The Role of Information and Communication Technology for Small, Medium and Micro Enterprise Development in Botswana

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I

The Role of

Information and Communication Technology for

Small, Medium and Micro Enterprise Development

in

Botswana

Interim Report

Interim Results of a Research Project Supported by the UK Department for International Development (DFID)

Prepared by Richard Duncombe

Institute for Development Policy and Management (IDPM) The University of Manchester

In co-operation with BIDPA

(Botswana Institute for Development Policy Analysis)

September 1999

The UK Department for International Development supports policies, programmes and projects to promote international development. DFID provided funds to support this study as part of that objective, but the views and opinions expressed are those of the author alone.

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II

Executive Summary

This is a summary of research that examines the role of information and

communication technologies (ICTs) in the development of small, medium and micro enterprises (SMMEs) in Botswana. The preliminary results are based on the initial phase of fieldwork conducted in Botswana from January to March 1999. The enclosed report presents the principal findings produced from the analysis of data at the interim stage of the project. The conclusions reached, therefore, are both tentative and partial. Whilst it is hoped that the report will be useful to its recipients, it should also be

emphasised that the final results and recommendations will only be made available upon completion of the fieldwork and publication of the final report.

Background

The role that emerging ICTs can play in closing knowledge gaps and solving information problems for SMMEs in Botswana has yet to be clearly defined. The impact of enhanced communications on the SMME sector has been extremely uneven. More sophisticated ‘modern sector’ enterprises have been able to take advantage of new technological opportunities, such as e-mail, Internet access and mobile

communications, which have seen rapid expansion within larger urban centres. However, most SMMEs operate in traditional or ‘backward sectors’ of the economy often in remote locations, and lack access to the skills, finance and infrastructure necessary for effective utilisation. The wider enterprise sector has remained largely untouched by rapid changes in technology and there appears to be an increasing polarisation between those sections of the population who are able to participate in the ‘global information revolution’ and those who remain distanced from it.

In recent years, however, the Botswana government has made a number of policy changes which offer the potential for extending information and communication services more widely. The new telecommunications policy has laid down three policy goals of universal service, efficient supply of services, and regional balance between urban and rural areas. The new policy for SMMEs aims to encourage the development of a competitive and sustainable SMME community, utilising modern technologies and business practices. The thrust of present policy is to encourage rapid adoption of emerging technologies with the hope of empowering more local entrepreneurs within the process of industrial growth and economic diversification.

At present there is little research, based on objective evidence, analysing the impact of emerging ICTs on industrial and commercial development in less developed countries (LDCs) such as Botswana. There is virtually no evidence to suggest how such advanced technologies can address the information and communication needs of poor and disadvantaged groups within LDCs, such as represented by the wider SMME community.

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Research Objectives and Methods

The main research objective is to provide realistic recommendations about the ways in which information and communication technologies can be applied to SMME development. The project has the following primary aims:

• Describe the ‘generic’ information needs of SMMEs in Botswana, and to assess

where the provision of externally generated information is likely to enhance the prospects for business survival and growth.

• Identify where information needs of SMMEs are currently not being met, and to

establish the nature of a possible ‘information needs gap’.

• Map current information systems, which are common to SMMEs, for the

acquisition, processing, storage and utilisation of information.

• Understand why entrepreneurs use current information systems, and to assess the

quality of information that is currently being provided.

• Establish the potential for information and communication technologies (ICTs) to

bridge the gap between information needs and current provision.

The initial phase of data collection used interview and questionnaire surveys to analyse the changing information needs and communication practices amongst a representative sample of Botswana-based formal sector enterprises, the results of which are contained in this interim report. The second phase of data collection will include in-depth enterprise case studies, and will assess the role of intermediary organisations in the provision of information to small/micro enterprises and in support of the non-formal sector. Finally, the role of government in setting the policy framework for effective IT implementation within the SMME sector as a whole will be considered.

Principal Interim Findings

The research findings, presented in abbreviated form, are based on data collected from 61 enterprises that participated in the study. Data was assembled from detailed questionnaire responses, and an additional 20 face-to-face entrepreneur interviews with a representative cross section of formal sector enterprises. The research sample covered SMMEs from a wide range of manufacturing and service-based sub-sectors as well as manufacturing exporters. The survey results are representative of the views, actions and experiences of relatively well-educated business owners/managers of established formal sector enterprises. It is the intention of the second phase of fieldwork to balance the ‘bias’ of the formal sector survey by concentrating data collection on micro and small-scale enterprises (MSEs) and the non-formal sector.

The intention of the survey was to establish the information needs and information practices of enterprises, including the formal and informal nature of sources, channels and content of enterprise information. Against this background the current, and possible future, role for ICTs in enterprise development could be determined. The principal findings were as follows.

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Information Needs of Formal Sector SMMEs

• Within all areas of business information (relating to business inputs, output markets and the business environment) there exists a widespread ‘information needs gap.’ There appears to be a large unmet demand for essential business information from all types of enterprises, and across all sectors.

• 91% of non-exporting manufacturers urgently needed information that would lead

to advice and/or assistance in accessing external financing and/or solving internal financial problems.

• 58% of manufacturing exporters had urgent needs for information concerning

access to trained personnel and assistance with workforce training.

• 74% of service-based enterprises expressed urgent needs for information

concerning management training and new trained employees.

