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 significantly to employment generation, poverty reduction, and GDP growth. Despite their potential, SMEs face numerous constraints, including limited financial access, regulatory burdens, inadequate infrastructure, and challenges in trade integration. This study provides a comprehensive review of the effects of government policies on SME growth, assessing the effectiveness of various policy interventions while identifying the key challenges and sectoral variations that influence their impact.

Methods: A systematic literature review methodology was adopted, focusing on scholarly articles, policy reports, and empirical case studies from 2005 to 2025. The study utilized electronic databases such as Scopus, Web of Science, JSTOR, and Google Scholar. Boolean search techniques were applied to retrieve relevant literature, and thematic analysis was used to categorize the findings into distinct policy areas. The review applied comparative analysis to examine policy effectiveness across different regions and economic contexts. Inclusion criteria were set to ensure relevance, prioritizing studies that explicitly examined the intersection of government policies and SME development within developing economies.

Findings: Government policies have played a critical role in shaping the SME landscape through financial inclusion initiatives, regulatory reforms, infrastructure development, trade and export promotion, digitalization policies, and sustainability measures. Financial policies, including credit guarantee schemes, microfinance programs, and interest rate subsidies, have improved access to capital. However, challenges such as high collateral requirements, inefficiencies in fund allocation, and the exclusion of informal enterprises persist. Regulatory reforms aimed at simplifying business registration and tax compliance have facilitated SME formalization, yet bureaucratic inefficiencies and corruption continue to undermine their effectiveness. Investments in physical and digital infrastructure have enhanced SME operational capabilities, but regional disparities remain, particularly between urban and rural enterprises. Trade promotion policies have provided SMEs with access to international markets through export processing zones and trade facilitation programs; however, complex certification requirements and non-tariff barriers hinder participation. Digitalization policies have encouraged SME adoption of e-commerce and financial technology solutions, yet cybersecurity risks and digital skill gaps present ongoing challenges. Sustainability policies, including incentives for green technologies and eco-friendly financing, are gaining traction, though high implementation costs and limited financial support restrict their widespread adoption.

Theoretical Contributions: The study integrates multiple theoretical perspectives to analyze the effectiveness of government policies in SME development. Institutional theory highlights the role of regulatory stability and governance quality in shaping SME growth. The resource-based view (RBV) emphasizes the importance of financial and technological resource availability in determining SME competitiveness. Entrepreneurship theory illustrates the role of government incentives in fostering a conducive business environment. Market failure theory justifies state intervention in addressing financing gaps and structural barriers, while public choice theory explores the influence of political and interest-group dynamics on SME policymaking. These theoretical frameworks collectively provide a multidimensional understanding of how government policies impact SME growth and sustainability.

Conclusion and Policy Implications: The findings suggest that SME growth in developing economies requires a multifaceted policy approach that integrates financial accessibility, regulatory efficiency, infrastructure investment, and trade facilitation. Governments should enhance financial inclusion through alternative credit mechanisms, reduce regulatory bottlenecks to encourage SME formalization, and strengthen institutional capacity to combat corruption. Digital and physical infrastructure investments must be expanded to bridge regional disparities, particularly in underserved rural areas. Trade facilitation policies should address certification and logistical challenges to improve SME integration into global value chains. Sustainability policies should be reinforced with financial incentives and technical support to enable SMEs to transition toward environmentally sustainable practices. A holistic and sector-specific policy framework, aligned with regional economic contexts, is essential for maximizing SME contributions to economic growth and development.