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The paper explains how the economic system determines the role and features of SMEs in a competitive environment. The economic system is defined as the co-ordinated set of institutions and structures that are economically relevant. As such, the economic system defines the way in which economic actors react to economic variables by adapting and acting and the way in which they interact. In particular, the fundamental features of the economic system contribute to determine what actors can and find profitable to do, i.e. determine the level and configuration of non purely material costs and the features of markets. The economic system also determines incentives to economic actors by defining property rights and their enforcement and the nature of contracts. This in turn influences investment and consumption decisions, the supply of resources, and the production and utilisation of information and knowledge. Finally, the economic system determines the type and features of actors, what actors do and how they do by defining the possibility and profitability of specific human and organisational investment. Based on these functions and given material technology, the economic system defines advantages and disadvantages of different organisational forms. Given capabilities and features of individuals and organisations, that cannot be easily changed in the short run, advantages and disadvantages determine the organisational form that is most efficient in any given context. Finally and considering network externalities and strategic complementarities, such an organisational form determines the organisational configuration as a stable configuration including features, weight and role of particular economic actors, the relation among actors of similar or different size and with governments. In the paper I consider the case of small and medium-size enterprises.