Many low- and middle-income countries suffer from a lack of medium-sized companies,
which tend to be the main creators of higher-income employment as well as the motors of
innovation and economic diversification. The chief reason is that few micro and small
enterprises are able to upgrade, that is, grow and become medium-sized through
innovation. There is extensive literature offering manifold explanations, but no conclusion
has been offered yet as to what the most important factors are: entrepreneur or firm
characteristics; personal or business networks; or the business environment. This article
contributes towards filling this gap on the basis of three extensive empirical case studies
on Egypt, India and the Philippines. It argues that the entrepreneur matters much more
than recent literature would lead us to believe. Due to chronic imperfections in the
business environment, entrepreneurs in all three countries face similar upgrading
constraints: lack of finance, skilled workers, market information, technology and security.
Some are able to upgrade despite the constraints, but they have to struggle to sustain their
success. The few that succeed in both regards have taken it upon themselves to develop
effective coping strategies. In all three countries, they use similar strategies, in which they
tend to benefit from: above-average financial, social and human capital; motivation; riskreadiness;
and a willingness to invest in human resources, market research as well as
research and development. As a result, standard reforms for the improvement of the
business environment are certainly important but unlikely to translate into the upgrading
of a much larger number of MSEs. Inequality of opportunity is going to prevail unless
governments are willing to create a level playing field through the provision of quality
education and training, human resource development, access to markets and finance, and
rule of law for all.