Why Most MSMEs Remain Small: A Comparative Analysis of Systems Dependency, Organizational Capability, and Enterprise Outcomes in Developing Economies

By Anayo Agu 

Co-Founder, Seeds of Greatness Institute (SGI) 

 

Abstract 

Micro, small, and medium-sized enterprises (MSMEs) constitute the dominant form of business organization in developing economies, yet they are persistently characterized by limited growth, high mortality rates, and weak intergenerational continuity. Despite extensive policy interventions focused on improving access to finance, enhancing entrepreneurial capabilities, and expanding market opportunities, most MSMEs remain small, informal, and structurally fragile. This persistent pattern raises a foundational question: why do most MSMEs fail to transition into larger, more enduring enterprises? 

This article argues that the central constraint is not primarily the absence of entrepreneurial effort or external resources. Rather, it lies in the limited development of systems dependency, governance maturity, and organizational capability within enterprises. Drawing on the foundational questions posed by the United Nations Commission on the Private Sector and Development, and extending emerging scholarship on enterprise development, the study develops a comparative analytical framework that links these internal organizational factors to enterprise outcomes. 

The analysis shows that most MSMEs remain small because their operations are predominantly person-dependent rather than system-dependent. In such configurations, decision-making, process execution, and operational knowledge are concentrated in individuals, limiting the enterprise’s capacity for repeatability, scalability, and continuity.  

 

By contrast, larger and more enduring enterprises exhibit higher levels of systems dependency, characterized by structured processes, distributed roles, and institutionalized routines that enable coordination, manage complexity, and sustain performance across time and context.  

 

While this pattern of person-dependency is observable across different economic environments, it is more pronounced in developing economies, where constraints in human capital development, limited diffusion of systems thinking, and weak institutional support for enterprise development reinforce person-dependent modes of organization. 

 

By reframing MSME smallness as an organizational and systems phenomenon, the article challenges dominant explanations centered on finance, informality, and market access. It concludes that enterprise capability—expressed through systems maturity, should be treated as a form of development infrastructure and positioned as a central objective of private sector policy in developing economies. 

 

1. Introduction 

More than two decades after the United Nations Commission on the Private Sector and Development was convened to address the question of how to unleash the potential of entrepreneurship in developing countries, the structural profile of the private sector in many of these economies remains largely unchanged.  

 

Micro, small, and medium-sized enterprises (MSMEs) continue to dominate the economic landscape, accounting for the overwhelming majority of business entities and a significant share of employment. Yet, despite their numerical prevalence, their contribution to productivity growth, industrial expansion, and structural transformation remains limited, with little change in structural and developmental outcomes (World Bank, 2019; OECD, 2019). 

 

This persistent condition presents a paradox that lies at the center of contemporary development challenges. MSMEs are numerous, yet they remain small. They are active, yet they are fragile. They generate livelihoods, yet they rarely evolve into enduring organizations capable of driving long-term economic development. The central question, therefore, is not simply how to create more MSMEs, but why existing MSMEs fail to grow, scale, and endure. 

 

Conventional explanations have focused on external constraints. Limited access to finance is frequently cited as the primary barrier to growth. Weak infrastructure, regulatory burdens, market inefficiencies, and informality are also identified as significant impediments. These factors undoubtedly shape the environment within which enterprises operate, and addressing them remains an important component of development policy. 

 

However, the persistence of MSME smallness across diverse contexts suggests that these explanations are incomplete. Even in environments where access to finance has improved, where markets have expanded, and where regulatory frameworks have been reformed, the structural characteristics of MSMEs have not changed substantially. 

 

This observation points to a deeper and less examined dimension of the problem: the internal structure and organization through which enterprises coordinate and sustain their activities. 

 

This article advances the argument that MSMEs remain small because they lack sufficient systems dependency, governance maturity, and organizational capability to support sustained growth and continuity. While external constraints influence enterprise performance, they do not fully determine it. The internal structure of the enterprise—how it organizes activities, distributes responsibilities, and manages processes, plays a decisive role. 

