Defining SMEs: A Less Imperfect Way of Defining Small and Medium Enterprises in Developing Countries


While it should be intuitively evident that SMEs are of special importance to private sector growth, there is considerable disagreement within development policy circles as to why, or even whether, this is so. Claims that SMEs are more efficient at creating quality jobs, are more innovative, or grow faster than larger firms have been questioned on the basis of large regression analyses or on the basis of examining company registrations and corporate failures. Arguments that the overall business environment in any given country is of greater importance than the development of the SME sector have apparently caused some in development to question whether taxpayer or foundation moneys should be spent on SME initiatives. The result is that the relative priority of SMEs, and therefore SME-related policy, in development is currently unclear.

A major contributing factor towards this lack of clarity is that few of these studies have used an informed definition of the “SMEs”. Within the current debate over SMEs we suggest that there are four questions of fundamental significance that should encourage the development community to discuss and determine what the definition of SMEs should be. Once there is a clearer focus on the definition, then the appropriate policy towards SMEs in developing markets will also become clearer. The four key questions are:

  1. Where do large firms come from?
  2. How does a country best diversify its economy?
  3. Which group of businesses, by size and degree of development, have the greatest incentive to insist on policy reforms and accountable, transparent government?
  4. What, in its essence, is an SME?

This paper will briefly address each of these questions but will focus primarily on the fourth, as the resolution of this question is needed in order to resolve the others.