In 2020, SMEs accounted for 99.7% of all enterprises in the WBCs, with a predominant share being micro enterprises (90.1%). This trend indicates a rising number of SMEs per resident, suggestive of an improving entrepreneurial culture and a potentially enhanced business climate, with simplified firm start-up procedures and initiatives combating informality. Notably, the highest proportion of SMEs per population is in Montenegro, followed by Serbia (OECD, 2023).

Enterprises within the WBCs predominantly exhibit a pronounced orientation towards service-oriented activities, with SMEs being heavily concentrated in sectors such as wholesaling, transportation, lodging and food, and real estate. The preponderance of SMEs within the manufacturing domain spans over 13% of all businesses throughout the region, with North Macedonia demonstrating the highest proportion at 24.7% (OECD, 2023).

Despite confronting challenges over the past three years, the economies of WBCs have shown improvement across 11 out of 12 policy areas, according to the 2022 Small Business Act (SBA) assessment (OECD, 2022). This progress indicates their ongoing commitment to cultivating an environment that supports SMEs. They have excelled in public procurement, standards, technical regulations, internationalization, support services for SMEs, and the institutional and regulatory framework for SMEs policymaking. However, the region has yet to effect improvements in several policy areas, including enterprise skills, innovation policy for SMEs, bankruptcy and second-chance policies, and the integration of SMEs into a green economy (OECD, 2023).

Across the WB region, SMEs identify the main challenges to growth as inadequate training and advisory services, limited market information, and restricted access to finance (Regional Cooperation Council, 2021). These difficulties were further aggravated by the COVID-19 pandemic, leaving SMEs especially susceptible to the crisis’s far-reaching consequences. The transition of Business Support Services (BSS) to online platforms, necessitated by the pandemic, proved to be disadvantageous to smaller and less connected SMEs, given the reliance of many BSS offerings on in-person interactions. Nevertheless, the shift to digital platforms has resulted in efficiencies for some SMEs by reducing travel expenses. BSS played a crucial role in overcoming barriers by offering training and mentorship to firms (OECD, 2023).

The business environment and firm growth are closely related; if the business climate is unfavourable, the firm’s ability to grow will be limited (Herrera and Kouamé, 2017). Herein, the business environment is the collection of factors encompassing strategies, institutions, and laws that influence and spur an organization’s growth, employment creation, and productivity (Igwe, 2016). Within the context of transition economies, SMEs play a transformative role by reducing labour force surpluses, establishing and reorganizing economic sectors, and effecting changes in social structures (Smallbone and Welter, 2001).

The conceptualization of firm growth dates back to the 1930s, when it was known as the Law of Proportionate Effect, commonly referred to as Gibrat’s Law of Proportionate Growth. This framework is used to determine firm growth, which is independent of the firm’s size (Rosli and Sidek, 2013). Sales growth is an exceptionally reliable and commonly used indicator due to its ease of measurement and higher likelihood of accurate recording (Barringer et al., 2005).

While previous studies have identified obstacles that SMEs face, there is a need for more empirical observations of the specific impacts on SMEs growth, particularly within transitional nations (Aidis and Estrin, 2006; Budak and Rajh, 2014; Bartlett et al., 2022). Based on the theories outlined above, this research aims to answer the primary question: “What are the key obstacles to SMEs’ growth in WBCs?” To evaluate what the literature indicates about obstacles within the context of WBCs, the following hypotheses have been formulated:

H1: Business environment barriers significantly influence sales growth.

H2: Firm characteristics significantly influence sales growth.

Fig. 1 presents the study’s conceptual framework. The framework illustrates the relationship between business obstacles, firm characteristics, and sales growth.