• 72% of all enterprises had urgent need to access information that would lead to increased sales through obtaining new local customers and/or expansion into export markets

Information Channels and Sources used by Formal Sector SMMEs

•

• Entrepreneurs depend heavily on their own ‘internally generated’ knowledge and

experience which has been built up within their present business or is a result of previous employment/business ownership.

• Current information practices for obtaining external information are predominantly

informal in nature. Critical business information, relating to output markets and business inputs, is received predominantly via personal contact through informal business networks of customers, suppliers, other business contacts, family and friends.

• Service-based enterprises and manufacturing exporters place little or no importance

on external business support institutions (governmental, non-governmental or private) for providing business information. In contrast, 50% of non-exporting manufacturers regard business support institutions as their single most important source of external business information.

• Formal sources, such as provided by journals and Internet access, are of greater importance to service-sector enterprises than for either non-exporting

manufacturers or manufacturing exporters.

Formal/Informal Information Content

•

• The exchange of informal information is common across all areas of business

activity. For example, informal loans from family and friends, on the job training whereby knowledge and experience are passed on from experienced to less experienced employees, informal advice or technical assistance from a business associate, or market information leading to a new contract received through the business grapevine or from a family member.

• At present insufficient data has been collected to determine the comparative quality of formal and informal information. However, information received through

informal sources and channels is rated highly by business owners when compared with formal institutional sources, because of the time, cost and convenience benefits of accessing information informally.

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•

• Face-to-face meetings and fixed line telephone and fax are all used very often by

approximately 70% of respondents within service and manufacturing sectors. Use of other communication channels, such as e-mail, mobile telephone and postal services, was appreciably higher amongst service-based enterprises and to a lesser extent manufacturing exporters, but hardly used within non-exporting manufacturing enterprises.

• Enterprises in specific sectors, such as technical services, the IT sector and travel and tourism, have achieved significant information access benefits from emerging technologies, such as e-mail and Internet. These are all sectors that require regular access to information and/or software across borders, both regionally and world-wide.

• The level of IT use was particularly low within non-exporting manufacturers.

These enterprises were predominantly citizen-owned (86%). Differences in levels of computer use amongst citizens or non-citizens were not, however, observable in the service sector.

•

• Amongst computer users with no external network connections, the level of IT

application within the enterprise was comparatively low. Only 20% of all such enterprises had computerised basic business functions such as customer invoicing and their internal accounting systems.

Some Preliminary Conclusions

It is not yet possible to present definitive conclusions concerning the applicability of ICT solutions to the information problems and knowledge gaps

experienced by SMMEs. It is clear from the survey that there is a widespread unmet

demand for business information and/or assistance involving information provision. The majority of entrepreneurs had a strong perceived need for quality information relating to workforce skills and training, finance and management skills, output markets and new technology. It is also clear, however, that enterprises depend upon, and often prefer to access, information through informal/personalised channels and sources. The costs and benefits and the ‘quality’ issues associated with informal information practices are not yet clear from the data collected.

Some conclusions can be presented based on a preliminary enterprise classification that defines formal sector SMMEs according to their level of ICT/information intensity. Non-IT users, were predominantly small-scale citizen-owned manufacturers within the survey response. They typically lacked finance, management and workforce skills, and considered these factors to be their most significant business constraints. In terms of telecommunications access these enterprises have potential for expanding their use of IT systems. It is not yet clear how such enterprises could benefit from enhanced use of ICTs, such as through the utilisation of internal computer systems, for example. It would appear that current non-IT users require improvements to their existing information practices, including access to quality training for improving business communication skills, enhanced financial management skills and training in sales and marketing techniques. Within such enterprises, improvement in basic skills (and

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expansion of financial resources) is likely to be a precondition for expanded use of ICTs.

Non-networked IT users can be described as ‘first-footers’ in small business computing, who have access to computers, but no external network connections. Although this category of enterprise has access to computers on the premises, the level of IT application was comparatively low. 50% of such enterprises, however, regarded upgrading computer systems as being critical to their future business success. Evidence shows this type of business is widespread throughout the manufacturing and service sectors covered in the survey. Many non-networked IT users are also lacking in managerial capacities and share many of the characteristics of non-IT users. In these cases the same pre-conditions for enhancing basic management skills would be required.

Anecdotal evidence from interviews suggests significant problems amongst this category of ‘first-footer’ computer users. It was not uncommon to find computers out of use or consigned to a back room, after initial failed attempts to adapt unfamiliar software to the needs of the business. The success or failure of this category of enterprise in expanding their use of computers would be critical to raising the overall level of ICT use within the SMME sector. The second phase of data collection will provide in-depth case studies of such enterprises, examining in detail the costs and benefits associated with current ICT investments.

Networked IT Users are predominantly service-based enterprises. E-mail and the Internet are used very or quite often by 85% of these enterprises, and computers were used for more complex business activities such as project planning by 50% of respondents. They all regarded further upgrading and continued expansion of computer-based management systems as being critical or very important for the future success of their businesses.

Anecdotal evidence shows that such enterprises have applied and adapted IT systems largely on an ad-hoc basis and in many cases they lack the employee skills to effectively manage the systems which have been developed. Such enterprises may benefit from a more strategic approach to managing information, in order that the costs and benefits associated with both technology based and non-technology based systems can be evaluated. It will be important to consider in more detail the potential of emerging technologies, such as the Internet/e-mail and electronic commerce, for the future of such businesses. This will apply particularly to enterprises that conduct transactions across borders, such as manufacturing exporters and the tourist sector. An Extended Summary and Conclusions can be found at the end of this report.

