<![CDATA[Small and medium-sized enterprises (SMEs) are widely recognized as important contributors to employment, income generation, and local economic activity, yet the presence of a large SME sector does not necessarily translate into sustained local economic development. This study examines the mechanisms through which SME activity can be transformed into broader local economic outcomes, with particular attention to productive capability and digitalization. Using an integrative literature review, the study synthesizes theoretical and empirical evidence on SME productivity, management practices, innovation, digitalization, access to finance, human capital, and institutional support. The synthesis identifies four key findings. First, SME activity is positively associated with local economic activity, but SME prevalence alone is insufficient to ensure sustained economic development. Second, managerial and organizational capabilities constitute a critical mechanism through which SMEs transform resources into productivity, innovation, and firm growth. Third, digital capability can strengthen this process by improving operational efficiency, innovation, information access, and market reach, although its benefits depend on complementary skills and organizational capabilities. Fourth, finance, human capital, infrastructure, and institutional support condition the extent to which SME capabilities generate broader local economic multipliers. The study therefore argues that SME-led local development should be understood as a capability-mediated process rather than a direct consequence of SME density. The findings contribute to the SME and regional development literature by shifting attention from the quantity of SMEs toward their capacity to generate productive, innovative, digitally enabled, and locally embedded economic activity. The study also highlights the need for SME policies to move beyond firm creation toward integrated capability-building strategies that combine finance, digitalization, skills development, infrastructure, and market access.]]>
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