This section outlines the dependent and independent variables employed for this study. The SMEs’ growth in terms of sales is the dependent variable, and the challenges they face in achieving this growth are the independent variables. Evaluating many independent variables provides a more accurate business development presentation (Wiklund et al., 2009). The questionnaire consists of questions that enable us to specify the variables of interest, as outlined in the literature review. As specified in the questionnaire, obstacles to the business environment are reported based on the respondents’ perceptions of these issues. To scale their perception, the Likert scale was applied with the following modalities: 0—no obstacle, 1—minor obstacle, 2—moderate obstacle, 3—major obstacle, and 4—very severe obstacle. We also include model control variables as dummy variables, which refer to the organizational competencies of the firms. The dependent variable, based on the respondents’ predictions, is derived from the question: Considering the following year, are this establishment’s total sales expected to increase, decrease, or stay the same? The answers decreased and stayed the same were coded, not growth. Therefore, we have a dummy sales variable: 1—growth and 0—no growth.

Table 3 shows descriptive statistics related to the perceived obstacles to sales growth in the context of the WBCs. These factors encompass aspects such as infrastructure (electricity, transport), regulatory environment (customs and trade regulations, tax administration), market dynamics (practices of competitors in the informal sector, inadequately educated workforce), governance issues (corruption, political instability), and internal organizational characteristics (sector, firm size, age of the firm, formal training programs, written business strategy, and international recognized quality certification).

The analysis reveals that 38% of SMEs anticipate sales growth, while 62% do not, indicating a notable variation across firms.

Among business environment obstacles, tax rates (0.71), political instability (0.68), and informal sector competition (0.65) are perceived as the most significant challenges. Electricity (0.58), corruption (0.57), access to finance (0.54), and tax administration (0.54) are viewed as moderate obstacles, while transport (0.45), customs and trade regulations (0.44), and labor regulations (0.44) are generally seen as minor issues. High standard deviations indicate considerable differences in how these obstacles are experienced across firms.

Regarding firm characteristics, most SMEs operate in the service sector (63%), while 37% are in the manufacturing sector. The majority are medium to large firms, with a substantial share established for 16 years or more (52%). Furthermore, 55% of firms offer formal training programs, 58% have a written business strategy, and 70% possess internationally recognized quality certifications, reflecting strong adoption of international standards among many SMEs.

We employ a probit model (Gujarati, 2004) to predict the effects of obstacles in the business environment on SMEs sales growth, using STATA/ SE 15.1 (StataCorp LLC; College Station, TX, USA) software. The probit model is specifically suited for situations where the dependent variable is binary, as in this case, SMEs sales growth in the WB is represented as a binary outcome. This model effectively captures the nonlinear relationship between the predictors and the probability of sales growth, making it an appropriate choice for this analysis. The coefficients derived from the probit model can be interpreted through their marginal effects, indicating how a one-unit change in a predictor variable influences the probability of sales growth (Wooldridge, 2019). The model incorporates a broad set of independent variables, detailed in Table 3, that reflect various dimensions of the business environment and the importance of firm characteristics. This comprehensive approach facilitates a nuanced understanding of how multiple factors collectively influence SMEs sales growth (Storey, 1994). The findings derived from the probit model can help inform targeted strategies for enhancing SMEs growth, thereby contributing to broader economic development in the WB.

Coefficients and marginal effects for all estimated equations are given in Table 4.

We conducted probit regression analysis using the aggregate data from the WBCs, followed by separate regression analyses for each country. Table 4 presents the probit regression results examining the impact of various firm-level obstacles and characteristics on the likelihood of experiencing sales growth among firms in the WB. The sample comprises 1804 firms, and the model shows a Nagelkerke pseudo-R² of 0.1513 with a log-likelihood of –592.34.

Table 5 presents marginal effects. Three variables emerge as statistically significant predictors of sales growth among the business environment factors. First, the effect of the variable “business licensing and permits” is estimated at around 6%, meaning that firms identifying this as an obstacle are 6% more likely to report sales growth. This suggests that firms overcoming such barriers might be better positioned or more capable. Second, the effect of the variable “labour regulation” is negative, indicating that firms identifying labour regulations as an obstacle are about 4% less likely to report sales growth. This suggests that regulatory rigidity in labour markets may constrain firm expansion.

