IPA is building a network on researchers and funding research on SME development. What are the main knowledge gaps when it comes to SMEs?
Lucia Sanchez:Governments, development agencies, and non-governmental organizations spend billions of dollars annually with the goal of promoting entrepreneurship and SME growth in developing countries, but little evidence exists about the actual barriers to growth for SMEs or the most effective means of addressing those barriers. As a result, SME policies are often based on conjectures and cannot rely on what has been proven to work. 

A fundamental knowledge gap pertains to the barriers hindering SME development in low- and middle-income countries.  Slow SME growth is often attributed to a number of perceived constraints, but little research rigorously tests how those constraints affect SMEs’ ability to invest, create jobs, and grow.  For example, how important is the lack of managerial human capital for firm profits and employment generation?  Is access to credit a binding constraint for SMEs, or are other financial services more critical for supporting SME growth?  A better understanding of which barriers affect SME development, and why, is critical for informing SME-related policies and interventions.  

Indeed, another key knowledge gap exists around the appropriate programs and policies for addressing constraints to SME growth.  There is a lack of information about which policies are most effective at achieving their objectives, how SME development programs should be designed and targeted, and the relative costs of various interventions.  Some of our current research seeks to address these knowledge gaps by focusing on questions such as: what is the best delivery mechanism for providing managerial training to entrepreneurs?  Is credit scoring an effective means of expanding access to finance?  Can supply chain financing increase firms’ ability to access new domestic and international markets?  In order to effectively support SMEs and spur their development and growth in developing countries, more information on successful programs and policies—and the mechanisms by which these positively impact small businesses—is needed.

How is the SME Initiative seeking to address this knowledge gap?
Lucia Sanchez:The SME Initiative aims to conduct and fund relevant research on access to finance, to markets, and to human capital for SMEs. Through experimental and quasi-experimental studies implemented by the SME Initiative, or supported by grants from our Research Fund on Entrepreneurship and SME Growth, we are working to build a knowledge base of what works and what does not work in promoting SME growth.

We use rigorous methods (primarily randomized controlled trials and natural experiments) to evaluate the impact of specific policies or programs and to answer questions about the mechanisms through which those programs affect SME growth and development. We also seek to replicate SME-focused interventions in different contexts, in order to assess their broader effectiveness and potential for being scaled-up.

How does the SME Initiative seek to translate knowledge (i.e. research outcomes) into action?
Lucia Sanchez:The SME Initiative shares research results through direct engagement with key stakeholders as well as by disseminating the policy implications of its findings.  The Initiative has an ever-growing global network of researchers, practitioners, and policymakers drawn from academia, international development institutions, non-governmental organizations, and the private sector.  This network of 60 affiliates provides a platform for sharing research results and supporting dialogue between the worlds of research and policy.  Annual conferences and working groups with our affiliates as well as the broader public provide further opportunities for disseminating findings from research studies and engaging with stakeholders on questions of innovation, research and design around SME-related interventions and policies.  Details of all SME Initiative research projects are available on our website, and policy briefs and working papers addressing the policy implications of particular programs or policies are published as study results become available.  Through these efforts, the SME Initiative hopes to bring rigorously tested outcomes to bear on SME policy in developing countries.

What are the SME Initiative’s biggest achievements to date?
Lucia Sanchez: During the first year and a half in operation, the SME Initiative made major strides on research support and development.  Since its start in October of 2010, the SME Initiative has grown its portfolio to include 24 research studies, and it has awarded 12 grants through the Research Fund for Entrepreneurship and SME Growth. We are proud that 4 out of the 12 projects that were awarded are collaborations between academics and practitioners in our network (TechnoServe, Building Markets, Root Capital, and YBI-the latter two ANDE members).  One of the key goals of the initiative was to increase the communication and collaboration between researchers and practitioners.  Not only does this help to ensure that the practitioners develop a greater appreciation for evidence-based programming, but also reinforces the need for academics to focus their research on policy relevant topics.  We will continue to seek out ways to support and encourage these collaborations as the initiative develops.

Another big achievement is building a platform for knowledge sharing and dissemination. We have built a community of more than 60 researchers and practitioners that are part of the ongoing policy discussion and meet regularly to share ideas and new insights as well as engage in discussions how to improve our knowledge base on this important topic. Our first Annual Conference, which we organized in collaboration with the IDB on November 30th, 2011, brought together our network members, as well as outside decision makers from private and public organizations. The event was attended by more than 150 people. Given the success of this event, we held our second Annual Conference in August 2012, in Bangkok. This time, we incorporated a matchmaking session at the end of the day sponsored by the Asian Development Bank, with the objective of connecting practitioners and researchers in the development of new research projects. Seed funding will be made available on a competitive basis for the most promising collaborations. The conference was a success and had more than 240 attendees.

We also held a number of smaller working groups throughout the year, focused on specific topics and a more technical in nature. 

Given the volume of research that we have seeded and managed to date, we expect the SME Initiative to be well positioned to inform and influence the private sector development policy landscape in a major way over the next 2-3 years.  Recently, much has been made of the importance of SMEs and “the missing middle” within the development community; however, the evidence base for this focus is limited.  We expect our work will provide a foundation for how, and whether, the development community should focus their efforts in this space going forward.