Small and medium enterprises (SMEs) in all national economies are generators of growth and development. This statement is confirmed by the fact that SMEs in the European Union (EU) account for 90% of the total number of companies, and that more than 23 million of these companies employ over 67% of the workforce in the private sector. European law on small and medium enterprises creates favorable regulatory conditions for their further growth. However, adequate attention has not yet been paid to this sector in Bosnia and Herzegovina (BiH). Economic growth in pre-war Yugoslavia was based on a system of large company networks from complementary industries which were deliberately designed. War and disintegration of Yugoslavia have disrupted this concept and sparked a series of dilemmas in terms of re-directing and developing the national economy. Many economists have advocated for the restoration of pre-war business giants. Nevertheless, war, institutional destruction and loss of educated and skilled labor, as well as technological obsolescence, loss of previous markets and industries created the opinion that SMEs should first be developed and then connected through networking and clustering. This would eventually lead to the creation of large and powerful production systems. This paper examines how far BiH has progressed in this regard and how consistent is its economic policy. Moreover, this work provides a review of business practices and the potential of clustering, and finally business internationalization of SMEs.