Report of the Secretary-General of UNCTAD to the ninth session of
the Conference
June 1996
Chapter III
PROMOTING ENTERPRISE DEVELOPMENT AND COMPETITIVENESS
IN DEVELOPING COUNTRIES AND ECONOMIES IN TRANSITION Introduction
247. The role of enterprises in development is receiving increased attention from
policy makers in all countries in the 1990s. Enterprises are the basic building blocks of
an economy, the entrepreneurial engine of the dynamic processes of capital accumulation,
growth and development. This has been a text book truism for many years, but only recently
has it found wide expression in the policy approach to major issues.
248. The reasons for contemporary interest in enterprise development are many, and are
as diverse as countries are different:
(a) Poverty. Micro-enterprises are increasingly seen as the means to empower the
poor and the disadvantaged.
(b) Employment . Small and medium-sized enterprises are seen as major
contributors to job creation, even in the mature industrial economies facing structural
unemployment.
(c) Adjustment. The considerable experience now gained from structural
adjustment programmes in many developing countries suggests that the supply response of
enterprises is essential to the success of structural adjustment measures.
(d) Transition. The nurturing of a whole new class of entrepreneurs and
wealth-seekers is fundamental to the reconstruction of the former socialist economies in
line with market principles.
(e) Privatization. Fiscal burdens, coupled with the need to promote
entrepreneurship and economic efficiency, have prompted the transfer of enterprises from
the public to the private sector in developing and developed countries.
(f) Competitiveness. The best industrial exporters among developing countries
have relied on enterprise development strategies, including linkages with foreign
investors and TNCs.
(g) Competition. The trend towards a borderless world is increasing competition
everywhere and bringing enterprise issues within the ambit of international discussion and
negotiation. These issues include competition policy, the harmonization of national
standards of all kinds and access to global networks.
249. This chapter examines this new policy setting and outlines main considerations for
the shaping of more coherent national and international strategies for enterprise
development in the current context of liberalization and globalization.
A. The enterprise sector in developing countries and
economies in transition
1. Main features
250. Over the past decade, nearly all developing countries and economies in transition
have enacted an array of institutional and economic reforms to liberalize the environment
for enterprise activity. These efforts are beginning to bear fruit, but not without a
degree of restructuring and dislocation.
251. The liberalization of domestic markets is encouraging greater private sector
activity generally. In some cases, the response has been impressive: double-digit annual
growth rates in private output in several countries in Asia and Latin America for
instance. At the same time, greater freedom for entrepreneurial activity has also given
rise, in some instances, to extortionate pricing, gangsterism and lawlessness.
Liberalization of the trade regime has meant that many enterprises have had to close down,
but the sustained growth in exports of developing countries in recent years is due largely
to private enterprises, domestic and foreign. Newly privatized or incorporated enterprises
have been stimulated to rationalize their production methods, but they have also shed
workers and the pool of unemployed has consequently grown in many countries.
252. In many developing countries, market reforms have been implemented in the context
of structural adjustment programmes. Although the stabilization objectives of these
programmes have met with some success, the persistence of low-growth conditions has
discouraged capital outlays on modernization of equipment, capacity expansion and
exploration of new business opportunities. The cutback in public expenditures in the many
developing countries has also prevented investment in the basic physical, institutional
and standard scientific and technological infrastructures that local and foreign-owned
enterprises require in order to be able to operate profitably.
253. The supply response has been particularly weak in Africa. A major inhibiting
factor is the scarcity of enterprises in general, and their low initial levels of
capabilities in particular. Because of low entrepreneurial capabilities, enterprises, even
if otherwise efficient producers, lack the know-how to tap emerging market opportunities.
The problem is aggravated when infrastructure and institutional support is limited, as is
the case in many of the least developed countries.
254. In the economies in transition, market implementation has been slowed by the
necessity to overhaul institutions with considerable historical, economic and
social-political dominance. The production base is outmoded in many economies, owing to
the earlier orientation towards satisfying military rather than consumer needs, and the
emphasis on meeting quantitative targets without regard to quality standards.
255. Public enterprises, generally, have faced more difficulty than the private sector
in adapting to market reforms. In part, this is because governments in economies in
transition have laid greater stress on improving financial performance rather than
efficiency. Reduction of the size of the public enterprise sector has received greater
attention than the need to improve management. At the same time, success in cutting the
relative size of the sector in developing countries has been limited.
256. Overall, enterprises in developing countries and economies in transition will need
to continue to restructure and improve their competitiveness if they are to meet
successfully the challenge of competing imports or to penetrate foreign markets.
