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The traditional view on innovative capacity and firm size is that large enterprises are uniquely endowed (with market power and economies of scale) to exploit innovative opportunities (Schumpeter, 1950). This is because innovative activities, like Research and Development (R&D), entail high fixed costs to fmance (Comanor, 1 967).

Galbraith ( 1 956) argued that because development is costly, it is likely to be undertaken only by larger enterprises that possess the commensurate resources. In

addition, the economies of scale in production yield benefits to large enterprises that provide scope for economies for R&D.

However, the traditional view about SMEs has been challenged by some researchers who argue that SMEs, compared to large enterprises, possess several advantages that are more conducive to innovative activity (Scherer, 1 99 1 ; Link and Bozeman, 1 99 1 ). These advantages stem from, among other things, the differences in management

structures between large and small enterprises (Rothwell, 1 989). Link and Rees

( 1 99 1 ) argue that innovation-based diseconomies of scale exist in large firms owing to the fact that bureaucratisation in the innovation decision-making process inhibits not only inventiveness but also slows the pace at which new inventions move through the corporate system toward the market. Scherer ( 1 99 1 ) argues tha�Es have less

bureaucratic layers, enterprises have highly structured organisations,

consequently SMEs � �ore s�ited t

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reported that, because i®,O-vative activity flourishes in environments that are free of bureaucratic constraints, often researchers are forced to leave large enterprises, and

opt for small firm ventures because they felt thwarted by the large managerial restraints apparent in large enterprises.

Numerous studies have provided evidence to support the notion that SMEs are generally more productive than large enterprises, especially in terms of innovations per dollar of R&D and innovations per employee (Freeman, 1 974; Acs and Audretch, 1 988; LaFaice, 1 990; Prattem, 1 99 1 ; Link and Rees, 199 1 ; Almeida and Ko gut, 1 997). Little, Mazumdar, and Page (1 987:4) however, argued that the innovation argument is less relevant to developing countries because in these countries "innovation consists . . . of learning about, choosing, importing, absorbing, and quite often modifying foreign technology. Larger firms have considerable advantages in these respects, and the very small are often able to acquire modem technology only via large enterprises". Nadvi and Schmitz ( 1 994), however, in a study of industrial clusters in several LDCs concluded that a number of small finn clusters showed signs of innovation and technological upgrading.

Other researchers cast doubt on the validity of findings on innovation and technological change. It has been suggested that the state of knowledge regarding technological change has been misguided because the kind of data used in the analysis has been incomplete and, at best, represented only a proxy measure reflecting some aspect of the process of technological change (Acs and Audretsch, 1 990). As earlier observed by Little, Mazumdar and Page (1 987), the argument about innovative capacity of small and large enterprises is likely to remain open given the difficulty in measuring contributions to innovation. Based on the various arguments and research findings, it can be concluded that although large enterprises might possess certain advantages over SMEs, there is case for acknowledging SMEs' innovative capability, at least in some industries.

3.4.10 Seedbed, Private-Sector Led Growth /Competitive Environment

Of all the many potential roles of small enterprises in the economy one of the crucial ones is that they act as a seedbed that would nurture and train entrepreneurs needed to develop robust private sectors, a feature that is important for the long-run health of the economy (Levy, Berry, and Nugent, 1 999). According to this argument the promotion of small enterprises can provide a nursery for a forest of firms, some seedlings will die but others will survive and prosper - which fosters continuing dynamic competitiveness, and forms a good environment for private sector-led growth. Underscoring the importance of the seedbed function of small firms, the Bolton Committee argued that the health of the economy requires the birth of new enterprises in substantial numbers and the growth of some to a position from which they are able to challenge and supplant the existing leaders of industry (Bolton, 1 97 1 ). Furthermore, they add that a thriving small firm sector will help to guard against possible ossification and decay of the economy as a result of domination by large firms. In a related argument Acs (1999:x) states that, "the crucial barometer for economic and social well being is continued high level of creation of new and small firms in all sectors of the economy."

SMEs, because they exist in large numbers, can help to challenge the monopoly power of large enterprises (Johns, Dunlop and Sheehan, 1 989; Little, Mazumdar and

Page, 1 987}. Their mere existence helps to promote a more competitive environment, thereby benefiting consumers in terms of lower consumer prices and a wider choice of

consumer goods. In developing countries, because SMEs and micro enterprises exist

in large numbers, they are seen as the emerging private sector; they form the base for private sector-led growth (IFC, 1 992, 1 998a, 1 998b, 2000), and they hold the promise for achieving more flexible and competitive domestic economies (Bruton, 1 985, 1 997). The development of small enterprises therefore can help towards the development of local entrepreneurship and local production structures, thus laying a good foundation for private sector-led growth, whilst simultaneously benefiting the country in terms of employment creation and achieving a fairer balance in the distribution of national resources, income, knowledge and power.

The presence of small enterprises in an economy is particularly important during the early stages of industrialisation. Evidence suggests that SMEs can help a country to maintain (i) a low cost of living in the short run in order to ensure long-term improvements in people's standards of living; (ii) a low-wage policy to boost labour intensive industries (Choy and Goh, 1 994). These features should be desirable to many poor countries because of low incomes and high levels of unemployment.

