Which Factors Determine the Upgrading of Small and Medium-Sized Enterprises (SMEs)? The Case of Egypt

Abstract

Many low- and middle-income countries have many micro and small but only a very few medium-sized and large enterprises. Micro and small firms seem to have difficulties growing into medium-sized companies. This is problematic because it is medium-sized companies that tend to be the main creators of higher quality and better-paid employment, motors of innovation and economic diversification, and future exporters.Companies grow for various reasons that are beyond their control, such as an increase in demand or failures of competitors. However, the only strategy that an enterprise can control is growth through innovation, which we term ‘upgrading’.A large strand of literature discusses the factors that favour or hamper the upgrading of small and medium-sized enterprises (SMEs): entrepreneur characteristics (education, gender, behaviour, etc.), firm characteristics (sector, location, workforce characteristics, etc.), inter-firm linkages (integration into value chains, clusters or business networks) and the business environment (macroeconomic and political stability, regulation, availability of finance, etc.). However, only a few studies provide empirical evidence for determining the most significant factors for SME upgrading in low- and middle-income countries.This study is meant to fill this gap thereby referring to Egypt. It is based on enterprise panel data from 2004 and 2008, a survey conducted by the authors in early 2012 among 102 SMEs and interviews with experts on private-sector development. It draws five main conclusions: – The scarcity of medium-sized enterprises in Egypt is not only due to the difficulty of SMEs to upgrade but also to their challenges in remaining medium-sized – or large.– In Egypt the main determinants for upgrading are the entrepreneur’s: (i) human capital (quality of education, work experience and international exposure), (ii) motivation and readiness to take risks, (iii) investment in human resources, (iv) market research, (v) access to finance and (vi) ability to deal with persistent deficits in the rule of law. – SMEs in Egypt are also constrained by the business environment, notably problems in state–business interactions such as licensing, taxation, inspections and competition control. But these problems are mainly due to deficits in law enforcement rather than what these procedures cost in time and money.– While integration into value chains and clusters might help SMEs to upgrade, the great reluctance of Egyptian entrepreneurs to co-operate with each other means that they cannot benefit from the advantages of vertical or horizontal business linkages. – The success of an SME largely depends on the owner’s capabilities. All SME owners in Egypt are constrained by structural factors such as deficiencies regarding education, skilled workers, market information, access to finance and law enforcement. However, a few SMEs man-age to circumvent these obstacles.To enable more SMEs to upgrade, the government of Egypt should improve its educational and vocational training system, help entrepreneurs conduct human resource development and market research, ease SME owners’ access to finance and strengthen the rule of law.