The Double-Edged Sword: Unintended Consequences of SME Promotion Policy
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 suggestive evidence that a significant of the observed bunching could be due to real operation responses. A difference-indifferences 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 further document substantial adverse effects on investment and profitability. 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 sizebased SME policies: while intended to help smaller businesses, the measures might inadvertently suppress growth and create resource misallocation. This study underscores the need for a careful policy design that supports SMEs without impeding their potential for growth.