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NEW PARTNERSHIPS INITIATIVE: SMALL BUSINESS PARTNERSHIP
TABLE OF CONTENTS I. POLICY GUIDANCE
DEVELOPMENT RATIONALE - PARAMETERS - RELATION TO ONGOING PROGRAM - RELATION TO OTHER NPI COMPONENTS - SEQUENCING TO LEVELS OF DEVELOPMENTII. PROGRAM DESCRIPTION
OBJECTIVES AND PROGRAM INDICATORS - CURRENT ACTIVITIES
Global Bureau - Africa Bureau - ANE Bureau - ENI Bureau - LAC Bureau
LESSONS LEARNED - NEW PROGRAM IDEAS - PROGRAM LINKS TO OTHER AREAS - EVALUATIONIII. NEW MANAGEMENT VEHICLES
POLICY - PROCESSAttachment A: Women's Business Network
Executive Summary
The Small Business Partnership is one of three components of the New Partnerships Initiative (NPI). This Report was prepared by the Small Business Working Group and chaired by G/EG, with participation from USAID staff, business associations, USAID contractors/grantees, the World Bank, the InterAmerican Development Bank, and others.A focus on small business partnership, within the context of NPI, is a logical next phase to the microenterprise strategy. Much of the policy and technical guid-ance developed under that initiative applies to small business. There is a strong development rationale for such a focus. As small businesses grow in size and number the economic benefits spread widely through the community, particularly to women. Small businesses tend to be in industries that are labor intensive and rapidly exploit new market opportunities. They create jobs, particularly for the poorest, and are typically strong change agents, as markets force innovation. They are numerous and competitive and will become engaged in the policy process and technology improvement when they are offered significant services. Income generated by small business is spent on education, health, shelter, nutrition and other quality-of-life improvements. Linking small business development to demo-cratic decentralization and the strengthening of nongovernmental actors promotes an efficient and effective civil society. Broad-based economic activity fosters broad based civil society.
The policy and institutional environment is viewed as the central determinant for the success of small businesses. Transparency, competition, and efficiency should be the most important goals of reform programs. The legal and institutional continuum, public and private, national to local, is imperfect at all levels, and requires investment. The issue is where and how to invest in capacity building to accelerate and sustain the process. The interrelationship between economic and political reform argues for a focus on local, nongovernmental actors, with assistance provided to the maximum extent possible through nongovernmental organizations (NGOs). When NGOs are strengthened to deliver valuable services, different parts of the community become committed to their support. USAID programs have shown that the business community can be engaged in ways that build credibility and support for local NGOs and help them establish long-term networks with the U.S. NGO and business communities. Capacity building of business associations, advocacy groups, cooperatives, think tanks, media and others should be a primary program objective. Women in business warrant special attention, as they face a disproportionate share of barriers.
The speed and impact of reform can be accelerated by creating new links among groups, both public and private, at all levels. USAID should foster access to global information, capital, business services, and business transactions networks, as well as to similar groups that can facilitate technology transfer and lower the cost of the traditional technical assistance programs. The links must focus on low-cost access to resources, especially to information and personal networks. Groups include, national and local governments, universities/think tanks, business associations, small business development NGOs, and others. Access to a wide variety of U.S. volunteer resources can also be made available through these networks.
USAID programs focus on policy and institutional reform, both public and private, at all levels, from the broadest macro policy change through assistance directly to enterprises. Forty of the 41 missions reviewed in the Annual Report on Program Performance, 1994 have economic growth objectives. Initial reports indicate that approximately 10 percent (@$200 million) of the budget is for small business programs. Accurate baseline data on the technical and financial composition of the programs is needed.
Policy guidance on small business development within USAID needs to be strengthened. For example, Encouraging Broad Based Economic Growth; USAID's Strategy should be revised to provide specific guidance relevant to this new small business initiative.
We also suggest that USAID use the knowledge gained through the microenterprise initiative to develop technical guidance, performance indicators and efficient mechanisms to engage the NGO community in small business development. While there are many examples of "lessons learned," a more comprehensive, strategic analysis of prior experience is needed.
Existing programs for business firms can be linked to those that strengthen NGOs and reform policies and regulations, to broaden democratic practices and ensure more effective support of policy reform. Programs that increase the ability of small businesses to enter markets and provide greater access to resources are beneficial. Long-term benefits accrue to the U.S. economy when U.S. firms are linked to opportunities in developing countries. Volunteer business networks have resulted in self-sustaining relationships.
The available information does not permit any broadly projected funding scenarios. However some new programming ideas should be further developed, including, inter alia, 1) an electronic technology based capacity building initiative to supplement current technical assistance efforts; 2) a model women's business/ political/volunteer network; 3) capacity building for general business associations and think tanks that can support a market oriented advocacy roles; 4) policy reform efforts in collaboration with other donors to stimulate a competitive banking system; 5) a mechanism for delivering present business assistance through appro-priate local NGOs; 6) an expanded use of credit guaranty authority to promote commercial bank lending to small business; 7) an initiative to stimulate more volunteer, U.S. NGO and contractor collaboration; 8) multi-country small business environment ranking report; and 9) encouragement of the expansion of existing sectoral experiments in health, population, environment and agriculture that support small business development and linkages to NGOs.
Networks of U.S. and other developing countries NGOs can be promoted and used to develop new partnerships in the policy reform and institution building process, empowering a broader set of local and international stakeholders.
Business assistance programs can be modified without significant cost to link the three NPI components. Different sets of institutions are represented in each of the three, but opportunities for cooperation exist. Capacity building, information sharing, common client servicing, and other areas hold much promise. For example, capacity building in business associations should be linked with local democracy programs to build NGO strengthening and with US technical volunteer networks to allow more effective services for local members.
A system for evaluation and feedback already exists, but a special effort is necessary to build on that system to summarize existing data and fill gaps in the knowledge base. In particular, the recent experience in the ENI region should be tapped. Performance indicators for small business programs, within the Economic Growth sector, need to be developed. The evaluations and related documents of USAID small business programs, and the experience of other donors, should be reviewed to provide further guidance for future interventions in policy strength-ening and goal setting.
