Small and Medium Enterprises Across the Globe

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.

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.	Friedman et al. (2000), Schneider and Enste (1998)
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.	La Porta et al.(1999), Djankovet al. (2003)
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

1. *Indicates either the country has no official definition of SME or we don’t have data for the country’s official cut off for SME.