Macroeconomic and sectoral effects of subsidies to smaller enterprises: The experience in Peru

This study uses a general equilibrium model to assess the macroeconomic and sectoral effects of a subsidy for industrial MSMEs integration (SIMI) in Peru. The findings show that SIMI reduces the cost of manufacturing MSME-produced inputs, encouraging domestic firms to source from these enterprises instead of relying on imports or larger competitors, thereby addressing demand-side constraints. This cost reduction increases MSMEs’ input sales, expanding their domestic market presence, while larger industries shift towards international markets to leverage their improved competitiveness. The analysis identifies a pronounced expansion in the manufacturing and tertiary sectors as a result of SIMI, while the primary sector experiences a contraction due to its comparatively lower reliance on manufactured inputs. Furthermore, the study highlights that SIMI’s efficacy depends on the degree of substitutability between inputs produced by MSMEs and large enterprises, as a higher degree of substitutability fosters deeper MSME integration and accelerates industrial growth. Finally, while SIMI fosters economic growth and bolsters national competitiveness, its implementation raises critical fiscal sustainability concerns, necessitating judicious policy design and complementary measures to ensure long-term viability.