MICROCAPITAL BRIEF: World Bank Working Paper, “Small vs. young firms across the world: contribution to employment, job creation, and growth” by Meghana Ayyagari, Asli Demirgüç-Kunt, Vojislav Maksimovic Explores Economic Contributions of Small and Medium Enterprises (SMEs)

In a recent World Bank policy research working paper, Meghana Ayyagari, Vojislav Maksimovic and Asli Demirgüç-Kunt offer a database on the contribution of small and medium-sized enterprises (SMEs) and young firms to total employment, job creation and productivity growth across 99 developing economies. The paper includes data collected from 47,745 firms from 2006 to 2010. The authors note that their sample does not include enterprises with less than 5 employees [1].

The first finding is that SMEs are the biggest contributors to employment across all countries and they contribute even more to employment in low-income countries than in higher-income countries. Specifically firms that are both old and small (over 10 years old and with 5-99 employees) have the largest proportional share of total employment. This is irrespective of the income level of the country. Secondly, SMEs with no more than 250 employees create the most new jobs. The authors’ third finding is that small and young firms have the highest employment growth rate.

The authors also point out that the small firms’ higher employment growth is not accompanied by higher sales or productivity growth. They conclude that while SMEs employ a large share of workers and create most jobs, their contribution to productivity and growth is “uncertain at best.” The paper finally suggests that the challenge for policy makers is to focus on “the obstacles faced by SMEs like lack of access to finance, need for business training and literacy programs” as well as “other constraints like taxes, regulations and corruption.” In addition, the authors emphasize the importance of policies to improve entrepreneurship and innovation among young and small firms.

By Nisha Koul, Research Associate

Sources and Additional Resources:

[1] World Bank Policy Research Working paper, “Small vs. young firms across the world: contribution to employment, job creation, and growth” By Meghana Ayyagari, Vojislav Maksimovic and Asli Demirgüç-Kunt, http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/04/11/000158349_20110411130747/Rendered/PDF/WPS5631.pdf

World Bank Blog, “All About Finance Blog” by Asli Demirgüç-Kunt, http://blogs.worldbank.org/allaboutfinance/generating-jobs-in-developing-countries-a-big-role-for-small-firms

MicoCapital.org story, July 26, 2011, “MICROCAPITAL BRIEF: Reserve Bank of India Urges Banks to Increase Credit Provision to Micro- and Small-Sized Enterprises”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-urges-banks-to-increase-credit-provision-to-micro-and-small-sized-enterprises/

MicroCapital.org story, June 18, 2011, “MICROCAPITAL BRIEF: Financial Sector Deepening Trust (FSDT) Launches Challenge for Financial Innovation Through SME (Small and Medium-Sized Enterprise) Finance Innovation Challenge Fund”, https://www.microcapital.org/microcapital-brief-financial-sector-deepening-trust-fsdt-launches-challenge-for-financial-innovation-through-sme-small-and-medium-sized-enterprise-finance-innovation-challenge-fund/

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