SMEs, Competition and Entry - A developing country perspective

The paper develops a simple model for a developing country with a dual economic structure. The model is a further theoretical extension and empirical work to an earlier published book chapter on the same topic. The abstract was updated after presentation at the conference in Gold Coast, Australia.

The main research question is why it is so difficult for new entrepreneurs to enter markets, or in other words, why are the barriers to entry seemingly higher in developing countries?

Development writers such as Hernando de Soto and Daron Acemoglu suggest that this question is closely related with a sizeable informal sector in developing countries and corruption. Other leading transition researchers such as Andrei Shleifer offer a variety of views on the informal sector from the romantic to the parasitic. This paper leans on the realist interpretation of de Soto grounded in institutional theory. High entry barriers push the entrepreneurs towards the informal sector. Whether entrepreneurs succeed in the transition towards the formal sector depends on the size of the entry barriers which are indirectly regulated both by informal institutions such as corruption and formal institutions such as competition policy.

The model is tested using the World Bank's BEEPS dataset which is a repeated cross section survey of firms across countries in development and transition. This data gives access to observe among other firm size and whether firms pay a bribe or not. This data is combined with Stephan Voigt's data that measures competition policy for a large cross section of countries.

The paper generally finds confirmation for the hypothesized relationship between the informal sector, firm size and corruption and the idea that competition policy may have a moderating effect on this relationship.

The implications of the paper for development policy is that the fight against corruption should also incorporate elements of the establishment of a sound competition policy. For international business practitioners the implications of the research is that they will need to enter into strategic alliances in countries with high corruption and a poor competition policy framework. Furthermore, prior to the entry into a strategic alliance the investor must carefully investigate the ethical behaviour and attitudes of the partners towards culturally embedded concepts such as what constitutes fair competition practise so that they conform with the expectations and formal institutions of the investor's home country and possible requirements in terms of good governance standards enshrined in the EUs free trade agreements with third countries.