Executive Summary
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The density of micro, small, and medium-size enterprises (MSMEs) is a good indication of positive or negative changes that are occurring in an economy, as high and upper-middle-income countries have a greater proportion of these types of enterprises than do low-income countries.
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Value chains are widely considered to be the main engine for MSME growth in developing countries, because they can provide access to markets and technology, encourage business linkages, facilitate the upgrading of skills, and create links with international companies.
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Value chains should not, however, be viewed as a panacea for MSME development, as linkages to large companies are easily broken during periods of sluggish growth and market contractions, and, more generally, MSMEs are often unable to integrate into large-scale business relationships because they lack international standards, and quality controls.
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Business development service (BDS) centers have proven successful in upgrading MSMEs, and facilitating their entry into value chains. As such, they should become an integral part of the MSME development process; the challenge is to make BDS centers self-sustainable. A model that combines a cost-sharing facility (CSF) with a credit guarantee facility (CGF) can provide a means of ensuring that sustainability.
Introduction
The predominance of micro, small and medium-size enterprises (MSMEs) in the business activities of countries generally reflects the magnitude of growth, employment, competition, and poverty within those countries. The density of MSMEs, measuring their number per 1,000 persons, is greater in high-income countries such as the United States and members of the European Union than in middle- and low-income countries such as Malaysia and Bangladesh (Figure 1). The same relationship exists between microenterprises and income levels: high and upper-middle-income countries have a greater proportion of these types of enterprises than do low-income countries. The density of MSMEs is, therefore, a good indication of positive or negative changes that are occurring in an economy.
Note: MSME density refers to the number of MSMEs per 1,000 persons in a country.
From an economic policy perspective, development of MSMEs can be a means of promoting growth and development in a country, although the causal direction is not always clear: in some cases, the MSME sector can be the driving force behind economic growth and poverty reduction, as it was in some Asian newly industrialized economies (NIEs, or “Tigers”) during the “Asian Miracle” of the 1980s, while in others it follows the growth of export-oriented large enterprises. In nearly all cases, however, large foreign and domestic enterprises have played a key central role in the growth process, with MSMEs linked closely to them as downstream suppliers, and subcontracting between MSMEs providing business linkages that have enhanced sector efficiency, and productivity. In the current global financial crisis, increasing attention is now being paid to the role of value chains in promoting growth, innovation, and cross-border investments as a means of efficiently exploiting existing MSME capacities to renew growth in the emerging economies of Asia, Latin America, and Eastern Europe.
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