Most programs provide technical assistance, either through "procurement" (USAID tells you what to do) or through "assistance" (USAID supports what an NGO wants to do). There is widespread support for further exploration of reengineering of the assistance system. Suggestions include, single USAID/NGO agreements that permit multiple sources of funding. For example, IESC has some 40 agreements to provide the same service, with longer term commitment of funds. Development of small business results packages to foster obligation by result, rather than by input, and designation of an independent assistance ombudsman.
The Small Business Working Group supports building a comprehensive initiative, rapidly integrating certain policy, NGO strengthening, and small business assistance efforts. This approach can accelerate development impact and leverage existing resources, while giving local institutions a better chance for long-term sustainability. The Working Group also suggests a long-term strategy, including revision of policy and strategy statements, a PPC/CDIE led comprehensive sector-specific review, an examination of ways to use the budget process to strengthen small business as a preferred development strategy, further reengineering of the USAID/NGO relationship, and the continuation of the current NPI Steering Committee/Working Group structure to champion the process.
I. Policy Guidance
A. Development Rationale
Small businesses make an important contribution to real incomes, economic growth, and equity in developing countries. Unfortunately, in all but a few countries this contribution falls far short of its potential, due in large part to subtle and not-so-subtle biases in the policy and regulatory environment that place them at a disadvantage against large and established firms.Although economies of scale give large firms a natural advantage in many manufacturing industries, small firms operate alongside large ones in many others, including food products, clothing, furniture, and building materials. Small firms play an equally important role in many services, where economies of scale are often less important. In both manufacturing and services, small firms tend to be more oriented toward production to meet local tastes and needs, including the needs of middle- and lower-income people for simpler, less costly products and services than those consumed by the upper classes. Small businesses are particularly prevalent in rural areas, where they serve the needs of farmers and other lower-income people, producing farm implements, processing agricultural outputs, renting machinery, etc. Small businesses' attention to the needs of lower-income consumers and producers promotes equity within the developing countries.
Small manufacturing firms tend to use more labor-intensive production techniques than their larger competitors, a pattern that enhances their role as sources of employment in countries with abundant and rapidly growing labor forces. In many cases, small businesses help absorb relatively less-skilled workers than those hired by larger firms. In both respects, small businesses contribute not only to overall prosperity, but to a more equitable distribution of income, yielding important non-economic benefits in terms of social and political stability.
As important as these "static" benefits are, one cannot fully appreciate the potential contribution of small firms without considering their dynamic role in the economy. In all economies, rich and poor, small businesses tend to have short life-expectancies, as the market winnows out all but those best-attuned to the needs of their customers. However, the few small firms that survive this process include some of the most dynamic and most responsive to emerging demands in the local and international economy. Given a level playing field for new competition, some of these survivors will emerge as the medium- and large-scale businesses of the future. Likewise, the process of identifying a market niche, establishing a small business to fill it, and struggling to make that business survive serves as a training ground for entrepreneurs, including many whose lack of formal credentials would make it hard to find a position in a large firm. The flow of entrepreneurs emerging from a vigorous small business sector can greatly add to the economy's overall flexibility and growth potential.
Unfortunately, in most developing countries a wide range of legal, regulatory and policy biases impose heavy costs on small businesses and limit the ability of more efficient emerging firms to compete with established businesses. In particular, privileges given to a few favored firms often limits access and competition.
The banking systems lack competition, are highly protectionist and choose not to serve small firms. There are norms and values that mitigate against charging full-cost interest rates to smaller firms. It's good business but it looks bad, and many people, including bankers, are not comfortable with it, even though it's the only way to make lending to small business profitable. Banks don't know much about effective lending to small business--both the appraisal skills and the technology are lacking. Collateral laws also make it difficult for small businesses to obtain loans.
Import license requirements and official allocation of foreign exchange made scarce by an overvalued exchange rate make it hard for small manufacturers to get the imported inputs they need. Investment licensing requirements can preclude new entry into sectors deemed "overcrowded." Subjecting business decisions to bureaucratic approval in these and many other areas presents irresistible opportunities for official corruption, and gives established firms the chance to collude with officials to keep new competitors out.
Urban zoning rules impose minimum size restrictions for business sites that are out of the reach of small firms, while complicated land titling laws make it difficult to develop and obtain secure tenure to land. Small businesses that operate in violation of these rules find it difficult or impossible to obtain water, power, and sewer hookups. Access to urban services is made more difficult where subsidized pricing for those services limits funding for system expansion to meet new demand.
Interest rate ceilings on loans prevent banks from raising rates to cover the higher unit costs of small loans and the greater perceived risks of lending to new customers. As a result, banks prefer to deal with large, established businesses, while even promising small enterprises are starved of institutional credit. Meanwhile, barriers to entry in the banking system keep costs high and discourages the cultivation of new clients, including small businesses.
In many countries, USAID has helped governments to remove or alleviate many of these policy and regulatory distortions. World Bank structural and sector adjustment programs have also helped: import and investment licensing, for example, are much less widespread than in the past. However, a wide range of subtle barriers continue to burden small businesses, even in countries that have undertaken policy reforms at the macro level.
Finally, in addition to the constraints posed by policy and regulatory barriers, small businesses in most developing countries suffer from the absence of effective supporting institutions. In most cases, small entrepreneurs have no effective sources of information on market opportunities at home or abroad, on improved production and business management techniques, and other basic information. Some of these functions can be carried out cheaply and cost-effectively by government offices operating under appropriate performance incentives, while others are more appropriately left to for-profit service providers and/or to associations of small entrepreneurs.
One of the first issues is the definition of small business, both in developing countries and in the U.S. The current Microenterprise Initiative uses five or fewer employees, so it follows that the definition for small business should start there. The issue for this Initiative is how large a firm qualifies. Considering the World Bank, OECD and other definitions, it appears reasonable that firms with up to 100 employees should be included. But country context must be a factor in the definition, e.g. Uganda versus Russia, allowing for flexibility in the definition.
