The governance environment and innovative SMEs

This paper examines the impact of the governance environment on SME performance, concentrating on differences between innovators and non-innovators. A poor environment is related to lower profits and sales for SME innovators than non-innovators. Using a complementary indicator, SME innovators tend to have higher sales and profits when courts are perceived to be strong. On the other hand, the governance environment does not impact large innovative and non-innovative firm performance differently. Latin America and the Caribbean is a region with many entrepreneurs but few innovators. The region also has a larger proportion of smaller firms compared to other regions. In this context, lessons on SME constraints related to governance are important for developing enabling policies.