MSME Growth: Policy recommendations

MSMEs have always faced a high mortality rate. Substantial failure factors include poor management, high debt in an adverse macro economy and an adverse microeconomic environment.213 Research has also found that significant factors causing the mortality of small businesses fall within two general classifications.214 The first specifies the internal and external factors, and the second relates to the owner-manager, the company itself, and the environment.215 Studies on entrepreneurship indicate an existing relationship between mortality factors and the MSME life cycle. The significance of mortality factors changes as the business move along the life cycle, including closure.216 While researchers find the life cycle model a useful analytical tool, policymakers can embrace the research findings to support dynamic MSMEs for business success. MSMEs require proper guidance to experience progress throughout the business life cycle. Policymakers can assist them by executing the recommended policies, enabling MSMEs to accelerate their business growth in the long terms:

  • Entry regulation: procedures to register a business 
    Making it easier to register a company may allow informal entrepreneurs to formalize, giving them access to markets and services and leading to firm growth.217 Simple entry procedures may also spur new business creation. Business registration reform is practical also since it lowers the costs of registration for all MSMEs.
  • Ongoing regulation: tax reforms
    MSME performance can be significantly affected by recurring tax payments and is often prominent compared to one-time registration costs Bruhn.218 Tax reform can be challenging since the government needs to balance lower tax rates for firms with tax collection. Many governments implement special tax regimes for MSMEs, with simplified procedures and (sometimes) lower tax rates; however, these can incentivise firms to stay small.
  • Access to finance
    Improved access to finance can help MSMEs stay in operation and increase employment and income. Effects are higher for low-income individuals and those located in areas with lower pre-existing bank penetration. Direct government interventions, such as government banks and credit guarantees, are challenging to implement since design matters a lot and may be subject to political capture. Market-oriented policies, such as collateral registries or credit bureaus tend to be more successful. Separately, a credit bureau helps facilitate the credit assessment process and help bring would-be lenders and borrowers closer. It helps detect and prevent credit risks and fraud and, in the long run, helps guard against problem loans in a national economy. Further, matching grants are one of the most commonly used policy tools for MSME growth.
  • Consulting services improve MSME performance 
    Policymakers can develop and provide consulting services that will take a look at an MSME’s overall objective and vision for one’s business, analyse practices and then recommend a plan of action to ensure business processes meet goals and add value to boost one’s business performance.

213 Collett, N., Pandit, N. R., & Saarikko, J. (2014). Success and failure in turnaround attempts: an analysis of SMEs within the Finnish restructuring of enterprises act. Entrepreneurship and Regional Development, 26(1–2), 123–141.

214 Santini, S., et al. (2015). Factors of mortality in micro and small enterprises: a study in the central region of Rio Grande do Sul. Revista Eletrônica de Estratégia e Negócios, 8(1), 145–169.

215 Bruderl, J., Preisendorfer, P., & Ziegler, R. (1992). Survival chances of newly founded business organizations. American Sociological Review, 57(2), 227–242.

216 Escrivão Filho, Edmundo & Albuquerque, Alexandre & Nagano, Marcelo & Junior, Luiz & Oliveira, Jair. (2017). Identifying SME mortality factors in the life cycle stages: an empirical approach of relevant factors for small business owner-managers in Brazil. Journal of Global Entrepreneurship Research.

217 De Soto, H. (2001) The Mystery of Capital: why capitalism triumphs in the West and fails everywhere else. 
London: Black Swan.

218 Bruhn, Miriam. (2012). A Tale of Two Species: Revisiting the Effect of Registration Reform on Informal Business Owners in Mexico. Journal of Development Economics.