We use a survey of small rural enterprises from Sri Lanka to demonstrate quantitatively the
economic importance of this sector and to identify participants’ characteristics and obstacles to
the sector’s expansion and productivity. Value added in the rural non-farm sector is estimated to
amount to 80% of agricultural GDP and mean incomes for those having a rural enterprise to be
about double of those who do not. Barriers to entry appear to be low and the impact of non-farm
enterprise development on inequality modest and temporary, implying the potential for the sector
to make a significant contribution to growth and poverty reduction. At the same time,
infrastructure constraints (but not regulatory obstacles) pose a formidable barrier to startup of
new enterprises and to investment and increased productivity by existing ones. The fact that such
constraints emerge as particularly harmful for small enterprises suggests that policies to improve
delivery of the public services in question will be important to provide a basis for a flourishing
rural non-farm sector which in turn will have an important role for poverty reduction.