Latin American Capital Markets

ACCESS TO FINANCING FOR SMALL AND MEDIUM ENTERPRISES 393In developed countries, small businesses often follow a so-called "niche strategy,"providing high quality, flexibility, and fast response to customer needs in order tocompete with larger enterprises. Many of these small firms are innovative. However,innovations require time and resources that are more often found in larger firms.Nevertheless, approximately 30-60 percent of SMEs are characterized as innovativein the OECD. About 10 percent of small businesses conduct research and development(R&D); they often receive government financing for private sector R&D. Manyof them also engage in informal R&D efforts (OECD 2000). The top 5-10 percentof all growing firms are said to be so-called "high-growth SMEs" that are exceptionalperformers in innovation and job creation. Usually, their job creation rates exceedthose of larger companies.They are usually active in knowledge-intensive service sectorsand in regions with intense economic activity and clustering. In addition to beinginnovative, their entrepreneurial spirit is the key to exceptional growth.Social and Political ContributionsSmall businesses represent the initial mechanism by which millions of people enter theeconomic and social mainstream. In many cases, micro, small, and medium enterprisesare the only employment opportunity for the poor However; microenterprises havea more direct contribution to poverty reduction than SMEs, Small business workersand owners are situated in the lower half of the income distribution; therefore, promotingtheir growth may lead to a more equitable distribution of income. However,it is unlikely that SME owners and employees are the poorest of the poor In this context,Hallberg (2000, p. 5) says, "Therefore SME promotion may not be the mosteffective poverty alleviation instrument." She argues, "The real reason that developingcountry governments should be interested in microenterprises and SMEs is becausethey account for a large share of firms and employment—in other words, becausethey are there" (Hallberg 2000, p. 5). Searching for further justification to promotesmallness as an instrument of poverty alleviation is not necessary, it is enough to recognizethat microenterprises and SMEs are the emerging private sector in poor countriesand thus form the base for private sector-led growth.Many countries see the development and support of microenterprises andSMEs as their key to reduce poverty and increase growth. One reason is that theybelieve globalization threatens their local economies unless proactive steps are takento build the competitiveness of local enterprises.The desire of governments to promoteSMEs is often based on political and social considerations because SMEs are adomain of certain ethnic groups or political constituencies.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub