Defining SMEs: A Less Imperfect Way of Defining Small and Medium Enterprises in Developing Countries Tom Gibson Principal, SMEthink Co-Founder, Small Enterprise Assistance Funds

Editor's Note: This paper was published on the Brookings Web site following discussions with the authors about small-and medium-enterprise research, which may inform Brookings' research in this area. It is intended to foster discussion about the policy issues and recommendations, and does not necessarily reflect the official view of Brookings, its board 2 or the advisory council members. For more information, please contact the Global program at [email protected]. Summary: Within the community whose work it is to promote economic growth in developing countries, the role of small and medium enterprises (" SMEs ") remains a topic of debate. This debate has been badly served by faulty definitions. As career practitioners in SME finance, we review in this paper how SMEs are defined for developing countries, how such definitions are used, and why this matters. We argue the following: 1. The inadequacies of current conventions in defining SMEs and the inconsistencies among official SME definitions can lead to serious distortions in the allocation of donor spending for private sector development. 2. The volume of turnover of a business is in general a more appropriate measure of its relative size than either of the more conventional measurements by number of employees or value of assets, when adjusted as described in the text. 3. The use of any single definition of SMEs for multiple countries in diverse stages of economic development leads to additional distortions. In the analysis, we describe some of the key qualitative characteristics of SMEs, beyond simple numerical tests, which support the rationale for tax-dollar funded promotion of SMEs. In order to provide the sort of clarity currently lacking in SME policy, however, we propose for consideration a new quantitative formula for defining SMEs that blends the principles summarized above. Given that the economic contribution of SMEs depends critically on initial success in their home markets, we believe the size parameters of SMEs should be scaled relative to their home base. To this end, the proposed formula is based not only the revenues of a company, but also takes into account the country-specific economic context in which the SME operates. By this formula, for example, an SME in Ghana would be defined as having annual turnover of between $23,700 and $2,370,000. [Editor's note: For the purposes of this paper, the use of the dollar sign refers to the U.S. dollar.] In Thailand, however, whose Gross National Income (GNI) per capita …