The Double-Edged Sword: Unintended Consequences of SME Promotion Policy
This paper investigates the unintended effects of size-dependent regulations in SME promotion policies. Using administrative data from all registered firms in Thailand, we examine the 2012 introduction of a revenue cap—designed for corporate income tax exemption of SMEs—and its cascading impact on firms’ growth and investment decisions and the broader market landscape. Our findings indicate a strong response to the cap, with a significant bunching of firms just below the threshold. After the introduction of the policy, we observe a significant decline in both revenue growth and investment among firms eligible for the scheme, compared to ineligible firms. This adverse effect is more pronounced among firms with lower pre-policy profitability. Additionally, while the size-dependent policy does not directly curtail the growth of large firms, it inadvertently enhances their market share due to the policy’s negative effects on SME growth. Our study highlights the unintended outcomes of SME policies that, while aiming to support smaller entities, may inadvertently curb SME growth—giving an edge to larger firms in the industry.