Abstract
This paper analyzes the relationship between the relative size of the small and medium enterprise (SME) Sector and the business environment in 76 countries. The paper first describes a new and unique cross-country database that presents consistent and comparable information on the contribution of the SME sector to total employment in manufacturing and GDP across different countries. We then relate the importance of SMEs and the informal economy to indicators of different dimensions of the business environment. We find that several dimensions of the business environment, such as lower costs of entry and better credit information sharing are associated with a larger size of the SME sector, while higher exit costs are associated with a larger informal economy.
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Appendix
Appendix
TABLE IVariable definitions and sources
Variable | Variable Definition | Source |
---|---|---|
Indicators of the SME Sector and the Informal Sector | ||
SME250 | Share of the SME sector in the total formal labor force in manufacturing when 250 employees is taken as the cutoff for the definition of an SME. | See Appendix A2 |
SMEOFF | Share of the SME sector in total formal labor force in manufacturing when the official country definition of SMEs is used. | See Appendix A2 |
SME_GDP | Share of the SME sector, as defined by official sources, relative to GDP. | See Appendix A3 |
INFORMAL | Share of the labor force of the shadow economy as a percent of official labor force. | Schneider (2000) |
INFORMAL_GDP | Average size of the shadow economy as a percentage of official GDP. | |
Business Environment Indicators | ||
Entry Costs | The legal costs of each procedure involved in formal registration of a company, relative to income per capita, that a start-up must bear before it becomes legally operational. The text of the Company Law, the Commercial Code, and specific regulations and fee schedules are used to calculate costs. If there are conflicting sources and the laws are not clear, the most authoritative source is used. The constitution supersedes the company law, and the law prevails over regulations and decrees. If conflicting sources are of the same rank, the source indicating the most costly procedure is used, since an entrepreneur never second-guesses a government official. In the absence of fee schedules, a governmental officer’s estimate is taken as an official source. In the absence of a government officer’s estimates, estimates of incorporation lawyers are used. If several incorporation lawyers provide different estimates, the median reported value is applied. In all cases, the cost excludes bribes. | World Bank Doing Business Database |
Contract Enforcement Costs | The indicator measures the official cost of going through court procedures, including court costs and attorney fees where the use of attorneys is mandatory or common, or the costs of an administrative debt recovery procedure, expressed as a percentage of the debt value. | World Bank Doing Business Database |
Exit Costs | All legal court costs and other fees that are incurred when closing a limited liability company, expressed as a percentage of the total value of the estate. The cost of the bankruptcy proceedings is calculated based on answers by practicing insolvency lawyers. If several respondents report different estimates, the median reported value is used. Costs include court costs, as well as fees of insolvency practitioners, independent assessors, lawyers, accountants, etc. Bribes are excluded. The cost figures are averages of the estimates in a multiple-choice question, where the respondents choose among the following options: 0–2%, 3–5%, 6–10%, 11–15%, 16–20%, 21–25%, 26–50%, and more than 50% of the estate value of the bankrupt business. | World Bank Doing Business Database |
Property Costs | Cost to register property. These include fees, transfer taxes, stamp duties, and any other payment to the property registry, notaries, public agencies, or lawyers, if required by law. Other taxes, such as capital gains tax or value-added tax (VAT), are excluded from the cost measure. If cost estimates differ among sources, the median reported value is used. Total costs are expressed as a percentage of the property value, calculated assuming a property value of 50 times income per capita. | World Bank Doing Business Database |
