Both Malaysia and India are countries steeped in innovation with a strong desire to foster new, innovative start-up enterprises.
With a global focus on providing more support to Small and Medium Scale Enterprises (SMEs) – and recognizing that – Asian countries are keen to learn from each other’s experiences. These efforts have taken on a greater priority in India under the leadership of Prime Minister Modi and his “Make in India” and “Start-Up India” campaigns.
, which is one of the most widely recognized impediments to SMEs, particularly for start-up enterprises. Through the $500 million MSME Growth Innovation and Inclusive Finance Project, the World Bank supports MSMEs in the service and manufacturing sectors as well as start-up financing for early stage entrepreneurs. The start-up support under this project ($150 million) is for early stage debt funding (venture debt) which isn’t well evolved. (Unlike India’s market for early stage equity which is considered to already be reasonably well developed.)
As part of this project, the World Bank and the Small Industries Development Bank of India (SIDBI), recently held a workshop in Mumbai to allow market participants to learn from one another, and particularly about Malaysia’s successful support for innovative start-up SMEs. The workshop’s participants included banks, venture capital companies, entrepreneurs, fintech companies, seed funders and representatives from the Malaysian Innovation Agency (Agensi Inovasi Malaysia – AIM).
From the Yemen Enterprise Reviltalization and Employment Pilot Project.
In December 2016, the 18th replenishment of the International Development Association, the World Bank’s fund for the poorest countries, put private sector development squarely at the heart of our organization’s commitment to end extreme poverty and boost shared prosperity. In addition, the Internal Finance Corporation’s 3.0 strategy placed new emphasis on creating and catalyzing markets and scaled up the role of advisory services in providing firm-level support.
This new focus makes it even more important to answer the following question: Do we have sufficient evidence about the efficiency and effectiveness of the tools used by the World Bank Group to help firms grow in our client countries?
Building on a broad evaluation of the Bank Group’s support to small and medium-sized enterprises (SMEs), published in 2014, a recent report by the Trade & Competitiveness Global Practice, supported by the Competitive Industries and Innovation Program, reviews the experience to date of supporting SMEs through matching grant schemes. The report looks at the how and why of an instrument that has been used in more than 100 Bank Group projects since the 1990s.
Matching grants are short-term, temporary subsidies, provided to the private sector on a cost-sharing basis (typically 50 percent). The grants generally aim at building firms’ capacity and knowledge through the procurement of business development services (BDS), which include a wide variety of non-financial services such as employee and management training; consultancy and advisory; marketing and information services; and technology development and diffusion. For example, a matching grant initiative in Uganda targets businesses in priority sectors such as tourism, agribusiness and fisheries with the goal of diversifying their products and increasing exports. A similar facility in Afghanistan operates in four cities – Kabul, Mazar-e-Sharif, Jalalabad and Herat – and helps SMEs and business associations to improve product quality and processing technologies, and to gain market knowledge in order to expand their presence in domestic and international markets.
The economic rationale for subsidies to private firms is usually a perceived underinvestment in BDS. This could be due to market failures preventing a profitable investment in such services (e.g., lack of financing for intangible activities, insufficient awareness of the potential benefits or perceived high risk), or to positive externalities from an otherwise unprofitable private investment (e.g., knowledge spillovers). If these conditions are not present, however, matching grants could create distortions in resource allocation, could have limited additionality and spillovers, or could have non-durable impacts if they fail to address the underlying market failure.
The Trade & Competitiveness report reviewed virtually all matching grant projects financed by the Bank Group over the last two decades. Most of these have focused on SME development while some have also supported rural development. Over half of the reviewed projects are in Africa, followed by Latin America and the Caribbean. The average size of matching grant schemes is $11.5 million, with grants for agriculture projects typically being significantly larger than for SME development. The average number of beneficiaries per project is 450 and the average maximum cumulative funding going to a single beneficiary is $112,000, although this amount is much lower in many projects.
In terms of how, the report examines a number of common variables of matching grant projects, such as type of implementing agency and eligibility criteria. A key conclusion is that there appears to be no obvious correlation between the design features of matching grants and either positive or negative outcomes. Rather, matching grants need to be tailored to local circumstances and capacities.
The report does find that personalized technical assistance to beneficiary firms can increase the odds of success. In addition, contrary to perceptions, public implementing agencies generally outperform private consulting firms. Public agencies do particularly well in lower income countries where procuring large international contracts can be difficult and where the agencies know the local context. Whether public or private, strengthening of local capacities, broad stakeholder engagement, and transparent communication increase the chances that a matching grant will achieve its goals.
In terms of why, the report also examines how projects define what constitutes a successful outcome. About three quarters of the reviewed projects received a positive outcome rating. However, the definition of success varied widely, and rarely reflected measures of broad and sustainable economic benefit. Projects should articulate a sound economic rationale identifying a specific market failure. Otherwise, the benefits of a grant may not extend beyond the recipient firm or be sustainable in the long term.