“Access to finance” shows a marginally negative effect, indicating that firms identifying it as an obstacle are about 3% less likely to report sales growth. This highlights the persistent challenge of securing credit for firms seeking to expand their operations. Other commonly cited barriers, such as electricity, transportation, customs regulations, and corruption, did not significantly impact sales growth.

Firm size plays an important role in sales performance. Medium-sized firms are about 3.8% more likely to report sales growth compared to micro and small firms, while large firms are 6.2% more likely. This suggests that larger firms benefit from economies of scale, stronger market presence, and greater resources, which enhance their ability to grow and compete effectively.

The country-level results reveal notable differences across the region. Firms in Bosnia and Herzegovina are about 15.5% more likely to report sales growth compared to those in Albania, while firms in Kosovo and Serbia are 11.1% and 14.2% more likely, respectively. These positive differences suggest that the business environments in these countries offer more supportive conditions for firm growth, due to stronger institutional frameworks, better market opportunities, or more effective policy support. In contrast, firms in Montenegro are 30.9% less likely to report sales growth relative to firms in Albania. This suggests potential structural or institutional barriers, such as a limited market size, regulatory challenges, or weaker access to resources, that may be constraining business performance in Montenegro.

These findings suggest that regulatory and financial constraints, along with country-specific factors, have a significant influence on firm performance in the WBs. The cross-country variations highlight the importance of considering local economic and policy contexts when evaluating business growth dynamics in the region.

The aggregate regression model included country dummy variables to account for fixed differences across countries. To examine potential heterogeneity, separate regressions were then conducted for each country, as presented in Table 6 (regression estimates) and Table 7 (marginal effects). This approach enables the coefficients of the explanatory variables to vary across countries, providing deeper insights into how specific barriers affect firm growth within different national contexts.

Key variables such as electricity (Montenegro), crime (Kosovo and Montenegro), access to finance (Montenegro), tax rates (Bosnia and Herzegovina), tax administration (Serbia), and business licensing (Albania and Kosovo) remain significant in both models, affirming their robust association with SMEs sales growth across the WB. Based on marginal effects for individual countries, obstacles related to electricity have been positively correlated with sales growth in Montenegro. A one-unit increase in the perception of electricity as a business obstacle increases the likelihood of sales growth by 23.8%, holding other factors constant. A comparable study on the impact of inadequate electricity supply on SMEs growth found that the unreliable electricity supply and its high tariffs negatively impacted the quantity and quality of production, resulting in low sales and profitability (Forkuoh and Li, 2015). Moreover, Akinyele et al. (2016) emphasize the importance of infrastructure, including electricity, as a supporting framework for the expansion of SMEs.

Transport and regulatory constraints in customs and trade did not significantly influence sales growth in WBCs. Nevertheless, firm growth is impeded by a legal, social, and fiscal framework that does not encourage the exchange of moral principles, particularly for small enterprises, which are then compelled to make tactical short-term concessions (Lorizio and Gurrieri, 2016). In transition economies, where higher levels of regulation are required, the incidence of bribery is also likely to be higher (Djankov et al., 2002).

Informal sector practices reveal a significant value related to Kosovo’s sales growth. The marginal effect for this variable suggests that it is subject to competitive pressure from unregistered firms. Informal sector activity often undermines formal sector activity, which is required to comply with regulations and pay taxes (Williams, 2005). However, while the informal sector primarily operates in marginalized contexts, providing self-employment and basic livelihoods, its formalization is essential for enhancing growth prospects and ensuring long-term sustainability (Zylfijaj et al., 2020).

In Kosovo and Montenegro, crime, theft, and disorder have had a significant impact, indicating that security concerns are a real impediment to growth. The overall results indicate that criminal activity is negatively associated with the performance of SMEs. The high incidence of crime affecting small firms and its adverse impact on their performance underscores the importance of collaboration between the government and the business sector in establishing effective and affordable security solutions tailored to small enterprises. Supporting these businesses is crucial for promoting economic growth and creating employment opportunities (Moyo, 2012). Access to finance is negatively related to sales growth in Montenegro. It indicates that the probability of experiencing sales growth decreases by 19.9% for every one-unit increase in the perceived severity of access to finance as an obstacle. The most significant barrier for businesses is the high cost of funding, which includes interest rates and bank-imposed administrative expenses (Zylfijaj and Nikoloski, 2021).

