Published on Let's Talk Development

SME capital markets: A viable alternative?

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It is well known that small and medium enterprises (SMEs) seldom raise funds in capital markets, which mainly attract fairly large corporations. Costly listing requirements, absence of investors demand, financial illiteracy, information asymmetries, and lack of collateral might be behind this problem.

Policy makers have tried to broaden access to capital market financing by promoting the establishment of alternative capital markets targeted at SMEs. Compared to traditional markets, SME capital markets try to attract smaller firms by reducing fees, offering less stringent listing and disclosure requirements, and appointing advisors that help firms navigate the listing process, among other measures.

One region that has placed particular emphasis in developing SME markets has been East Asia. Since the Asian Financial Crisis, several economies have established new SME markets or reformed existing ones. As a result, compared to those in other regions, including advanced ones, SME markets have become large in East Asia (Figure 1).

Figure 1: Size of SME Capital Markets


In a new paper (Abraham et al., 2019), we document patterns in the largest East Asian SME capital markets: SME Board, ChiNext, and NEEQ in China, GEM in Hong Kong SAR, and TPEx in Taiwan.

The data we collected show that, relative to the number of issuers in traditional markets and the total universe of SMEs, few firms are participating in SME markets. The number of issuing firms per year in the SME Board, ChiNext, and GEM is about one-third of the number of issuers in traditional markets. In addition, whereas in some cases these markets are effectively serving SMEs, in others they are serving rather large corporations. For example, in the SME Board the median issuer has $234 million in assets and 1,502 employees, well above the thresholds that typically define SMEs.

On the positive side, these markets seem to be providing financing to new sectors that are not adequately served by traditional markets. Most of the issuers in traditional markets are firms from the manufacturing and finance sectors. In SME markets, the presence of the manufacturing sector is also relevant, but the finance sector is significantly smaller. In turn, SME markets are characterized by a large presence of issuers dedicated to services (mainly, information technology firms), which together with manufacturing are the largest sectors in terms of amounts issued.

Overall, most SMEs do not seem to use capital market financing even when SME markets are in place. It would be worth examining the reasons why SME markets seem to fail to attract many small firms and whether these reasons lie on the supply or the demand side of funds. Answers to these questions might provide insights on how these markets could be improved.


Sergio Schmukler

Research Manager, Development Research Group, World Bank

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