For this reason, the report recommends that, when considering the use of matching grants, development practitioners identify a clear economic rationale, consider alternative instruments, carry out an economic analysis, assess the potential for additionality and spillovers, and establish a realistic exit strategy that would leave sustainable benefits. A strong monitoring and evaluation system is an equally important requirement and an essential tool for real-time assessment of impact, potential course corrections and learning. Strengthening these elements could help development practitioners and their clients maximize the benefits of this potentially powerful tool for private sector development and competitiveness.
To gain access to the full report, click here.
Against the backdrop of low oil and gas prices and fiscal consolidation, economic diversification and private sector development is a top policy priority for the countries of the Gulf Cooperation Council (GCC).
Inadequate access to finance, especially bank lending, is constraining SMEs in GCC countries. Only 11% of SMEs have access to credit and some 40% of SMEs cite a lack of financial access as a major constraint.
Bank competition in the GCC is among the lowest in the world. Strict entry requirements, restrictions on bank activities, relatively weak credit information systems, and a lack of competition from foreign banks and nonbank financial institutions all contribute to weak competition in the banking sector.
How to identify and support fast-growing firms that can take off, create jobs, and yield significant value in a short period of time is one of our biggest dilemmas in nurturing private sector development in emerging markets.
The Sustainable Development Goals (#8) include the need for decent jobs as an important developmental priority, and small and medium size enterprises (SMEs) are expected to create most jobs required to absorb the growing global workforce.
But many young firms will fail; by some accounts more than half of new firms won’t make it to their second birthday.
However, despite the high rate of firm failure, research from the US and evidence from India, Morocco, Lebanon, Canada and Europe shows that (net jobs are jobs created minus jobs lost) and lasting employment opportunities.
In addition, even when a firm survives beyond the first two years of operation, there are no assurances it will become a fast-growing firm -- a gazelle.
Although estimates vary widely, the share of gazelles -- fast-growing firms that generate a lot of value-added and jobs -- is thought to be only between 4% to 6% of all SMEs, and, possibly, even less in many emerging countries.
All this makes creating favorable conditions for entrepreneurship a priority.
Easing business entry -- the time and cost involved in establishing a new enterprise -- is extremely important. As the annual Doing Business report shows, many countries have made a lot of progress on this indicator over the past decade.
But business exit is an equally critical piece of the puzzle.
South Korea today has the fourth largest economy in Asia, is a member of the OECD’s “Rich Club,” and is part of the G20. Despite sharp economic shocks emanating from the Asian financial crisis in the late 1990s, the global financial crisis in 2008, and the more recent slowdown in the Chinese economy – Korea has bounced back and continues to grow.
So it’s hard to imagine that some 70 years ago, Korea’s future looked very bleak – and akin to many of the excruciatingly difficult post-conflict environments that we face today.
To briefly summarize Korea’s post-World War II history: a 1947 report on Korea commissioned by U.S. President Truman concluded, “South Korea, [as] basically an agricultural area, does not have the overall economic resources to sustain its economy without external assistance …. Prospects for developing sizeable exports are slight ….. The establishment of a self-sustaining economy in South Korea is not feasible.” Then the Korean War compounded these problems – resulting in massive damage to both the north and the south – with destroyed infrastructure, a loss of skilled workers, a million South Koreans killed, and as much as one-quarter of the country’s population refugees.
We have many lessons to learn from Korea – particularly as our institution, the World Bank, increasingly focuses on post-conflict and fragile environments.
Although South Korea is known for its large scale “Chaebols,” which have dominated much of its political and economic life – less well known is the considerable support that the government has provided to small and medium scale enterprises (SMEs). As in most countries, (3 million SMEs), over 80% of all employees (10.8 million employees), and almost 48% of total national production.
At a recent European Commission SME Envoy meeting in Ljubljana, Slovenia, the European group responsible for advising on policy and strategic directions for SME support in the EU discussed options for the way forward.
Battered by continued anemic growth since the 2008 global financial crisis, hit with a flood of Middle Eastern refugees, and (in early June) facing the possibility of Brexit, the mood was anything but upbeat and the future of “Project Europe” seemed to hang in the balance.
, account for 60% of jobs in many countries, and supply as much as 50% to national income. All of this makes SMEs’ contribution to the economy crucial. Yet, since the financial crisis, banks in many countries haven’t managed to bring their SME lending portfolios back up to pre-crisis levels. Many are deleveraging out of riskier lending such as SME loans. Venture capital in Europe remains well below its levels of 8 years ago. And SME capital markets and SME securitization of loans continue to be severely battered by the continent’s ongoing economic malaise.
