Original Article A Decade On: How Relevant is the Regulatory Environment for Micro and Small Enterprise Upgrading After All? Tilman Altenburg a , Aime ´e Hampel-Milagrosa a, * and Markus Loewe a a German Development Institute, Department of Sustainable Economic and Social Development, Tulpenfeld 6, 53113 Bonn, Germany. E-mail: Tilman.Altenburg@die-gdi.de E-mail: markus.loewe@die-gdi.de *E-mail: Aimee.Hampel@die-gdi.de Abstract Micro and small enterprises in developing countries rarely upgrade and grow. The reasons are disputed. Recently, the ‘Doing Business’ reports strongly influenced the policy agenda, attributing small enterprise stagnation mainly to excessive bureaucracy and over-regulation. They claim a strong causal relationship running from regulatory reform and formalisation to business performance and overall economic growth and advocate reforms to reduce the complexity and cost of regulation. Our findings from research in the Philippines, India and Egypt challenge this view. Bureaucratic hurdles are of secondary importance. Entrepreneurs who want to formalise are usually able to do so. Formalisation usually comes after a firm has upgraded, i.e. when the entrepreneur perceives that the advantages of formalisation outweigh its disadvantages. Success in upgrading is strongly related to entrepreneurial attitudes and skills: know-how, proactive search for market opportunities, risk-taking attitude and creativity in dealing with financial constraints and deficits in the rule of law. Les micros et petites entreprises dans les pays en voie de de ´veloppement ne s’ame ´liorent et ne se de ´veloppent que rarement. Les raisons sont conteste ´es. Re ´cemment, les rapports de « Doing Busi- ness » ont fortement influence ´ l’agenda politique, attribuant la stagnation des petites entreprises princi- palement a ` la bureaucratie excessive et a ` la surre `glementation. Ils re ´clament un fort lien de causalite ´ allant de la re ´forme re `glementaire et de l’officialisation a ` la performance commerciale et de la de ´fense des re ´formes pour re ´duire la complexite ´ et le cou ˆt du re `glement. Nos re ´sultats de recherches dans les Phi- lippines, en Inde et en Egypte remettent en cause ce point de vue. Les obstacles bureaucratiques sont d’importance secondaire. Les entrepreneurs qui veulent formaliser peuvent habituellement le faire. La formalisation vient habituellement apre `s qu’une entreprise se soit ame ´liore ´e, c’est a ` dire lorsque l’en- trepreneur se rend compte que la formalisation compte plus d’avantages que d’inconve ´nients. Le succe `s dans l’e ´volution est fortement lie ´ aux attitudes et aux qualifications entrepreneuriales : savoir-faire, recherche proactive des opportunite ´s du marche ´, qui ose prendre des risques et cre ´ativite ´ face aux con- traintes et de ´ficits financiers dans l’E ´ tat de droit. The European Journal of Development Research (2016). doi:10.1057/s41287-016-0010-2 Keywords: doing business; regulations; enterprise upgrading; micro and small enterprises; innovation; business environment Introduction In many developing countries, the private sector is made up by a small number of fairly large, registered firms and a huge number of micro and small enterprises (MSEs), which operate at very low levels of productivity and are often not duly registered. Most of these enterprises began small and will probably remain small. For Sub-Saharan Africa, the seminal study by Ó 2016 European Association of Development Research and Training Institutes (EADI) 0957-8811 The European Journal of Development Research www.palgrave-journals.com/ejdr/