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A Critique of SME-led Approaches to Economic Development - May 2003

1. Critique of SME approaches

Definitions of SMEs vary significantly, usually in line with the scale of the economy concerned, its degree of development and the economic structures that are present. Studies define SMEs according to the number of workers employed, or according to the scale of operations of the firm. Taking the number of workers as the point of reference,2 definitions of SMEs vary between a few and few hundred workers.3

The difficulty in defining SMEs within a reasonable range of common indicators raises three problems. First, the definition of SMEs is invariably relative to other economic indicators. This is true even for studies discussing SMEs in economies of similar status but different structures - for example, studies about Kenya and Mozambique, and about Taiwan and South Korea, define SMEs very differently, because what is medium and small in each economy depends on factors that are, some of them, exogenous to the defined small and medium firm. While in Korea anything smaller than a Chaebol (large conglomerate) could be small or medium, in Taiwan there were no Chaebols. Therefore, there is no universal concept of SME such that SMEs are an inadequate analytical tool for economic evaluation and policy making.

Second, if SMEs are so significantly differently defined, there is little hope for a common set of policies and analytical tools to be successfully developed to address the SME issue (if there is a SME issue). Additionally, if SMEs are not specifically defined with respect to far more decisive development goals (such as the type and nature of linkages and the engines of such linkages, the nature of industrialization, the type of technology and markets to be addressed, skills to be developed), then there is no set of policies that adequately addresses de SME issue. The promotion needs of trading and industrial SMEs vary significantly, as they vary between industries, specific economic structures and social and economic dynamics.

Third, large differences with respect to definitions of SMEs also depend upon the social and economic processes that are discussed in the studies. These processes vary, also very significantly, between the creation and mobilization of the so called "informal sector", on one extreme, and the creation and mobilization of domestic capital, on the other extreme. The focuses of the studies vary between the dynamics of labour markets and the dynamics of technological innovation. Thus, the problems to be addressed are too many, very different, and it is not clear at all that SMEs are the best "peg" to help understanding and solving such dynamic processes.

Thus, under these conditions it is not surprising that the list of arguments for SMEs is almost infinite. Such a list includes almost everything that development scholars and practitioners have to deal with: employment creation, democratic management, adequate technology and technological development, environmental issues, market flexibility, market fragmentation and proximity, competitive conditions in goods and factor markets, rent-seeking and political and economic (market) power, controversial (often very poor) debates about economies of scale and scope, questionable theories of consumer preference and choice, accessibility to domestic capital, sunk cost theories and their implications for the choice of scale, scope and technology, exploration of factor endowment based comparative advantages, creation and mobilization of entrepreneurial spirit, democratic capitalism… and so on and so forth.

The range of issues SMEs are expected to solve is, in itself, a problem. On the one hand, it reflects the wide range of reasons why the SME debate came about - from the believers of "small is beautiful" (appropriate technology, market flexibility, adequate environmental management, democratic management, etc.), to the critics of the (largely unsuccessful) large project approach to development of LDCs. Amongst the critics are those who focus on the pitfalls of soviet style central planning, fast capital accumulation and accelerated industrialization, as well as those who argue around the need to support small holders and peasant societies. Some of the critics are focused on a different issue altogether - that of the (apparent) conflict between domestic (small and medium) and foreign (large) capital. Other critics argue that SMEs are more in line with factor endowments of poor countries, thus more efficient, because they are less capital intensive and more labour intensive.

On the other hand, and related to the point mentioned above, SMEs are often presented as a panacea as they can solve every problem. SMEs are rarely seen as part of the problem, or at least as having some potential shortcomings and pitfalls. It is as if being small or medium would make firms not only better, therefore less hazardous, but also would make them capable of avoiding and solving the problems created by other types of firms. The nature of capitalist accumulation is barely discussed, and SMEs are often seen as capable of avoiding the excesses of capitalism by being and staying small. However, small capitalist firms only make sense within the specific context of concrete and real processes of capitalist accumulation, and thus are bound by the same dynamics as large capitalism. The nature of capitalist accumulation is one of avoiding competition through different means: innovation, growing large, mergers and acquisitions, product differentiation, combination of scope and scale, and so on. In a way, the rule of the game is to grow large, or become part of a large organization or large chain of production and value.

At this stage, it is important to acknowledge that any economy is made of many different types of institutions, including firms; that all such institutions are somehow related; and that the scale of any institution is only one amongst many issues to look at, and not necessarily the most important one. Actually, almost always scale is a variable determined by other factors.

Moreover, institutions are only one part of the economic process, the part that regulates and organizes the social and economic relationships between economic linkages and economic agents, and that is also influenced by the development of economic linkages and the interests of economic agents.

In relation to the above, there is no single institution or economic policy or organization that can address all, or most of, the economic problems, and that is more or less appropriate for any stage of development irrespectively of history, society and the dynamic relationship between linkages and agents. As any institution and economic organization, firms are social, economic and technical constructions, and it would be surprising if a blueprint for scale provides any useful direction for development irrespectively of the issues to be addressed and the social and economic conditions under which such issues are to be addressed.

It would not be too much to remember one rule of thumb often mentioned but easily forgotten or not fully understood: when there are too many reasons to do something, it might be that there is no clear reason to do it. Three relatively recent examples, in economic analysis and policy, come to mind when this rule of thumb is mentioned: large privatisation programs in LDCs, Washington consensus led structural adjustment and… development approaches based on SMEs. None of these three cases has yet succeeded to prove its worth, at least in a generalised manner.4

Thus, it seems that SME approaches miss the development lesson they are trying to learn from the experience, often unsuccessful, of the very large project approach - as the large project approach has shown, scale is not the most adequate analytical starting point.

  1. The definition based on the number of workers is slightly less sensitive to the type of activity than different definitions of the scale of operation, and it is a more straight forward statistic. Thus, it is more widely used to define SMEs than other indicators of the scale of operation.
  2. See, for example, Cornia and Helleiner (eds) 1994; Cornia, van der Hoeven and Mkandawire (eds) 1992; Deyo (ed) 1987; Kiely 1998; Kitson and Michie 2000; Michie and Smith (eds) 1998; Stewart, Lall and Wangwe (eds) 1992; Weiss 1992 and 1989; World Bank 1994.
  3. See, for example, Bayliss and Cramer 2001, Bayliss and Fine 1998, Castel-Branco 2002a, Castel-Branco and Cramer 2003, Cramer 2001, and Fine 2000, for a critique of privatization programs. See also, for example, Cornia and Helleiner (eds) 1994, Cornia, van der Hoeven and Mkandawire (eds) 1992, Fine, Lapavitsas and Pincus (eds) 2001, Fine and Rustomjee 1996, Gore 1996, Stewart, Lall and Wangwe (eds) 1992, Stiglitz 1998 and 1996, for a critique of Washington consensus led structural adjustment.
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