The double-edged sword : unintended consequences of small and medium-sized enterprise promotion policy

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 introducing a revenue cap in the SME tax incentive program qualification. Our study shows a marked bunching of firms just below the cap, illustrating tax salience. We provide evidence suggesting that the bunching is due to real operation responses. A differencein-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 assertion that government support enhances SME survival. Our findings also indicate a marked reduction in the presence of large firms, suggesting broader implications on 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 may 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.