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Project Outline

The project aims to find out what role new information and communication technologies (ICTs) may play in small, medium and micro enterprise (SMME) development. The project will principally focus on analysing the information and communication needs of small medium and micro enterprises, and will assess the opportunities for ICT application. The project will produce a set of recommendations aimed at three groups within the SMME development community: small, medium and micro enterprise entrepreneurs, intermediary support organisations and government policy making bodies. All recommendations will guide recipients toward best practice in the application of new technologies for SMME development and toward alternative non-technology-based improvements in information and communication systems.

Research Background

The need to harness information and knowledge in pursuit of economic and social development in less developed countries has been emphasised recently by a number of influential international bodies. The rapid advances taking place in information and communication technologies in the developed countries are seen as a potential vehicle for enabling participation of poorer countries in the ‘global information revolution.’ It is suggested that less developed countries must fully embrace new technologies or risk exclusion from the global economy and competitive disadvantage for their goods and services. It is also suggested that information and communication technologies offer potential to solve pressing problems of human and economic development in areas of health, education, poverty alleviation, rural development and care of the environment. In the developed countries emerging technologies are having a dramatic impact on the growth and development of the enterprise sector, and particularly within small and medium enterprises. Enterprises are adapting rapidly to new forms of communication, organisation and new methods of doing business, and a wide range of new

information-based industries have been established. The enterprise sector in less developed countries has also taken on a new importance for development within a more market orientated economic climate. However, the ability of small, medium and micro enterprises, in less developed countries, to take advantage of the potential benefits of emerging technologies are likely to be constrained by a wide range of factors including lack of infrastructure, education, technical support and low information handling capacities.

The governments of less developed countries are being encouraged to developed strategic policies and implementation strategies that will facilitate rapid adoption of emerging technologies, giving rise to new structures and methods of working as well as demanding new skills and knowledge. At present there is little understanding of the current and likely future impact of emerging technologies on industrial and commercial activity in less developed countries. There is even less understanding of exactly how such advanced technologies can address wider social and economic development priorities of poor and disadvantaged groups within LDCs.

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It is essential, therefore, that the governments and non-governmental organisations within LDCs are informed on the real issues concerning this new wave of technological development. At present there is little research, based on objective evidence, that describes the actual impact of ICTs on less developed countries. It is imperative, therefore, that research is undertaken in the area, and that such research is able to take an objective view of the costs and benefits associated with the rapid and large-scale adoption of such technologies. On the basis of the results of such research policy makers, and those involved in enterprise development, will be able to make informed choices regarding policy formulation, investments and support for emerging technologies.

Research Objectives

Botswana has been chosen as a case study for this research project for two main reasons. First, due to Botswana’s relatively well developed communication infrastructure which affords scope for observing current ICT applications, and also making meaningful recommendations on future policy toward ICT implementation. Second, due to the large number of enterprises across a range of sectors which are relatively easily accessible, and the large number of intermediary organisations - both governmental and non-governmental - operating in the role of SMME support.

The main research objective is to provide realistic recommendations about the ways in which information and communication technologies can be applied to small, medium and micro-enterprise development. Initially, an analysis will be made of the changing information needs and communication practices amongst a representative sample of Botswana-based formal sector enterprises. The role of intermediary organisations in the provision of information will also be assessed as well as the potential role of ICTs in supporting the non-formal sector. Finally, the role of government in setting the policy framework for effective IT implementation will be considered.

The project has the following primary objectives:

• Describe the ‘generic’ information needs of SMMEs in Botswana, and to assess

where the provision of externally generated information is likely to enhance the prospects for business survival and growth.

• Identify where information needs of SMMEs are currently not being met, and to

establish the nature of a possible ‘information needs gap’.

• Map current information systems, which are common to SMMEs, for the

acquisition, processing, storage and utilisation of information.

• Understand why entrepreneurs use current information systems, and to assess the

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• Establish the potential for information and communication technologies (ICTs) to bridge the gap between information needs and current provision.

The research aims to take a broader and deeper perspective in analysing the potential role of ICTs in enterprise development. The intention, therefore, is not to begin by analysing the application of technology, but instead to concentrate on assessing the existing information and communication practices of enterprises, and to examine the requirements of enterprises for improvement in those practices. When this analysis has been carried out it will then be possible to come to realistic and informed conclusions regarding ICT application.

Research Method

The core component of the research method will be semi-structured interviews with Botswana entrepreneurs using a sample set controlled for sector, location and size. The sample set is intended to cover export and non-exporting enterprises, as well as current ICT and non-ICT users. The research method will also draw a distinction between survivalist enterprises: to be found mostly in the non-formal sector where entrepreneurs are motivated primarily by the need to sustain their livelihood; and dynamic enterprises, to be found mostly in the formal sector where entrepreneurs are primarily motivated by the need for business growth and profitable operation.

