Small and medium‐sized enterprises (SMEs) have played an important role in many countries’ industrial development. Among these countries, Taiwan is well known for the outstanding performance of its SMEs. Limited knowledge about the causes of such performance has been revealed gradually. The main purpose of this study is to explore the determinants of SMEs’ market shares in Taiwan’s manufacturing sector. According to economics literature, economies of scale determine the market share of SMEs. The usual explanation given is that economies of scale create barriers against SMEs entering the market and competing efficiently with larger firms. It is also said that the strong entrepreneurial drive to have a self‐owned business is a crucial explanation for the creation of new businesses, usually as offshoots from a small one. Finally, such factors such as an even‐handed policy scheme, the availability of technology in relation to R&D, transaction costs, and so forth, are also important for creating a favourable environment for SMEs.
Applying cross‐industry pooling data from 1976 to 1986, the market shares of SMEs in Taiwan’s manufacturing sector were found to be affected by the following factors: (1) SMEs’ performance related to labour productivity and their willingness to set up new enterprises; (2) institutional factors including low entry barriers, suitable technology, the adoption of a subcontract system, and prosperous export markets. The empirical findings are compared with those from studies of the US and Germany.