Surveys of Theory, Evidence and Policy
Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde
Chapter 11: Small and Medium Sized Enterprises in Developing Economies
11. Small and medium sized enterprises in developing economies 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...
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