Heptagonal Cross-Border Cooperation and SME Development in the Caucasus and Central Asia: Econometric Modeling of Growth Channels and Spatial Agglomeration

Backgrounds: Small and Medium-sized Enterprises (SMEs) are pivotal drivers of economic diversification and social stability across the Caucasus and Central Asia, accounting for up to 74% of employment and over 61% of GDP in key markets. Yet, they face persistent structural barriers, including capital concentration in urban hubs, institutional corruption, and financial exclusion. Objectives: Using ADB SME Monitor 2024 data (2019-2023), this study examines the causal link between SME credit and SME output across seven Central Asian and Caucasus economies, applying Dumitrescu-Hurlin Granger causality and FE-2SLS. Methodology: This study uses an unbalanced panel of seven Central Asian and Caucasus economies (2019-2023) from the ADB SME Monitor 2024, with variables grouped into three pillars: MSME landscape and employment, sectoral output, and financing. Variables are converted into year-over-year growth rates to ensure stationarity before testing bidirectional Granger causality between SME loan growth and GVA growth. Findings: A fragmented transmission mechanism with three archetypes is revealed. A Credit-Led Channel dominates in Kazakhstan and Uzbekistan, where credit expansion precedes Gross Value Added (GVA) growth. An Output-Led Channel defines Tajikistan and Kyrgyz Republic, where banks expand credit reactively. A Bidirectional Feedback Channel emerges in volatile contexts such as Armenia, Azerbaijan, and Georgia. Importantly, the FE-2SLS model highlights severe weak-instrument constraints (F = 0.0483, p = 0.8275), underscoring institutional heterogeneity. Conclusions: A heptagonal cross-border management framework is proposed, leveraging rural entrepreneurship and ADB-aligned co-financing. Tailored policy recommendations emphasize fintech integration and digital-green transitions, enabling SMEs to overcome institutional frictions and embed into high-value global supply chains.