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Why SMEs?

Many researchers and policy makers believe small and medium enterprises (SMEs) serve as engines for innovation, economic growth, employment and social mobility, due to their flexibility in responding to new opportunities and their potential for rapid growth. While small businesses make up a particularly large part of developing country economies, data suggest that very few grow into larger businesses. Cross-country research shows that small firms face many obstacles to growth, starting with resource constraints, problems with accessing labor and product markets, and regulatory burdens. What can be done to unleash their growth and market potential?

Answering such basic questions about the economic role played by SMEs and entrepreneurs is crucial to overall development policy. Unfortunately, high quality research on SME growth and entrepreneurship is very limited, especially in emerging markets. The true transformational potential of SMEs on job creation and economic growth remains as yet unproven. What are the most important barriers to small business growth and how can they effectively be removed? How does removing barriers to SME growth translate into development goals such as job creation, wealth accumulation, and ultimately economic growth? Or, are there internal constraints that prevent SMEs from achieving such transformational impact even when external bottlenecks are removed?

The SME Initiative at Innovations for Poverty Action (IPA) will create a coordinated research effort to answer these questions and to begin to identify and scale-up solutions that alleviate barriers to SME growth.  In particular, a need exists for closer coordination and better feedback between the worlds of action and research. Greater coordination between research and practice will help to shape a more relevant and effective research agenda and will deepen our understanding of best practices for SMEs.  We intend for the SME Initiative to bridge this gap.