1.

Introduction Most of todays giant firms that dominate the landscape of the emerging global economy began as small businesses. In the early decades of the twentieth century, Joseph Schumpeter (1934, 1942) wrote the process of creative destruction, which states that the continual creation of new ideas by innovative firms steadily destroys the position of stagnant firms. Many economists consider this process to be fundamental to the prosperity of a global economy. Small and medium size firms face two challenges in globalization: property rights protection and barriers to entry. We suggest that these barriers faced by SMEs in international markets can be overcomed by using methods and technologies suggested by policy makers, such as factoring, credit-scoring and leasing. In the next section we outline the importance of SME firms for economic growth. In the third section, we discuss about SMEs, business environment and growth. The fourth section summarizes the paper.

2. The importance of small and medium-size firms for economic growth As described by Schumpeter, the theory of creative destruction is embraced by many economists as being the main force behind sustained improvement in the standard of living of market economies. In the process of creative destruction, the continual emer gence of innovative ideas underlies the sustained growth of global economies. The most important aspect of economic growth is the ongoing destruction of companies that fail to prevail upon the market. Schumpeter considered that innovations give firms temporary monopolies, which are essential since developing, producing, and marketing new products imply a high cost, because they generate funds to finance further innovations. Apparently, large firms are the ones that are able to develop and retain expertise in this areas, thus Schumpeter saw innovation as increasingly an activity of very large companies.

Actually, in modern economy, innovation remains largely the work of SME. As Acs and Audretsch demonstrated in their book Innovation and Small Firms, innovative ideas occur mostly in industries with SME, even though large firms tend to be more dominant and have higher level on innovative ideas. In a frequently cited article Innovation in large and small firms (1998), Acs and Audretsch determine that the total number of innovations in an industry is negatively related to industry concentration but positively related to the intensity of R&D, the ratio of skilled employees and the proportion of large companies. They argued that industries with a high share of large companies exhibit more innovative activity despite the fact that is mainly the small firms that are responsible for this activity because where an industry is dominated by large enterprises, the small ones will have to be innovative in order to survive. SME face two challenges in globalization: property rights protection and barriers to entry. 2.1 Property rights The critical role of property rights in maintaining the prosperity of capitalist economies is becoming increasingly evident, especially as more information about why economic growth in socialist countries, and the main third world countries that imitated them was so low. In a large country, an innovator has limited property rights in his/her innovation. The new products belong to the firm, not to the employees who invented it. Thus, this reduces the incentive of creative employees to work hard for their firms.

2.2 Barriers to entry There are a number of barriers to entry, both natural and deliberate, that prevent new upstart firms to gain market share. In an industry with higher entry barriers, smaller firms become less innovative. We now examine several forms these barriers might take. Financing constraints In order for SME firms to be able to apply innovations to large scale productions, they must be able to grow fast. As Schumpeter recognized, economic growth is dependent on a well

established financial system. Poor access to capital can reduce the expansion of innovative SME, to the detriment of the economy as a whole. It is debatable that large firms remain important in modern industrial economies because of the resources they can direct at innovation. These advantages stem from the access to capital, and can compensate for the poor property rights protection large companies offer innovators. Barriers to entry due to new entrants information disadvantages to others poor information about a new entrant Poor information about labor, output market conditions can determine new entrants to make costly mistakes. Due to the fact that employment and contracts with established firms are seen less risky, new entrants find it difficult to attract good workers. However, steady entry might erode these informational barriers. Later entrants can learn from the mistakes of early entrants. Thus, more frequent new market entry reduces these kind of barriers.

3. SMEs, business environment and growth As we argued in the previous part, SMEs are the engine of economic growth, but market imperfections and entry barriers impede their growth. Skeptics question the efficacy of this policy and point to empirical evidence in favor of large firms, or of a size-blind policy approach (Biggs, 2002). Even if many country-level studies have stated the importance of SMEs in the economic development and industrialization process (Snodgrass and Biggs, 1996), Beck, Demirguc-Kunt and Levine (2005a) provide the first cross-country evidence on the links between SMEs, economic growth, and poverty alleviation, using a new database compiled by Ayyagari, Beck and Demirguc-Kunt (2003). SMEs are more likely to enter a country with better access to finance and better investor protection. It is important to have a competitive business environment that allows for the entry of new and innovative entrepreneurs resulting in a Schumpeterian process of creative destruction rather than having a SME sector, which can be characterized by a large number of small enteprises that are neither able to grow nor exit. A poor business environment can cause a SME to stagnate.

However, policy makers had developed different medium long term methods and technologies to ease the SMEs financing constraints and improve their access to external financing. Factoring is an example of a technology that is promising in the absence of developed institutions, as it relies on them to a lesser extent. Credit-scoring and leasing can be useful with development of institutions over time. An important role in this development has the banks because it can facilitate the process.

4. Conclusions In this paper, we have stated the importance of SMEs, that creative destruction plays an important role in the process of economic growth. SME play a crucial role in the process of creative destruction because the diffusion of property rights, along with other problems characteristic of larger firms, dampen potential innovators incentives to be creative. Hence, we argue that smaller firms are better at creating radical innovations because they better protect the property rights.