Institutional Innovations to Support Micro, Small, and Medium Enterprises

Transcription

1 TOOLS AND PRACTICES 11 Institutional Innovations to Support Micro, Small, and Medium Enterprises Many governments of developing countries perceive micro, small, and medium enterprises (SMEs) as engines of employment, poverty alleviation, and broad-based economic growth. Growth and development of SMEs in developing countries can increase poor people s opportunities, security, and empowerment. This note presents examples of two types of commercially viable innovations that increase productivity and growth of SMEs in developing countries: business networks and clusters and venture capital to small enterprises through a combination of equity investments and technical assistance. SME Network and Cluster Development In order to better compete in the marketplace, micro, small, and medium enterprises in the same or related industries can form business collectives. Partnerships among businesses in geographic proximity are called clusters, while businesses that team up to work on a joint development objective are called networks. The term networking characterizes the overall process of building business relationships, whether through clusters or networks. SMEs team up for sound economic reasons, including the opportunity to procure raw materials and other resources more efficiently, the availability of customized business development services, the abundance of clients attracted by the cluster, and the presence of a skilled labor force. Such partnerships reduce costs for individual enterprises through economies of scale and raise profits through industry development. Cooperation among firms can also create a learning environment in which firms can exchange ideas and knowledge to improve products and profits. The following examples explore how business networks and clusters can be supported, yielding benefits to both firms and economies. Broadening SME Networking in Nicaragua In 1995, the United Nations Industrial Development Organization (UNIDO) and the government of Nicaragua formed a partnership to develop a strategy for strengthening small and medium enterprises in the country. The technical assistance program promotes networking, understood as relations between enterprises (and between enterprises and institutions) that allow the SMEs to overcome their isolation and achieve new collective competitive advantages unattainable by individual firms. The program also helps develop local institutions that facilitate the networking process by helping to forge a joint entrepreneurial vision and build capacity to implement that This note was prepared by Radha Seshagiri (PRMPR), under the overall guidance of Deepa Narayan, (PREM).

2 vision through common development projects. These network brokers act as system integrators at the local level, facilitating the development of relationships between the enterprises and optimizing the use of available technical and financial services. The joint Nicaragua-UNIDO initiative to foster the growth of Nicaraguan SMEs emphasizes local capacity building. The national consultants working in the project are local professionals with no international experience and no direct knowledge of cluster or network practices or policies. The project therefore invests in training for them to upgrade and specialize their skills, which is expected to result in improved services to the enterprises. Project consultants are also training network brokers to expand network creation capabilities and multiply results throughout the country. Network brokers are selected from locally active institutions, especially entrepreneurial ones, and from other technical assistance projects. The project also seeks to diversify its activities to include the training of new network brokers, the promotion of industrial districts or clusters, and the promotion of industrial integration along production chains (large enterprises subcontracting to SMEs, with emphasis on upgrading of the small firms that serve as suppliers). The initiative has resulted in growth of clusters and networks among Nicaraguan SMEs. Twenty networks were created within two years by a team of seven national consultants, assisted by short-term international consultants. More and more local institutions are demanding the services of network brokers. The project was invited to assume an important role in the National Committee for Competitiveness and Sustainable Development, made up of high-level policy makers and representatives from the private sector and academia, and is contributing to the dialogue around design of an overall SME development policy. The early support for and involvement in this business networking project by the Nicaraguan government has been important to its success. First, the project has had easy access to local policy dialogue and formulation around business development and has been able to propose business networking as a key SME development strategy for Nicaragua. Network promotion has now become one of the main instruments of the government s approach to private sector support. Second, public sector involvement has made the project a model of interinstitutional coordination and, as a result, has enabled the project to have greater access to local people and resources. Third, public sector involvement has brought about a much clearer prospect for sustainability of the project. The long-term expectation is that the networking project will be taken over by the public sector counterpart and eventually become an independent agency. EcoHamaca: Networking Hammock Producers One successful example supported by this initiative is Ecohamaca, a network of 11 small enterprises in Nicaragua producing handcrafted hammocks. Each enterprise employs about 15 people and competes with the other hammock producers in the local market. After consultations with UNIDO experts at the beginning of 1997, the producers were convinced of the need for closer collaboration in order to develop and carry out an export strategy. They subsequently applied for UNIDO support in March By August of that year, the group had gained formal legal status as a producer association and had a standing constitution signed by all 11 members. Through the UNIDO networking project, producers received technical assistance to help standardize their production so that they could collectively improve the quality and design of 185

