Final Documentation

Regulation, Competition and SMEs in Developing Countries, Quartey 2001

    The main focus of this paper is to trace the channels or processes through which regulation and competition affect small and medium enterprises (SMEs) in developing countries. The principal issues to be addressed include the following: (i) to review the existing literature1 on regulation, competition, and SMEs in developing countries and identify gaps in the literature; (ii) to trace the channels or processes through which regulation directly or indirectly affect Small and medium enterprises in developing countries; (iii) to identify the impact of competition or competition policies on SME development.

    Summary of results
    The discussions so far have revealed that there are quite a number of gaps in our knowledge on regulation, competition and small and medium-sized firms. First, there is very little empirical analysis on the impact of regulation and competition policies on small and medium enterprises in developing countries. Even where such a study exists, the methodology is woefully inadequate; entrepreneurs are presented with a set of constraints (including regulatory constraints) and asked to choose those that affect their businesses. This methodology should be complemented with an empirical analysis, that is, empirically compare the various regulatory regimes and firm performance (growth in sales, profit, employment, etc).

    Secondly, very little is known about how the regulatory environment affects the behaviour of small and medium enterprises. Does regulation encourage compliance or promote illegal activities? Does regulation discourage the setting up of small and medium firms? The answers to these questions will then affect how regulatory and competition policies are designed to incorporate the special needs of small and medium-sized firms.

    Another important revelation is that there is little hypothesis testing particularly in developing countries on the subject matter. For instance, one may hypothesize and test for the assertion that the Impact of regulation on SMEs varies according to firm size and across countries. This is a very important hypothesis which needs further investigating.

    Although competition promotes efficiency and reduces wastage in an economy, unhealthy competition can have disastrous effects on economy, especially infant industries. Whereas considerable amount of literature has been generated on regulation, competition and competition policies, very little is known about the impact of regulation o competition. Regulation increases the transactions costs of firms, which in turn makes them less competitive but there is lack of empirical evidence on the impact of regulation on firms, particularly SMEs.