Skip to main content

A Decade On: How Relevant is the Regulatory Environment for Micro and Small Enterprise Upgrading After All?

Abstract

Micro and small enterprises in developing countries rarely upgrade and grow. The reasons are disputed. Recently, the ‘Doing Business’ reports strongly influenced the policy agenda, attributing small enterprise stagnation mainly to excessive bureaucracy and over-regulation. They claim a strong causal relationship running from regulatory reform and formalisation to business performance and overall economic growth and advocate reforms to reduce the complexity and cost of regulation. Our findings from research in the Philippines, India and Egypt challenge this view. Bureaucratic hurdles are of secondary importance. Entrepreneurs who want to formalise are usually able to do so. Formalisation usually comes after a firm has upgraded, i.e. when the entrepreneur perceives that the advantages of formalisation outweigh its disadvantages. Success in upgrading is strongly related to entrepreneurial attitudes and skills: know-how, proactive search for market opportunities, risk-taking attitude and creativity in dealing with financial constraints and deficits in the rule of law.

Les micros et petites entreprises dans les pays en voie de développement ne s’améliorent et ne se développent que rarement. Les raisons sont contestées. Récemment, les rapports de « Doing Business » ont fortement influencé l’agenda politique, attribuant la stagnation des petites entreprises principalement à la bureaucratie excessive et à la surrèglementation. Ils réclament un fort lien de causalité allant de la réforme règlementaire et de l’officialisation à la performance commerciale et de la défense des réformes pour réduire la complexité et le coût du règlement. Nos résultats de recherches dans les Philippines, en Inde et en Egypte remettent en cause ce point de vue. Les obstacles bureaucratiques sont d’importance secondaire. Les entrepreneurs qui veulent formaliser peuvent habituellement le faire. La formalisation vient habituellement après qu’une entreprise se soit améliorée, c’est à dire lorsque l’entrepreneur se rend compte que la formalisation compte plus d’avantages que d’inconvénients. Le succès dans l’évolution est fortement lié aux attitudes et aux qualifications entrepreneuriales : savoir-faire, recherche proactive des opportunités du marché, qui ose prendre des risques et créativité face aux contraintes et déficits financiers dans l’État de droit.

This is a preview of subscription content, access via your institution.

Figure 1

Source: Reeg (2013a).

Figure 2

Source: Loewe et al (2013).

Figure 3

Note: Interviewees were asked to mention up to 6 factors from any of the layers on our ‘onion model’ (Figure 1).

References

  1. Altenburg, T. (ed., 2006) Shaping value chains for development. The European Journal of Development Research 18(4): Special issue.

  2. Altenburg, T. and Eckhardt U. (2005) Productivity Enhancement and Equitable Development: Challenges for SME Development. Vienna: UNIDO.

    Google Scholar 

  3. Altenburg, T. and Lütkenhorst W. (2015) Industrial Policy in Developing Countries. Failing Markets, Weak States. Cheltenham: Elgar.

    Book  Google Scholar 

  4. Altenburg, T. and von Drachenfels C. (2006) The “new minimalist approach” to private-sector development: A critical assessment. Development Policy Review 24(4): 387–411.

    Article  Google Scholar 

  5. Arruñada, B. (2007) Pitfalls to avoid when measuring institutions: Is Doing Business damaging business?. Journal of Comparative Economics 35(4): 729–747.

    Article  Google Scholar 

  6. Ayyagari, M., Demirgüç-Kunt A. and Maksimovic V. (2006) How important are financing constraints? The role of finance in the business environment. Washington DC: World Bank, Research Working Paper 3820.

  7. Banerjee, A. V. and Duflo E. (2000) Reputation effects and the limits of contracting: A study of the Indian software industry. Quarterly Journal of Economics 115(3): 989–1017.

    Article  Google Scholar 

  8. Beck, T., Demirgüc-Kunt, A., Levine, R. and Maksimov, V. (2000) Financial structure and economic development: Firm, industry, and country evidence. Washington DC: World Bank, Policy Research Working Paper 2423.

