Factors Affecting Micro, Small, and Medium-Sized Enterprise Development in Developing Asia: Findings from a Probabilistic Principal Component Analysis

FACTORSAFFECTINGMICRO,SMALL,ANDMEDIUM-SIZEDENTERPRISEDEVELOPMENTINDEVELOPINGASIA FINDINGSFROMAPROBABILISTICPRINCIPALCOMPONENTANALYSIS ShigehiroShinozaki,DaisukeMiyakawa,andRomeoArahan NO.715 February2024 ADBECONOMICSWORKINGPAPERSERIES ASIANDEVELOPMENTBANK ADBEconomicsWorkingPaperSeries FactorsAffectingMicro,Small,andMedium-SizedEnterpriseDevelopmentinDevelopingAsia: FindingsfromaProbabilisticPrincipalComponentAnalysis ShigehiroShinozaki,DaisukeMiyakawa,andRomeoArahan TheADBEconomicsWorkingPaperSeriespresentsresearchinprogresstoelicitcommentsandencouragedebateondevelopmentissuesinAsiaandthePacific.TheviewsexpressedarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesofADBor itsBoardofGovernorsorthegovernmentstheyrepresent. No.715|February2024 ShigehiroShinozaki(sshinozaki@adb.org)isasenioreconomistandRomeoArahan(rarahan.consultant@adb.org)isaconsultantattheEconomicResearchandDevelopmentImpactDepartment.DaisukeMiyakawa(damiyak@waseda.jp)isaprofessoratWasedaUniversity,andchiefeconomistofUTokyoEconomicConsultingInc.(UTEcon). ASIANDEVELOPMENTBANK CreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO) ©2024AsianDevelopmentBank 6ADBAvenue,MandaluyongCity,1550MetroManila,PhilippinesTel+63286324444;Fax+63286362444 www.adb.org Somerightsreserved.Publishedin2024. ISSN2313-6537(print),2313-6545(electronic)PublicationStockNo.WPS240032-2 DOI:http://dx.doi.org/10.22617/WPS240032-2 TheviewsexpressedinthispublicationarethoseoftheauthorsanddonotnecessarilyreflecttheviewsandpoliciesoftheAsianDevelopmentBank(ADB)oritsBoardofGovernorsorthegovernmentstheyrepresent. ADBdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilityforanyconsequenceoftheiruse.ThementionofspecificcompaniesorproductsofmanufacturersdoesnotimplythattheyareendorsedorrecommendedbyADBinpreferencetoothersofasimilarnaturethatarenotmentioned. Bymakinganydesignationoforreferencetoaparticularterritoryorgeographicarea,orbyusingtheterm“country”inthispublication,ADBdoesnotintendtomakeanyjudgmentsastothelegalorotherstatusofanyterritoryorarea. ThispublicationisavailableundertheCreativeCommonsAttribution3.0IGOlicense(CCBY3.0IGO)https://creativecommons.org/licenses/by/3.0/igo/.Byusingthecontentofthispublication,youagreetobeboundbythetermsofthislicense.Forattribution,translations,adaptations,andpermissions,pleasereadtheprovisionsandtermsofuseathttps://www.adb.org/terms-use#openaccess. ThisCClicensedoesnotapplytonon-ADBcopyrightmaterialsinthispublication.Ifthematerialisattributedtoanothersource,pleasecontactthecopyrightownerorpublisherofthatsourceforpermissiontoreproduceit.ADBcannotbeheldliableforanyclaimsthatariseasaresultofyouruseofthematerial. Pleasecontactpubsmarketing@adb.orgifyouhavequestionsorcommentswithrespecttocontent,orifyouwishtoobtaincopyrightpermissionforyourintendedusethatdoesnotfallwithintheseterms,orforpermissiontousetheADBlogo. CorrigendatoADBpublicationsmaybefoundathttp://www.adb.org/publications/corrigenda. Note: Inthispublication,“$”referstoUnitedStatesdollars. ABSTRACT Limiteddataonmicro,small,andmedium-sizedenterprises(MSMEs)makeitdifficultforgovernmentstodesignappropriateMSMEpoliciesinAsiaandthePacific.ToidentifyfactorsaffectingMSMEdevelopmentandpromoteevidence-basedpolicymaking,weproposeaprobabilisticprincipalcomponentanalysismethodthatworksdespitecurrentdatalimitations.Thestudyusestime-seriesMSMEdatacollectedfrom25developingmembercountriesoftheAsianDevelopmentBank(ADB)throughtheAsiaSmallandMedium-SizedEnterpriseMonitorproject.TheestimationresultssuggestthatsoundMSMEcreditmarkets,diversifiedfinancingoptions,supportfornewbusinessesandjobcreation,andactiveMSMEparticipationinglobalmarketplacesplayacriticalroleinensuringasmoothbusinessrecoveryfromvariouscrisesandshocksaffectingdevelopingAsiaandthePacific. Keywords:SMEdevelopment,accesstofinance,financialinclusion,SMEpolicy,probabilisticprincipalcomponentanalysis,SoutheastAsia,SouthAsia,CentralandWestAsia,thePacific JELcodes:D22,G20,L20,L50 1.Introduction DevelopingAsianeconomiescontinuetorecoverfromthecoronavirusdisease(COVID-19)pandemicthatbeganinMarch2020,althougheconomicgrowthdiffersbycountry.Continuousglobaleconomicuncertainty,however,hasamplifieddownsiderisks—includinghighinflation,currencydepreciation,andglobalsupplychaindisruptionsacceleratedbyregionalpoliticalturbulence.InSoutheastAsia,arecoveryintourismpartlycontributedtotheregion’s5.6%growthin2022;butitisforecasttodropto4.6%in2023givencontinuedweakexports.InSouthAsia,economicandpoliticalcrisesinPakistanandSriLankapushedtheregion’sgrowthdownfrom6.7%in2022to5.4%in2023.InCentralandWestAsia,theongoingimpactfromtheRussianinvasionofUkrainehelpedlowertheregion’sgrowthfrom5.1%in2022toaforecast4.6%in2023.InthePacific,astrongpost-pandemictourismreboundenergizedtheregion’ssharpeconomicrecoveryto6.1%growthin2022;butitisforecasttoslowto3.5%in2023partlyduetolaborshortagesacceleratedbyemigrationfromsmallislandcountriestoAustraliaandNewZealand(ADB2023a). Micro,small,andmedium-sizedenterprises(MSMEs)helpdrive