The tax rate is highly significantly related to the sales growth of Bosnia and Herzegovina, North Macedonia, and Albania. In Bosnia and Herzegovina and Albania, firms that perceive the tax rate as a more severe obstacle are likely to experience sales growth, possibly because better-performing firms report higher taxes, holding other factors constant. In North Macedonia, firms are 7.9% less likely to experience sales growth for each additional severity level in the tax rate as an obstacle. Most SMEs perceive their tax liability as a growing burden; as a result, they frequently have to pay extra taxes, as they require more competent personnel to address tax compliance concerns. Abrie and Doussy (2006) argue that there is a need to increase awareness of available services and tax incentives for SMEs to mitigate this burden.

Perceptions of tax administration were significantly negative in Albania ($\beta$ = –0.092, p = 0.073), indicating that administrative inefficiencies deter sales growth. In contrast, they were positive in Serbia ($\beta$ = 0.063, p = 0.044), suggesting that reforms or improvements in public services may be enabling growth. This divergence suggests that administrative inefficiencies deter growth in some contexts while improved systems support it in others. Anim et al. (2020) found that tax administration has a statistically significant, albeit weak, positive influence on the growth of SMEs.

Political instability did not significantly affect sales growth in any country. Although a study has demonstrated the significance of SMEs for economic growth, impediments to SMEs development are frequently caused by government regulations and political instability (Tambunan, 2009). If entrepreneurs encounter an unfavourable environment for growing their businesses due to political instability and cultural impediments, it could lead to a decline in the growth of small businesses (Ahmed et al., 2015).

Instances of corruption manifest non-significant values in WBCs. Nevertheless, the effects of corruption on the business environment and how competition across enterprises is distorted have been extensively researched in the literature (Mauro, 1995). Nevertheless, Djankov et al. (2002) argue that an excessive number of rules and procedures within the regulatory environment not only delays and deters businesses but also acts as a catalyst for the emergence of informal operations. In a study by Budak and Rajh (2014), respondents who perceive corruption as a significant barrier to their business place more emphasis and responsibility on the government’s response to the issue, rather than taking individual measures against corruption as a business.

Court inefficiency has a negative impact on sales growth in Bosnia and Herzegovina and Kosovo, indicating that firms that perceive court inefficiency as a significant obstacle are less likely to experience sales growth, holding other factors constant. Firm growth is further hampered by a legal, social, and fiscal framework, particularly for small enterprises. Thus, actions should be taken to address the issues with the judicial system and establish clear connections between justice and competitiveness (Lorizio and Gurrieri, 2016). Labour regulations did not significantly affect growth in any of the countries. While coefficients were generally negative (Kosovo, Serbia), the results suggest labour rigidity may not be the most binding constraint.

Moreover, firms that perceived an inadequately educated workforce as a more significant obstacle did not experience a significant impact on sales growth in any of the countries. Formal education is key to developing human capital and personal attributes, while educational reforms are crucial for equipping the workforce with the essential skills it needs to succeed (Cooper et al., 1994; Nikoloski et al., 2024). Hypothesis 1, that business environment barriers significantly impact sales growth, is partially confirmed.

Firm characteristics also play a significant role in determining firm growth. The results show that sector affiliation is positively associated with sales growth in Albania and North Macedonia. Specifically, firms in the service sector (7.6% in the case of Albania and 8.6% in the case of North Macedonia) are more likely to experience sales growth compared to firms in the manufacturing sector. A previous study has largely focused on manufacturing firms (Menor et al., 2002). Several studies highlight the significance of the service sector (Gianiodis et al., 2010; Rodríguez-Gutiérrez et al., 2015). Still, Thornhill (2006) emphasizes that firms can exhibit growth based on industry dynamism, regardless of the industry in which they operate.

