Where is SME density the highest?
Answer: Cyprus, Czech Republic, El Salvador, Greece, Hungary, Iceland, Italy, Sweden and Britain. They all have over 70 small and medium-sized enterprises (SMEs) per 1,000 people. Behind the bald statistics lie millions of stories of lives changed and jobs created. Last month I was in Bosnia and met a woman who had started by stitching clothes for her neighbours and now employs 4 people in a thriving retail and tailoring enterprise. The light was in her eyes as she described her plans and how her children would one day take over the business.
There is a debate over whether it really matters how many small firms exist in a country. What may matter more is whether successful firms are able to grow, and whether new firms can enter markets easily. (See this paper by my colleagues Thorsten Beck and Asli Demirguc-Kunt on the link between SMEs, growth and poverty.) In any case, we would all benefit from better information and more standardized definitions to be able to compare firm numbers and sizes between countries - and relate them to their respective business environments. The World Bank maintains a database on micro, small and medium enterprise activity in more than 100 countries. There are some important caveats regarding methodology, not least because the definition of micro, small and medium varies considerably across data sources.
Caveats notwithstanding, one pattern does seem to emerge from the figures. Countries with better business environments have more SMEs than those which don't. This suggests that a good way for governments to help develop small firms is to improve the business environment - including reducing the time/costs for new firms to enter the market, improving access to information about credit, etc. The data gathering exercise is a start, but if you have additional suggestions I would love to hear from you.
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One thing that I would like to see is the "churn" rate for new businesses. We always hear about the failure rate, but in many countries businesses within certain industries are granted limited time tax incentives. In many developing countries, these companies will re-constitute themselves every few years for as long as they can keep getting the extra taxpayer benefits, but not grow as fast as they would otherwise...
Posted by: Dan Kahn | Aug 9, 2006 1:01:37 PM
Klapper (2006) shows that the business entry rates are consistently about 7-8% and exit rates about 4-5% across regions. The only exception is Asia where the 'churn' rate is higher (entry rate is 9.2% and exit rate is 6.9%), which might be associated with the tax benefits granted, as you rightly suggested. However, it is important to note that the data on business exit is extremely elusive by nature.
You might also be interested in an ongoing joint IFC-IMF project which is working to track down the enterprises through their tax payments which would allow us to capture the degree of informality both in business entry and exit (Contact: Jackie Coolidge, FIAS).
Posted by: Mallika Shakya | Aug 13, 2006 7:23:01 PM