In addition to numbers of employees, value of assets and gross revenues could be factors. For example, a three person law firm would not be considered an appropriate microenterprise target for a financing program. At the same time, a rattan organization might hire as many as 100 people to help weave baskets, but would not be considered a medium-sized enterprise in terms of its structure, fixed assets or technology. For our purposes, to define a small business we must consider how it applies technology, management processes, human resource applications, relations with the external environment, and the unique charac-teristics of different industries within which the firm operates. Flexibility in the definition is key.
It should be left to USAID missions to determine, within broad parameters, which businesses qualify. In the U.S. we will use Small Business Administration categories. One of the problems with any fixed definition is that it may preclude some otherwise developmentally sound interventions.
In defining U.S. partners we want to have as broad a definition as possible. It should include small businesses, private voluntary organizations (PVOs), associations, universities (including community colleges), state and local governments, cooperatives, and think tanks. Consideration should be given to including large businesses in the U.S. as partners, as there are opportunities to engage them in partnering arrangements. For example, multinational agribusi-nesses have technology and resources that can be useful in partnering with small businesses.
C. Relation to Ongoing Program
The biggest payoff for NPI will be in adjusting current programming to increase capacity building at lower levels of society.
As most missions already have programs aimed at the economic policy environment, one of the first tasks for the agency is to analyze the content of such programs to determine the extent to which they have a direct impact on small business development, and, more importantly, the extent to which they comply with the tenets of NPI. The data requested from field missions was not available at the time of the drafting of this report, making it difficult to suggest courses of action for the agency. This Working Group suggests that a joint Global Bureau/ PPC analysis be undertaken to determine the extent of the USAID program affecting small business and the extent to which the programs fit within the thrusts of NPI.
The review should also include an analysis of the relationships between the other two components of NPI.
D. Relation to Other NPI Components
Coordination with the other components of NPI is also critical as decentral-ization of political and economic decision making is critical to sustainability in both sectors. Of particular importance is the decentralization of decision making as it relates to the well-being of small business. The institutions that affect the political and economic policy must include the voice of the small business sector, both at the national and at the local levels. Democratic decisionmaking, as it relates to economic policy, is key to equity and sustainability. The most effective way to identify and change biases against small business is for small business to organize and participate in the policy process.
The Small Business Component's focus on building capacity within the business community must parallel other efforts in countries to devolve political power to local government. Common elements in the capacity building effort must be identified and mechanisms to have them complement one another must be developed. Common clients, information sharing, access to technology and shared strategies are among the many elements to be examined.
At the strategic level, i.e. in AID/W, technical guidance, performance indicators and flexible delivery mechanisms that foster capacity building through NGOs and complementary programming must be developed.
E. Sequencing to Levels of Development
As is true of the definition of small business, the interventions of the donor community should vary from country to country and from industry to industry. Small business development in Eastern Europe will differ substantially from that occurring in other regions of the world, particularly in Africa. However, many of the lessons learned will apply equally across regions. Sequencing must consider the levels of political development, natural resources and human capacity, markets--both internal and external--and other factors. The complex interaction between the levels of political, economic and institutional reform in each country argue for sequencing strategies that are highly country specific.
II. Program Description
This program proposes to accelerate the reform process, and lower the overall cost of the effort, by promoting new forms of partnerships between U.S. and developing country NGOs. Horizontal links (i.e. South-South) and those between like groups (e.g. trade associations) can speed the growth of technical capacity. New electronic networks can be established to speed the flow of infor-mation and technology necessary to enable nongovernmental groups to participate in reform efforts. The policy environment in developing countries is seen as the most critical component of the initiative. In most developing countries distorted economic, legal, financial, judicial, labor and other policies that make up the enabling environment limit the growth of small business. The effectiveness of small business promotional programs sponsored by governments has proven ques-tionable, and direct support for small businesses has a mixed record of success. The weakness and/or absence of supporting institutions, information and voice further hamper reform efforts. Building local capacity to identify the distortions that particularly constrain small business, and increase the demand for reforms are important goals of NPI.The program will target barriers that constrain small business creation and growth. Within the overall reform process, we want to create the capacity of local groups to identify the constraints and to press for reform. The voice for selecting the targets must be that of the small business sector, aided by information links to other groups. A concerted effort of association building through NGO partnering will be undertaken.
In addition to the policy environment, small businesses lack skills, tech-nology, financial and other resources necessary for success. Many of their needs can be met by creating links to partners, either in the U.S. or in other developing countries. But it is no longer feasible for donors to bear the full cost of the transfer of skills and technology. This program will seek to engage the U.S. business community in self-sustaining partnerships with developing country firms, by creating information links.
The program will seek to create a Women's Business Network using existing U.S. organizations and reaching out to businesswomen as volunteers. The network would be implemented first on a country level, with the goal of creating future regional and global links. By coordinating local business development efforts through a series of Women's Business Centers, the network would enable U.S. donors, PVOs, associations and businesses to implement complementary, rather than duplicative, women's business initiatives.
New uses of technology, such as Internet "webs" that link groups around the world, will be explored. Providing access to the information electronically, rather than the traditional consultant transfer route, can have an enormous impact on capacity building. University-to-university, association-to-association and other types of partnerships will be created to take advantage of the immense amount of information available in the U.S.
The program will seek to build on existing successful small business programs, and to link the small business concept to sustainable development in differing USAID sectors (e.g. environment, health and agriculture) with a focus on integration of program objectives.
With thousands of entries on small business information in USAID's information system, the program will review USAID and other donor experience to determine a set of "best practices" to inform the strategic planning and intervention systems in USAID.
A. Objectives and Program Indicators
The economic growth activities have yet to undergo a thorough development of objectives and program indicators. Many indicators have been suggested, including numbers of jobs created, numbers of businesses assisted/formed, numbers of laws/regulations changed, amount of financing made available, increases in exports, increases in revenues to firms, and many others. The Working Group suggests that, as part of the continuing effort of NPI, the Global Bureau and PPC develop a set of indicators specific to small business development, within the broader context of the economic growth indicators yet to be developed.