 

By reframing MSME smallness as a systems problem, the article seeks to extend the conversation initiated by the United Nations Commission. It shifts the analytical focus from external barriers to internal organizational dynamics, without dismissing the importance of the former. The objective is not to replace existing explanations, but to complement and deepen them. 

 

The analysis proceeds by examining dominant explanations for MSME smallness and their limitations, followed by the development of a systems-based framework centered on systems dependency, governance maturity, and organizational capability. It then applies a comparative lens to distinguish between enterprises that remain small and those that achieve scale and continuity. Finally, it considers the implications for policy, practice, and empirical research. 

 

2. Dominant Explanations of MSME Smallness and Their Limitations 

The persistence of MSME smallness has generated extensive debate within development economics and entrepreneurship research. Several dominant explanations have emerged, each highlighting a different dimension of the problem. 

One of the most widely cited constraints is access to finance. MSMEs are often described as being “credit constrained,” lacking the collateral, credit history, or formal documentation required to secure loans from financial institutions. This has led to a proliferation of microfinance initiatives, credit guarantee schemes, and financial inclusion programs aimed at expanding access to capital. 

 

While these interventions have increased the availability of financial resources, their impact on enterprise growth has been mixed. Empirical studies suggest that access to finance does not automatically translate into sustained business expansion (Banerjee & Duflo, 2011; Bruhn et al., 2010). In many cases, loans are used for consumption smoothing or short-term needs rather than long-term investment in productive capacity. As a result, the diversion and misallocation of funds can undermine the intended purpose of financing and may, under conditions of weak organizational controls, contribute to enterprise instability and eventual failure. 

 

A second explanation focuses on informality. A large proportion of MSMEs operate outside formal regulatory frameworks, limiting their access to legal protections, formal markets, and financial services. Informality is often associated with low productivity and limited growth potential (La Porta & Shleifer, 2014). 

 

However, the relationship between informality and enterprise performance is complex. Formalization does not necessarily lead to growth, and many informal enterprises remain small even when regulatory barriers are reduced. This suggests that informality may be a symptom rather than a root cause of limited enterprise growth and development. 

 

A third line of explanation emphasizes managerial and entrepreneurial skills. Training programs have been designed to improve personal and organizational leadership, business planning, financial management, and marketing capabilities. While such programs have shown some positive effects, their overall impact on enterprise growth remains modest (McKenzie & Woodruff, 2014). 

 

Finally, infrastructure and market access are frequently cited as constraints. Poor transportation networks, unreliable power supply, and limited access to larger markets can increase costs and reduce competitiveness. Addressing these challenges is essential, but it does not fully explain why many enterprises fail to grow even when such conditions improve. This limitation becomes evident when observing that some enterprises operating within the same commercial environment—facing similar external constraints, including infrastructural deficits, nonetheless achieve superior performance, growth, and scale. 

 

Taken together, these explanations highlight important dimensions of the problem, but they share a common limitation: they focus primarily on external conditions and individual capabilities, rather than on the internal organization of the enterprise. 

What remains insufficiently examined is how enterprises are structured to utilize the resources and opportunities available to them. 

 

3. A Systems Explanation of MSME Smallness 

To address this gap, it is necessary to adopt a systems perspective on enterprise organization. 

 

The central proposition of this article is that MSMEs remain small because they operate with low levels of systems dependency, limited governance maturity, and underdeveloped organizational capability. These factors constrain their ability to achieve repeatability, scalability, and continuity—three conditions essential for growth and development. 

 

3.1 Systems Dependency and the Limits of Person-Dependent Enterprises 

In many MSMEs, business operations are heavily dependent on the founder or a small group of individuals. Decision-making is centralized, processes are informal, and knowledge is not codified. While such arrangements may be effective in early stages, they create structural and operational limitations. 

 

Person-dependent enterprises face several challenges. First, they struggle to maintain consistency in operations, as performance varies with individual involvement. Second, they find it difficult to delegate responsibilities, limiting their ability to expand. Third, they are vulnerable to disruptions, as the absence of key individuals can halt operations and compromise the timely fulfillment of critical tasks or obligations to key customers. 