Production in many countries has typically consisted of the domestic replication of
foreign products for local markets that are not large enough to permit operation in
efficiently scaled plants at full capacity. Costs tend to be excessive and quality
standards barely sufficient to meet the requirements of local markets. In the context of
liberalization and globalization, firms will need to react flexibly and quickly to a
dynamic setting with new technologies, changing market demands and the entry of new
competitors. World markets have exacting standards as regards packaging, finishing,
styling and technical specifications that firms in developing countries and economies in
transition must be prepared to meet.
257. Foreign direct investment and other types of foreign collaboration can help
improve competitiveness, particularly in the manufacturing sector, and almost all
developing countries and economies in transition are able to point to at least a few such
projects. However, many countries have been disappointed in the interest so far shown by
foreign enterprises - as investors, joint venture partners, technology suppliers,
franchisers, trading companies, sales agents and buyers - in potential ventures. Although
countries have liberalized their framework for foreign investment, foreign partners are
often not enticed because of the high transaction costs and risks inherent in investing
in, or in collaborating with, weak and inexperienced local partners in many developing
countries. Nevertheless, starting from a small base, there has been a rapid growth in
international subcontracting with the small-scale enterprise sector, mainly in East and
South Asia, North Africa and parts of Latin America and the Caribbean. FDI and joint
ventures have, meanwhile, grown rapidly in a number of more advanced or large developing
countries. Where a dynamic, indigenous enterprise sector is not yet entrenched -
particularly in sub-Saharan Africa and in the economies in transition - prospects for
increased foreign investment will largely depend on the pace and success of enterprise
development.
258. National policies can also help foster the emergence of a dynamic enterprise
sector, since market forces alone may not provide sufficient incentive to private
enterprises to invest or innovate in a developing or transitional economic environment.
Factors which markets tend to ignore include: the presence of economies of scale; risky
and unpredictable learning sequences whose costs differ according to the technologies and
which cannot be financed by firms themselves or by capital markets; and various
spill-overs (such as inter-linked cost reductions to other firms which are not reflected
in current market prices). Under these conditions, market-friendly policies can help
improve the allocative potential of markets while generating new skills and capabilities,
and can increase private profitability while lowering the risk of investing. That is by no
means a simple or straightforward task but, as the successful East Asian experience
attests, it is possible to influence the market-place while taking account of price
signals in setting priorities and mapping out strategies and, in so doing, serve the
long-term interests of the enterprise sector and the economy as a whole.
2. The East Asian experiences
259. There can be no across-the-board extrapolation of the East Asian experiences to
the rest of the world, but they do contain several features that seem relevant to
enterprise development anywhere. To begin with, the governments of the region pursued
sound macro-economic and exchange rate policies that ensured the stability necessary for
profitable investment, high saving and rapid economic growth. Savings were channelled
through the banking system to the enterprise sector, which relied extensively on
debt-financing. State-subsidized credit was made conditional on competitive performance
criteria. The availability of credit allowed those with management experience, often
acquired from employment in TNC affiliates, to set up their own SMEs.
260. Many East Asian countries relied on protectionist trade policies in order to
provide scope for technological learning in their infant industries. However, protection
was selective, staggered and (starting in the 1980s) time-bound. Also, emphasis was placed
on the establishment of local suppliers, many of which were SMEs linked to the larger
firms through sub-contracting arrangements. The supply of technical know-how associated
with these inter-firm relationships contributed to technological learning. Moreover, in
some countries the existence of a dense network of relationships with local suppliers,
which emerged in the 1980s, gave exporters of more modern products an advantage in being
able to respond quickly and flexibly to shifting demand patterns.
261. The pattern of importing technology and capital varied between economies. Whereas
the Republic of Korea, following Japan, was selective in permitting foreign investment,
Taiwan Province of China did not discriminate between foreign and domestic investment
except in a few individual sectors. Singapore relied on FDI as a means of importing
technology, as did several other ASEAN countries. In all instances, however, government
policies were designed to enhance the learning potential of domestic producers. There was
a continuing emphasis on education at all levels, and on training. Public and private
investment was made in the creation of technical institutes and vocational training
schools, which helped train and supply middle-level technicians and foremen. Owing to the
high rate of growth in real wages, families had incentives and the means to invest in the
education of their children. Through a system of tax incentives and levies, governments
also promoted in-house training in domestic firms which supplemented the training provided
by affiliates of TNCs. In some countries, such as Singapore, governments prevailed upon
and cooperated with TNCs to establish training facilities in selected industries.
