepreneurship and Enterprise in Europe’s Peripheral Rural Areas: Some Issues Facing Policy-Makers.” European Planning Studies 14.1 (2006): 41–60.

  DOI: 10.1080/09654310500339125

  Rural areas in Europe still have little support for entrepreneurs of SMEs. The current state of rural policy support as it relates to SMEs is addressed, as well as the policy needs and potential roles of such policies in stimulating growth and entrepreneurship. In addition to more policy support, well-determined and defined goals for SMEs in rural areas are thought to be critical.

• Organization for Economic Co-operation and Development. SMEs, Entrepreneurship and Innovation. Paris: OECD, 2010.

  This book presents data and policy information from forty economies that are active in innovation policy: specifically, how do these countries nurture and encourage innovation performance in small and medium enterprises (SMEs) by their favorable government policy environments. Three critical areas for growth were focused on: knowledge flows, skills and education, social entrepreneurship and social innovation.

• Organization for Economic Co-operation and Development. Financing SMEs and Entrepreneurs 2017: An OECD Scoreboard. Paris: OECD, 2017.

  A review of the finance trends in thirty-nine countries supporting SMEs and entrepreneurs and country “OECD Scoreboard” from 2007 to 2015. Almost ten years after the 2007–2008 financial crisis, the financing situation improves yet remains vulnerable to downside risks in the economy. Weak demand for credit and a lack of investment opportunities are factors in holding back a stronger recovery.

• Pissarides, Francesca. “Is Lack of Funds the Main Obstacle to Growth? EBRD’s Experience with Small- and Medium-Sized Businesses in Central and Eastern Europe.” Journal of Business Venturing 14.5 (1999): 5319–5539.

  This article discusses the financial and credit barriers for SMEs that can develop due to inadequate financial institution policy. The European Bank for Reconstruction and Development (EBRD) failed to provide SMEs in central and eastern Europe with proper finance and credit support. The EBRD evaluates strategies to correct these failures by focusing on “local financial intermediaries, a commercial approach to provision of finance, and a focus on development of local financial systems. . . .

• Tambunan, Tulus. “Promoting Small and Medium Enterprises with a Clustering Approach: A Policy Experience from Indonesia.” Journal of Small Business Management 43.2 (2005): 138–154.

  DOI: 10.1111/j.1540-627X.2005.00130.x

  Indonesian SME policy focuses primarily on clustering, an approach in this case that appears to be largely unsuccessful. The main factor appears to be an inability of Indonesian SMEs to reach domestic and foreign markets, potentially due, in this case study, to government policies which either missed targeted problems or created new ones. This case suggests that SMEs should be able to achieve growth with established connections with markets.

• Wright, Mike, Paul Westhead, and. Deniz Ucbasaran. “Internationalization of Small and Medium Sized Enterprises (SMEs) and International Entrepreneurship: A Critique and Policy Implications.” Regional Studies 41.7 (2007): 1013–1030.

  DOI: 10.1080/00343400601120288

  The authors discuss SME policy that creates an environment for growth through internationalization. They introduce international entrepreneurship as a “counterpoint to the established international perspectives.” This perspective is represented as integral to establishing policy that is more flexible and conducive to the diverse and complicated needs of SMEs as they enter the international marketplace.