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Small and Medium Sized Enterprises

SMEs play a vibrant role in emerging and developed economies alike.  The data show that the SME sector forms a larger share of GDP as country income increases, and that the SME sector generates a larger percentage of employment in higher income countries.  What is less clear, however, is the nature of the causal relationship, if any, between SMEs and economic growth.  Similarly, questions abound regarding the pro-poor impact of SMEs; strategies in support of the sector have often been assumed to have an implicit poverty reduction effect, yet there are little data and few examples to demonstrate this effect.

In the U.S., efforts to support SME development are almost a century old and have helped to create a strong enabling environment. This experience suggests that key environmental supports for SMEs include:

• Sophisticated capital markets that offer the full range of financial products, ranging from seed capital to secured debt.
• Public policies that provide incentives to private financial institutions to lend directly to SMEs. Comprehensive public delivery system for business development services supplemented by innovative private and nonprofit initiatives.
• Tax incentives for SME development and expansion.
• Legal and regulatory protections that provide incentives for innovation, ease business entry and exit costs, and reduce business risk.
• Public policy that promotes the creation, analysis, and dissemination of data on the SME sector.

The state of the field in transitional and developing economies is, to date, less well documented than in the US.  Yet that experience offers key opportunities to glean lessons about how to foster a strong SME sector while also supporting pro-poor economic growth.  As part of its work on SMEs and poverty reduction, CFED seeks to collect, document, and share such knowledge from around the world.

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Desktop Study: SMEs and Poverty Reduction

Small Grants Program
With generous support from the Ford Foundation's Affinity Group on Development Finance, CFED launched a Small Grants Program in 2006 designed to explore the linkages between SME strategies and poverty reduction.  CFED solicited proposals to document innovative pro-poor SME programs and/or policies, and received over 40 applications.  From that group, four innovative strategies in four different countries were ultimately chosen to receive funding for the creation of case studies – guided by independent researchers and evaluators - that would document their theories of change, program components, and outcomes for poor individuals throughout the value chains of the SMEs they support. 

The grants were awarded to Pacific Community Ventures of San Francisco, California; Center for Human and Economic Development Studies at Peking University in Beijing, China; Aavishkaar India Micro Venture Capital Fund in Mumbai, India; and FUNDES Argentina in Buenos Aires, Argentina

To read the case studies and CFED's summary analysis, click here.