Forty of the 41 missions studied in the 1994 CDIE performance impact report had strategic objectives in the economic growth category, ranging from the broadest macroeconomic reforms to assistance to individual businesses. Insti-tutional reform in both the public and private sectors marks nearly all programs. Initial data indicate that nearly 10 percent (@$200 million) is invested in small business development activities. However the data is sketchy, and does not reflect a collection or analysis that measures activities within the framework of NPI, e.g., amount done through NGOs, amount aimed at local, private capacity building, among others.
One of the first tasks for NPI is to analyze the Agency portfolio to develop a baseline of data, both technical and financial, to measure the dimensions and impact of the programs, and to inform future strategic and programming decisions regarding NPI. Listed below is a summary statement of each Bureau's small business portfolio.
Each Center in the Global Bureau maintains a portfolio of projects aimed at promoting the growth of small business. They include programs to improve the economic and regulatory environment, e.g. macroeconomic/sectoral restructuring in areas such as financial sector, privatization, and investment/export promotion; direct assistance to developing country firms, e.g. management and technical training and technology transfer; institution building for participation in policy formulation, e.g. empowerment of business associations and economic think tanks; assistance to microenterprises to foster their growth to small business status; and portfolio credit guarantees through the banking sector to increase flows of capital to the small business sector; agribusiness support; health/population services and financing; and environmental technology and services.
The programs that promote small business growth cross sectoral lines. For example, in health and population the PROFIT and Contraceptive Social Marketing projects both aim to increase small business participation in the delivery of health and population services, by supporting local businesses/associations with training, loan guarantees and other services. The International Fertilizer Development Center promotes the creation of a competitive small business system for the distribution of fertilizer. A series of small grants to U.S. manufacturing associations is promoting ties between U.S. small businesses and counterparts in developing countries, seeking job creation in both the U.S. and the developing countries.
Virtually all Africa Missions currently have private sector projects that support either directly or indirectly small business development. Most projects have a policy reform component. These activities are designed to provide a more hospitable business environment and focus on trade and investment policies, administrative procedures, tax policies and access to foreign exchange. Other Mission projects facilitate the development of non-traditional exports by providing new technologies, products, feasibility studies and marketing assessments for small businesses. In the area of agribusiness, USAID has funded the development of producer and marketing associations as well as assisting with the introduction of new crops and other agricultural products.
To assist with the financing of small business enterprises, the Africa program has provided technical assistance to establish and strengthen local financial institutions, and finance the development of new institutions such as venture capital funds as well as credit and savings associations and rural banking institutions. All Africa Missions have funded both short-term as well as long-term training for small business entrepreneurs.
Through its Washington funded programs in support of small business, the Africa Bureau recently established the $100 million Southern Africa Enterprise Fund. This Fund will provide both debt and equity financing for small and medium enterprises in the Southern Africa Region. The Fund will be complemented by a new technical assistance project to provide training and other assistance essential for the success of these new businesses. The West African Enterprise Network is a regional initiative supported by Washington to assist business men and women to achieve policy reforms, from the ground up, which affect small business private sector development.
The Asia Near East program recognizes includes support to small business development in all sectors. Efforts to support the growth and sustainability of small businesses are undertaken from two perspectives: assistance in creating an enabling legal, regulatory and financial environment, and assistance in strengthen-ing the organizational and technical skills of small businesses. ANE addresses the business environment through its policy reform and finance projects. Assistance in the development of balanced regulations and expanded access to credit provide businesses with the setting needed for growth. Assistance supporting joint ven-tures with U.S. companies or supporting the development of business associations and chambers of commerce provide the opportunities and exposure businesses need to move products and better understand the market.
The ENI Bureau places heavy emphasis on establishing a fair, transparent and efficient business environment and focuses on capital market improvements and legal/regulatory reform. An important part of the program is working with national and local government to improve government-business relations and to encourage a supportive business environment. Missions actively monitor the business environment to provide feedback and policy advice is an important component of the program. To expand this policy feedback projects actively work with firms and business associations to encourage communication and structure information on experience and problems.
Assisting small firms in adapting to the new market environment is a critical focus of Bureau activity in this transition environment. Support is provided to small business development by working directly with entrepreneurs to improve business operations and management, improve market information, and improvement of training programs, and encouragement of business associations. Joint ventures with U.S. firms is encouraged.
Encouragement is given to local business associations both for policy advocacy and for the provision of business services to small entrepreneurs. Linkages between local associations and international organizations are likewise encouraged.
Finally, improvements in access to capital is encouraged by support to credit unions, enterprise funds, and general improvement in financial services.
Support for microenterprise and small business development is one of the key action items under the Summit of the Americas. Small businesses play a major role in contributing to output, employment and the sharing of economic benefits within the region's economies. In Bolivia, for example, some 60,000 small entre-preneurs have taken out loans totalling $30 million and they have paid them back. The Bolivian bank, created through USAID's support, is now self-sustaining with a $60 million portfolio and extends more loans than any other financial institution in the country.
In view of the importance of this sector, USAID promotes regional and bilateral microenterprise projects as well as coordination with the Inter-American Development Bank in the latter's design and implementation of some $500 million in projects over the next five years.
USAID's support for small business in Latin America takes three forms: (1) technical assistance and training projects for microenterprise; (2) support for agribusiness cooperatives, often with a view to bolstering non-traditional exports; (3) institutional strengthening projects which channel small business technical assistance and training through local trade associations and small business groups, thus helping bolster sustainable institutions in the process; and (4) policy projects which, by strengthening developing countries' enabling environment, create a more favorable business climate for the growth of small enterprise.
Small business programs in Latin America take place at both the regional and bilateral level. In FY 1995 the Bureau approved a $500,000 in regional funding through a PVO, ACCION International, to assist PVO lenders to microenterprise to become financially sustaining. The Bureau also provides region-wide support through the LACTECH Project to work with Missions in supporting land privatiza-tion, non-traditional exports and other activities which strengthen small farmer revenues. Both these regional activities are part of a broader Bureau strategy which attempts to "graduate" small businesses to regular, commercial providers of financial, marketing and other services.
At the country level, small business programs take a variety of forms. Some examples include:
Chile: A $980,000 Small Business Pollution Prevention Project aims at reducing industrial emissions at their source. 17 industrial audits have been completed to date, with some indicating savings of up to $100,000.
