ABSTRACT
Small and medium enterprises (SMEs) have long been recognised as key to economic development (Anderson, 1982; Mead, 1984; Schmitz, 1995). They are the backbone of all economies, constituting the biggest segment of manufacturing sector firms and employment, and their predominance is seen in both developed and developing economies. In the latter, SMEs are particularly significant in that they provide employment and incomes for the poor, especially where SMEs merge into informalised, or non-regulated, forms of production and service delivery (Tendler, 2002), and they help promote local and regional economic development (Parrilli et al., 2013). The aim of this chapter is to assess the role SMEs can play in industrial development and poverty reduction. SMEs are usually constrained by their very size in terms of access to technical, financial and managerial resources and capabilities. On the other hand, there is a substantial body of conceptual argument and empirical evidence that illustrates how SMEs can and do enhance their competitiveness when they build on their inherent flexibilities and where they are a part of clusters, or agglomerations, of similar producers. The next section outlines the potential benefits that can arise from clusters. The third section considers the links between clusters and pro-poor outcomes, drawing both on the conceptual connections between, and empirical evidence on, cluster processes and dynamics and poverty reduction. The fourth section illustrates how clustering has become a key area for industrial strategy in many countries and discusses how cluster development policies have evolved in specific developing country contexts. The fifth section concludes.
