example, labor productivity for larger firms was between two and four times higher than that of smaller firms—when firm size was measured by either number of workers or gross production value. SMEs require a much higher proportion of working capital as a percentage of sales than larger firms, affecting unit costs and productivity. The figures below show some indicators for Chile. All point to the SMEs’ disadvantages relative to larger firms. However, a closer look at the business environment and the causes or drivers behind those differences is essential in evaluating the case for intervention, at least on efficiency grounds.<sup>18</sup> Firm entry and exit rates and growth trends for SMEs are similar to large firms; and there appear to be no significant differences in growth trends and levels of growth. However, large companies have a lower risk of closing Sector concentration and the availability of machinery suppliers also affect risk of closing. Other factors linked to a higher risk of failure include the firm’s debt and productivity, the availability of financial services, the growth of market, and the debt of the sector.<sup>19</sup> The proportion of firms that grow, shrink or exit the market shows a great deal of dynamism. The sectors with the highest entry rates have the highest exit rates. They also have a large number of SMEs. The entry and exit trends of Chilean SMEs appear to be similar to those in OECD countries. However, exit rates for medium and large firms appear high by OECD standards, and the likelihood of a small firm in Chile growing into a medium firm appears low. The exception is agriculture, which has a low rate of entry and a low exit rate. SMEs in Japan and the United States have similar trends.<sup>20</sup> Company survival rates are positively related to company size (see Table 2.7). A company’s risk of closing declines with its size, the concentration of the sector, and the availability of machinery suppliers. It increases with the firm’s debt, productivity, the availability of financial services, the growth of markets, and the debt of the sector. Not surprisingly, with low entrance barriers and little documentation required for bankruptcy, micro businesses have a high exit rate. It seems that they also mature into small firms at a fairly high rate—but this could be based on the definitional distinctions between micro and small firms.<sup>21</sup>

**Table 2.7   Matrix Measuring Transition over ten-year period**<sup>**22**</sup>

|**En’****_t_ + 10**�<br>**En****_t_**|**Microenterprise**|**Small**|**Medium**|**Large**|**Exiting Firms**|
|---|---|---|---|---|---|
|**Micro**|0.16|0.11|0.03|0.03|0.66|
|**Small**|0.01|0.37|0.10|0.01|0.51|
|**Medium**|0.01|0.09|0.34|0.21|0.35|
|**Large**|0.01|0.01|0.04|0.68|0.26|

Source: Cabrera, de la Cuadra, Galetovic, and Sanhueza, 2002.

# **EFFICIENCY**

Efficiency is the key to growth and jobs creation. The technical efficiency of SMEs is central to the debate about the role of small-scale industries in economic development. SMEs are unlikely to be

> 18 Little, Mazumdar and Page (1987), Dahlman et al (1992), FIEL (1996), Kosacoff (2000), Batra and Tan (2001).

> 19 Controling for the sector activity, concentration has the effect of increasing the risk of closure for a firm. Crespi, G. (2003), Pp. 78-80

> 20 On Japan and the United States, see: Audretsch, D. (1995), Chapter 6. See also Cabrera, A., el. al. (2002), pp 23-24.

> 21 Controling for sector activity, concentration increases the risk of closure for a firm. See: Crespi, G. (2003), pp. 78-80.

> 22 Based on a panel of businesses interviewed by INE between 1986 and 1997. Note: The transition matrix has been constructed in the following way. In year t, all existing plants were classified according to criteria provided in table 5 (of Cabrera, de la Cuadra, Galetovic, and Sanhueza, 2002). Ten years later, the size of the plant is measured again. For example, the matrix shows that, on average, 1% of the small businesses transformed into microbusinesses, 37% remained in the small category, 10% became medium sized firms, 1% became large firms, and 51% had ceased operations. The database starts with information from 1986 and 1987, to permit a ten-year analysis.

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