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Home > Business Strategy Best Practice > Assessing Opportunities for Growth in Developing Countries of Micro, Small, and Medium-Size Enterprises

Business Strategy Best Practice

Assessing Opportunities for Growth in Developing Countries of Micro, Small, and Medium-Size Enterprises

by Montague Lord

Executive Summary

  • The density of micro, small, and medium-size enterprises (MSMEs) is a good indication of positive or negative changes that are occurring in an economy, as high and upper-middle-income countries have a greater proportion of these types of enterprises than do low-income countries.

  • Value chains are widely considered to be the main engine for MSME growth in developing countries, because they can provide access to markets and technology, encourage business linkages, facilitate the upgrading of skills, and create links with international companies.

  • Value chains should not, however, be viewed as a panacea for MSME development, as linkages to large companies are easily broken during periods of sluggish growth and market contractions, and, more generally, MSMEs are often unable to integrate into large-scale business relationships because they lack international standards, and quality controls.

  • Business development service (BDS) centers have proven successful in upgrading MSMEs, and facilitating their entry into value chains. As such, they should become an integral part of the MSME development process; the challenge is to make BDS centers self-sustainable. A model that combines a cost-sharing facility (CSF) with a credit guarantee facility (CGF) can provide a means of ensuring that sustainability.

 

Introduction

The predominance of micro, small and medium-size enterprises (MSMEs) in the business activities of countries generally reflects the magnitude of growth, employment, competition, and poverty within those countries. The density of MSMEs, measuring their number per 1,000 persons, is greater in high-income countries such as the United States and members of the European Union than in middle- and low-income countries such as Malaysia and Bangladesh (Figure 1). The same relationship exists between microenterprises and income levels: high and upper-middle-income countries have a greater proportion of these types of enterprises than do low-income countries. The density of MSMEs is, therefore, a good indication of positive or negative changes that are occurring in an economy.

Note: MSME density refers to the number of MSMEs per 1,000 persons in a country.

From an economic policy perspective, development of MSMEs can be a means of promoting growth and development in a country, although the causal direction is not always clear: in some cases, the MSME sector can be the driving force behind economic growth and poverty reduction, as it was in some Asian newly industrialized economies (NIEs, or “Tigers”) during the “Asian Miracle” of the 1980s, while in others it follows the growth of export-oriented large enterprises. In nearly all cases, however, large foreign and domestic enterprises have played a key central role in the growth process, with MSMEs linked closely to them as downstream suppliers, and subcontracting between MSMEs providing business linkages that have enhanced sector efficiency, and productivity. In the current global financial crisis, increasing attention is now being paid to the role of value chains in promoting growth, innovation, and cross-border investments as a means of efficiently exploiting existing MSME capacities to renew growth in the emerging economies of Asia, Latin America, and Eastern Europe.

Defining Micro, Small, and Medium-Size Enterprises (MSMEs)

There is no single standard for defining the size of MSMEs. Most countries use the following definitions based on the number of employees:

  • Microenterprises: 1–9 employees

  • Small-size enterprises: 10–49 employees

  • Medium-size enterprises: 50–199 employees

 

Note: The greatest variation in definition occurs in the upper end of medium-size enterprises, and can range from 99 to 499 employees.

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Further reading

Articles:

  • Ayyagari, Meghana, Thorsten Beck, and Asli Demirgüç-Kunt. “Small and medium enterprises across the globe.” World Bank, March 2005.
  • Mugione, Fiorina. “Good practices and policy options in the promotion of TNC-SME business linkages”. Trade and Development Board Commission on Enterprise, Business Facilitation and Development Expert Meeting on Best Practices and Policy Options in the Promotion of SME-TNC Linkages. Geneva, November 6–8, 2006.
  • UNCTAD Secretariat. “Developing business linkages.” Trade and Development Board, Commission on Enterprise, Business Facilitation and Development, Expert Meeting on Best Practices and Policy Options in the Promotion of SME-TNC Business Linkages. Geneva, November 6–8, 2006.

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