Finance and Development

Finance and Development

Surveys of Theory, Evidence and Policy

Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.

Chapter 11: Small and Medium Sized Enterprises in Developing Economies

Frederick Nixson and Paul Cook

Subjects: development studies, development economics, economics and finance, development economics, financial economics and regulation


Frederick Nixson and Paul Cook 1. INTRODUCTION There is general agreement that small and medium sized enterprises (hereafter SMEs) have played a crucial role in the process of economic development. They contribute to employment, the production of appropriate goods and services and exports (Berry and Levy, 1994). Widespread research has identified the importance of finance for the development of SMEs and the constraints faced by them in this area, particularly with respect to their access to credit (Levy, 1993). Some studies (for example, Parker et al., 1995) have found that around 90 per cent of small enterprises surveyed indicated that the limited access to credit was a major constraint to new investment. The access problems faced by SMEs in low-income countries have largely been with respect to formal sector banking institutions. Collier and Mayer (1989) have argued that commercial banks are more likely to be sources of finance for smaller enterprises in poorer countries since the role of financial institutions is related to the life cycle of enterprises and economies. As the corporate sector develops, capital and money markets become more important vehicles for the financing of larger enterprises. Improvements in the efficiency of financial intermediation and financial liberalization, that reduce oligopolistic behaviour in the banking sector, are likely to lead to new sources of finance for smaller enterprises, and we are likely to witness a movement away from debt to equity-based forms of finance, as illustrated by the experience with venture capital in Malaysia (Boocock, 1995). Improved...

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