The interviews will collect background data on current information needs and communication practices, as well as profiling the enterprise, the entrepreneur, the ICT access, use, skills and awareness of business owners. Data will be gathered by the use of critical incident recall, and structured around issues of information needs, content, sources, channels, recipients and use. An information mapping exercise will be used to help illustrate typical information linkages for enterprises according to a range of sampling criteria. Interview data will be supplemented by a small number of extended observations of information seeking behaviour of entrepreneurs, and on the basis of interview data, a questionnaire survey will be used to gather information from a broader spread of enterprises. In addition, ICT and small enterprise context data will be gathered from interviews with staff in intermediary and support organisations as well as within governmental and non-governmental policy-making bodies.

Research Outputs

Research project outputs will be presented in both interim and final versions:

Interim Research Papers dealing with the current information and communication systems of SMMEs, and the status and constraints of ICT application.

Final Research Report including summary of interim papers and recommendations for ICT application to SMME development, as well as non-technology-based-improvement of information and communication systems. Practical Handbooks providing straightforward guidance for improvement in

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ICT implementation, aimed at a) entrepreneurs b) intermediary organisation staff.

Communication and Dissemination of Results

All reports and papers will be circulated to a compiled mailing list of Botswana recipients, and through the international mailing list of small enterprise development institutions operated by IDPM. Papers will also be published on the world-wide-web and distributed to dissemination services such as ID21. The practical handbooks will be circulated to a range of intermediary and support organisations in Botswana, and -in translated form - through appropriate channels to Botswana entrepreneurs. Additionally, a one-day workshop will be organised in Botswana for intermediary organisations and officials from policy-making bodies, to present recommendations and discuss surrounding issues.

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The Role of Information and Communication

Technology in Small, Medium and Micro Enterprise

Development in Botswana

Introduction

Information and communication technologies (ICTs) are playing a growing role in the process of industrial and commercial development within the countries of the Southern African region. Since the mid-1980s, the Botswana Government has been investing heavily in a sophisticated telecommunications infrastructure for the country and is establishing its own data communication networks across a range of ministries and departments, as well as within parastatal organisations and public utilities.

Currently, the Government of Botswana remains by far the largest contributor to investment in IT and communications systems, but it is expected, in the years to come, that the private sector will play an increasing role both as a provider and a user of ICT goods and services. There are a number of factors that are driving this process of change:

• Botswana’s Vision 2016 document makes a strong commitment to the

development of competitive industries utilising the most modern technology, including the implementation of information technology across all industrial and service sectors.

• Policy towards the SMME sector has been revised since the new policy on

SMMEs was approved by the Botswana Government in December 1998. The Government envisages a growing role for SMMEs in the future development of the economy, and is providing revised and updated institutional, regulatory, training and financial support to that end.

• The Telecommunications Act (1996) has committed Botswana to enhanced private

sector involvement within a deregulated competitive environment allowing new market entrants to compete in the provision of infrastructure, network access and value added services.

• Government is restructuring and de-centralising its own computer operations and

will allow individual ministries and departments, at central and local level, to form their own partnerships and contracts with the private sector. This is likely to lead to increased opportunities for SMMEs in the provision of IT hardware and in the support of IT systems development within individual departments and within other government funded organisations.

• The education system is being restructured, increasing opportunity for following

technical, managerial and computer related subjects. A major programme of computerisation in schools will lead to increasing levels of computer literacy amongst the working population.

ICTs are already in widespread use within a range of more ‘information intensive’ enterprise sectors, as well as within many medium and large-scale firms within urban areas. Within intermediary and support organisations, ICTs are also playing a

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growing role in the capture, processing and the dissemination of information, giving rise to a rapid expansion in their utilisation in the role of project support across a range of social development sectors, primarily education, healthcare and agriculture.

The role of the SMME sector has already been recognised as critical to achieving the objectives of the long-term vision for Botswana. SMMEs are recognised as having substantial employment creating capacity; they provide a means of empowering more citizens in the process of industrialisation; and they are able to give rise to a wider base of indigenous, and sustainable, technological capability. SMMEs, however, are being subjected to increased competition, as well as increased demands for quality of products and services. Surviving in this increasingly competitive environment will require raising the overall productivity of the SMME sector, which in turn will require higher levels of management capacity. In this regard the ability to acquire, process and effectively use business information becomes central.

Emerging ICTs have the potential for transforming access/provision to information, improving internal information systems and enhancing methods and scope of information dissemination. However, the extent to which the SMME sector can benefit from emerging ICTs is still open to question. In terms of scale, sophistication, market orientation and geographical location, the SMME sector is extremely diverse. The information needs of an urban-based medium-scale enterprise in the technical services sector will differ radically from the needs of a small rural-based retail outlet in a remote village. The vast majority of business owners, particularly those within micro and small-scale enterprises, (MSEs) have little or no formal education, and may lack the capacity to access, process and use information provided through ICTs.

In the past few years there have been calls for the Botswana Government to develop an integrated and co-ordinated policy toward ICTs, as well as strategies for

implementation and support. The New Industrial Development Policy for Botswana

states the need for a comprehensive science and technology policy. There is, however, no clearly stated recognition of the strategic importance of ICTs in the process of industrial and commercial development. As the impact of emerging ICTs grows in the wider economy, there may be a more pressing need to develop a national policy framework for implementation of ICTs in the enterprise sector, including SMMEs. It is likely that a more co-ordinated approach will be required in areas such as awareness and training, infrastructure provision, the role of business support services, data protection and privacy and standardisation/regulation.

