Small and medium-size enterprises in economic development : possiblities for research and policy

How (if at all) can the World Bank promote economic development by mobilizing resources organized as small and medium-size enterprises in developing countries? What lines of research about small and medium-size enterprises would help support the Bank's policymaking in this area? The World Bank's most important long-term advantage in promoting development, says Winter, may lie in opportunities to address related obstacles simultaneously. It could mount concurrent efforts to address the problems of small and medium-size enterprises in a particular sector, region, or economy, for example. It could address the conditions of founding new firms, providing finance or technical assistance, developing mutual support institutions, resolving disputes, and perhaps reducing counterproductive government interventions. Were the Bank to follow such a coordinated approach, programs could be designed to generate data to illuminate the impacts and interactions of various elements of policy. These data could be exploited, then, in research designs, or even the design of management information systems, shaped by program evaluation. Winter proposes four general issues for research (plus a series of topics for each issue): Can Bank initiatives involving small and medium-size enterprises in developing countries facilitate the entry of these enterprises into similar learning relationships with other firms - foreign firms, larger firms in their own countries, or each other? (Topics/actionable items: Identify large firms noted for their willingness to help improve their suppliers' operations; survey these firms' practices and the criteria they use to identify possible suppliers not currently in their system; consider how these and other sources define prevailing standards for small and medium-size enterprises.) The economic significance of high turbulence (entry and exit rates) in small-firm populations is poorly understood. The fact of high turbulence is well-documented in industrial countries; it is not for developing countries, but available data suggest a broadly similar pattern. Are high failure rates for small businesses symptomatic of an important shortcoming in the system of economic organization itself? Or should the unit of analysis be the enterprise, the entrepreneur, or the entrepreneur's family? Is the apparent trend favoring a larger economic role for smaller production units autonomous rather than induced by other changes? Does it depend on general operating factors such as the declining costs of communication and computation? The rate of learning by a small firm may depend on the nature of its transacting partner. Certain multinational enterprises make good teachers, for example, but certain local labor markets or markets for consumer goods and services may not be well-positioned for relevant learning. They may learn well how to adjust to local circumstances but not to the international diffusion of technology and ways of organizing (the main source of hope for developing countries). Perhaps Bank policy should be more concerned with transaction patterns. This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to study small and medium-size enterprises and their role in development.