Targeted interventions and institutions are still needed to improve the access of small enterprises to finance, business development services and business linkage opportunities. There is growing agreement, however, that as much as possible they should be demand-driven, market-oriented and delivered by private firms, business-like nonprofit intermediaries, or public-private partnerships rather than through the more traditional approach of direct intervention by publicly-funded, highly-subsidised and supply-driven public bureaucracies.
The private sector in general
INTERVENTIONS
Removal of obstacles to private sector investment Improving organisational capacities and governance
Removal of anti-small enterprise biases Improving the advocacy and representation of small enterprises
The policy, legal and regulatory framework is ‘size-neutral’ (without parallel frameworks for small enterprises) Fewer obstacles to small enterprise activity Small enterprises participate more effectively in policy, legal and regulatory reforms
Greater participation by small enterprises in domestic and international markets Improved competitiveness among small enterprises Growth and improvement in small enterprise employment Greater participation by the poor in markets (through small enterprises)
OUTPUTS
Fewer obstacles and bottlenecks to private sector activity
Government is more aware of influence of policies and laws on the private sector Improved governance – in general as well as regulatory authorities
OUTCOMES
Greater investment in the private sector
More signs of growth from micro to small to medium to large sized enterprises More partnerships between the public and private sector Government interventions are more precise
IMPACTS
More competitive, efficient and functioning markets
More diverse, resilient and entrepreneurial national and local economies
Bigger private sector with more demand for employment Economic growth Poverty Reduction The small enterprise sector in particular
In the area of delivering financial services to small enterprises, for example, a growing number of development experts argue for market-oriented strategies that aim to increase the number and diversity of financial institutions that can make a profit by serving small enterprises and thereby provide what is likely to be a more sustainable and scalable service over time. Hallberg and others argue that governments can support this approach through policy, legal and regulatory interventions that create a viable market for delivering such services, rather than trying to provide subsidised credit and financial services directly to small enterprises. Such public sector interventions can help to reduce the barriers of entry and risks associated with lending to small enterprises. They can improve access to information on the exact financing needs and creditworthiness of small firms. In some cases they can encourage innovation in new financial instruments and delivery technologies to enable private financial institutions to serve these clients in a cost-effective and profitable, or at minimum cost-recovery manner.20
The dramatic growth in market-oriented approaches to deliver microfinance services to entrepreneurs offers a good example of this new approach in practice. A variety of other innovative financing mechanisms are emerging, many of which use a ‘blended value’ approach, a term coined by Jed Emerson to describe investment strategies and instruments that explicitly include social and/or environmental factors into investment decisions, as well as an expectation of financial return.21
A ‘blended value’ approach can include a combination of commercial or philanthropic funding from private sector enterprises, as well as a combination of public funds and private funds.
For example, some commercial banks are starting to establish microenterprise or small enterprise programmes that are being driven by business units, but include some philanthropic money as ‘seed funding’ for initial pilot projects or as capacity building and technical assistance support, with the aim of achieving sufficient economies of scale over time to make the programmes commercially viable. Equally, there are a growing number of financing mechanisms to support small enterprise development that consist of both public funds and private funds, ranging from challenge funds to business linkage facilities and natural resource revenue-sharing mechanisms. Some of these emerging public-private funding partnerships are profiled in Part V of the report. Although many are still at an early stage of development and implementation, they offer encouraging models for a more market-oriented, demand-driven approach, but one that is still facilitated by public sector support. Such an approach offers great potential to provide small enterprises with access to financial services such as credit, insurance, equity, savings and remittance services on a more affordable, but also more sustainable basis. The same type of argument is being made for the delivery of small business development services. The Donor Committee for Enterprise Development describes such business development services as including: “training, consultancy
and advisory services, marketing assistance, information, technology development and transfer, and business linkage promotion.”22 The Committee differentiates
between what it terms as ‘operational services’ needed for day-to-day operations, such as information and communications, management of accounts and tax records, and regulatory compliance, and ‘strategic services’, to help small enterprises identify and service new markets, design products, set up facilities and seek financing.
As with financial services, the traditional model has often been to deliver these business development services, even the more transactional operational services, through supply-driven, heavily subsidized or free public sector programmes. The Donor Committee for Enterprise Development comments that, “Traditional approaches have failed to achieve high outreach, since the numbers of small enterprises served is limited by the amount of subsidies available. In addition, institutional sustainability has been low, since programmes often cease when public funds are exhausted.”23 At the same time, these approaches have often ‘crowded
out’ existing or potential commercial providers of business development services, distorting the markets for such services that do exist and discouraging new market entrants and innovation.
This is not to suggest there is no role for direct public sector intervention, especially in cases where markets for such services are seriously underdeveloped or there are severe market failures. There is growing agreement, however, that the role of government should increasingly be to ‘facilitate market development’ for these services rather than ‘substitute for the market’.
A key challenge is determining when business development services have a strong public goods nature, which will require some level of donor or government support if they are to be delivered. The Donor Committee for Enterprise Development argues for example that, “Accelerating structural change in nascent markets may require support for services in areas such as information, dissemination of best practices and technologies, and human resource development. Research and development and quality assurance (e.g. through certification of trainers) are market-enhancing activities whose costs may be difficult to fully recover.”24
In such cases, new ‘blended value’ approaches or public-private partnerships can play a valuable role either as a transitional mechanism before services can be delivered on a cost-recovery or profitable basis, or in some cases as intermediaries on an ongoing basis. At all times, the aim should be to ensure that products and services are appropriate to the demands and needs of local small enterprises, viewing them as active clients rather than passive beneficiaries, and are delivered in the most cost-effective way with the least market distortions.
One key area where such public-private approaches can play a role is in addressing some of the information and capability gaps that undermine business linkages
between large companies and small enterprises. UNIDO’s Wilfried Luetkenhorst argues that, “…large corporations usually cannot justify bearing alone the expense of upgrading entire local productive systems, which is often required to reduce capability gaps. Also, the benefits of such efforts cannot be completely appropriated at the firm level, thus assuming significant elements of a public goods character. …Hence there is a case for an intermediary to intervene and complement market mechanisms in creating sustainable business linkages. Any such linkage programme initiated by an impartial broker will need to adopt a sector-wide approach, strengthen existing service institutions, work with local partners, and arrange for world-class expertise to be delivered to SME suppliers.”25
UNCTAD and others have proposed that public sector support in this area can include: the provision of information; matchmaking initiatives such as trade fairs and databases; and either requirements or incentives for foreign companies and large national companies to transfer technology to their SME business partners, and/or support training and capacity building initiatives for small enterprises.26