Aims and Structure of the Interim Report

The overall aim of the study at the interim stage is to provide a preliminary research output on the role of ICTs in SMME development in Botswana, which will form the basis upon which the 2nd phase of the project will be built. At present there is little or no country-specific research available that describes the impacts and opportunities created through emerging ICTs in less developed countries. It is hoped that the interim findings will provide an aid to effective policy formulation in the area and will help to support implementation strategies, assisting policy makers, intermediary organisations and the enterprises themselves. It is also hoped that the

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lessons learned from the Botswana case will be applicable to other countries in the region.

Currently the research project is at an interim stage and has already produced a range of results and outputs which are contained in this report. The results obtained thus far, however, are not sufficient to warrant definitive conclusions and detailed policy

recommendations to be put forward. Therefore, the conclusions presented are tentative in nature, and are designed to provide a sound basis for the second phase of the

project. The interim report is structured to meet the following objectives.

Chapter one presents a summary of a theoretical framework that has been developed during the course of the project. A research model has been developed in order to enable a broader and deeper perspective in analysing the potential role of ICTs in enterprise development. The research model does not begin by analysing the application of technology, but instead provides a framework for assessing the existing information and communication practices of enterprises. The model describes the role of information in enterprise development within the context of the market, as well as considering the social, cultural and institutional factors that shape the information and knowledge environment.

Information, as applied to enterprise development, is conceptualised in a number of different ways. A distinction is drawn between data, information and knowledge, and information is described, not in static terms, but as a dynamic ‘human centred’ process involving information access, processing, application and as a tool for decision making by entrepreneurs. Information is considered in its formal and informal context, and a range of information barriers and resource inequalities typical of LDCs are suggested. Finally, information is considered as a resource that can be mobilised to enhance enterprise survival and possible growth within a changing market environment.

Chapter two describes the local context for SMME development in Botswana. A detailed survey of the literature concerning economic background, market structure and economic impact of the SMME sector is provided. Enterprise development is considered in its historical context, and it is suggested that a more competitive and open market environment is likely to present a future challenge for the SMME sector to increase both its productivity and competitiveness. The SMME sector is also considered in terms of its employment creating capacity and it is suggested that whilst enterprise development has provided substantial employment growth in Botswana, it has been largely unable to absorb the growing pool of, predominantly young,

unemployed citizens.

Evidence concerning a wide range of constraints to SMME development in the formal and non-formal sector are then considered. Evidence from previous studies identifies considerable barriers to enterprise development relating to entrepreneurial, educational and skill-based deficiencies. Constraints are also considered in relation to lack of access and availability of business inputs, lack of incentives and opportunities created in output markets and weaknesses in institutional support. Some evidence is presented concerning the extent to which ‘information problems and knowledge gaps’ contribute to identified business constraints, and number of hypotheses are put forward concerning a possible role for information and communication technologies in

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overcoming such constraints.

Chapter three presents the results of the fieldwork undertaken up until the interim stage of the project. The data collected through a questionnaire survey and semi-structured interviews with business owners/managers is presented. Results are analysed focussing on the information needs of enterprises, methods of information access and sources of information for formal sector enterprises. Comparative results are presented covering service sector enterprises, non-exporting manufacturers and manufacturing exporters from a wide range of economic sub-sectors. Some initial findings are provided on the formal/informal nature of information practices, describing the content, sources and channels of information, in different information categories. Details of research methods and techniques of data collection are also provided, including sampling and problems of non-response bias.

Chapter four presents evidence concerning current usage and applications of information and communication technologies within Botswana-based SMMEs. The impact of current telecommunications expansion and de-regulation are surveyed and the potential impact of emerging business-related ICTs is described. Data is presented concerning current levels of usage of ICTs for the access, storage and processing of business information. A range of archetypes of Botswana-based SMMEs are also considered according to their level of ICT intensity. Five categories of enterprise are suggested that exhibit characteristics that are typical of SMMEs in Botswana, and a number of case studies are presented to illustrate differing levels of ICT usage within contrasting business environments.

The report ends by presenting an extended summary and conclusions. Some

tentative conclusions are drawn concerning how ICTs can be best applied to SMME development in Botswana. The conclusions consider both technology-based and non-technology-based improvements, in SMME information and communication systems, and a range of ICT constraints are described.

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Chapter 1. The Role of Information in Enterprise

Development

The acquisition of knowledge and the effective use of information are seen as increasingly important to economic and industrial development in less developed countries (LDCs). The most recent World Bank Development Report (1998)

highlights the existence of knowledge gaps and information problems as primary

impediments to the growth and development of LDCs, and particularly, to the economic and social progress of disadvantaged groups within LDCs. The report identifies knowledge about attributes, in relation to human skills, product quality and financial viability, for example, as playing a particularly important role in the effective operation of internal markets within developing countries. The critical role of reliable information in creating market knowledge, and hence, giving rise to market opportunities and increased economic activity, is emphasised.

“ Information is the lifeblood of every economy. In more traditional economies, information may be less codified, more often conveyed in personal interaction, but it is vital nonetheless…. The ways people get information, and the incentives they have to gather and provide it, are affected by the way society is organised: legal rules and social conventions, institutions and governments, all determine how much information people have and the quality of that information…. Without reliable information markets do not work well. “1

Within less developed countries, market and non-market mechanisms for the

transmission of information are likely to be less developed; barriers to the freeflow of information are likely to be higher, and resource inequalities in the provision of information more extensive. Local business networks will be less developed and more fragmented, and entrepreneurs are likely to be less educated and less skilled in

acquiring, processing and using business information. There is likely to be, therefore, a lack of capacity for handling formal information amongst LDC entrepreneurs.

