WASHINGTON, D.C., May 11, 2000
— Smaller businesses are the foundation of the emerging private sector in developing countries and governments should help them to survive and thrive, according to a discussion paper released by the Economics Department of the International Finance Corporation.
Small enterprises are not the most efficient, productive or best generators of jobs, but they account for a large share of firms and employment, and form the basis for private sector-led growth in developing countries, argues author Kristin Hallberg in the paper, A Market-Oriented Strategy for Small and Medium Scale Enterprises.
IFC has set a high priority on supporting small and medium enterprises (SMEs) through its investments in developing countries, often by investing in the banks that onlend to smaller businesses. Some 40 percent of IFC's new business is in the financial sector and many of those investments ultimately finance SMEs. Against the backdrop of a high World Bank Group priority on support for smaller businesses, this paper considers the importance of SMEs in developing countries and investigates the economic rationale for intervention in support of SMEs.
The paper finds that the lack of access to and high cost of acquiring information, local regulations, taxes and incentives, and the relatively larger risk and investment for training or consultancy may create biases against smaller businesses, resulting from fixed costs, market failures or policy inadequacies.
It argues that governments should avoid introducing further distortions through tools such as subsidies, but they have an important role in improving information flows and rewriting unfavorable statutes. They can also help by addressing negative aspects of the business environment such as barriers to entry and non-competitive behavior, and inadequate laws to protect business and intellectual property, the use of property as collateral, commercial
transactions and the resolution of disputes. Governments can help reduce the risk in lending to small businesses by measures such as refining laws and promoting innovative financial and lending instruments.
Governments can also accelerate the development of markets for financial and non-financial services that are appropriate for smaller enterprises by promoting innovation in products and delivery mechanisms and by building institutional capacity.
Discussion Paper No. 40 is available on the IFC website at
http://www.ifc.org/economics
. To request a copy of this publication, please call (202) 473-4650.
The mission of IFC, part of the World Bank Group, is to promote private sector investment in developing countries, which will reduce poverty and improve people's lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets and provides technical assistance and advice to governments and businesses.
