How can small and medium-sized enterprises (SMEs) become more efficient? Can the success of northern SMEs be replicated in developing countries? How has trade liberalisation impacted SMEs?

A wide-ranging review from the University of Manchester shows that we cannot answer these questions without a better understanding of the relation between finance and SME development.

SME research has largely focused on US and UK firms and has been preoccupied with investigating the extent to which small firms form the foundation for larger firm growth. Lack of data on the management and characteristics of smaller firms in developing countries has hampered research. Baseline information has been more qualitative than quantitative, capturing only a point in time and not looking at firms which have failed.

The report examines the mixed effects of agricultural price and import liberalisation, currency devaluation, and industrial, public sector and financial sector reforms. Lack of management and technological skills combine with insufficient finance to constrain the development of southern SMEs.

Generally SMEs lack capacity to meet standards to enter niche markets. Reduced real wages and increased interest rates have caused a shift from technological-intensive production towards more labour-intensive operations. Locally produced, labour-intensive products have trouble competing with mass-produced, low-cost imports especially when there is dumping of manufactured goods and importation of second-hand goods.

Further findings include:

• Insufficient attention has been paid to the impact of devaluation in increasing the cost of imported agricultural inputs.
• Export promotion policies have had a limited impact on SMEs as few have the capacity to produce sufficient quantity or quality for export and lack contacts.
• High and complicated transaction costs for registration and licensing constrain SMEs.
• Public sector retrenchment, introduced under structural adjustment, has pushed ex-civil servants into (often unsuccessful) small-scale enterprises and reduced urban purchasing power.
• Financial sector reforms have not generally given SMEs greater access to credit for working capital and equipment. High interest rates and transaction costs means the formal banking system remains out of reach for most SMEs.

The report urges combined theoretical and empirical research to provide policy makers with more information about:

• The forms of finance used by SMEs and made available by lending institutions and investors.
• The relationship between different financial structures of SMEs and a range of performance measures.
• The links between different forms of finance and the impact of SME development on poverty alleviation.
• The supply side of finance.

Source(s):
'Finance and Small and Medium Enterprieses in Developing Countries', Journal of Developmental Entrepreneurship, Volume 6 #1 by Paul Cook (2001)
‘Finance and small and medium-sized enterprise development’, by Paul Cook and Frederick Nixson, Finance and Development Research Programme Working Paper #14, Institute for Development Policy and Management, University of Manchester, April Full document.

Funded by: Department for International Development

id21 Research Highlight: 5 June 2001

Further Information:
Paul Cook
Institute for Development Policy and Management
University of Manchester
Crawford House
Precinct Centre
Oxford Road
Manchester M13 9GH
UK

Tel: +44 (0) 161 275 2823
Fax: +44 (0) 161 273 8829
Contact the contributor: paul.cook@man.ac.uk

Institute for Development Policy and Management (IDPM), UK

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'Rethinking small enterprise development: between poverty and growth'

'Small and Medium Enterprises and Development'

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