Ecuador: USAID/Ecuador provides $3 million to Fundacion Ecuador which has produced studies and agreements with the government to both liberalize foreign investment regulations as well as to deregulate state restrictions on microenterprise growth.
Honduras: The $6.5 million Small Farmer Agribusiness Development Project has directly affected some 2,800 farmers with administrative and financial strengthening of local agribusinesses.
Jamaica: The $2 million Small Business Export Development Project provides technical assistance, training and market information services to small businesses and agricultural producer groups while simultaneously improving the Jamaica Exporters Association's capacity to effectively deliver services to its members.
USAID has devoted considerable attention over the years to learning about a country's macroeconomic policy and its effect on small business development. Specific program development components integral to small business development include small business skills, technology, finance, and other resources. These programming elements were identified from evaluations of successful and unsuccessful projects linked with recommendations for future programming efforts. Even though a comprehensive review of the sector is suggested, past experience leads to several principles and priorities that should guide efforts under this initiative. They include:
This list illustrates the lessons learned from USAID program experiences. To design a detailed, innovative, and sustainable program requires a review of small business projects from USAID and other donors projects to ensure that strategic and budget plans meet the needs of the small business community for the developing and emerging market economies. It is recommended that PPC and G be charged with undertaking the review.
- Concentrate on existing businesses;
- Foster business-to-business consulting linkages;
- Create business links with U.S. firms;
- Develop small business advocacy groups;
- Promote local capacity building;
- Strengthen the usefulness of NGO small business assistance programs;
- Focus on land, property rights, and collateral reform;
- Promote commercial lending from banks to small businesses;
- Develop short-term lending services;
- Avoid venture capital as a financial tool for small business development;
- Provide market access and information;
- Charge fees for any direct training and technical assistance provided to small businesses;
- Concentrate assistance on technology development, transfer, and adaptation;
- Provide management training;
- Provide skills and services training;
- Provide technology and niche marketing training;
- Develop trust with small business owners;
- Provide services to firms in a flexible and timely manner;
- Invest in highly visible successful models;
- Avoid working with governmental small businesses support organizations; and
- Promote the value and usefulness of local intermediaries.
The initiative proposes to increase developing countries access to tech-nology, both hard and soft. Hard technology, in the form of equipment, materials and other goods, and soft technology, such as management skills, advocacy and information, needed by small businesses, are best transferred business-to-business. The U.S. is the largest repository of such technology, and USAID must find new ways to encourage U.S. business to transfer such technology. Creating a welcome policy environment in developing countries for U.S. business participation is important, and reforming the environment can be accelerated with U.S. private participating in the process. Transaction driven policy reform, e.g. investment in telecommunications restructuring, is driven by the interests of those who seek long-term involvement in a sector, and represents one of the best ways to target and press for specific sectoral reforms. New uses of electronic communication must be used to link U.S. sources of information, to transfer intellectual capability from the U.S. to developing countries to provide the analytical underpinnings of coherent reform. Decentralization of access to technology will promote decentralization of political and economic participation.
Partners in the U.S., both profit and nonprofit, are critical to the success of the initiative. The strategic political and economic interests of the U.S. would be best served my maximizing the participation of U.S. actors in the small business development process. The U.S. contains the largest private resource base in the world, with immense capabilities to be brought to bear on small business develop-ment worldwide. The globalization of the world economy and the USAID role in developing that economy provide unprecedented opportunities for U.S. firms. USAID must also take advantage of this phenomenon to promote nongovernmental ties that create economic opportunity in both the developing world and in the U.S., and that are sustainable by mutual business interest. USAID must also engage the policy voice mechanisms used in the U.S. to assist in developing a like capability in developing countries. Business associations, think tanks, universities and other nonprofit organizations can play a crucial role in promoting participation in the process.
Strengthening the Policy Dialogue. A more vigorous, more public and more sophisticated approach to the policy dialogue is critical. Invigorating and spreading the involved network should include participation by the public, private, business, agricultural, labor, media, academic and NGO communities. But that will require improved media, institutions and fora to support a higher quality of information exchange. This means better data, more related analytical resources for surveys, staff training, fora, publications, and information technology (computer, reproduc-tion, information access, and telecommunications equipment).
Gender-based biases are a particular problem in developing countries. The initiative must recognize this and make special efforts to remove those biases at every level. The reform of the enabling environment must include women's partici-pation in the identification and reform of constraints. Capacity building efforts must ensure that women are included at the leadership level. Property rights, business regulations and other policies that affect the growth of small business must be made gender-neutral. USAID must take advantage of the network of women-owned/women-operated businesses and advocacy groups in the U.S. to advance the reform process. A concerted effort to engage these groups must be a component of the initiative.
Business Association Development in Developing Countries. Increased and strengthened U.S./host country business association ties are an effective means to promote market and democracy friendly policy reforms. Such ties help to both im-prove the business climate as well as providing profit-generating linkages between U.S. and host country economies. Learning works best when it's business-to-business, and especially within the same sector. Businesspeople learn more from each other than from trainers or consultants. Business-to-business learning also leads to identifying expanding market opportunities.
Business Associations Linked with NGOs and Local Governments in the Policy Dialogue. NPI's impacts through developing country business associations should be substantially enhanced by association collaboration in the policy dialogue with NGOs and local governments. All of these parties will generally have an interest in reforms that facilitate the modernization and growth process, and NPI will sub-stantially augment its impact by facilitating such collaboration.
Evaluation of Donor Experience in Business networking and Association Development. An evaluation should be carried out which looks at the charac-teristics of donor support to business associations and networks. The purpose would be to identify those characteristics which typify and distinguish the successful from the unsuccessful activities to develop business networks and asso-ciations. The evaluation might learn from the one recently dealing with the charac-teristics of successful microenterprise finance institutions. Considering successful and failed cases of business association development would enable identification of both characteristics of winners as well as factors that seem to cause losers.