  9. Berg, J. and Cazes S. (2007) The Doing Business indicators: Measurement issues and political implications. Geneva: ILO, Economic and Labour Market Paper, 2007/6.

  10. Berner, E., Gomez, G. and Knorringa, P. (2012) Helping a large number of people become a little less poor: The logic of survival entrepreneurs. European Journal of Development Research 24, 382–396.

    Article  Google Scholar 

  11. Branstetter, L., Lima, F., Taylor, L. and Venancio, A. (2014) Do entry regulations deter entrepreneurship and job creation? Evidence from recent reforms in Portugal. Economic Journal 124(577): 805–832.

    Article  Google Scholar 

  12. Bruhn, M. (2011) License to sell: The effect of business registration reform on entrepreneurial activity in Mexico. Review of Economics and Statistics 93(1), 382-386.

    Article  Google Scholar 

  13. Charmes, J. (2012) The informal economy worldwide: Trends and characteristics. Margin: The Journal of Applied Economic Research 6(2): 103–132.

    Article  Google Scholar 

  14. Collier, P. and Duponchel M. (2010) The Economic Legacy of Civil War: Firm Level Evidence from Sierra Leone. New York: UN WIDER.

    Google Scholar 

  15. Commander, S. and Svejnar, J. (2007) Do institutions, ownership, exporting and competition explain firm performance? Evidence from 26 transition countries. Bonn: Institute for the Study of Labor, Discussion Paper 2637.

  16. Cortes, M., Berry A. and Ishaq A. (1987) Success in Small and Medium-Scale Enterprises: The Evidence from Colombia. Washington DC: World Bank.

    Google Scholar 

  17. De Mel, S., McKenzie D. and Woodruff C. (2008) Who are the microenterprise owners? Evidence from Sri Lanka. Bonn: Institute for the Study of Labor, Discussion Paper 3511.

  18. De Soto, H. (1989) The Other Path: The Invisible Revolution in the Third World. New York: Harper & Row.

    Google Scholar 

  19. Divanbeigi, R. and Ramalho. R. (2012) Smart Regulations and Growth. Mimeo. Washington DC: World Bank, Doing Business Unit.

  20. Djankov, S., La Porta, R., Lopez de Silanes, F. and Schleifer, A. (2002) The regulation of entry. Quarterly Journal of Economics 117(1): 1–37.

    Article  Google Scholar 

  21. Dollar, D., Hallward-Driemeier M. and Mengistae T. (2005) Investment climate and firm performance in developing economies. Economic Development and Cultural Change 54(1): 1–31.

    Article  Google Scholar 

  22. Eifert, B. (2009) Do regulatory reforms stimulate investment and growth? Evidence from the Doing Business Data. Washington DC: Center for Global Development, Working Paper 159.

  23. Enterprise Surveys (2004/2008). Egypt, Arab Rep._2004_2007_panel.dta: panel micro data set of two rounds of private enterprise survey conducted by the Social Research Center of the American University in Cairo on behalf and with the funding of the World Bank and under the auspices of the Egyptian Ministry of Investment in, 2004 and, 2008, Washington, DC; online: http://www.enterprisesurveys.org (accessed 01 February, 2012).

  24. Fafchamps, M. (2001) Networks, communities and markets in Sub-Saharan Africa. Journal of African Economies 10(2): 109–142.

    Article  Google Scholar 

  25. Gereffi, G., Humphrey J. and Sturgeon T. (2005) The governance of global value chains. Review of International Political Economy 1(1): 78–104.

    Article  Google Scholar 

  26. Granovetter, M. (1982) The strength of weak ties: A network theory revisited. In: P. V. Marsden and N. Lin (eds.) Social Structure and Network Analysis. Beverly Hills, Ca. Sage, pp. 105–130.

