The preponderance of large firms and economic gigantism under the communist economic system, has been steadily reversed over the last decade in most transition economies. Typically, the largest proportion of the numbers of firms are now classified in the category of small and medium sized enterprises (SMEs). As one would expect, their contribution to employment and value added is of lesser importance, with the greater part of output still usually generated through large state or privatised firms. Yet the SME sector is of crucial importance in its role in producing intermediate goods for use by larger firms, often through subcontracting arrangements; in its opening up of the previously neglected services sector; and in creating a middle class and hence a constituency for the support for continuing social-democratic reforms. In addition it makes an important contribution in three key areas which support economic growth: job creation, innovation, and in the impetus it gives to the development of competition (Brezinski and Fritsch, 1996). This latter factor is particularly important in delayed-transition economies where the entry and growth of new SMEs challenges the established positions of existing large state or privatised companies which are often backed by, and connected to, powerful political elites. The conventional approach to economic transition, based upon neo-classical economic theory, has been that the development of the small and medium sized enterprises sector will occur spontaneously following a process of stabilisation, liberalisation, and privatisation. Blanchard (1997) in a major theoretical contribution to the economics of transition, has stressed the role of reallocation of resources from the old state sector to the new private sector, which must implicitly include a large contribution from newly created small firms. However, although many hundreds of thousands of SMEs have been established in the transition economies, they still face severe barriers which hinder their expansion and the realisation of their full potential. In one of the early critiques of the conventional view, Amsden et. al.(1994) argued that effective transition policies need to be backed up by the intervention of a “developmental state” to create the institutional framework needed to promote a market economy. The state should act in a complementary way to the market and push through the required pro-market reforms. As Amsden et al. pointed out, the success of the transition process depends on the emergence of institutions to support long-term investment and risk-taking. This approach can be characterised as a “top-down” method of economic development. The danger for countries in transition is that the strong state, necessary to implement the pro-market reforms, can easily become a clientelistic state in which the instruments of