CreditInformation Index | This index measures rules affecting the scope, access and quality of credit information available through either public or private bureaus. A score of 1 is assigned for each of the following six features of the credit information system: (i) Both positive and negative credit information (for example on payment history, number and kind of accounts, number and frequency of late payments, and any collections or bankruptcies) is distributed. (ii) Data on both firms and individuals are distributed. (iii) Data from retailers, trade creditors and/or utilities as well as financial institutions are distributed. (iv) More than five years of historical data is preserved. (v)Data on loans of above 1 percent of income per capita is distributed. (vi) By law, consumers have the right to access their data. The index ranges from 0 to 6, with higher values indicating that more credit information is available from either a public registry or a private bureau to facilitate lending decisions | World Bank Doing Business Database |
Rigidity ofEmployment Index | The Rigidity of Employment index is the average of three sub-indices: a Difficulty of Hiring index, a Rigidity of Hours index, and a Difficulty of Firing index. All sub-indices have several components and take values between 0 and 100, with higher values indicating more rigid regulation. | World Bank Doing Business Database |
Instruments | ||
Legal Origin | An indicator of the type of legal system in the country. It takes the value 1 for English Common law, 2 for French Civil Law, 3 for German Civil Law, 4 for Scandinavian Civil Law and 5 for Socialist Law countries. | |
Religion | An indicator of the dominant religious group in the country. It takes the value 1 for Catholics, 2 for Protestants, 3 for Muslims, and 4 for Others. | La Porta et al.(1999) |
Ethnic Fractionalization | Probability that two randomly selected individuals in a country will not speak the same language. | Easterly and Levine (1997) |
Latitude | Absolute value of the latitude of a country, scaled between zero and one. | La Porta et al.(1999) |
TABLE IIOfficial country definitions of SMEs
Country | Official Definition of SME | Time Period of Data | Source |
---|---|---|---|
Albania | 500 | 1994–95 | United Nations Economics Commission for Europe |
Argentina | 200* | 1993 | Inter-American Development Bank-SME Observatory |
Australia | 100 | 1991 | APEC, 1994: The APEC Survey on Small and Medium Enterprises. |
Austria | 250 | 1996 | Eurostat |
Azerbaijan | 250* | 1996–97 | United Nations Economics Commission for Europe |
Belarus | 250* | 1996–97 | United Nations Economics Commission for Europe |
Belgium | 250* | 1996–97 | Eurostat |
Brazil | 250 | 1994 | IBGE-Census 1994 |
Brunei | 100 | 1994 | APEC Survey |
Bulgaria | 250* | 1995–97, 1999 | Center for International Private Enterprise, Main characteristics of SME: Bulgaria Country Report, Institute for Market Economics |
Burundi | 100 | 90s | Regional Program on Enterprise Development Paper # 30 |
Cameroon | 200 | 90s | Regional Program on Enterprise Development Paper # 106 |
Canada | 500* | 1990–93, 1996, 1998 | Presentation to the Standing Committee on Industry, Science and Technology, APEC Survey, Globalization and SME 1997(OECD) |
Chile | 200* | 1996 | Inter-American Development Bank-SME Observatory |
Colombia | 200 | 1990 | Inter-American Development Bank-SME Observatory |
Costa Rica | 100 | 1990, 92–95 | Inter-American Development Bank-SME Observatory |
Cote D’Ivoire | 200 | 90s | Regional Program on Enterprise Development Paper # 106, #109 |
Croatia | 250 | 1998 | United Nations Economics Commission for Europe, Center for International Private Enterprise |
Czech Republic | 250* | 1996 | United Nations Economics Commission for Europe |
Denmark | 500 | 1991–92 | Globalization and SME 1997(OECD), International Labor Organization |
Ecuador | 200 | 1994 | Inter-American Development Bank-SME Observatory |
El Salvador | 150* | 1993 | Inter-American Development Bank-SME Observatory |
Estonia | 250* | 1996–97 | United Nations Economics Commission for Europe |