In many countries Government is the biggest procurer of goods and services, which makes them an attractive client for small and medium scale enterprises (SMEs) seeking to get a leg up in business.
Recognizing the important role that the public sector plays as a purchaser of goods and services, as well as the critical role SMEs have for the economy, Governments frequently use Public Procurement to incentivize, support and otherwise sustain local SMEs.
Also, as in many of our client countries, where the vast majority of SMEs are informal, the lure of a significant Government contract can serve as a strong motivator to register and formalize – bringing these companies in from the shadows.
But there is also a significant downside in many countries. Cash-strapped governments frequently don't pay their bills on time and, in some countries, payment delays of 12 months or even two years are not uncommon. Such delays can seriously compromise the position of a small scale enterprise which – with limited access to formal bank financing – relies critically on cash flow from its clients to sustain its business. A six month delay in receiving payment on a contract can easily put a small firm out of business.
The World Bank and Rabobank Foundation are teaming up to strengthen financial cooperatives in rural areas to improve financial services for smallholder farmers and agricultural SMEs.
Financial services in rural areas are scarce and expensive. Servicing smallholder farmers spread across wide geographical areas isn’t attractive to mainstream financial institutions as their transactions are small, their cash flows seasonal and returns on investments can be risky due to potential crop failures or weather calamities.
To get access to savings and credit, rural households and farms often establish cooperative financial institutions (CFIs). While CFIs have a strong local presence and knowledge, they often have weak institutional capacity and governance, lack access to information technology, and suffer from political interference. Also, the laws regulating CFIs are often inadequate and supervision is weak, all of which hampers CFIs’ ability to deliver financial services. Often, CFIs don’t fall under the purview of the main financial sector regulator and supervisor, but of other entities that don’t always have the required capacity and expertise.
I recently attended an SME Conference in Jordan around SME Finance and Employment – extremely important issues in a troubled region. All participants agree that much more needs to be done to address the lack of jobs in the region and to increase financial access at all levels, to individuals, households and small and medium scale enterprises (SMEs).
despite being a middle income region.
Only 4% of unbanked adults in the Middle East say that they don’t have an account because they don't need one. In other words, it is clear there is widespread unmet demand for financial services.
A person living in the Middle East is less likely to have a bank account than is a low-income person living in Africa or South Asia, and significantly less likely than a person living in Latin America, Eastern Europe or East Asia from comparable middle income country or region. This poses a dilemma – why?
With this week's kickoff of the 2016 China “Business 20” (B20) proceedings in Beijing, this is an opportune time to reflect on some of the key accomplishments of the 2015 Turkey B20. As many readers of this blog know, the B20 is the premier dialogue platform of the business community with the G20 policymakers representing the most important economies of the world, and it is influential in identifying and supporting policies that are crucial for overall economic development. I believe that taking stock of the past enables us to learn from both successes and failures, and helps sustain the momentum on what worked and generated the desired impact.
Looking back at my involvement as Chair of the B20 Steering Committee, what strikes me as a major achievement is the amplification of the voice of small and medium enterprises (SMEs). I believe that, if we want our economies to have healthy and inclusive growths, this must remain as a key priority for the upcoming B20 in China.
Participants in the Turkish G20/B20 process shared the assessment that SMEs’ potential was not being fully realized. SMEs account for about two-thirds of all private-sector jobs globally and about 80 percent of net job growth. They are the engine for equitable growth and poverty alleviation. And they are the backbone of the middle class and of social stability. Yet they suffer disproportionately from limited access to markets, finance, talent, skills and innovation. In addition, regulations also often put them at a disadvantage. Until recently, SMEs had lacked an organization that would champion their cause.
With these major issues in mind, and with strong deliberations of the B20 Leadership and support from the G20 Finance Ministers, last year TOBB and the ICC officially founded the World SME Forum (WSF), with the mission to help improve the overall growth and impact of SMEs globally, by effectively tackling the key challenges they face. WSF aims to provide SMEs with effective representation and to advance the recognition of the role of SMEs in the global economy by partnering with international financial institutions (IFIs) and development agencies. WSF has membership from associations and chambers working in the SME space from all over the world.
WSF is ready to represent SME interests with regional and global bodies, and to advocate for better rules and regulations among standard-setters.
As I am on my way to Beijing, I cannot help but think that this is indeed a major achievement, which will give the SME development agenda a much better chance at succeeding. WSF can be a “bridge” across B20 presidencies, so that we can ensure continuity in the crucial SME agenda. WSF can help avoid any loss of momentum on the implementation of the recommendations we develop during each cycle.
Even better, after B20 China officially decided to continue the SME Development Taskforce, which was started for the first time by B20 Turkey, they invited WSF to be a Business Network Partner for the Taskforce. WSF will therefore be coordinating the network and will help drive the ideas that emerge from the Taskforce discussions into implementation.