One of the greatest challenges facing developing countries in the 2 1 st Century is to position themselves against the threats of globalisation and be able to seize opportunities. Whilst globalisation is being hailed for opening up opportunities for all, the results so far have produced winners and losers and sadly many developing countries fall in the latter category.34 There are reports that globalisation has led to uneven development by widening the gap between the rich and the poor within countries and regions, disturbed national industrial structures, and some countries have experienced de- and under-industrialisation (Abdullah, 200 1 ; Harvard, 2001 ). Joseph Stiglitz, former World Bank chief economist, in his book 'Globalisation and its Discontents' argues that globalisation left millions of people worse off in year 2000 than they were in 1 990 (Stiglitz, 2002). The promotion and development of SMEs, therefore, is potentially viewed as strategically important with respect to

34 For various views about Globalisation see for example Stiglitz (2002); Harvard (200 1); Grunberg

( 1 998); Ohmae ( 1 990; 1 996); Giddens (1999); Gray ( 1 998); Dobbm ( 1 998); James (200 1 ); Rugman (200 1); Strange ( 1 996, 1 998); Tomlison (1999); Dunning ( 1 997); Prakask and Hart (2000).

achieving a counterbalancing force, which will reduce the existing imbalanced industrial structures of many developing countries.

SMEs also have the potential for reducing the large dependency on foreign-based investments and to widen the industrial base. The importance of SMEs in widening the industrial base and reducing foreign domination has to do with linkages. Foley and Griffith ( 1 992) explain this concept very well by arguing that although the economist's concern is not necessarily with nationality per se, but with the different

economic characteristics and implications of foreign owned-industry branch plants of multinationals vis-a-vis locally-owned or indigenous industry, ownership and size

raise important economic issues such as linkage patterns, profit repatriation, research and development and the mobility of plants. Unfortunately large enterprises, which tend to be mainly foreign owned, have negative implications on these economic issues, hence SMEs (mainly locally owned) are needed to counter these negative effects and promote a more balanced private sector development agenda. Also, SMEs are needed because increased FDI, which tends to bring in large manufacturing enterprises, has proved insufficient, on its own, to solve regional disparities between, say, rural and urban areas.

3.4. 1 1 Summary

To summarise, SMEs have numerous benefits to offer the economy and contribute to the achievement of social and economic development of a country. They can provide an outlet for entrepreneurial talents, a wide range of consumer goods and services, a check to monopoly inefficiency, a source of innovation, and a seedbed for new industries - all features reflecting the competitive spirit that a market economy needs for efficiency. Most importantly SMEs have the potential to increase employment opportunities to skilled and unskilled workers, offering income opportunities to marginalised groups thus contributing to a more equitable distribution of income. Because of their flexible nature, they enable an economy to be more adaptable to structural change through continuous initiatives embodying new technologies, skills processes or products (Ibielski, 1 997).

It is accepted that the extent and magnitude of the benefits and impacts from SMEs may differ depending on the level of development of the country, the maturity of SMEs, and the environment in which they operate. IFC (1 992) stated that for anyone that believes that the future in Africa depends on the private sector, then they have to pay a lot of attention to the small business sector. Dallago (2000:309) assert "small firms are relatively more important to small economies than in large economies and in less developed countries compared to developed countries." The accuracy of the statements about the relative importance of SMEs to developed and developing countries are a subject of further research. There is no doubt, however, that SMEs have a lot to offer to the economies of both developed and developing countries. Given the increasing evidence on the strategic role of SMEs in the fast growing economies of Asia, and other developed countries, there is growing recognition of the fact that SMEs are a critical factor in achieving a sustainable economy. Several developing countries are now focusing on the development of their SMEs, by designing special programs aimed at releasing the potential of SMEs. The focus on SMEs as a solution to the many problems facing developing countries has been endorsed by international donors and lending agencies (like the World Bank,

UNCTAD, lLD, etc.) who, in recent years, have reassessed their commitment to the development of SMEs. Consequently they (international institutions) have stepped up financial and technical assistance to this sector. As Dana ( 1 996a) notes, small enterprises are now looked upon as the 'cure-all'. Within countries there are several enterprise-related projects, some established with the assistance of international institutions, focusing on micro, small and medium enterprises.

UNCT AD has, however, cautioned that not all SMEs play an important role in economic growth and development, and advises that promotion efforts should be more focused on growth-oriented small and middle-sized enterprises, which typically, tend to have a higher degree of internationalisation. This group, it has been argued, is often 'missing' in many developing countries (UNCTAD, 1 995a, 1 995b, 1 998a) partly due to policy biases and/or improper targeting (or design) of government assistance programs (Moini, 1 998).

In the following section, we discuss the 'missing middle' issue by looking at its characteristics, problems created by its existence in an economy, and the research evidence.

3.5 The Nature, Characteristics, and Causes of the 'Missing Middle'