to SME access and usage of finance as per the latest WBES available in a country. Our final sample is a cross-section of 153 countries around the world, including both advanced economies and emerging markets and developing countries, spanning 2006-2020.

FCS countries are defined as those countries with a Fund for Peace’s Fragile States Index (FSI) above the cutoff point of 90, as in Assaf et al (2021). The FSI is a composite indicator based on 12 sub-indicators capturing a country’s political and economic strength, internal cohesion, and social stability. Scoring is done with a 10-point scale, with 1 for least fragile and 10 for most fragile. These are then added up to give a total score for the country, which serves to determine country rankings.<sup>2</sup> This approach gives 31 countries classified as FCS (see Table 1 in the Annexes). Our classification of FCS countries is robust to alternative definitions such as the one provided by the World Bank Group.<sup>3</sup> According to our data, SMEs represent an important share of firms and employment in FCS countries. In line with world averages, SMEs in FCS countries account for 85 percent of all registered companies, employing 60 percent of the total labor force, more than in non-FCS countries (Figure 1.a). However, a significant share of SMEs in FCS countries is likely to operate in the informal sector. Based on <u>Elgin et al (2021), informal output in our sample of FCS</u> countries accounts for more than 40 percent of official economic activity on average. For formal firms, access to finance is consistently ranked among the biggest business environment constraints for SMEs in FCS countries, especially for small-sized businesses (Figure 1.b).

SMEs in FCS countries lag their peers in non-FCS countries in terms of both access and usage of financial services. While SMEs in FCS countries perform relatively well in terms of access to accounts (78 percent of SMEs in FCS countries have a checking or savings account compared to 91 percent in non-FCS countries), they score particularly poorly when it comes to access to lending services, with only 19 percent having a bank loan/line of credit as opposed to 38 percent in non-FCS countries (Figure 1.c).

Usage of financial services shows similar trends, with the share of SMEs in FCS countries using banks to finance working capital and investment, and the proportion of working capital and investment financed by banks, at about half the levels observed for SMEs in non-FCS countries (Figure 1.c). No significant differences are observed between SMEs in FCS countries and those in non-FCS countries with regard to other variables of interest such as the value of collateral needed for a loan, the share of firms whose recent loan application was rejected, and the proportion of investment financed internally (Figure 1.d).

> 2 The FSI is publicly available at https://fragilestatesindex.org.

> 3 The World Bank Group, similar to other international organizations that classify FCS countries, defines FCS countries based on the nature of issues they face. In particular, the classification uses the following categories: (i) countries with high levels of institutional and social fragility, identified based on indicators that measure the quality of policy and institutions, and manifestations of fragility; and (ii) countries affected by violent conflict, identified based on a threshold number of conflict-related deaths relative to the population. See <u>https://www.worldbank.org/en/topic/fragilityconflictviolence/brief/harmonized-list-of-fragile-situations.</u>

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