Why consider small-scale, local enterprises in Private Sector Development?

Small scale enterprises need more business support and business development services than larger enterprises do. Priority should be business support services like an enabling environment through relevant policy and appropriate law to govern the sector by government. Business development services ought to be championed by the private sector. However government’s role will be complementary to the already available business development services to set priorities right and appropriate interventions.

While I agree that capacity building, financing and marketing, I believe from experience that any of these given outside the value chain in which the SMEs operate tends to be less sustainable. The more specific the support is and supplied by other value chain actors, the more valuable and appropriate.

A casual observation of the growth of SMEs in Nairobi Central Business District in Kenya also tells me a vary different story about the kind of support that SMEs require. Most SMEs are not able to invest in infrastructure required to bring their business to locations where customers are. Can private sector development strategies then create incentives for providers of such infrastructure required by SMEs?

Thanks for all the excellent contributions so far.

Let's move on to the second question:

What have we learnt from previous experiences in supporting this sector (good and bad) and what does this mean for donor policy (in terms of private sector and / or economic development?

Trust is one key issue, Ekanath. While some private firms are being victimized as being bullies when it comes to contract-farming, in many cases, the contract-growers themselves are breaching the contract and selling the products elsewhere. Local traders sometimes offer a one-off higher prices just to lure the growers into selling their products to them in stead of the supermarket supply chain, because they know very well that once breached, a supermarket will not further go into such arrangement with the farmers/farmers' groups. But unfortunately, the growers sacrifice their long-term benefits over short-term ones.

Alexander, Geoffrey, the UK government has said it wants to focus its foreign aid more towards supporting economic development in poorer countries. What checks would you like to see, or advise them to put in place, to measure the impact on MSMEs?

I would like to follow-up on Sarah Montgomery's comment. Small and medium sized businesses need acces to capital and a broad scale of financial services. At the same time we see that most DFIs - that have been expanding their programmes targeted at SMEs - don't seem to reach that 'missing middle' developing tailored products. A problem that seems to be linked to the business model of DFIs: going for market-rate returns while reaching SMEs with suitable services don't seem to go well together.

I certainly agree with you Ekanath. Multinational companies too need training on how to be inclusive of small businesses in their business. I have seen multinational companies enganging foreign businesses to provide goods and services that local small businesses are able to supply. Big businesses needs to be conscious of the need to support small local businesses as part of their corporate social responsibility

This is indeed a critical issue. On the one hand developing countries need to increase domestic revenues to meet the cost of much needed investments in infrastructure and improved public services. So they need to broaden the tax net - as well as take measures to curb the practice by multinational companies of using transfer prices that take profits offshore. On the other hand, if the tax regime is too punitive for small enterprises - there will be a further incentive for such businesses to remain in the informal sector, where productivity is lower, working conditions worse.

What is needed is a tax regime for small firms that is graduated, encourages firms to formalise

Hi Zunaed, i likt the point that you raise about workers and owners. I think that the decent work agenda as proposed by the ILO is key and has important lessons for small business support. Most small and micro businesses have one or two people working in them - very often these are family members. Very often they can not achieve decent work standards even though they are the business owner. It is essential that while providing and enabling business environment for small businesses to be able to succeed, we also support workers and entrepreneurs where they are by ensuring they have rights, social protection and voice in decision and policy making

Some of the support such as training must be channeled through the private sector and civil society that are working on the needs of small businesses and not leave everything to government. We know of so many failed attempts that government has attempted to implement to promote the nneds of the private sector. The UK government should also bring on board small busniesses in their policy framework to ensurte that their needs are taken care of.

Donors have been focusing on reinforcing the links between public and private finance, and domestic and international resources, particularly through promoting the use of public resources to leverage private finance. While access to finance is one of several problems MSMEs face in partner countries, there is a need for assessing the different roles that public and private resources play in development.

External private finance has several key limitations: (i) it predominantly flows towards higher income countries, (ii) it has proved very difficult to target towards MSME’s, certainly those operating in the informal sector, (iii) its for-profit nature means its contribution to sustainable development in partner countries is often dependent on public sector involvement.

In stead donors could focus on how international public flows can help reduce the barriers to private sector investments through investing in essential services, such as health and education and social infrastructure. The issue of how public regulation, incentives and subsidies can be used to direct, increase and improve private investment would be better resolved at national level.

Based on the previous experiences, private sectors increasingly have a bigger roles to play in supporting local economy, at the same time they have to gain fair profit margins by developing innovative inclusive business model or supply chain , That can be achieved by engaging more small scale, Local enterprise (MSMEs) in to their both upward supply chains and developing BoP markets. Most important issues here is how to develop WIN –WIN perceptions among small scale enterprise level and bigger private sector investments? -

Private sector is very broad and varied. A one size fits all solution will not work. The trickle down approach will fail again. Small businesses can never be always helped through proxies of big businesses. They are key stakeholders as they contribute to poverty reduction, job creation and economic growth. They should be taken on board from the begining. We should not focus on growth and then hope small businesses will benifit in the by and by.

The good thing is that we are focusing on the private sector to grow the economy and bring about development and not to give handouts/aid.

Zunaed / Geoffrey / others - I'd be interested in your view on another way to distinguish the type of entrepeneurs. We hosted an interesting discussion a little while ago on "How to best support entrepreneurship across the value chain" http://snipbfp.org/16esl9h and one point was the distinction between "opportunity" and "survival" entrepreneurs, and the different types of support each needs.

But then there should be a mechanism for the private sector and civil society to harmonize their work with those of the government, because if you want to reach scale and ensure an enabling environment, getting government's involvement is very important.

The policy should not be a "one size fits all". It must provide for different types of SMEs, operating in different settings, etc. For instance, the type of support required for SMEs in post conflict environment will be very different.

DFIDs focus has moved over the years towards supporting Large enterprises to do business with SMEs. I think there should be more of this. For instance donors should be willing to put resources into large businesses that can develop support structures to local SMEs.

This kind of market 'dysfunction' is common and often everyone looses out as the sector fails to become competitve. Investing in understanding what governs the relationships and behaviours of enterprises, of all sizes, is critical. What are their incentives? What are the levels of trust?

Facilitating change in systems where there are large numbers of small players is not easy and we need to learn more about the processes that work. Practical Action has been exploring this with others.

See http://www.pmsdroadmap.org/index.html

There is good evidence that specific and targeted support to MSMEs could be transformative and would be beneficial in tackling inequality, reducing poverty and making growth more inclusive – in fact poverty reduction is higher when growth is biased towards labour intensive sectors such as these. If you want to truly achieve inclusive growth that has poverty impact this sector would be key.

one thing the research shows us is that one-size-fits-all approaches don't work and often miss the specific needs and constraints that small businesses face. this is one of the key things our research highlighted. If we want to support small-scale entrepreneurs to step up and out of poverty, we need to ensure that policies are targeted at their specific needs

Thanks for all the great insights everyone!

Let's move on to the third question:

What would a pro-poor framework within private sector development look like?