The Effects of Government Policies On SME Growth in Developing Economies: A Comprehensive Review

Abstract

Background and Purpose: Small and Medium Enterprises (SMEs) are fundamental to economic development in developing economies, contributing substantially to employment generation, poverty reduction, and GDP growth. Despite their potential, SMEs face persistent constraints related to finance, regulation, infrastructure, trade integration, digitalization, and sustainability. This study reviews the effects of government policies on SME growth and identifies the policy areas, implementation barriers, and contextual factors that shape their effectiveness.

Methods: A systematic literature review was conducted using scholarly articles, policy reports, and empirical case studies published from 2005 through November 2023. Searches were conducted across Scopus, Web of Science, JSTOR, and Google Scholar using Boolean combinations related to SME growth, government policy, finance, regulation, trade, infrastructure, and innovation. Findings were synthesized thematically and compared across developing-economy contexts.

Findings: Government policies influence SME growth through financial inclusion initiatives, regulatory reforms, infrastructure development, trade and export promotion, digitalization support, and sustainability measures. Credit guarantees, microfinance, simplified registration, infrastructure investment, and trade facilitation can improve SME performance; however, collateral requirements, bureaucratic inefficiencies, corruption, regional disparities, digital skill gaps, and implementation constraints continue to limit policy effectiveness.

Theoretical Contributions: The review integrates institutional theory, the resource-based view, entrepreneurship theory, market failure theory, and public choice theory to explain how government interventions affect SME growth. Together, these perspectives show that policy outcomes depend not only on the availability of support but also on institutional quality, resource accessibility, entrepreneurial incentives, market imperfections, and political implementation dynamics.

Conclusions and Policy Implications: SME development requires an integrated and context-sensitive policy approach combining financial accessibility, regulatory efficiency, infrastructure investment, capacity building, trade facilitation, and digital support. Governments should strengthen implementation capacity, reduce regulatory bottlenecks, improve access to finance for formal and informal enterprises, address rural-urban infrastructure gaps, and provide targeted support for digital and sustainable business transformation.