Thursday, 19 March 2015

Shortages of publicly available goods affect smaller companies worse in Burundi

Small and medium enterprises (SMEs) are often said to be engines of growth in an economy.  The idea is appealing; they may respond agilely to market changes, and grow rapidly, for example.  But there are some voices and analysts who argue that the evidence doesn't point to an important role for SMEs in growth.  Although there is evidence that fast growing economies have lots of SMEs, it is the speed of growth that leads to SME formation, they say, rather than the other way round.

As described in my last post, smaller companies produce less of their own electricity than large companies.  Generators are expensive, and larger companies can spread the cost over more production.  For small companies, buying a generator is not profitable, and they are reliant on publicly available electricity (whether from the state or private providers).  I suspect that the same is true of purchases of other large production goods like computers.

The inability to purchase production goods because of high fixed costs, or purchase the output of these goods because of supply shortage, seems likely to explain part of the inability of SMEs to contribute to growth.  To accumulate capital and buy a generator, you have to increase productivity, but it can be difficult to raise productivity without first accumulating capital.

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