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Should policymakers support small enterprises?

Small and medium enterprises (SMEs) are common in developing countries. They often comprise the majority of businesses and provide a high proportion of employment. However, SMEs are diverse: policy interventions must understand what they are dealing with to successfully contribute towards sustainable development, rather than detract from it.

Almost all researchers and policymakers agree that there is a need for policies in favour of SMEs. This is sometimes because there are so many of them, sometimes because of distinct benefits to poor people that merit support and sometimes because market and institutional biases against small scale businesses need to be rectified.

Research from the International Institute of Environment and Development, UK, highlights some promising opportunities for successful policy interventions. SMEs are especially critical in times of change. They help:

rural households to diversify and adapt to increasingly urban patterns of development
households cope with transitions from state-controlled economies to market-driven economies
households adjust to shifts away from family labour towards waged employment
to maintain the supply of culturally specific products and services that might be missed by larger global enterprises.

However, SMEs do not always offer a way forward. SMEs often lack bargaining power in competitive markets and suffer from high transaction costs. In many cases, SMEs pay less attention to worker welfare and the environment than larger enterprises. It is often difficult for larger businesses to work with SMEs, which are usually less formal and timely in their operations and spread across wide areas. Informality is also a challenge for policymakers looking to support (and collect revenues from) SMEs.

A complicated mixture of institutional partnerships and policy support can help or hinder SMEs. For example, a medium-scale cashew-processing factory in Mozambique employs approximately 100 local people, who have contracts and good working conditions. The factory was designed with the help of Technoserve and set up in an old government building. It was made possible by the strong relationship between the entrepreneur and a Dutch non-governmental organisation linked to a Dutch cashew nut buyer. Government taxes that encourage in-country nut processing form part of the policies that made it work.

By contrast, policies in the Red River Delta, Vietnam, are less supportive to SMEs. About 80 percent of non-farm employment is in handicraft SMEs. Despite this importance to local livelihoods, government programmes to support rural industries do not include these enterprises. Programmes have a minimum size for enterprises, which is too large for many handicraft SMEs. They also require advance payments from enterprises that are unaffordable.

There is no ‘one-size-fits-all’ policy framework to support SMEs. This diversity means that debates about the merits of supporting SMEs will continue. However, three particular areas merit further support:

Investigating and designing models for incentive, competition and procurement policies that support SMEs without compromising bilateral and multilateral commitments.
Supporting particular types of SME association that build entrepreneurial capacity and market power without strengthening local elites.
Helping SMEs to negotiate special provisions within standard and labelling schemes that often discriminate against them.

Source(s):
‘Small scale enterprise and sustainable development: key issues and policy opportunities to improve impact’ IIED Policy Discussion paper, IIED: Edinburgh, by Duncan Macqueen, 2005 Full document.

Funded by: Swiss Development Corporation (SDC); UK Department for International Development (DFID)

id21 Research Highlight: 24 March 2006

Further Information:
Duncan Macqueen
Forestry and Land Use Programme
International Institute of Environment and Development
4 Hanover Street
Edinburgh, EH2 2EN
UK

Tel: +44 (0) 131 226 6860
Fax: +44 (0) 131 624 7050
Contact the contributor: duncan.macqueen@iied.org

International Institute of Environment and Development, UK

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