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17 February 2021 (Updated 3 December 2024)
202116135200000001733184000000
No. 148

The Double-Edged Sword: Unintended Consequences of SME Promotion Policy

Athiphat MuthitacharoenArchawa PaweenawatKrislert Samphantharak

Abstract

This paper investigates the unintended consequences of size-dependent regulations in small and medium-sized enterprise (SME) promotion policies. We use data from all registered Thai firms to analyze the effects of an introduction of a revenue cap for the SME tax incentive program qualification. Our study shows a marked bunching of firms just below the cap, illustrating its tax salience. We provide evidence suggesting that a significant of the observed bunching is due to real operation responses. A difference-in-differences analysis indicates that eligible firms just under the threshold exhibit a significant decline in revenue growth compared to those just above it. This adverse effect is more pronounced among firms with lower pre-policy profitability. We also document substantial negative effects on investment and profitability but find no significant impact on firm survival—challenging the common assertion that government support enhances SME survival. In addition, our findings indicate a marked reduction in the presence of large firms, suggesting the broader implications on the firm size distribution in the economy. We highlight the double-edged nature of size-based SME policies: while intended to help smaller businesses, the measures might inadvertently suppress growth for firms near the threshold and potentially create resource misallocation. This study underscores the need for a careful policy design that supports SMEs without impeding their potential for growth.

Athiphat Muthitacharoen
Athiphat Muthitacharoen
Chulalongkorn University
Archawa Paweenawat
Archawa Paweenawat
Puey Ungphakorn Institute for Economic Research
Krislert Samphantharak
Krislert Samphantharak
University of California San Diego
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JEL: G3H2K3L2L5
Tags: size-dependent policysmesbunchingtax incentivescorporate tax
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Athiphat Muthitacharoen
Athiphat Muthitacharoen
Chulalongkorn University
Archawa Paweenawat
Archawa Paweenawat
Puey Ungphakorn Institute for Economic Research
Krislert Samphantharak
Krislert Samphantharak
University of California San Diego

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