The firm size negatively affects sales growth in Albania and Kosovo, indicating that small firms do not outperform larger ones in terms of sales growth. Although Gibrat’s law of proportionate growth assumes no correlation between size and firm growth, another empirical study has concluded that growth decreases as firm size increases (Almus and Nerlinger, 2000).

The age of a firm, in terms of the growing firms’ category, exhibits a negative impact on sales growth in Bosnia and Herzegovina and Kosovo. Thus, these findings align with other studies that indicate a significant negative correlation between firm age and growth (Krasniqi, 2010; Coad et al., 2018). However, Garnsey et al. (2006) argue that firm age can have a positive effect on growth, suggesting that the relationship between firm age and growth may vary across different contexts.

Implementing formal training programs had no statistically significant effects, though Kosovo again showed a strong positive coefficient ($\beta$ = 0.565, p = 0.113). Investments in human capital may still matter, but more granular studies are needed. Another study agrees that training is crucial for successful organizational change (Pardo del Val et al., 2003).

Formulating a written business strategy is associated with positive sales growth in Kosovo, indicating that firms with a written business strategy are 7.2% more likely to experience sales growth than those without one. In line with our empirical findings, Ghobadian et al. (2008) highlight the contribution of strategic planning to firm growth. Strategic planning is perceived to contribute to a firm’s survival and growth but not necessarily its short-term performance. Moreover, business strategy has a significant impact on export performance; therefore, firms should develop effective business strategies to grow and succeed in both local and international markets (Safari and Saleh, 2020).

Additionally, possessing internationally recognized quality certifications is negatively related to sales growth in Kosovo, indicating that firms with a quality certificate are 11.3% less likely to experience sales growth than those without one. A study concludes that the certification process, based on the ISO 9000 standard, represented an evolution in managing the organization. It has been associated with cultural change in the organization, communication, and quality system (Cooper et al., 1994). Nevertheless, the challenges SMEs face with ISO standards are related to their size and scarce resources. Technical issues and challenges are often associated with high implementation costs, inadequate resources, and insufficient external assistance (Lo and Humphreys, 2000). Hypothesis 2, which is that firm characteristics significantly influence sales growth, is confirmed.

WBCs encounter business environment barriers, making their reduction essential for improving SMEs’ growth (Ur Rehman et al., 2019). Government intervention plays a crucial role in helping SMEs overcome barriers to growth and improve their business environment. For instance, there are numerous options for SMEs to flourish when there is a high awareness of their contribution, including simple loan applications from official financial institutions, providing training programs, helping with technology acquisition, and much more (Irjayanti and Azis, 2012). Entrepreneurial value within education is crucial for achieving long-term benefits within SMEs. Marinkovic (2015) states that the lack of promotion of an entrepreneurial culture through regional education underscores the need for institutional interventions. Potential reforms from policymakers can help achieve better regulations, institutional development, and efficient governance. Moreover, SMEs should direct their strategic emphasis toward addressing internal barriers to systematically reduce their impact on growth, leading to sustained competitive advantage.

The informal sector plays a crucial role in addressing poverty, particularly for vulnerable groups, such as women and children; therefore, more political support should be provided to this sector to facilitate its formalization. There must be a shift from a family business to a more formal labour relationship, setting aside personal ties. Additionally, it is essential to highlight the benefits of formalization, thereby increasing awareness of access to various instruments, including training, assistance, and finance. Employees should be protected by offering good working conditions, investing in their development by enhancing their skills, and expanding health and social benefits.

Given the shared challenges across the WBCs, there is a strong case for regional policy harmonization and cooperation to strengthen SMEs as a vital sector for job creation and economic growth. Firms in the WBCs should consider adjusting their strategies in response to the identified internal and external challenges, which include enhancing workforce skills to remain competitive, improving productivity, and raising quality standards.

Future studies may employ a panel data set with a larger sample size to enhance the robustness of analyses. Additionally, it is possible to undertake comparative assessments of the main barriers faced by SMEs across diverse sectors. Research could be conducted to develop specific steps for implementing possible solutions to SMEs’ barriers within WBCs.