The aim of this book is to assess the dynamics and determinants of firm growth in less-developed countries, through the exploration of four important dimensions: firm creation, exit , and survival dynamics; firms inputs, firms’ managerial practices and organizational capabilities; how external (environmental) factors affect firm growth, and how social conditions enable and/or constrain the capabilities of firms to innovate. Although the main focus in the book is the case of Kosovo, this economy is not treated as an isolated case; the findings are compared to a set of five reference countries. This positions the analysis between the body of microeconomic work on firm growth and the empirical literature on less-developed countries.
The book begins with a comprehensive introductory chapter, which discusses the inspiration for the book and implications for empirical analyses that emerge. It sets out an empirical research agenda and identifies some characteristics of the countries used as benchmarks.
1.1 Motivation for the Book
The book addresses the important theme of which factors enable and constrain firm growth in less-developed economies. The empirical evidence used for the analysis is related to Kosovan firms, but the findings are presented in the wider context of development economies. However, the Kosovan context has some intrinsic merits since there is no other published book that addresses economic development in Kosovo specifically. Although Kosovo is a small country, it reached the international headlines in the context of its centrality in a major war in Europe. Its geopolitical importance and the unresolved nature of the conflict between Kosovo and Serbia, which could erupt again in Europe, mean that economic development and job creation in this country are issues deserving of more attention than they have received in the current scholarly literature.
Albeit from a low base, in the post-financial crisis period, Kosovo’s economy has grown consistently and at a higher rate compared to other Western Balkans countries. In 2017, Kosovo’s GDP per capita reached US$ 3902 from US$ 1088 in 2000 (World Bank 2018). The World Bank includes Kosovo in the group of countries with low-income per capita group. Its economy is dominated by Small and Medium-sized Enterprises (SMEs ). According to the Kosovo Statistics Agency (KSA) these types of firms account for 99.78% of the total firm population.
Consequently, the analysis in this book focuses on SMEs . The empirical evidence suggests that this category of firms is of vital importance for sustainable economic growth in both high- and low-income economies (Ayyagari et al. 2011; OECD 2016). Governments and policy makers around the world recognize the strategic importance of SMEs and identification and implementation of policies to promote a conducive business environment are a deliberate goal of the governments in both advanced and less-developed countries (Smallbone and Welter 2001).
The following list of reasons why SMEs play such a pivotal role in economic growth is not exhaustive, but includes the most prominent ones:
- there is empirical evidence showing that SMEs are the dominant business firm type in the firm populations of many economies. Although accurate and up-to-date data on the structure of the firm population is not immediately accessible, according to Ayyagari et al. (2011) more than 95% of firms across the world are SMEs . This percentage varies across regions and countries, but in those market economies with the lowest shares their numbers are still high. For instance, among the industrialized countries, Japan has the highest proportion of SMEs and they account for more than 99% of total firm population (EIU 2010). The picture is similar for the Organisation of Economic Cooperation and Development (OECD) area countries where SMEs predominate and represent some 99% of all firms. They are the main source of firm employment in these countries, accounting for around 70% of jobs on average, and are major contributors to value creation, generating between 50 and 60% of value, added on average (OECD 2016). An IFC (2010) report indicates the number of micro, small and medium-sized enterprises in emerging markets as somewhere between 365–445 million, 25–30 million of which are formal SMEs and 55–70 million formal micro enterprises, with the remaining 285–345 million being informal enterprises and one-person firms.SMEs are known for their contribution to economic development, particularly in developing countries, although this varies substantially across countries. According to IFC (2010), SMEs contribute up to 33% of GDP in developing economies, although this is significantly higher if the contribution of firms operating in the informal sector is included. In a report prepared for the European Commission, Wymenga et al. (2011) argue that the contribution of SMEs to overall output is generally lower than that made by larger companies. This is because the former group tend to be more labour intensive, with the result that smaller firms, typically, are less productive;
- since SMEs are more labour intensive business entities, they provide a more substantial contribution to employment in national economies around the world. Higher labour intensity results in a lower capital cost of job creation in smaller compared to in larger firms, which matters for developing countries and economies with high unemployment rates (Liedholm and Mead 1987; Schmitz 1995). The contribution of SMEs to total employment varies widely between countries and regions; there is some evidence that SME employment, which is important in all countries, is especially important in high-income countries. According to the OECD (2016), SMEs are the main employers in developed countries, accounting for around 70% of jobs, on average, while in emerging economies SMEs represent up to 45% of total employment. These figures confirm the finding in an earlier report, based on a World Bank survey of 47,745 businesses in 99 countries, which shows that firms with between 5 and 250 employees account for 66% of total permanent, full-time employment in these countries (Ayyagari et al. 2011). Figure 1.1 depicts the contribution of SMEs to employment in different country groups;
Fig. 1.1Employment contribution of SMEs(Source Author of the book, using data from Ayyagari et al. [2011])SMEs are responsible for a higher proportion of job creation than large enterprises. De Kok et al. (2011) argue that between 2002 and 2010, 85% of total employment growth, on average, was attributable to SMEs. Ayyagari et al. (2011, p. 3) provide evidence showing that, across country income groups, while small firms may not employ large numbers, they generate the most new jobs. More specifically, they show that small firms with less than 20 employees generate 45.34% of new jobs and that, even in countries with aggregate net job loss, small firms (less than 20 employees) are the major job creators (36.54% of new jobs). Job creation is particularly important in countries plagued by high rates of unemployment such as Kosovo; - SMEs are critical for innovation and productivity growth. The empirical evidence suggests that the SME sector makes a significant contribution to the invention and innovation diffusion processes and the establishment of competitive national innovation systems (Baumol 2002; Piech 2004; Radosevic and Mickiewicz 2003; Čučković and Bartlett 2007, p. 16). The further input of SMEs to national innovation activity has been boosted by the development of knowledge-based economies, increased non-technolog...