SMEs and regional economic growth in Brazil

This paper examines the relationship between the small and medium-sized enterprise (SME) sector and economic growth for an annual panel of Brazilian states for the period 1985-2004.We investigate the importance of the relative size of the SME sector measured by the share of SME employment in total formal employment and the level of human capital in SMEs measured by the average years of schooling of SME employees. The empirical results indicate that the relative importance of SMEs is negatively correlated with economic growth, a result that is consistent with previous studies examining developing countries. In addition, our results show that the human capital embodied in SMEs may be more important for economic growth than the relative size of the SME sector.