 

Yet, these structural limitations often remain under-recognized and insufficiently integrated into enterprise diagnostics, performance assessments, and development planning frameworks. 

 

3.2 Governance Maturity and Organizational Stability 

Governance maturity refers to the presence of structures and mechanisms that guide decision-making, ensure accountability, and provide strategic direction. In many MSMEs, governance is informal or absent. Decisions are made reactively, often without clear criteria or long-term planning. 

 

The absence of governance structures limits the enterprise’s ability to coordinate activities, manage risk, and engage with external stakeholders. It also reduces transparency, making it difficult to attract investment or access formal financial services. 

 

As enterprises grow, the need for governance becomes more pronounced. Without it, complexity increases faster than the organization’s capacity to manage it, leading to instability. 

 

3.3 Organizational Capability and the Coordination of Activities 

Organizational capability encompasses the ability of the enterprise to coordinate resources, processes, and people to achieve desired outcomes. It is closely linked to systems dependency and governance maturity. 

 

In MSMEs with limited organizational capability, activities are often fragmented. Functions such as procurement, production, finance, and sales operate in isolation, without integration. This leads to inefficiencies, delays, and inconsistencies in performance, while also creating structural gaps that increase the risk of resource misallocation and undermine adherence to due process, accountability, and transparency—particularly in financial management and reporting. 

 

By contrast, enterprises with higher organizational capability exhibit coordinated processes, clear role definitions, and effective communication mechanisms. These characteristics enable them to manage complexity, adhere to cue process, enforce accountability, and sustain growth. 

 

4. Comparative Logic: Why Some Enterprises Scale While Others Stall 

The persistence of MSME smallness becomes more intelligible when examined through a comparative lens. The question is not simply why MSMEs remain small in absolute terms, but why some enterprises—operating within the same macroeconomic and institutional environments—manage to scale, stabilize, and endure, while others remain constrained. 

 

This comparative logic is critical because it shifts the analysis away from purely external explanations. If all firms were equally constrained by finance, infrastructure, or regulation, one would expect uniformly limited outcomes. Yet, within the same cities, sectors, and markets, there are observable differences in enterprise trajectories. Some firms grow beyond their initial scale, formalize their operations, attract investment, and develop institutional structures. Others, often starting under similar conditions, remain small, informal, and vulnerable. 

 

The distinguishing factor, this article argues, lies in the internal organization of the enterprise—specifically, in the degree of systems dependency, governance maturity, and organizational capability. 

 

4.1 MSMEs as Person-Dependent Systems 

Most MSMEs in developing economies operate as person-dependent systems. The founder is the central node through which decisions, information, and operations flow. This configuration has several defining characteristics. 

 

First, decision-making is highly centralized. Strategic, operational, and even routine decisions are made by the founder, often in real time and without formal criteria. While this allows for speed and flexibility, it limits the organization’s ability to process complexity, adhere to due diligence, and scale operations. 

 

Second, processes are largely informal. Activities are carried out based on experience, intuition, and immediate necessity rather than predefined procedures. This results in variability in quality, inefficiencies in execution, and difficulty in training or integrating new personnel. 

 

Third, knowledge is tacit and individualized. Critical information about suppliers, customers, pricing, and operations resides in the founder’s memory rather than in documented systems. This creates a structural dependency that inhibits delegation and continuity. 

 

These characteristics are not inherently problematic in the early stages of enterprise formation. Indeed, they often enable businesses to emerge under conditions of uncertainty and resource constraint. However, they become limiting as the enterprise attempts to grow. 

 

The absence of systems transforms growth into a source of instability. Increased activity generates more decisions, more transactions, and greater coordination demands, all of which remain concentrated in the founder. The result is operational bottlenecks, declining efficiency, increasing dysfunctions, overwhelming workload, and eventual stagnation. 

