Size Matters: Entrepreneurship and Institutions

Abstract

Encouraging the growth of firms is a priority for many governments, so identifying the factors that keep firms small is extremely important for public policy. One of these factors might be the poor quality of institutions. In this paper, I test whether institutions such as corruption, law and order, regulations, bureaucracy, investment friendliness of the government and property rights affect the number micro, small and medium firms and their rate of growth. This paper uses data on micro, small, and medium enterprises (MSME's) from the International Finance Corporation and firm growth data from the World Bank's Enterprise Surveys. It shows that better institutions increase the number of medium firms and encourage their growth, but do not have an effect on the number or growth of micro, small or large firms. These results suggest that changes in public policies are needed to improve institutions and foster the survival and growth of medium firms.