Because of the lack of an information infrastructure, entrepreneurs tend to rely on informal methods for the accessing, processing and application of information within their businesses. Informal information is generally in an unwritten/unrecorded form, is of variable quality, and obtained through networks of local contacts, friends or family. The costs and benefits associated with both formal and informal information practices within LDC market environments have not been clearly defined, and are generally not well understood.

This chapter will put forward some suggestions for a theoretical framework which will assist in understanding the relationship between information and enterprise, drawing together three strands of enterprise development, information and entrepreneurship, within the context of a market structure typical of a less developed country. It will take a systemic view of enterprise development, set within the environment of the market, as the main conduit for the acquisition, communication and use of information.

1

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Additionally it will stress the important role of the entrepreneur in the information process.

1.1 Information

Information, relating to all aspects of enterprise development, can be

categorised as either internally or externally generated. Internally generated

information will include that which is gained from the inherent skills and capacities of the business owner and the employees of the enterprise. It will also include knowledge and information accumulated within the enterprise, incorporating financial, technical

and managerial data.2 Most market-related information, however, will be externally

generated: information relating to market price, product quality requirements, existing and potential customers, sources of finance and new innovation, for example. Therefore, understanding the role of information in enterprise development initially requires an analysis of the interaction between the enterprise and its market environment. Theories concerning the role of information in enterprise development, and in the growth of markets, have had a long history.

Orthodox market economics has always regarded information as being a freely available commodity which all enterprises have access to, within an environment characterised by ‘perfect competition’. This model regards each enterprise, regardless of size, as an independent economic unit, acting independently within a competitive market where both buyers and sellers are able to make rational decisions based on

perfect information. Models of perfect markets (Friedman, 1953; Marshall, 1966) have formed the basis for the mainstream of modern micro-economic theory.

According to the neo-classical model, information relating to the price and availability of inputs (capital, labour, materials and technology) and outputs (goods and services) should flow freely and equitably between producers and consumers, buyers and sellers. In this ‘ideal’ model, markets will operate efficiently; more productive and efficient consumers will succeed, whilst those less productive and less efficient will go under. Benefits to consumers will be maximised in terms of price, availability and quality of goods; and benefits to the wider economy will be maximised through increased productivity within market sectors, leading to increased levels of competitiveness in external markets. Orthodox market economics, by making assumptions about ‘perfect information’ has tended to downplay the role of information in enterprise development and in the formation of markets. However, other schools of thought, have given information a more prominent role in economic theory.

Economic theorising emphasising imperfect information has been more influential when considering the relationship between enterprises and their economic

environment. Economists belonging to the Austrian school (Knight, 1921; Mises, 1949; Hayek, 1978) placed issues of information at the centre of an economic model

2

The importance of accumulated knowledge and expertise for the growth of firms has been emphasised by a number of studies. (Arrow, 1962; Lall, 1980, Bell, 1985) All these writers suggested that internal information, and hence knowledge, gained through learning by doing over time, represents the most significant factor in a firm’s ability to adapt and change to a new technological/market environment.

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which suggests that economic decisions are made in the face of imperfect information about alternatives and outcomes. The development of enterprise, and of markets, is seen as a dynamic process which is characterised by uncertainty, and which is driven, not by the impersonal ‘invisible hand’ of the price mechanism, but by the real actions of ‘profit motivated’ entrepreneurs.

Modern economists have taken theories of imperfect information, and uncertainty in markets, a step further. Most notable of these, (Williamson, 1975) who in his theory of transaction economics, sees the enterprise (or the firm) as the basic driving force which determines the allocation of resources within a market. The market is defined, in Williamson’s model, only by the transactions, which take place between buyers and sellers. (I.e., without transactions between economic actors, there would be no market and no firms.) In this model, information plays a significant role in the transaction costs, which arise for the enterprise as a result of entering the market.

These ideas have given rise to a number of important concepts concerning the role of information in the development of the enterprise. Firstly, information about future events is inevitably uncertain. Enterprises are required to make decisions in the face of uncertain or incomplete market knowledge. Secondly, the information held by parties to a transaction is not likely to be equitable. This is likely to give rise to ‘non-rational’ opportunistic behaviour. Thirdly, individuals have limited ability to process complex market information and are unlikely to come to optimum decisions regarding the allocation of resources.

1.2 Enterprise

Orthodox economics tends to take a ‘black box’ approach to understanding the enterprise. Individual enterprises are concerned solely with profit maximisation, and their actions are merely responses to changes in cost and demand taking place in external markets.

