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RESEARCH PRODUCT

Obstacles Facing Smaller Business in Developing Countries

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Small and medium enterprises (SMEs) play a central role in economic growth and poverty alleviation in developing countries and transition economies. Yet small and medium-scale enterprise may suffer from a number of disadvantages compared with larger firms. Market imperfections, notably those caused by underdeveloped financial and legal systems, typically constrain small firms and severely limit their ability to grow. Economies of scale and entry cost favor large firms, and large entrepreneurs usually wield more political influence. Thus government rules and regulations may also be biased in favor of large firms. To the extent that market and government failures are more prevalent in developing countries, these may constitute sizable obstacles to the growth of enterprises-and thus impede upward mobility and poverty reduction. It is therefore particularly important that governments focus their attention on removing the kinds of obstacles identified in this chapter, in their efforts to encourage the creation and growth of small enterprises.