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

The article reports the results of field surveys conducted inSri 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 theresults in relation to other empirical indicators. Lack of accessto finance emerges as the binding constraint for smaller, lessestablished firms in Sri Lanka and for all of Tanzania's SMES—notonly is informal financing limited for Tanzania's firms, evenfirms of adequate size and experience have difficulty borrowingfrom banks, and, if they do borrow, have difficult relationswith their lenders. In Tanzania, regulatory and tax constraintsappear largest for the smallest firms, declining somewhat asfirms grow: because enforcement is comprehensive, the bureaucraticburden of negotiating with government officials is greatestfor small firms. By contrast, in Sri Lanka the regulatory burdenrises with firm size, because enforcement is more stringentfor the larger and more visible firms. Constraints on physicalinputs continue to inhibit Sri Lankan SMES—a legacy ofexcessive vertical integration by parastatals. Technical constraintsare appraised as most significant by relatively educated entrepreneurswith some involvement in high-quality market niches.