262. Ample resources were also poured into the funding of R & D which was
encouraged by the granting of tax advantages and other incentives. Promotional policies
favoured competitiveness by distinguishing between infant, mature and declining
industries. Sectors with the potential for high productivity growth were encouraged to
export, inter alia, through exemptions from tariffs, preferential interest rates
and tax write-offs. Governments invested heavily in creating the necessary infrastructure
in the form of modern telecommunications systems, cheap and reliable electrical power,
roads and transportation facilities and ready-to-use factory sites. This investment in
modern infrastructure has helped offset the declining importance of labour-cost advantages
in the face of new competition from other low-cost producers since the 1980s.
263. Firms responded to the opportunities created by this favourable environment in a
number of ways. Initial emphasis was on learning-by-doing and applying imported
technologies for production in the domestic market. Gradually, this led to the acquisition
of the capacity to make minor changes and improvements in productive facilities, and to
realize minor innovations through reverse engineering. All this strengthened their ability
to respond to growing competition in world markets, producing for specialized product
niches and increasingly more sophisticated knowledge-intensive products. Experience in
servicing export markets provided the necessary technical and marketing expertise even to
invest abroad, both in less developed and in industrialized countries.
264. The conditions leading to these favourable outcomes do not prevail in all
countries, nor do all of them have the option for an orderly sequencing of liberalization
in today's globalizing world economy. Furthermore, the legal framework has been changed by
the Uruguay Round. Nevertheless, the East Asian experience does suggest the main elements
of a national strategy for enterprise development: the creation of an enabling
environment; provision of market-friendly incentives for national enterprise development
and business support services; and the fostering of backward and forward linkages between
firms, and horizontal linkages between firms and other institutions, particularly science
and technology institutes.
B. National and regional policies for enterprise
development and competitiveness
1. The enabling environment
265. The creation of an enabling environment for entrepreneurship and enterprise
activity is one of the most important roles of public policy intervention, including
government measures and international financial support of such measures. A favourable or
enabling environment is not by itself sufficient to ensure the emergence of a dynamic
enterprise sector, but it is a highly desirable and often necessary condition for
enterprise activity. It requires, primarily, sound and consistent economic policies to
foster business confidence and investment, mobilize savings and facilitate structural
adjustment. Also essential are the institutional, legal and commercial frameworks that
define the market conditions for transacting business.
266. An important aspect of the enabling environment is the quality of the working
relationship between government and the private sector. All governments regulate and
promote enterprises in one way or another, and how this is done often matters more
than why. Quite often, well-intentioned policies to correct market failures have
the opposite effect; on the other hand, interventionist policies can be market-friendly
when formulated in a transparent and non-discretionary manner, in cooperation with the
constituency most affected - the private sector.
(a) Fostering business confidence and investment
267. Most developing countries and economies in transition have already put in place
policies to liberalize and improve their national environment for enterprise activity.
Such efforts include, among others, macro-economic stabilization programmes which seek to
maintain and/or restore price stability and economic growth. They also include significant
liberalization of FDI frameworks and the implementation of trade-policy reforms. These
involve the reduction or elimination of licensing and quantitative restrictions, high and
extremely differentiated tariff rates, export taxes and burdensome bureaucratic
requirements and paperwork.
268. Industrial reforms include measures to reduce the number of inefficient and
loss-making public enterprises through privatization and other public enterprise reforms,
reduction of entry and exit requirements on private enterprises, easing of price controls
and removal of soft budget constraints. Such measures make it easier for investment to
take place, eliminate obstacles to doing business and put management of enterprises in the
hands of professionals whose performance is made subject to the test of the market.
Combined with stabilization measures and trade-policy concerns, they increase the rewards
to productive entrepreneurial activity - or activity "subject to verification by the
market" - as distinct from speculation and rent-seeking.
269. Liberalization inevitably involves a process of restructuring and dislocation.
When inherently inefficient activities are wound up, resources are released for more
productive purposes; however, when potentially competitive activities fail, resources are
simply left unemployed. As it is difficult to choose winners, it is important that all
enterprises be allowed an opportunity to restructure and upgrade their physical and human
capital. As already noted, many countries undergoing structural adjustment programmes have
experienced a generally weak supplier response. In such instances, governments may need to
go beyond market liberalizing reforms and consider more proactive, supply-side policies to
facilitate enterprise restructuring, particularly in industries that appear to have
medium-term technological and competitive potential. Such policies would need to be
market-friendly, and avoid the pitfalls frequently associated with industrial policy. They
should also receive the support of international institutions, by ensuring that structural
adjustment programmes include strong measures in favour of enterprise development.