Alternative theories, developed as critiques of the neo-classical perfect market approach, have described enterprises, not as individual economic units, but rather as part of a wider network or hierarchy of economic units. According to the hierarchical model, small enterprises sit at the bottom of a hierarchy of enterprises which is

dominated by the activities of large national and multi-national corporations. (Williamson, 1981; Castells and Portes, 1989) In the context of less developed

countries, this hierarchy has been further widened at the base by the inclusion of a large so called non-formal sector. In most LDCs the non-formal sector comprises the vast majority of enterprises, and provides the bulk of employment for both urban-based and rural-based populations. It is typically made up of survivalist and micro-businesses which are characterised by traditional backward technology; which serve highly competitive ‘cut throat’ local markets; and which have little opportunity to progress from their marginalized size and status to compete in the ubanized and more advanced

formal economy. (Hart, 1973)

These two models, the perfect market model and the perfect hierarchy model, are the two extreme ends of a spectrum of theoretical approaches for understanding the

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relationship between the enterprise and its environment. More recently, alternative models have been observed from the results of research carried out in a range of countries and socio-cultural environments in different stages of development. (McCormick and Pedersen, 1996; Van Dijk and Rabellotti, 1997) All these studies suggest that the behaviour, success or failure of enterprises cannot be understood in isolation from the specific market and socio-economic environments within which they operate.

Researchers of less-developed countries have outlined a range of country specific models, which describe the relationship between the enterprise and their socio-economic environments. All these theories see interactions between enterprises and

their environment as creating networks, which may be based upon personal relations,

trust and reciprocity; as well as embodying relationships defined by simple market transactions, or by the exploitative relationships suggested by pure hierarchies. Pedersen (1996) points toward the usefulness of theories based on networks.

“ When talking about networks of enterprises we do not use the term to denominate any specific form of inter-enterprise organisation. Rather we see the network metaphor as a tool to investigate the dynamic interaction between the enterprise and its environment, in whatever form it may take.”3

Understanding the role of information in enterprise development, therefore, demands a network model. It is necessary to know how an enterprise interacts with its

environment: to identify what are the sources, channels and content of externally

generated information, how that information is accessed, and accordingly, processed and used within the enterprise to inform decision making, and to enable effective interaction with the market.

1.3 Enterprise Information Needs

The information needs of entrepreneurs/enterprises will be determined by a wide range of market and non-market factors. All enterprises need information, but to differing degrees and at differing levels of complexity. There are three main factors that should be pointed out in relation to the information needs of enterprises.

• Information is a generic term. The information needs of an enterprise include

information and data that relate to all aspects of business operation. Information is not, therefore, a resource that should be considered in isolation from other business resources such as finance, technology and labour. Rather, the accessing, storage, processing and use of information form an intrinsic part of all business activities.

• All enterprises will have common information needs, relating to sources of finance,

access to markets, management skills, technology, etc. However, the type of information required will vary widely, according to type/size of enterprise, the nature of the market within which the enterprise is operating and the capacities/abilities of the business owner/employees of the business.

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• The information needs of enterprises/entrepreneurs will vary over time, according which stage of the enterprise lifecycle the enterprise finds itself. The needs of enterprises prior to start-up, or during the start-up phase, will differ from those in a growth or expansion phase. Additionally, enterprises which are in danger of imminent collapse, or that have recently failed, will also have differing, and possibly more urgent, needs for information and/or assistance.

The information needs of enterprises/entrepreneurs can be understood in terms of the

content, sources and channels of business information. Information content describes

the formal/informal nature of information relating to all aspects of business operation including business inputs, customers, markets and competitors, and the business environment. Information can be categorised as follows.

Supply-side information. Information concerning:

• Sources of finance.

• Sources of materials

• Sources of technology/technical assistance

• Sources of labour/skills

• Sources of land/premises

Demand-side information: Information concerning:

• Existing customers and markets.

• Potential new customers and markets

• Export markets

Business environment: Information concerning:

• Positioning of existing competitors,

• Threat of substitute products and new market entrants.

• Regulatory/legal Information.

• External assistance/promotion

• Economic Information.

Information channels and sources, both formal and informal, will arise from ‘enterprise specific’ information networks: These will be established through the contacts, relationships and linkages formed with customers, suppliers, collaborators and competitors. (See Fig 1.)

1.31 Factors affecting information needs

• Enterprise Size/formality. Within each market sector there exist a wide range of enterprises of differing sizes. These will include both formal and non-formal sector enterprises. The non-formal sector will include extremely marginal survivalist enterprises that are only generating enough income to meet basic need, as well as

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micro-enterprises with potential for growth. (Farbman, 1981). Formal sector enterprises will range from very small recent start-ups to well-established small and medium-scale firms. Each of these categories of enterprise will have divergent needs for information, as well as widely differing capacities to assimilate information.

• Market orientation. Enterprises will serve home markets or export markets, or a combination of both. Enterprises may be heavily dependent on single customers, such as through preferential purchasing from government. They may have a wide customer base, serving predominantly open/private markets. Differing groups of customers will place widely divergent quality assurance demands on products and services, giving rise to needs for information of differing levels of sophistication.

• “Traditional”/”modern” sector. Within less developed countries, high technology enterprises can exist alongside low technology, within the same sector and within close geographical proximity. Capital intensive enterprises utilising modern technology may coexist with labour intensive enterprises using low traditional manufacturing (or service provision) methods. Such enterprises may also be interdependent, with low-capital intensive sectors acting as suppliers or sub-contractors to high-capital intensive. (or vice-versa)

• Location. The information needs of rural enterprises will largely be determined by local market demands. Because of communication problems, rural enterprises will be cut off from sources of information open to those in urban areas. Rural

enterprises will not only be less able to access information, but will also lack the capacity to absorb and utilise information, due to reduced levels of education and literacy.

