Impact of National Policy and Legal Environments on Employment Growth and Investment in Micro and Small Enterprises

This working paper contributes to the discussion about growth and employment creation in micro and small enterprises (MSEs) by relating employment growth and investment behaviour to underlying national policy differences.

Enterprises in Chile, Guinea, Pakistan, Peru, South Africa, Tanzania and Viet Nam participated in this study and the present analysis is based on firm-level data collected during the research process in each country.

The analysis shows that national policy environments affect MSEs and that employment creation takes place in micro enterprises where growth rates are high. Growth rates drop as micro enterprises become larger and barriers to entering the formal economy are observed. The formal status of enterprises is still seen to facilitate growth since registration gives a more legitimate status in input and output markets. Access to national markets and export markets is important for employment creation and access to credit is found to be a significant determinant of investment within firms.

These findings further stress the need for focusing on the barriers and constraints to growth that MSEs face in many countries. Entry into the formal economy comes at a cost but it also opens up opportunities for growth. A common challenge for governments and international agencies is to reduce barriers to growth and to facilitate enterprises' entry into the formal economy. Formal status and improved enabling environments do create better prospects for employment creation in small enterprises.