Evaluation of Policy Reform Networks and Tactics. A review of evaluations of policy reform networks should be considered, to assess whether it is necessary to update what is known about the best means of pursuing policy reforms. Experi-ence that well might be reviewed includes that of USAID's support to the relatively popular Implementing Policy Change (IPC), the Institutional Reform and the Informal Sector (IRIS), and the International Center for Economic Growth (ICEG), the Enterprise Network of West Africa, the Center for International Private Enter-prise (CIPE) and the Consulting Assistance for Economic Reform (CAER) Projects.
Donor Collaboration. As it implements this NPI for small business, USAID should work carefully to assure that other donors are well coordinated with USAID's program. This will be especially important in the policy reform area, where the leverage brought to bear on reforms, and its impact, will be substantially greater if the donor community is well synchronized.
Policy Reform priorities Clearly both the macro and the small business bias reforms will need to be promoted. Preferably, both levels of policy could be pursued simultaneously. If, however, an initial priority must be determined, it must be for macro reforms. If the macro economy is broken, then there is much less to be gained in attempting to fix the small business subsector, for it appears heavily dependent upon the macro economy. After the macro issues are reasonably favorably resolved, then, for economic and political democracy reason, strong attention needs to turned to the biases against small business.
Privatize Business Associations. In countries where industry or trade associations are dominated by the state, donors should work to fully privatize such associations, or when that is impossible, develop parallel, fully private organiza-tions representing the interest of their members and train them in techniques used by U.S. organizations to foster membership loyalty and support ("back-selling").
Technology Transfer. Transferring appropriate technology to developing countries is not a new idea. Too often, however, such transfers have come cloaked in the guise of technical assistance. Government funds spent on technical assistance have sustained a cadre of consultants who specialize in providing it, but such expenditures do not necessarily put new or appropriate technology in the hands of small entrepreneurs in developing countries. Efforts to foster direct business-to-business transfers of technology may hold more promise, but the question remains as to how such links should be made.
With declining donor resources, there may be opportunities for strategic coordination among donors and government agencies to pool resources and agree on common objectives with respect to the transfer of information technology to developing countries. For example, at the request of the White House, USAID's Africa Bureau has undertaken the "Leland Initiative" to provide Internet connec-tivity for Africa. Likewise, in the past two years, the United Nations' Commission on Trade and Development (UNCTAD) has established trade points in over forty countries and has set up a worldwide electronic clearinghouse, of "electronic trade opportunities" in Thailand to match buyers and sellers of products. UNCTAD's initiative hopes to reduce the transaction costs of international trade by as much as $100 billion by the year 2000. While the Leland Initiative and UNCTAD work on connecting countries to the internet, USAID's NPI might focus on the "last mile" of extending Internet connections from single nodes in countries to smaller cities, towns, and even rural areas.
It is also conceivable that some countries might leapfrog intermediate stages of development in telecommunications. Rather than follow their predecessors' costly and time-consuming process of laying copper wires, some developing countries are opting for cheaper cellular connections and relay towers that offer greater reliability of service in urban areas. To reach more remote locations, governments must still lay wires, but now can choose modern digital switches that can carry visual images and data as well as sound over broader bandwidth transmissions.
As the U.S. moves from the industrial to the information age, other coun-tries, even less developed ones, need not lag far behind. If semiconductor chips one day replace petroleum as the raw material that fuels a country's development, donors should ensure that developing countries are in a position to make the adjustment. Importance of Training. To transfer technology to small businesses in developing countries, donors must determine the potential interface between small entrepreneurs' work habits and their use of technology. An intervention that relies on technology should first understand the entrepreneurs' situation and then design the application of technology based upon this understanding. Alternatively, donors can train the entrepreneurs to change their behavior to adopt existing technology. In either case, one cannot simply focus on the technological hardware.
Expenditures on training may exceed those on hardware by several times, depending on the situation, as efforts are made to boost the information culture in lesser developed countries. Lack of literacy could pose an obstacle to promoting access to the information technology. Translating documents, using pictures, and even voice messages can help address this issue, but "low-tech" solutions exist as well. For example, in some African locations educated, but physically handi-capped, individuals man phone stations and help the illiterate through the steps for making calls.
Containing Costs. Just as donors tend to focus on the hardware, there is also a tendency among both donors and recipients to want the latest gadget and most advanced system, when simpler, older, and less expensive communications technology might suffice. For sharing information and brokering small business services, e-mail should be sufficient. African countries rely on a system called Fidonet to transmit e-mail and access the internet. Fidonet is electronically analogous to a ham radio network where operators relay messages along and there is no control over the time of message receipt. Fidonet can operate over poor phone lines and users need only the most basic of computers and modems.
Internet E-Mail. In many locations, access to the Internet is virtually free: users pay the cost of a local phone call if they are located in the same city as the internet node. Other users must pay the cost of calling into the capital (or node) city to relay messages even if they are corresponding via e-mail with a neighboring town. One of the more promising applications of internet is the creation or enhancement of local markets. Small businesses and others in developing countries suffer from poor communication networks and a shortage of information regarding, for example, prices for supplies and products or cargo information for sharing shipments. Just as UNCTAD's work can reduce trade transaction costs, extending the internet to small entrepreneurs in rural areas could rationalize their high costs in conducting business. Going on line could enable small businesses to find a market niche or broaden their existing market.
Not every business needs a phone line, modem, and computer to access the Internet. Community or business associations can set up a simple computing center where members can share a single computer, modem, and phone line. Such trade information exchange centers are in the process of being set up in some locations. For example, USAID/Egypt has proposed a new activity called "Business Link" that would connect via a computer network the major Egyptian business associations and business development organizations (including private sector foundations engaged in small and microenterprise development). The network would permit the members to communicate easily within Egypt and access both domestic and international electronic data services. The American Chamber of Commerce would house the system's server. The Chamber is currently developing the specifications for the system.
Internet e-mail messages and attachments, whether done locally or internationally, are cheaper and more reliable than faxes. E-mail also levels the playing field for small businesses competing for orders. Potential buyers or sellers on the receiving end of an e-mail message cannot discriminate against a small upstart business because large and small businesses all look the same over e-mail.