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1.4 Enterprise/Entrepreneur Information Networks

The relationships, linkages and contacts that an entrepreneur/enterprise forms with its external environment will form the channels along which information will

travel, giving rise to an enterprise specific set of information networks. Fig 1.

illustrates the information networks of importance for enterprises including economic (business) linkages, institutional networks and information received from the socio-cultural environment.

Fig 1. Schematic Representation of Small Enterprise Information networks.

Institutional Networks

Socio-economic Environment

1.41 Economic (business) linkages

A wide range of market and non-market factors will determine the linkages, which an enterprise establishes with other enterprises. Economic networks, however, will be largely defined by contractual relationships, which involve transactions between enterprises. Enterprises will form relationships with others, which will give rise to information flows, through three forms of linkage:

• Information flows through forward business linkages: which will be defined by

relationships with customers or potential customers, and the marketing of final goods and services. These may include linkages with individual customers, retail outlets, distribution chains, other SMMEs or sub-contracting relationships with larger firms.

Output Markets

Procurement Sub-contracting Local Sourcing Individual Customers Retailers Wholesalers

Business Inputs

Finance Labour Skills Technology Premises/Land Materials Infrastructure Services Enterprise/ entrepreneur Regulatory Legal Assistance Support Promotion Marketing Economy Markets Political Environment Socio/ Cultural Forward Linkages Backward Linkages Supply-side Information Demand-side Information Competition

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• Information flows through backward business linkages: which refer to relationships with the suppliers of inputs, including: finance, materials, labour and technology. These may include both local sourcing, and the importation of goods and services either directly or through import agents.

• Information flows through horizontal business linkages: from established

competitors or new market entrants, supplying home-produced or imported products and services. Also through collaborative relationships with similar firms producing similar products or services.

1.42 Socio-cultural environment

Socio-cultural networks are seen to play a more important role in less developed countries in the process of enterprise development. This is because within those societies, market environments tend to be more highly influenced by traditional allegiances of family, region and socio-economic grouping. Traditional structures of kinship will tend play a far greater role as social support structures than would be found in developed countries. Enterprise information networks will be defined by a number of characteristics and tendencies, which are more prevalent in less developed countries. These will include:

• The tendency of small/micro entrepreneurs to have multiple occupations, which

may include a combination of formal and informal employment, which may vary seasonally, from week to week, or day to day. (Kilby, 1971; Shipton, 1985)

• A large overlap between family networks and enterprise networks. Enterprises, as

well as providing employment and paying wages to extended family members, may also provide a resource upon which extended families can draw in times of hardship. (Benedict, 1968, 1979)

• A tendency for enterprises to be confined to markets defined by specific territories. These are likely to be more strongly defined in developing countries according to non-market parameters, such as family lineage, castes or classes, chiefdoms or local village allegiances. (Badgely, 1978)

Economic and social networks in less developed countries are more likely to overlap. Hence, enterprise information networks, are likely to be more diffuse, extending into both traditional and modern social structures, which themselves, will be defined by complex interactions between family and ethnicity, region and tribe.

1.43 Institutional networks

Institutional information networks include those contacts, relationships and linkages that are established between enterprises, governmental, non-governmental and private institutions. These may include government departments or central purchasing organisations, acting as customers or suppliers of goods and services. They may involve commercially driven linkages with private institutions such as banks or

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insurance companies offering financial/management services. They will involve interaction with national/international bodies that define the legal/regulatory environment within which enterprises operate. They may include assistance from business support agencies/NGOs that are seeking to facilitate the establishment and growth of enterprise. Within less developed countries, institutional information networks can be considered to fulfil three separate functions:

• Regulatory environment – which may give rise to either an enabling of a restrictive environment for enterprises. Information will largely be that which is generated by central/local government bodies, or possibly regional or international organisations – concerning trade relations, licensing, business/labour law, etc.

• Promotional networks – promotional activities carried out on behalf of enterprises, which may be conducted by governmental, non-governmental, or in some cases private institutions. These activities will create the potential for exchanging large amounts of information through the provision of human and technical infrastructure, the research and publicising of economic opportunities, the formation of business associations or professional bodies and the organisation of marketing or promotional events such as trade fairs/conferences.

• Assistance networks – direct assistance in the form of preferential purchasing, financial assistance, marketing, skills enhancement, etc. These networks may include both commercial and non-commercial organisations. At one end of the spectrum, commercial banks and money lenders providing commercial loans and assistance, and at the other end, government bodies and NGOs providing non-commercial finance and other non-fee paying assistance.

1.44 Entrepreneurship

The critical role that the entrepreneur plays in the development of enterprise and in the growth of new markets has largely been ignored by orthodox economics. This has been particularly the case, until recently, in development economics which has tended to concentrate on macro-economic analysis, and less on economics at the micro-level as a human-driven activity. Entrepreneurship, however, is seen as the essential dynamic component of a range of economic development models, which acknowledge the reality of imperfect information. (Knight, 1921; Mises, 1966; Kirzner, 1979; Casson, 1982)

Entrepreneurs have been characterised in a number of different ways:

• as creative and innovating prime movers, propelling the economy forward by increasing efficiency through technical and managerial innovation, and the establishment of new methods. (Schumpeter, 1943; Williamson 1983) Entrepreneurs are seen to embody special qualities, distinct from those of managers or owners, which lead to the establishment of new products and services, the exploitation of new markets and to greater economic efficiency.