3 their products, develop pricing systems, and produce quantities suitable for export. In order to offer a more eco-friendly and exportable product, the group changed the wood used for the poles (from cedar, which is close to extinction, to other more abundant exotic species) and shifted from chemical to natural dyes. The producers have agreed on the common brand name, Made in Masaya, in order to promote a local identity. By 1999, the network was exporting more than 3,000 hammocks a month, with regular customers in Sweden, Finland, the United States, and Peru. In order to advance their common work and maintain their competitiveness, EcoHamaca has hired a manager whose tasks include identifying more formal training opportunities for the producers, securing additional technical and financial assistance from local SME support institutions, and developing a stronger marketing strategy that capitalizes on the Internet. Hand-Block Printed Textile Cluster of Jaipur, India Jaipur, Rajasthan, India is home to a group of artisans specializing in hand-block printing, a form of fabric printing that uses ethnic designs and traditional, eco-friendly vegetable dyes to produce colorful textiles. More than 550 small firms engage in both hand-block and screen printing and employ almost 10,000 workers. In the 1980s and 1990s, as national and international demand for hand-block textiles grew, traditional hand-block printers in Jaipur failed to keep up. Increasing competition from substitute products also began to squeeze the artisans out of the market. UNIDO conducted a diagnosis of the artisan group in 1996 and offered recommendations to help revitalize these small businesses. 93 The recommendations included developing clusters interlinked similar enterprises in a particular sector in order to promote cooperation and collaboration and thus achieve greater gains than would be possible for the enterprises individually. UNIDO also recommended fostering cooperative relations between the public and private sectors to develop a coordinated industrial policy, identify and implement coherent actions, and support entrepreneurship. For the hand-block artisans, the result has been a revitalization of their business cluster, greater access to international markets, and a restructuring of activities to meet growing demand. Revitalizing the hand-block cluster UNIDO s study assessed constraints to the cluster and the potential for growth. It identified an unexploited potential for traditional artisans in the cluster to target profitable national and world markets. Constraints included lack of an active association, limited capacity, and inadequate access to financial services. The resulting action plan aimed to promote traditional production methods and improve the living standards of the artisans. The plan envisaged restructuring the cluster and improving linkages among the different enterprises; enhancing the design, production, and marketing capacity of the firms; developing a product image to meet market demand; and improving business support services. 93 UNIDO s 1996 survey of small-scale enterprise clusters in India found that there are 350 industrial clusters and approximately 2,000 rural and artisan-based clusters throughout the country. These clusters account for approximately 60 percent of manufactured exports from India (Clara and others 2000). 186

4 Has it worked? As a result of the UNIDO intervention one dormant artisan association, Calico Printers Cooperative Society (CALICO), has been revitalized. Its membership has increased from 26 artisans in 1997 to 120 by 1999, and a common showroom has been created. In addition, after two years of UNIDO assistance four new formal networks (three of women) and four informal networks had been created. The Consortium of Textile Exporters (COTEX) has also been formed. By 1999, of the 155 firms involved in the whole hand-block cluster, 40 have expanded their capacity; 20 have been exposed to international markets; 25 have improved their design capacities; 80 have been registered with various institutions to provide regular market linkages; 15 have received bank credit; 22 have trained in visual merchandising; and 55 have trained in marketing and entrepreneurship. India s National Bank for Agriculture and Rural Development played a key role in the growth of the cluster. Following the bank s 1998 contribution of 15% of costs for the cluster artisans to participate in a product fair in Jaipur City, collaboration within the cluster improved considerably. Other agencies, working in partnership with UNIDO, also made contributions. Small Industries Development Bank of India (SIDBI) and the National Institute of Design initiated activities related to marketing training, design development, technical training, and introduction of an innovative credit mechanism. SIDBI has also adopted the cluster for further intervention under its Rural Industrialization Program. Commercial banks have also begun playing a role in development of the hand-block cluster. Lending by commercial banks to these small-scale businesses was suspended in 1991 following a flood that deprived the artisans of their collateral. Once the hand-block cluster was reestablished with UNIDO assistance in 1997, the president of CALICO, a respected businessman from Sanganer, successfully negotiated an agreement with the banks for the resumption of lending to the small businesses. CALICO smoothed the financing process by providing collateral on behalf of its members to secure the loans and by screening applications before submission to the commercial banks. In a matter of months, 15 loan agreements were signed between local banks and CALICO members. The supply of loans has increased so dramatically that bank managers have been known to reach out to CALICO to inquire about upcoming projects and identify potential loan recipients. The cluster has progressively relied on fewer subsidies as it has developed. UNIDO s contribution declined from 50 percent in the first product fair in 1998, to 7 percent at the last fair, a year and a half later. Small Enterprise Assistance Funds (SEAF) Small Enterprise Assistance Funds is a U.S.- and Dutch-based NGO that aims to foster economic development and entrepreneurship in developing and transitional countries. Spun off from the development organization CARE in 1989, SEAF began by pursuing operations in Central and Eastern Europe, then expanded to Latin America. It is now branching out to operations in Asia. With $140 million under management in 2001, it has made over 160 investments valued at about 187

