In developing countries micro and small enterprises (MSEs) constitute a large part of the industrial fabric, which is why policy makers and scholars alike look at small-scale entrepreneurs as important development agents in society. By offering possibilities to gain income, training and work experience micro and small enterprises are said to provide livelihoods to millions of people worldwide (Altenburg / Eckhardt 2006). Moreover, donors and policy-makers stylise small enterprises as drivers of private sector development.

However, the view of micro and small enterprises as being a seedbed for future enterprise growth and upgrading is open to doubt. Across developed and developing economies empirical observations suggest that most micro and small enterprises are stagnating (Mead 1994; Mead / Liedholm 1998; Cotter 1996; Fajnzylber 2006; Fajnzylber / Maloney / Montes-Rojas 2009). Only a minority of these firms manages to upgrade their businesses to the next level of productivity, assets and employment (Berner / Gomez / Knorringa 2008). Typically, few small enterprises pass the threshold of 20 employees. As a result, there is a “missing middle” between the poles of large and micro/small enterprises.

While the majority of small enterprises stagnate there are some exceptional cases which actually manage progressing from micro and small into medium enterprises. The literature refers to this group as ‘upgraders’.

To be precise, at a conceptual level enterprise upgrading has two constituting elements – one quantitative and one qualitative: First, enterprise upgrading is understood as a step from a business with stagnating or declining income, productivity and employment to a business that significantly increases its income or number of paid workers. Secondly, enterprise upgrading includes qualitative improvements in products, processes and ways of organising production (Schmitz / Knorringa 2000).

The overarching research questions revolve around

1. Why do some enterprises succeed in making progress while others do not?
2. What are the critical success factors that facilitate the increase in employment, assets and production capabilities?
3. How does the process of enterprise upgrading unfold?

Based on previous research enterprise success is not a mono-causal story but one of different factors coming together allowing for development to take place. The literature differentiates between critical success factors internal and external to the firm. While recent approaches have forwarded explanations mainly focusing on the role of external factors, such as a favourable institutional and regulatory environment as well as access to credit, this research project will be also focusing on factors internal to the firm, such as firm strategy, skill base and absorptive capacity for external knowledge. Including these internal firm factors is important to understand how firm characteristics match with external factors in explaining “combinations of success”. Accordingly, rather than stating that some factors matter for upgrading this research tries to uncover how these factors combined matter for the process of enterprise upgrading.

This research is innovative in three ways: First, it starts by identifying 60-70 successful upgraders and traces back which critical incidences explain their above-average performance; second, after having identified the critical success factors it cross-checks their relevance with a group of 60-70 micro enterprises in the same activities and location that have not (yet) upgraded and explores what prevents those firms  from pursuing the same upgrading strategies; third, it compares three countries - the Philippines, Egypt and India – with very different traditions of entrepreneurship and external conditions. The comparative design shall help to identify systematic patterns of small enterprise growth and innovation.

The insights of this study will help to understand what might help enterprises in upgrading their businesses today. It will provide information for practitioners on how micro and small enterprise learn to initiate and organise innovation dynamics within their businesses. Findings of this research will help decision-makers to develop tailored policy interventions to push MSEs towards upgrading.