This paper investigates how SME’s local business environment affects its performance. Theoretical arguments for business environment and performance go in both directions. That is, on the one hand business environment enhances SME’s performance; on the other hand it also impedes its operation. Using these arguments, we hypothesize that both favor treatment of local government for state-owned companies and bribery (or “speed money”) are negatively related to SME’s performance. Promotion policies of local government for private firm and local labor force have positive effects on SME’s performance. We test these hypotheses in a survey data from sixty three manufacturing and servicing SMEs locating in three provinces of Mekong Delta the period of 2011 and 2012. Using fixed effect and random effect models, the empirical results release that local government’s favor policies for private firm and labor force have positive effects on SMEs’ performance. We found that although bribery has positively related to SME’s performance, this relation becomes negatively when the level of bribe is high.