SMEs, growth and poverty - cross country evidence

Thorsten Beck, Asli Demirguc-Kunt, and Ross Levine
November 2003

Abstract: This paper explores the relationship between the relative size of the Small and Medium Enterprise (SME) sector, economic growth, and poverty using a new database on the
share of SME labor in the total manufacturing labor force. Using a sample of 76 countries, we find a strong association between the importance of SMEs and GDP per capita growth. This relationship, however, is not robust to controlling for simultaneity bias. Thus, while a large SME sector is a characteristic of successful economies, the data fail to support the hypothesis that SMEs exert a causal impact on growth. Furthermore, we find no evidence that SMEs reduce poverty. Finally, we find qualified evidence that the overall business environment facing both large and small firms– as measured by the ease of firm entry and exit, sound property rights, and contract enforcement – influences economic growth.