Information Technology. Another approach to encourage the transfer of technology involves linking developed and developing country businesses directly. Developing countries are becoming increasingly important as an outlet for U.S. products and as a source of imported inputs. Large and small businesses in the U.S. will engage small businesses in developing countries as trading partners or joint producers when they see it is in their interest and ability to do so. Tech-nology, and specifically information technology, can catalyze such linkages by informing U.S. companies of opportunities with small businesses in developing countries and by giving these small businesses access to a global marketplace. Electronic commerce will enable small businesses to one day benefit from the telecommunication techniques already used by large multinational companies.
Smart Card Technology for Small Business. Credit cards embedded with microchips, known as "smart cards" reduce the costs of monitoring and servicing loans to small businesses in Swaziland. The technology has not caught on in the U.S. because U.S. banks can rely on efficient telecommunications services. The cards require only a modest initial investment and offer greater flexibility and convenience to the customers. Within a closed system, such technology provides security in financial transactions that would otherwise require cash.
Coventures. Coventures, or non-equity sharing cooperative relationships such as licensing agreements, contracts, or consortia, are probably better suited to technology transfer for small businesses than joint ventures where a separate legal entity is created and jointly owned by the venture partners. Acquiring technology and know-how is a prime motivation for cooperative ventures. Coventures ensure the partners' independence while making use of the existing assets and abilities of each business. Small businesses are least able to afford the upfront costs of developing ventures such as travel, feasibility studies, and consultant fees. Communications technology is ideally suited for lowering some of those costs. Small businesses are generally reluctant to pursue international ventures and exploit opportunities with LDC firms because of their lack of experience and knowledge in doing so. Intermediaries can reduce the costs of searching for partners and familiarize firms with the process of developing ventures. Eventually, electronic commerce "bulletin boards" may be able to replace such live intermediaries.
In 1995, USAID will launch a major new environmental initiative in LAC (Environmental Initiative of the Americas) and Asia (Asia sustainable Energy Initiative) that will seek to engage and develop small and medium businesses in environmental activities. We will look to the U.S. private sector as development partners in this initiative. The initiative will be strengthening environmental standards, reducing urban pollution, and promoting energy efficiency. The program will provide technical assistance to small businesses to come into compliance with standards, develop small businesses that can conduct industrial audits, and encourage environmental enterprises.
In the health sector, we would build on existing activities to expand support to small businesses in two areas. First, we would expand social marketing activities in the population field, and increase support for small business activities in family planning and reproductive health. This would include credit programs, technical assistance to small firms, and assistance in import services. Second, we would expand support for small food enterprises to improve food preservation and safety, marketing and product development, business practices, and micronutrient fortification.
In the agroenterprise sector, we propose bilateral and central assistance to individual business and their associations be provided. Assistance would focus on making domestic and international marketing transparent (establishing affordable market price and transportation information systems); linking budding and potentially viable agroenterprise concerns with markets, services and providers of materials; and, strengthening the political voice of small entrepreneurs through more effective associations.
Global bureau already has loan guarantee authority, but it has not been used for small business activities. We would propose to expand those guarantees to the small scale sector for financing modernization of small businesses. Where there can be links to U.S. business, the U.S. firm may be able to leverage credit and re-duce risks to local banks by co-signing the loan under the guarantee arrangement.
The development of industry standards and efficient ways of enforcing such standards is central to the modernization of the economy. Business groups need to be involved in this process procedures need to be simple and transparent. As these standards are industry specific, there is a strong case for USAID to work actively in those sectors where we have a comparative advantage -- environment, agribusiness, and health.
E. Program Links to Other Areas
To maximize the impact of NPI, it is suggested that any program indicators be developed in coordination with the development of indicators in other program-matic areas of interest to USAID. It is undeniable that the success of efforts to develop a small business sector in a country is directly linked to the efforts in the areas of democracy and governance, the environment, health/population/education and others. One of the key tenets of NPI is empowerment through a participatory process. Developing small business as a part of health and education, and other, delivery systems can be an important factor in the overall sustainability of those efforts.
Small business development in the priority areas of health, population, agriculture and environment hold much promise for development. Privatizing delivery systems and creating markets in these areas could spur the development of small business providers and reducethe burden on government budgets. Non-governmental providers are more efficient, more innovative and more responsive to the needs of the community.
As the Small Business Working Group began to collect information for this report, it became clear that there is no single body of evaluative evidence to guide the development and implementation of a Small Business Partnership within NPI. While there is over 30 years of experience in the area, and a portfolio of hundreds of individual project evaluations, there has been no effort by the donor community to analyze the body of information of small business development. The Working Group suggests that PPC/CDIE consider a small business evaluation series, looking at various aspects of the development experience. For example, there has been no evaluation of the experience in developing business associations, an important part of any effort to engage businesses in the reform process.
III. New Management Vehicles
A. Policy
USAID's Strategies for Sustainable Development (March 1994) has three Strategic Goals and Areas of Concentration. Of the three--Strengthening Markets, Expanding Access and Opportunity, and Investing in People--only the second mentions "small business," as is the case in the section on Programs and Methods. Nonetheless, hundreds of project claim small business as a target. Individual country programs frequently have multiple projects, implemented by multiple agents. Creating a coherent small business initiative within USAID will be difficult, and will take time. Revision of the Strategic Guidelines and central policy coordination are necessary to strengthen the strategic position of "small business" within USAID. A requirement for a small business component of USAID mission strategies, tracked through the budget system, and a coordinated internal-USAID program, such as the population and microenterprise programs, is suggested to increase the impact.
Encouraging Broad Based Economic Growth: USAID's Strategy (March 1994) cites three "strategic goals and areas of concentration". The first, strengthening markets, is a good general statement on the need for healthy markets as a basis for sustainable growth. Within this strategic goal there is no mention of small business as a priority component of that strategy, leaving missions the option to pursue reform efforts on a much broader front. If there is to be a focus on small business, the section on strengthening markets should be revised to include small business as a priority. This would bring a strategic focus to small business, which is now lacking in the USAID strategy.
The second goal, expanding access and opportunity, does state that "USAID will pay particular attention to expanding economic opportunity.....by helping to promote microenterprises and small business...."
The third, investing in people, cites areas such as reproductive health and primary education for girls, but contains no reference to investing in people in the small business sector.
