A Market-Oriented Strategy for Small and Medium-Scale Enterprises

The paper examines small-and medium-scale enterprises and how governments and aid agencies can best encourage their development using a market-oriented strategy. On both theoretical and empirical grounds, the paper:

• Investigates the economic rationale for intervention in support of small-and medium-scale enterprises, placing SME development within the broader context of the evolution of industrial structure;
• Identifies policy biases and market distortions that affect SME competitiveness, which should be the focus of SME development strategies;
• Illustrates the application of these principles in three areas: the business environment, financial services, and business development services. It also pays attention to the market-development-versus-market-distortion debate surrounding subsidies;
• Proposes a framework for SME intervention to help the World Bank Group's client countries design SME strategies and evaluate the impact of SME interventions.

The author sees that the justification for SME interventions lies in market and institutional failures that bias the size distribution of firms, rather than on any inherent economic benefits provided by small firms; arguing that the overall business environment is the most important determinant of SME competitiveness and growth, as well as a necessary condition for the success of targeted assistance programs. The paper concludes that:

• Role of the state is mainly to provide an enabling business environment that opens access to markets and reduces policy-induced biases against small firms;
• Governments can accelerate the development of markets for financial and non- financial services suited to SMEs by promoting innovation in products and delivery mechanisms and by building institutional capacity.