270. Competition policies can help strike a balance between, and create a level
playing-field for, small and large enterprises, fostering enterprises that are capable of
standing up to international competition, and permitting enterprises to take advantage of
large size and opportunities to cooperate with other firms in R & D and other
technical (cooperation) activities. The enforcement of competition laws takes on increased
relevance in economies in transition and more generally wherever the public interest needs
to be protected from restrictive business practices and other potential abuses of monopoly
power arising from privatization of large enterprises.
271. Enterprise development also requires a transparent, predictable and supportive
commercial and legal framework. Although such a framework exists in many developing
countries, it still needs to be put in place in most economies in transition, in which
there are no traditional legal institutions for enforcing contracts, incorporating
enterprises, protecting creditors against defaults, preventing business fraud, etc., and
where it is sometimes necessary to reinforce the public's perception of the legitimacy of
private economic activity. Adequate protection of intangible assets such as patents and
copyrights is an inherent element in the creation of a hospitable environment for
investment and for the encouragement of technical progress.
(b) Strengthening government-business relationships
272. The involvement of governments in enterprise development varies greatly from
country to country. In all instances, it is the vocation of governments and donors to act
as catalytic agents, doing only what enterprises and markets cannot do themselves. In
practice, however, cumbersome policies, rigid measures and overly bureaucratic rules often
tend to crowd out the private sector and de facto circumscribe, or even supplant, the
responsibility of enterprises to manage their own establishment, operation and
technological advance. It is therefore essential that all strategies for enterprise
development be formulated in close consultation with the private sector. Whenever
possible, enterprises should pay for the services that they receive from the government,
to ensure that these are demand-oriented and self-terminating when no longer needed.
273. The quality of the working relationship between government and the private sector
is particularly important for building skills, technological and infrastructure
development and the promotion of inter-firm linkages.
274. Various mechanisms have been established by governments for the promotion of
policy dialogues between different economic actors - workers, entrepreneurs, investors,
bankers, consumers, large and small enterprises, and elements of the civil society - and
between them and the government in order to balance their different "claims" and
to reconcile them with the objectives of government policy. The deliberative or
consultative councils established in Japan and the Republic of Korea have served as useful
forums to exchange information and to obtain inputs for policy-making from the private
sector on such matters as market trends, technological developments, regulations and
potential business plans - the latter on both a functional (e.g. pollution, finance or
taxation issues) and an industry-specific or sectoral (e.g. automobiles or chemicals)
basis. Government-business consultative committees have also been established in Malaysia,
Thailand and other countries. An essential condition for the success of such bodies is an
efficient and reputable bureaucracy that commands the confidence of all the parties
concerned.
275. Consultative mechanisms help to strengthen the quality of government-business
cooperation. They establish the broad parameters for business cooperation, allowing firms
to concentrate on market competition and not worry about trying to curry favour with the
government. They also serve as proto-democratic institutions, providing direct channels to
governmental authorities for businesses, labour, consumers and academia.
2. Formulating national strategies for enterprise development
276. A favourable enabling environment provides the necessary backdrop for policies
directed more specifically at fostering enterprise development. In many countries that
have succeeded in fostering a strong enterprise sector these policies were brought
together in a coherent enterprise development strategy. At UNCTAD IX, developing countries
that so wish might declare their intention to formulate or update national enterprise
development strategies, with help from the international community as required. The
following paragraphs discuss some of the more important elements that would need to be
included in such strategies, focusing in particular on micro-enterprises and small and
medium-sized enterprises, which are of central importance in most developing countries.
(a) Elements of an enterprise development strategy
277. The enterprise sector is highly diverse, with different growth potentials,
structures and problems, depending on the particular industrial sector and economy.
Typically, it consists of a network of micro-, small and medium-sized enterprises (SMEs),
big locally-owned companies, affiliates or partners of transnational corporations (TNCs)
and State-owned or parastatal companies operating in a market system with freedom for
private entrepreneurship.
278. The focus of an enterprise development strategy should be primarily on SMEs, as
these constitute the vast majority of enterprises in most countries, developed or
developing. Of course, particular country situations and national objectives may warrant
additional foci (e.g., privatization of large parastatals in some economies in
transition).
(i) Mobilizing entrepreneurial resources
279. Entrepreneurs are economic risk-takers - individuals who can perceive a profitable
opportunity and are willing to take risks in pursuit of it. They also need business
acumen, but the ability to organize a business can be learnt, and it can of course improve
with experience, for few entrepreneurs succeed in their first venture. All societies have
men and women who are inherently entrepreneurial, although these capabilities may not
always be put to productive use if economic conditions and the business environment are
not favourable, as can be the case in developing countries and economies in transition.
