Wealth creators under systemic threat
Over the past century, the world has seen unprecedented economic growth driven in large part by competition and free markets. A key component of this growth process has been SMEs. But for such companies to flourish, free and competitive markets are required, where regulations are predictable, rule of law is impartial, decent financial tools are available, and money is sound. In many emerging economies, however, small and medium enterprises suffer (or never have the opportunity to start) due to political corruption, enervating regulation, poor courts, a lack of access to credit, and highly inflationary currencies.
Some other problems for SMEs in developing countries include economies overly reliant on natural-resource extraction and sporadic inflows of foreign aid. Both the so-called “resource curse” and foreign aid tend to redirect creative energies away from starting private enterprises (or scaling them up into medium-sized firms), which are so crucial for sustainable development over the longterm, and into whatever projects the large corporations and NGOs deem best. In other words, Western economic aid and charitable donations can distort local markets and delay the growth of a broad-based economy composed of self-determining businesses. Our help ends up hurting.
SMEs in developing countries are also hampered by artificial barriers to international networks of productivity and exchange—economic protectionism in its various forms. While most developed nations generally align their economic institutions and legal regimes to the free market system, they nonetheless pursue protectionist policies. For instance, as Tan and Griffiths have noted in Fighting Poverty Through Enterprise, Europe has long subsidized its agriculture by roughly $35-40 billion per year, even as it demands that other nations liberalize their markets to foreign competition. Similarly, in the United States, direct government farm payments from 2018 to 2025 amounted to roughly $210 billion, highlighting the immense and sustained scale of federal agricultural subsidies. Such protectionism and subsidies skew competition, leaving developing-country SMEs with fewer opportunities and tougher paths to scale.
Additionally, foreign aid usually comes with strings attached. These conditions—which might include requirements to use particular contractors, products, or services from the donor country or impose certain practices such as the dissemination of artificial contraception—tend to exclude local businesses from core economic activity of their own country and reinforce a neocolonial system of economic and cultural dependency. All of this not only wastes taxpayer money in rich countries, but also hurts farmers and entrepreneurs in poor countries who might otherwise be able to develop sustainable enterprises. If local firms in poor countries benefit, they tend to be the largest and most politically connected ones. Economist Peter Bauer famously caricatured this dynamic when he defined foreign aid as “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”
What’s missing in the ‘Missing Middle’?
Supporting microenterprises has been a fashionable cause in the world of foreign development and missions. While they can be useful for local development under the right circumstances, there are greater development opportunities with cultivating conditions for small and medium enterprises. Why is this the case? What role in the economy do SMEs fill that microenterprises and large companies can’t?
Small Enterprise Investment Funds (SEAF) is a not-for-profit corporation dedicated to development through SMEs. SEAF focuses on solving the “missing middle” challenge, where SMEs are too large for microfinance but too small or risky for traditional capital markets. SEAF supports and invests in SMEs on the theory that they have the ability to create an economic multiplier effect as firms hire and train workers, pay wages and taxes, and purchase from local suppliers. SEAF’s 2024 Impact Report tracks this ripple effect with a new Local Multiplier Effect metric that follows three concrete channels—wages to local employees, taxes to local governments, and purchases from local suppliers.
In 2023, reporting SEAF portfolio companies generated a combined local multiplier of $201 million, including $28 million in wages, $16 million in taxes, and $159 million in spending on local suppliers—flows that lift disposable incomes and local demand, strengthen public services and infrastructure, and deepen domestic supply chains. As SEAF’s report demonstrates, SME growth spreads value well beyond the firm, compounding across households, city halls, and vendor networks. Building up these kinds of economic networks are essential to longterm, sustainable development.
Encouraging small and medium enterprises
On the strength of reports like SEAF’s, we believe more energy needs to be focused on encouraging the success and growth of SMEs in the developing world. This could happen by encouraging and pursuing change on several fronts:
- Cultivate access to networks of productivity and exchange by deregulating the SME sector and lowering barriers to trade. Deregulation, if it ever happens, is usually focused on multination corporations, not the SMEs. This is counter-productive.
- Stop punishing rational risk-taking and strive to celebrate innovation and initiative instead of rewarding dependency and the status quo.
- Look for informed methods of increasing access to growth capital for SMEs. Here, as in so many aspects of development, local knowledge is essential to avoid waste and the unintentional subsidizing of corruption.
- Teach virtue and character instead of watered down ethics courses, and maintain a high view of the Gospel’s role in transforming culture for the better. Building a “culture of trust,” which includes, but extends far beyond, the business community, is essential to a flourishing commercial society.