    Google Scholar 

  27. Grimm, M., Knorringa, P. and Lay, J. (2012) Constrained gazelles: High potentials in West Africa’s informal economy. World Development 40(7): 1352-1368.

    Article  Google Scholar 

  28. Hampel-Milagrosa, A. (2014) Micro and small enterprise upgrading in the Philippines: The role of entrepreneur, enterprise, networks and the business environment. Bonn: German Development Institute/Deutsches Institut für Entwicklungspolitik, Study 86.

  29. Hampel-Milagrosa, A., Loewe M. and Reeg C. (2015) The entrepreneur makes a difference: Evidence on MSE upgrading factors from Egypt, India and the Philippines. World Development 66: 118–130.

    Article  Google Scholar 

  30. Humphrey, J. and Schmitz H. (2000) Governance and upgrading: Linking industrial cluster and global value chain research. London: Institute of Development Studies, Working Paper 120.

  31. IEG (Independent Evaluation Group of the World Bank) (2008) Doing Business: An Independent Evaluation: Taking the Measure of the World Bank-IFC Doing Business Indicators. Washington DC: World Bank.

    Google Scholar 

  32. Johannisson, B. and Nilsson A. (1989) Community entrepreneurs: Networking for local development. Entrepreneurship and Local Development 1(1): 3–19.

    Article  Google Scholar 

  33. Kaufmann, D. (2005) Myths and realities about governance and corruption. In: A. Lopez-Claros, K. Schwab and M. Porter (eds.) The global competitiveness report, 20052006. Davos: World Economic Forum, pp. 81–98.

    Google Scholar 

  34. Klein, M. and Hadjimichael B. (2003) The Private Sector in Development: Entrepreneurship, Regulation, and Competitive Disciplines. Washington DC: World Bank.

    Google Scholar 

  35. La Porta, R. and Shleifer A. (2011) The unofficial economy in Africa, Cambridge, MA: National Bureau for Economic Research, Working Paper 16821.

  36. Laffont, J. (1998) Competition, information, and development. Paper prepared for the Annual World Bank Conference on Development Economics, Washington DC, 20–21 April. http://time.dufe.edu.cn/jingjiwencong/waiwenziliao/laffont003.pdf, accessed, 20 April, 2015.

  37. Lee, K. and Temesgen T. (2009) What makes firms grow in developing countries: An extension of the resource-based theory of firm growth and empirical analysis. International Journal of Technological Learning, Innovation and Development 2(3): 139–172.

    Article  Google Scholar 

  38. Loewe, M., Hampel-Milagrosa A. and Reeg C. (2013) Which factors determine the upgrading of small and medium-sized enterprises (MSEs)?: The case of Egypt, Bonn: German Development Institute/Deutsches Institut für Entwicklungspolitik, Study 76.

  39. McKenzie, D. and Woodruff C. (2006) Do entry costs provide an empirical basis for poverty traps?: Evidence from Mexican microenterprises. Economic Development and Cultural Change 55: 3–42.

    Article  Google Scholar 

  40. McPherson, M. A. and Liedholm C. (1996) Determinants of small and micro enterprise registration: results from surveys in Niger and Swaziland. World Development 24(3): 481–487.

    Article  Google Scholar 

  41. Mead, D. C. and Liedholm C. (1998) The dynamics of micro and small enterprises in developing countries. World Development 26(1): 61–74.

    Article  Google Scholar 

  42. Mead, D. C. and Morrisson C. (1996) The informal sector elephant. World Development 24(10): 1611–1619.

    Article  Google Scholar 

  43. Navas-Alemàn, L. (2011) The impact of operating in multiple value chains for upgrading: The case of the Brazilian furniture and footwear industries. World Development 39(8):1386-9137.

    Article  Google Scholar 

  44. Palmade V. and Anayiotos A. (2005) Rising informality, reversing the tide: Public policy for the private sector. Washington DC: The World Bank Group, Note 298.

