The Impact of the Business Environment on the Size of the Micro, Small and Medium Enterprise Sector; Preliminary Findings from a Cross-Country Comparison

According to the study Voices of the Poor from the World Bank, poor people expect to escape poverty through “income from their own business or wages earned in employment”. A streamlined business environment supporting the sustainable development of small and medium enterprises (SMEs) may contribute to improve the living conditions of low income households in terms of employment opportunities. The paper tries to determine if having a larger SME sector is the result of competitive or constraining business environments. Applying an OLS estimation of a multiple linear regression model using cross-country data, the study attempts to assess how much of the cross-country variation in the contribution to employment and the size of the SME sector in the economy can be explained by cross-country variation in business environment regulations. The estimation results show that low entry costs, easy access to finance, and good levels of business sophistication and innovation predict a larger SME sector. There is a weak association with high exit costs as well. A productive and competitive SME sector must be associated with sophisticated and innovative business environments, in that sense the paper tries to contribute a basis for gauging this approach.