The Role of Government in SME Development in Transition Economies

Abstract

DAVID SMALLBONE IS PROFESSOR OF SMALL and Medium Enterprises and Head of the Centre for Enterprise and Economic Development Research at Middlesex University Business School. Friederike Welter is Senior Researcher, 'Crafts and SMEs' Research Group, Rhine- Westphalian Institute for Economic Research (RWI), Essen, Germany. The paper is concerned with the role of government in relation to SME development in economies at different stages of market reform. It demonstrates that, as in mature market economies, the state is a major factor influencing the nature and pace of SME development, although more through its influence on the external environment in which business activity can develop than through direct support measures or interventions. Survey evidence from the Ukraine, Belarus and Moldova suggests that many enterprises are set up, survive and sometimes even grow despite government, because of the creativity of individuals in mobilising resources and their flexibility in adapting to hostile external environments. The problem is that in these situations the number of firms remains small and their contribution to economic development rather limited. In such a context, government still has to create the framework conditions for private sector development to become embedded and sustaining. At the same time, in countries where market reforms are at a more advanced stage (such as Poland), current priorities for government with respect to the environment for SME development include bringing legislation and regulations in line with EU standards in preparation for EU accession, encouraging the banking system to adapt and recognise the SME sector as a potential market for a range of financial products, facilitating the development of venture capital funds for that minority of SMEs that seek external equity, and working in partnership with the private sector to establish an effective support infrastructure. Although there may be a case for selective interventions in both types of circumstances, direct support measures are not the main role for government in either case.