Obstacles to Developing Indigenous Small and Medium Enterprises: An Empirical Assessment

The article reports the results of field surveys conducted in Sri Lanka's leather industry and Tanzania's furniture industry. It outlines an approach to learning how small and medium enterprises (SMES) perceive the impact of financial, regulatory, technical, marketing, and other input constraints, and to evaluating the results in relation to other empirical indicators. Lack of access to finance emerges as the binding constraint for smaller, less established firms in Sri Lanka and for all of Tanzania's SMES—not only is informal financing limited for Tanzania's firms, even firms of adequate size and experience have difficulty borrowing from banks, and, if they do borrow, have difficult relations with their lenders. In Tanzania, regulatory and tax constraints appear largest for the smallest firms, declining somewhat as firms grow: because enforcement is comprehensive, the bureaucratic burden of negotiating with government officials is greatest for small firms. By contrast, in Sri Lanka the regulatory burden rises with firm size, because enforcement is more stringent for the larger and more visible firms. Constraints on physical inputs continue to inhibit Sri Lankan SMES—a legacy of excessive vertical integration by parastatals. Technical constraints are appraised as most significant by relatively educated entrepreneurs with some involvement in high-quality market niches.