Bonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Many low- and middle-income countries suffer from a lack of medium-sized companies, which tend to be the main creators of higher-income employment as well as the motors of innovation and economic diversification. The chief reason is that few micro and small enterprises are able to upgrade, that is, grow and become medium-sized through innovation.
There is extensive literature offering manifold explanations, but no conclusion has been offered yet as to what the most important factors are: entrepreneur or firm characteristics; personal or business networks; or the business environment.
This article contributes towards filling this gap on the basis of three extensive empirical case studies on Egypt, India and the Philippines. It argues that the entrepreneur matters much more than recent literature would lead us to believe.
Due to chronic imperfections in the business environment, entrepreneurs in all three countries face similar upgrading constraints: lack of finance, skilled workers, market information, technology and security.
Some are able to upgrade despite the constraints, but they have to struggle to sustain their success. The few that succeed in both regards have taken it upon themselves to develop effective coping strategies. In all three countries, they use similar strategies, in which they tend to benefit from: above-average financial, social and human capital; motivation; risk readiness; and a willingness to invest in human resources, market research as well as research and development.
As a result, standard reforms for the improvement of the business environment are certainly important but unlikely to translate into the upgrading of a much larger number of MSEs. Inequality of opportunity is going to prevail unless governments are willing to create a level playing field through the provision of quality education and training, human resource development, access to markets and finance, and rule of law for all.