According to the World Bank’s study Voices of the Poor, poor people expect to escape poverty through "income from their own business or wages earned in employment". A streamlined business environment supporting the development of competitive small and medium enterprises (SMEs) may expand employment opportunities and improve the living conditions of low income households. This study tries to determine if having a larger SME sector is associated with competitive or constraining business environments. Applying an OLS estimation of multiple linear regression models using cross-country data, the study attempts to assess how much of the cross-country
variation in the size, and contribution to employment of the SME sector can be explained by cross-country variation in business environment regulations. While a factor analysis over regulatory variables confirm previous findings that regulation comes in packages, the estimation results show that streamlined tax and labor regulations predict larger numbers of SMEs in the economy. Considering micro and SMEs contribution to employment together, it is the regulation of labor and product-market (easy entry, exit, access to credit, well functioning of judiciary system, and trade) that have a determinant role. However, the role of the latter is subject to governance levels. Productmarket regulation remains significant after an instrumental variables analysis. The evidence suggesting that a larger SME sector might be associated with constraining business environments is weak. Overall, an adequate business
environment with regulatory procedures that are transparent, easy to comply, and accessible to all despite of their connections, may foster a greater contribution of the small enterprise sector to the economy.