Cairo: Economic Research Forum (Working Paper 866)
Many low and middle-income countries suffer from a lack of medium-sized companies, which tend to be the main creators of higher income employment, motors of innovation and economic diversification. The chief reason is that few micro and small enterprises are able to upgrade, i.e. grow and become medium-sized through innovation. An extensive literature discusses manifold explanations but has not yet concluded which are the most important factors: entrepreneur or firm characteristics, personal or business networks or the business environment. This paper contributes to filling this gap on the basis of three extensive empirical case studies on Egypt, India and the Philippines. It argues that the entrepreneur matters much more than recent literature makes us believe. Due to chronic imperfections in the business environment, entrepreneurs in all three countries face similar upgrading constraints: lack of finance, skilled workers, market information, technology and security. Some are able to upgrade despite the constraints but they struggle to sustain their success. The few that succeed in both regards have taken it upon themselves to develop effective coping strategies. In all three countries, they use similar strategies, in which they tend to benefit from above average financial, social and human capital, motivation, risk readiness and willingness to invest in human resources, market research and research and development. As a result, standard reforms in the improvement of the business environment are certainly important but unlikely to translate into the upgrading of a much larger number of MSEs. Inequality of opportunity is going to prevail unless governments are willing to create a level-playing field by the provision of quality education and training, human resource development, access to markets and finance, and rule of law for all.