 

4.2 Scaling Enterprises as System-Dependent Organizations 

In contrast, enterprises that achieve scale and continuity exhibit a different organizational logic. They transition from person-dependent to system-dependent modes of operation. 

 

In these enterprises, decision-making is structured and distributed. Strategic decisions may remain centralized, but operational decisions are guided by defined processes and delegated to appropriate roles. This reduces bottlenecks and enables the organization to handle increased complexity. 

 

Processes are formalized and standardized. Activities such as procurement, production, quality control, and customer engagement are governed by procedures that ensure consistency. This allows for repeatability and facilitates training, replication, and expansion. 

 

Knowledge is institutionalized. Information is documented, shared, and embedded within the organization. This reduces dependency on individuals and enables continuity even when personnel changes occur. 

 

Governance structures are also more developed. There are mechanisms for oversight, accountability, and strategic direction. These structures provide stability and enable the enterprise to engage more effectively with external stakeholders, including financial institutions and partners. 

 

These differences are not merely incremental and peripheral; they represent a qualitative shift in how the enterprise functions. The transition from person-dependent to system-dependent organization marks a threshold beyond which growth becomes sustainable. 

 

4.3 The Structural Nature of Enterprise Divergence 

The divergence between MSMEs that remain small and enterprises that scale is therefore not primarily a function of external opportunity, but of internal organization. 

This does not imply that external factors are irrelevant. Access to finance, infrastructure, and markets remains important. However, their impact is mediated by the enterprise’s internal capacity to utilize them effectively. 

 

An enterprise with limited systems dependency may receive financing but lack the structures to deploy it productively and keep the records. It may gain access to new markets but be unable to meet demand consistently. It may hire additional staff but struggle to coordinate their activities or appropriately delegate responsibilities. 

 

Conversely, an enterprise with higher systems maturity is better positioned to leverage external opportunities. It can integrate new resources into existing processes, maintain quality standards, and manage increased complexity. 

This comparative insight reinforces the central argument of this article: MSME smallness is not merely a condition imposed by external constraints, but an outcome shaped by internal organizational structure, governance maturity, and capability. 

 

5. Enterprise Outcomes Framework: Linking Systems to Performance 

To further clarify the relationship between organizational structure and enterprise performance, it is useful to develop a framework linking systems dependency, governance maturity, and organizational capability to key enterprise outcomes. 

Five interrelated outcomes are particularly relevant: survival, efficiency, bankability, scalability, and continuity. 

 

5.1 Survival 

Survival is the most basic outcome, yet it remains a significant challenge for many MSMEs. Enterprises with low systems dependency are highly vulnerable to disruptions. The absence of the founder, fluctuations in demand, or operational challenges can quickly destabilize the business. 

 

By contrast, enterprises with higher systems maturity are more resilient. Defined processes and distributed responsibilities allow operations to continue under varying conditions. Survival, in this sense, becomes a function of organizational structure rather than mere persistence. 

 

5.2 Efficiency 

Efficiency reflects the ability to utilize resources effectively. In person-dependent enterprises, inefficiencies arise from duplication of effort, conflicts of interest, inconsistent processes, and lack of coordination. Costs are often higher than necessary, and productivity remains low. 

 

System-dependent enterprises, on the other hand, benefit from standardized operations, processes, clearer workflows, and better coordination. This reduces waste, improves productivity, and enhances competitiveness. 

 

5.3 Bankability 

Access to finance is often treated as an external constraint, but it is also influenced by internal organizational factors. Financial institutions assess not only the availability of collateral but also the reliability of the enterprise’s operations and records. 

 

Enterprises with weak governance and informal processes struggle to demonstrate creditworthiness. Their financial records may be incomplete, their operations opaque, and their risk profiles uncertain. 

 

In contrast, enterprises with stronger systems maturity are more likely to maintain accurate records, demonstrate operational stability, and meet the requirements of formal financial institutions. Bankability, therefore, is partly a function of internal organizational structure, governance maturity and operational capability. 

