The Role of Micro, Small and Medium Enterprises in Economic Growth: A Cross-Country Regression Analysis

Date Published: 
Sep 2008
Leegwater, A. & Shaw, A.

How do microenterprises contribute to economic growth in developing countries?

This study explores the role of micro, small and medium enterprises in the growth of per capita income. It examines an expanded database of firms in the formal manufacturing sector with fewer than 10, 20, 100 or 250 employees.The study begins with the hypothesis that countries with larger microenterprise (ME) or small and medium enterprise (SME) sectors have more rapid economic growth in per capita income. Study findings indicate that:

  • Countries with larger share of SME employment have higher economic growth than their counterparts;
  • Controlling for the business environment in each country reduces statistical significance of the relationship between SME prevalence and economic growth;
  • Countries with larger shares of MEs do not have more rapid economic growth rates in per capita income;
  • MEs cannot be shown to be the clear, causal force behind economic growth;
  • Business environment may matter more for the larger of the manufacturing MEs.

The study finds no evidence at the micro and small enterprise level of a positive association between ME prevalence and economic growth.