The role of SMEs in fostering
employment and growth

Small- and medium-sized enterprises (SMEs) play a substantial role in developing economies, generating employment and growth. As income levels increase, formal SMEs tend to comprise a larger share of the economy, while the micro and informal sectors recede. Economic growth creates opportunities often filled by SMEs entering or sometimes “graduating” from microenterprise status.

World Bank Group strategy continues to position SMEs as key vehicles to promote employment, value chain development, economic and social inclusion, and resilience in the face of fragility and conflict.

This note synthesizes findings regarding SMEs and SME support from recent IEG evaluations, independent evaluations by other MDBs, and relevant World Bank Group research.

The objective of the exercise is to shed light on the following policy and strategic questions:

  • Does the World Bank Group know which approaches effectively serve the needs of SMEs and in which contexts?
  • What are the factors of success or failure of the main types of interventions in support of SMEs? What lessons of experience can be drawn? 
  • Should the World Bank Group distinguish SMEs as a firm size category to support?

The findings in this Synthesis Note also seesk to inform the World Bank Group's evolving approach to supporting SMEs. 

Pictured above: Staff at BCEL Bank, Vientiane, Laos. The private sector is creating opportunities for entrepreneurs in Laos, and 30-40% of these entrepreneurs are women. A female entrepreneur is visiting a bank in Vientiane. Vientiane, Lao PDR. Photo credit: Stanislas Fradelizi / World Bank

Key Findings

Key findings of this Synthesis Note include the following:

What is an SME - The problem of inconsistent definition of SMEs limits what we know about supporting them from evaluation and research and merits a cautious approach to interpreting and generating evidence on what works.

SME credit lines - There remains a lack of evidence that lines of credit, the World Bank Group’s leading instrument to support SMEs, is effective and beneficial. Similarly, evidence is limited on the benefits to SMEs of most value chain interventions. Addressing the lack of data and M&E collection (especially on beneficiaries) would generate missing evidence on key approaches to SME support. This could help to bring practice in line with evidence of what works, why and for whom.

Business development - There is important evidence of benefits from well-designed business development services (BDS) programs. At the same time, there remains a limited understanding of what mechanisms strengthen SME management and entrepreneurial capabilities to encourage growth in productivity and employment, suggesting an opportunity for good research.

Lessons of experience - Several IFC approaches to support SMEs, such as credit lines and risk sharing facilities, have faced challenges in their effectiveness. These challenges may be assisted by learning from the attributes and context of successful projects and products.

Sustained engagement - IEG evaluations provide evidence on the important benefits of continuous, coordinated, multi-instrument engagement informed by analytic work and on the effectiveness of combining investment and advisory interventions.

Sustainability and monitoring - Sustainability is a key challenge to several SME support instruments. Learning would require robust and longer-term approaches to monitoring and evaluation.

Firm size criteria - There is growing evidence of the limitations of size as a criterion for allocating support to enterprises, while competing criteria such as firm age, fast growth and productivity are drawing important attention. At the same time, there is strong evidence of the heterogeneity of SMEs, which vary across many dimensions including size, sector, location and formality, but also across different characteristics of owners, managers, and workers.

MDB challenges - While the modes of operating and programmatic details varied, evaluations by kindred Multilateral Development Banks (MDBs) raise some important and common challenges relating to their SME support activities. These include a lack of a strategic and conceptual framework, inconsistent or missing definition, eligibility and targeting to SMEs, tracking and monitoring of outcomes, and additionality of their SME support.