 

5.4 Scalability 

Scalability depends on the ability to replicate performance across larger volumes or new contexts. As discussed earlier, this requires standardized processes and coordinated systems. 

 

Person-dependent enterprises face inherent limits to scalability. Growth increases complexity without corresponding increases in organizational capacity, leading to diminishing returns. 

 

System-dependent enterprises are better equipped to scale because their operations are structured for replication. Processes can be extended, roles can be duplicated, and performance can be monitored across different units. 

 

5.5 Continuity 

Continuity represents the highest level of enterprise development. It involves the ability of the enterprise to endure over time and across leadership transitions. 

In many MSMEs, continuity is compromised by founder dependency. When the founder exits—whether due to retirement, illness, or death, the enterprise often declines or collapses. 

 

Enterprises with higher systems maturity are more likely to survive such transitions. Their operations are institutionalized, and their knowledge is embedded within the organization. Continuity becomes a function of the system rather than the individual. 

 

6. Implications for Developing Economies: Rethinking Policy and Practice 

The analysis presented in this article has significant implications for how private sector development is conceptualized and implemented in developing economies. 

First, it suggests that the focus of policy should shift from increasing the number of enterprises to improving the quality of existing ones. The question is not only how many businesses exist, but how they are organized and how they perform. 

 

Second, it highlights the need to integrate enterprise development into the core of development strategy. This involves recognizing that building enterprises is a structured process that requires deliberate intervention, not an automatic outcome of entrepreneurial activity. 

 

Third, it calls for a re-evaluation of existing support mechanisms. Programs focused solely on finance, training, market access, or ease of doing business, may have limited impact if they do not address the internal organization of the enterprise. Integrating systems development into these programs could enhance their effectiveness and outcomes. 

 

Fourth, it positions enterprise capability as a form of development infrastructure. Just as investments in physical infrastructure enable economic activity, investments in organizational systems enable enterprises to convert activity into sustained performance. 

 

This perspective aligns with, and extends, the concerns raised by the United Nations Commission on Private Sector and Development. It suggests that engaging the private sector in development requires not only expanding its reach, but strengthening its internal capacity to function effectively. 

 

7. Implications for Empirical Research and Doctoral Inquiry 

The framework developed in this article also provides a basis for empirical investigation. 

 

The concepts of systems dependency, governance maturity, and organizational capability can be operationalized and measured through indicators such as process documentation, role clarity, decision-making structures, and performance monitoring systems. These indicators can then be linked to enterprise outcomes such as growth, profitability, and survival. 

 

A comparative research design, examining differences between MSMEs and larger enterprises within the same context, can provide insights into the factors that enable or constrain enterprise development. Such an approach aligns with the broader objective of understanding not only whether enterprises succeed, but why. 

 

This has direct relevance for doctoral research focused on enterprise development and systems thinking. It offers a framework for integrating theoretical insights with empirical analysis, contributing to both academic knowledge and practical application. 

 

8. Conclusion 

The persistence of MSME smallness in developing economies is not merely a reflection of external constraints, but a manifestation of internal organizational limitations. 

 

This article has argued that the central issue lies in the absence of systems dependency, governance maturity, and organizational capability within enterprises. These factors constrain the ability of MSMEs to achieve survival, efficiency, bankability, scalability, and continuity. 

 

By adopting a systems perspective, it becomes possible to reframe MSME smallness not as an inevitable condition, but as a problem that can be addressed through deliberate enterprise development. 

 

The implication is clear and significant. Private sector transformation requires more than the proliferation of entrepreneurial activity. It requires the formation of enterprises that function as systems. 

 

In this sense, the challenge identified by the United Nations Commission remains unresolved not because of insufficient effort, but because of incomplete framing. The task is not only to unleash entrepreneurship, but to build enterprises capable of sustaining and scaling its outcomes. 

 

This requires the institutionalization and mainstreaming of enterprise development as a strategic priority in developing economies, supported by deliberate capacity-building and policy frameworks that enable its systematic adoption by governments, policymakers, and private sector actors. 

 

 

 

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