The "Operational Approaches" of "Participation, Institutional Development and Sustainability" make no mention of small business as an approach.
The section of "Programs and Methods" whose sections mirror the "strategic goals" (i.e. strengthening markets, expanding access and opportunity and investing in people) mentions small business only in the section on expanding access and opportunity.
The section on "Measuring Results" could also be strengthened, as small business is cited in only one section, asking "Have the flow of technical and support services to small businesses...improved....?" This section could be strengthened to define the results the agency seeks in small business programs.
In summary, while small business is mentioned in the Strategies, it is not given sufficient priority to carry its weight as a special initiative. If field programs are expected to take NPI seriously, more weight should be given to small business in the Agency strategy statement.
Some other suggested actions are:
1) A statement of policy by the Administrator, to the effect that the New Partnerships Initiative has been adopted by the Administration and all USAID elements are expected to help meet its objectives. More specifically, an endorse-ment of the concept that the small business component of the initiative is a logical complement, and necessary follow-on, to USAID's Microenterprise Initiative. To wit, that success in the microenterprise arena is to a significant extent defined by the graduation of microenterprises into small businesses.
2) An endorsement of the small business component by the regional and central bureau AAs, as a complement to the Administrator's policy statement.
3) A cable to the field from the Administrator, stating the above and directing missions to assess their portfolios and determine whether modified or new activities will contribute to the small business component.
4) A small business sector review as part of the annual budget submission. A policy of donor coordination should also be developed. The significant structural adjustments sought by NPI cannot be achieved without the cooperation of the rest of the donor community. USAID requires the support of other major donors to provide consistent policy leverage, technical assistance, and resources. The adjustments we seek are increasing in importance to other donors, but approaches to adjustment are too often ad hoc and "projectized" -- often unrelated to general country strategies. The priorities of the donor coordination strategy of the Working Group are, first, to build on the growing interest in decentralization, participation and entrepreneurship to reach a donor consensus that empowerment is a pre-requisite to such change, and, secondly, to work at the country level to coordinate approaches to change. The OECD Development Assistance Committee (DAC) Working Group on Participatory Development and Good Governance will be the focal point for such coordination. The World Bank, through the Inter-Donor Working Group on Participation, and the Consultative Group to Assist the Poorest, the European Union, and other multilateral organizations will be targeted for coor-dination. USAID missions will be charged with coordinating at the country level.
B. Process
If empowerment of local NGOs is a goal of NPI, the fact that only one of the 14,000 Egyptian PVOs is registered with USAID is indicative of the problem facing us. Prudent management requires that one of the elements of capacity building at the local level be administrative management. More efficient systems, including umbrella grants, shared accounting/administrative centers, and others should be explored.USAID should explore new ways of doing business with its partners. As the agency moves to reengineer, it should consider the current cost of doing business with its partners. Relationship with partners should be streamlined by considering actions such as obligating funds by strategic objective, in one agreement with any particular partner. For example, The International Executive Service Corps, has had as many as 45 different agreements with different parts of USAID to accomplish essentially the same objectives.
USAID and ACVFA may want to revisit the final report of the September 1993 Task Force on Streamlining the Procurement Process and Reducing Admin-istrative Requirements to test current practices against the findings of the report.
Attachment A
Women's Business Network
In order to build local capacity and support an environment conducive to small business development among women, NPI would develop and support a Women's Business Network. This network would be implemented first on a country level, with the goal of creating future regional and global links. By coordinating local business development efforts through a series of Women's Business Centers, the network would enable U.S. donors, PVOs, associations and businesses to implement complementary, rather than duplicative, women's business development initiatives.Each country network would consist of a series of computer linked Women's Business Centers. Each Center would house a computer lab/center, clearinghouse/ library and provide consultations for local businesswomen.
The computer/lab center will provide computer training in basic computer applications that support daily business operations (word processing, database and financial spreadsheets). Once training has been provided, computer access is imperative to program sustainability. Each center can provide women access to a variety of computer/technology based services, either on a fee-for-service basis or as a service for members. The potential for cost recovery or funds to expand the program exists.
In addition to basic computer training, e-mail and on-line program training will be conduced. This element of the program would strengthen general and specific research efforts; promote the development of sustainable business-to-business links and mentor relationships (identified through the linkage/mentor component); create on-line local, regional, and global fora for networking, informa-tion sharing, brainstorming, developing advocacy groups for policy reform; and serve as a mechanism to identify additional areas for U.S. business participants.
A clearinghouse/library would provide members with access to organization, management, leadership and financial models and materials; up-to-date lists of business resources, potential mentors, and access to successful small business development models being implemented globally.
Training and technical assistance could be provided through a core group of trainers and business professionals.
A linkage/mentor component would be designed in collaboration with businesswomen, local foundation/university representatives, local governments and others to promote private ownership of the component. There is a need to target specific businesses owned or operated by women in selected countries. In the U.S. each of these business sectors has its own trade or professional association, union, or the people in these professions belong to a wide variety of organizations that offer a multitude of services to strengthen women's business ownership.
Each industry group has a trade association not only with a division dedicated to government affairs and a division dedicated to membership services, but they also have a division dedicated to philanthropy. Opportunities for links by businesswomen through mentoring and technical assistance in each of these divisions can significantly contribute to institution building through partnerships. While the well known women's business organizations may be a good place to start, one-on-one mentoring will come from industry specific organizations.
The National Association of Women Business Owners and the National Association of Female Executives are well established and well known organiza-tions with a strong and active membership that facilitate these very activities. Additionally, they have, or are establishing, international chapters. Each of the business sectors also has either a professional organization for women or a group within the organization for women's professional development. In addition the International Women's Forum and the C-200 are organizations for women CEOs who either own businesses or manage multi-million dollar businesses. Both have chapters throughout the U.S.
It is important to find out exactly what each of the organizations is doing internationally in order not to re-create the wheel. Many have some kind of mentoring programs and information exchange opportunities in place. Once the business women in selected countries are identified, professional organizations can go to their membership and recruit mentors and technical assistance.
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Last Updated on: December 22, 2000 |