5 $45 million, and manages a network of 14 commercially driven investment funds around the world. Individual investments range from $100,000 to $1.5 million, with SEAF holding a minority equity position of percent. SEAF funds companies that are too small to interest most mainstream foreign investors, commercial banks, or public development banks, typically those with 10 to 100 employees and annual revenues of $200,000 to $2 million. Its approach is similar to that of a venture capital firm. As an active shareholder, it provides donor-funded technical assistance and fee-based services to help the firm grow, and exits the firm when it has reached a point of maturity, usually after five to seven years. While SEAF is a nonprofit with a development objective, it manages each of its investment funds as separate, for-profit entities. At the end of 2000, the average company in SEAF s portfolio saw a revenue increase of 80 percent. Employment growth was also strong: 7,000 jobs have resulted from the funds investments. As of April 2000, SEAF had sold nine of its 37 investee companies, earning a 32 percent return. SEAF typically begins operations in a particular country or region by launching an SME equity fund to serve emerging enterprises, then seeks promising firms that need outside capital and management support to grow. Once it identifies a firm, SEAF takes a minority equity position in the firm and helps it grow by providing technical assistance. SEAF s equity plus assistance model provides technical assistance along with funds to develop capacity in SME management and expertise, and builds a relationship with firm managers to achieve growth. Technical assistance in financial management, marketing, accounting, and other fields are provided to the firm for a fee. Specialized consultants funded by donors are also available if needed. SEAF has found that this customized support to firms has helped small firms grow rapidly. It recovers approximately 50 percent of its costs through fees and return on equity, while the remainder is financed by loans or grants from development institutions. Examples of SEAF Investments Bolivia: Jolyka Flooring Company In Cochabamba, Bolivia, SEAF helped to restructure management operations of a small flooring company, Jolyka. After making an investment of $860,000 in 2000, SEAF helped the company restructure its balance sheet and negotiate its debt to achieve greater profitability. The new structure of the company has helped production; annual revenues have risen from $850,000 to $2.2 million. SEAF has also helped to negotiate contracts with major U.S. firms and introduced Jolyka to trade shows in North America. Poland: Holding Centrum Bookstore A typical example of a company that has benefited from SEAF assistance is Holding Centrum in Poland, which grew from a start-up of 86 employees run from its founder s apartment into a nationwide chain of 50 bookstores with 446 employees. Technical assistance grants from donors also helped the firm grow. 188

6 Estonia: Regio Maps Technology company Regio was the first firm in Estonia to receive assistance from SEAF, which provided Regio with strategic management advice to help expand its production and operations. Regio had focused its operations on sales of paper and digital maps. When SEAF invested $140,142 in 1998, acquiring a 28.6 percent stake in the company, it recommended moving into higher-value-added services and improving financial management, marketing, and business organization. In 2000, SEAF facilitated negotiations with the Finnish industrial group DONE to purchase Regio, which resulted in a Euro 3.9 million sale of 100 percent of Regio s shares. IFC s Role In 1996 SEAF began working with IFC through a $600,000 IFC/GEF line of credit. Since IFC s subsequent 1998 investment in SEAF Macedonia, the two have collaborated to improve the efficiency and reduce management costs of SEAF s operations. Since 1999, IFC has invested $17 million in four different SEAF-managed funds. SEAF receive $850,000 from IFC s SME Capacity Building Facility in March 2001 to help the organization scale up and expand to several countries and regions. Resources Ceglie, Giovanna, and Marco Dini SME Cluster and Network Development in Developing Countries: The Experience of UNIDO. Paper presented at the International Conference on Building a Modern and Effective Development Service Industry for Small Enterprises, organized by the Committee of Donor Agencies for Small Enterprise Development, Rio de Janeiro, Brazil, March Available: Clara, Michele, Fabio Russo, and Mukesh Gulati Cluster Development and BDS Promotion: UNIDO s Experience in India. Paper presented at the International Conference on Business Services for Small Enterprises in Asia: Developing Markets and Measuring Performance, Hanoi, Vietnam, April Available: International Finance Corporation Partner Profile: Small Enterprise Assistance Funds. SME Focus 1 (2): 6. Small and Medium Enterprise Department, Washington, D.C. Available: a. The Power of Partners. SME Focus 2 (2): 1 3. Small and Medium Enterprise Department, Washington, D.C. Available: b. Partner Profile: SEAF. SME Fact Sheets, March. Small and Medium Enterprise Department, Washington, D.C. Available: 189

7 United Nations Industrial Development Organization. Cluster Development in India. Document Available: 190