  45. Pyke, F., Becattini G. and Sengenberger W. (eds.) (1990) Industrial Districts and Inter-firm Cooperation in Italy. Geneva: International Institute for Labour Studies.

  46. Rahaman, M. (2011) Access to financing and firm growth. Journal of Banking & Finance 35(3): 709–723.

    Article  Google Scholar 

  47. Reeg, C. (2013a) Micro, small and medium enterprise upgrading in low- and middle-income countries: A literature review. Bonn: German Development Institute/Deutsches Institut für Entwicklungspolitik, Discussion Paper 15/2013.

  48. Reeg, C. (2013b) Micro, small and medium enterprise upgrading in India: Learning form success cases. Bonn: German Development Institute/Deutsches Institut für Entwicklungspolitik, Study 78.

  49. Schmitz, H. and Knorringa P. (2000) Learning from global buyers. Journal of Development Studies 37(2): 177–205.

    Article  Google Scholar 

  50. Schumpeter, J. (1934) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. Cambridge, MA: Harvard University Press.

    Google Scholar 

  51. Sharma, S. (2009) Entry Regulation, Labor Laws, and Informality. Washington, DC: World Bank.

    Google Scholar 

  52. Singh, A. (2002) Competition and competition policy in emerging markets: International and developmental dimensions. Cambridge, UK: University, ESRC Centre for Business Research, Working Paper 246. http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.167.5828&rep=rep1&type=pdf, accessed, 20 April, 2015.

  53. Stiglitz, J., Ocampo J., Spiegel S., Ffrench-Davis R. and Nayyar D. (2006) Stability with Growth: Macroeconomics, Liberalization, and Development. New York: Oxford University Press.

    Book  Google Scholar 

  54. Szirmai, A., Naudé W. and Goedhuys M. (eds.). (2011) Entrepreneurship, Innovation, and Economic Development. Oxford: Oxford University Press.

    Google Scholar 

  55. Tokman, V. E. (1990) The informal sector in Latin America: Fifteen years later. In: D. Turnham, B. Salomé and A. E. Schwarz (eds.) The Informal Sector Revisited. Paris: OECD, pp. 94–109.

    Google Scholar 

  56. van Dijk, M. (2000) Beyond the informal elephant: Competitiveness of micro and small enterprises in the MENA region. Paper submitted to the Seventh Annual Conference of the Economic Research Forum (ERF), Amman, Jordan, 26–29 October. http://citeseerx.ist.psu.edu/viewdoc/download;jsessionid=1EE40298CF39E403E934612335D5137B?doi=10.1.1.195.9672&rep=rep1&type=pdf, accessed, 20 April, 2015.

  57. Weichenrieder, A. (2007) Survey on the taxation of small and medium-sized enterprises. Draft report on responses to the questionnaire, Paris: OECD. http://www.oecd.org/dataoecd/52/25/39597756.pdf, accessed, 20 April, 2015.

  58. World Bank (2004) Doing Business in, 2005: Removing Obstacles to Growth. Washington DC: World Bank Group.

    Book  Google Scholar 

  59. World Bank (2013) Doing Business, 2013: Smarter Regulations for Small and Medium-Size Enterprises. Washington DC: World Bank Group.

    Google Scholar 

  60. World Bank (2014) Doing Business, 2014: Understanding Regulations for Small and Medium-Size Enterprises. Washington DC: World Bank Group.

    Google Scholar 

  61. Zinnes, C. (2009) Business Environment Reforms and the Informal Economy. London: Donor Committee for Enterprise Development.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Aimée Hampel-Milagrosa.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Altenburg, T., Hampel-Milagrosa, A. & Loewe, M. A Decade On: How Relevant is the Regulatory Environment for Micro and Small Enterprise Upgrading After All?. Eur J Dev Res 29, 457–475 (2017). https://doi.org/10.1057/s41287-016-0010-2

Download citation

Keywords

  • doing business
  • regulations
  • enterprise upgrading
  • micro and small enterprises
  • innovation
  • business environment