This paper aims to explore the role of interpersonal trust and knowledge in the number of Small and Medium Enterprises (SMEs), both conceptually and empirically. The number of SMEs in an economy seems largely to depend on level of knowledge of employees and educational level of leading entrepreneurs. Furthermore, existence of trust in transactions lowers cost of such transactions, as it allows financial agreements to be less dependent on formal regulations and facilitates investment and innovations. This study uses a series of variables to express these structural relationships, which are analysed using a principal component analysis (PCA), a regression analysis and a two-stage least squares (2SLS) analysis. Through our empirical work, we conclude that there is an endogeneity problem between interpersonal trust and the number of SMEs. By solving the endogenous problems, the conclusions confirm two strongly positive effects; knowledge positively affects the number of SMEs, which in turn, positively affects interpersonal trust. Note that the empirical results indicate that interpersonal trust does not affect the number of SMEs. Therefore, although knowledge development can reinforce SMEs, trust becomes widespread in a society when the number of SMEs is greater. Copyright Springer Science+Business Media New York 2015