Finland | 250* | 1996–97 | Eurostat Database |
France | 500 | 1991, 1996 | International Labor Organization, OECD SME Outlook |
Georgia | 250* | 1996–97 | United Nations Economics Commission for Europe |
Germany | 500 | 1991, 1993–98 | Globalization and SME 1997 (OECD), Fourth European Conference paper |
Ghana | 200 | 90s | Regional Program on Enterprise Development Paper # 106, #109 |
Greece | 500 | 1988 | OECD |
Guatemala | 200* | 1990 | Inter-American Development Bank-SME Observatory |
Honduras | 150 | 1990 | Inter-American Development Bank-SME Observatory |
Hong Kong, China | 100 | 1993, 2000 | APEC Survey, Legislative Council 17 Jan 2005 |
Hungary | 250 | 1997 | United Nation Economic Commission for Europe |
Iceland | 100 | 1996 | Eurostat Database |
Indonesia | 100 | 1993 | OECD Paper, Speech of State Minister of Cooperatives and SME in Indonesia |
Ireland | 500 | 1997 | Globalization and SME 1997 (OECD) |
Italy | 200 | 1995 | Russian SME Resource Center, Eurostat Database |
Japan | 300 | 1991, 1994, 1996,1998, 1999 | Globalization and SME 1997 (OECD), SME Agency in Japan |
Kazakhstan | 500* | 1994 | United Nation Economic Commission for Europe |
Kenya | 200 | 90s | Regional Program on Enterprise Development Paper # 106, #109 |
Korea, Rep. | 300 | 1992–93, 1997, 1999 | APEC Survey, OECD, Paper titled “Bank Loans to Micro-enterprises, SMEs and Poor Households in Korea” |
Kyrgyz Republic | 250* | 1996–97 | United Nation Economic Commission for Europe |
Latvia | 500* | 1994–95 | United Nation Economic Commission for Europe |
Luxembourg | 250* | 1996 | Eurostat Database |
Mexico | 250 | 1990–97 | Inter-American Development Bank-SME Observatory, APEC Survey |
Netherlands | 100 | 1991–98 | G8 Global Marketplace for SME, Globalization and SME 1997(OECD) |
New Zealand | 100* | 1991, 1998–00 | SMEs in New Zealand, Structure and Dynamics, APEC Survey |
Nicaragua | 100 | 1992 | Inter-American Development Bank-SME Observatory |
Nigeria | 200 | 2000 | Regional Program on Enterprise Development Paper # 118 |
Norway | 100 | 1994, 1990 | European Industrial Relations Observatory |
Panama | 200 | 1992 | Inter-American Development Bank-SME Observatory |
Peru | 200 | 1994 | Inter-American Development Bank-SME Observatory |
Philippines | 200 | 1993–95 | APEC Survey, Situation Analysis of SME in Laguna |
Poland | 250 | 1996–97, 1999 | United Nation Economic Commission for Europe |
Portugal | 500 | 1991, 1995 | OECD |
Romania | 250 | 1996–1999 | United Nation Economic Commission for Europe, Center for International Private Enterprise |
Russian Federation | 250* | 1996–97 | United Nation Economic Commission for Europe |
Yugoslavia Fed. Rep. | 250* | 1999 | Center for International Private Enterprise |
Singapore | 100 | 1991, 1993 | APEC Survey |
Slovak Republic | 500 | 1994–95 | United Nations Economic Commission for Europe |
Slovenia | 500* | 1994–95 | United Nations Economic Commission for Europe, SME in Central and Eastern Europe, Barriers and Solution by F.␣Welter |
South Africa | 100 | 1988 | World Bank Report |
Spain | 500 | 1991, 1995 | OECD |
Sweden | 200 | 1991, 1996 | OECD |
Switzerland | 500* | 1991, 1995, 1996 | OECD |
Taiwan | 200 | 1993 | APEC Survey |
Tajikistan | 500* | 1994, 1995 | United Nations Economic Commission for Europe |
Tanzania | 200 | 90s | Regional Program on Enterprise Development Paper # 106, #109 |
Thailand | 200 | 1991, 1993 | APEC Survey |
Turkey | 200* | 1992, 1997 | SME in Turkey |
Ukraine | 250* | 1996 | United Nations Economic Commission for Europe |
United Kingdom | 250* | 1994, 1996–00 | Department of Trade and Industry, UK |
United States | 500 | 1990–1998 | Statistics of US Businesses: Microdata and Tables |
Vietnam | 200 | 1995 | Nomura Research Institute Papers |
Zambia | 200 | 90s | Regional Program on Enterprise Development Paper # 106, # 109 |
Zimbabwe | 200 | 90s | Regional Program on Enterprise Development Paper # 106, #109 |
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Ayyagari, M., Beck, T. & Demirguc-Kunt, A. Small and Medium Enterprises Across the Globe. Small Bus Econ 29, 415–434 (2007). https://doi.org/10.1007/s11187-006-9002-5
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DOI: https://doi.org/10.1007/s11187-006-9002-5