280. Experience suggests that programmes to identify and develop the entrepreneurial
skills of particular individuals and groups can play an important role in mobilizing
entrepreneurial resources. When carefully designed and implemented, these programmes can
bring economic and social benefits that greatly exceed their cost. Typically, the
programmes are targeted, with candidates undergoing self-selection procedures or
behavioural testing before qualifying for training. The programmes then focus on building
business skills and aptitude, by providing instruction and counselling related to
activities ranging from the original screening of the project to the actual operation of
an enterprise. Successful entrepreneurship development programmes ensure that the demand
for training and advisory services is a genuine response to the opportunities of a
competitive economy. They also avoid creating new windows for privileged access to
subsidized credit and other forms of special treatment.
281. Entrepreneurship training can be an important component of an enterprise
development strategy, particularly when adapted to target a wide variety of groups such as
high school and university graduates, middle-level employees of large enterprises
(including parastatals), redeployed workers from the public and private sectors, school
leavers, women and the poor.
(ii) Supporting micro-enterprises in the informal sector
282. Micro-enterprises that function outside the official regulatory framework
contribute substantially to employment and productivity. It is estimated that the informal
sector accounts for over 50 per cent of the labour force and some 20 per cent of GDP in
many African, and a few Latin American, countries. The informal sector thrives because of
its responsiveness to market forces; ease of entry and exit makes it a magnet for
entrepreneurs from all sections of society, including women, the poor and minority groups.
283. The competitive environment of the informal sector is a good breeding ground for
entrepreneurs, but it cannot provide the infrastructure and support services that
enterprises need to expand and grow. The informal sector offers little recourse when
business deals are not honoured; moneylenders are often the only ready source of credit.
Micro-enterprises that limit business contacts to close acquaintances and relatives stay
small. An accessible and predictable legal framework could help entrepreneurs escape the
constraints imposed by informality, while also helping to eliminate some of the barriers
that prevent graduation to a larger scale of production. Successful government policies to
facilitate the development of enterprises that originate in the informal sector include
measures to lower the costs of compliance with regulations and provision of support
services to micro-enterprises, which encourage them to strengthen their linkages with
formal markets and institutions and eventually to formalize their participation therein.
284. Experience suggests that programmes to help develop micro-enterprises in the
informal sector - typically owned by women, rural residents and the urban poor - increase
employment and incomes. By raising the incomes of the poor above marginal subsistence,
they also boost the demand for products and services of all domestic enterprises. By
legalizing the ownership of assets and bringing them into the production system, the
formalization of the informal sector is also wealth-creating. The most effective
micro-enterprise development programmes are locally run and focused on specific
objectives. The beneficiaries are many, as the individual assistance offered is often
modest (e.g. small loans of US$ 1,000 or less are often all that is required).
(iii) Assisting small and medium-size enterprises
285. Small and medium-size enterprises play a crucial role in industrial, technological
and trade development, and are an essential part of the "supply response" to the
pressures and opportunities of globalization. SMEs are, by definition, relatively more
adaptable, flexible and innovative than large enterprises. By working together in
cooperative arrangements with other SMEs and/or with larger firms, they can become
specialized suppliers of goods and services and achieve scale economies associated with
such specialization. By investing in multi-purpose equipment together with other
cooperating firms, they can also achieve the benefits of flexible specialization. However,
being small has its drawbacks, particularly in terms of access to essential inputs, such
as support services, credit and finance, and business information.
(iv) Access to support services
286. There is need for a framework of proactive policies designed to expand the demand
for a broad range of "producer" or support services that enterprises use
insufficiently, either because the market, such as it is, does not supply them or because
they are unaware of their importance in improving performance. Support services cover such
areas as project execution, pre-investment studies, management consulting, production
control, product development, marketing, engineering design, quality control, laboratory
testing, packaging, accounting, insurance, banking, legal services, repair, maintenance
and hire of equipment, data management, computer and software, transport, etc.
287. Programme coverage is always likely to be limited in comparison with the number of
potential users. Additionally, to be cost-effective, programmes need to target firms with
a likelihood of success. In order to ensure that it is genuinely needed and in line with
market demand the cost of a service should be, at least partly, borne by the recipient
firms. The success of any one programme depends on the functioning of many: since SMEs
typically need multiple support services, programmes need to be integrated and organized
so as to fill a wide gamut of needs (e.g., human resources management, advice on
organizational improvements, design, quality assurance and marketing, etc.). Even the most
successful programmes show results in terms of contributions to growth and exports only in
the medium to longer-term but, when they do appear, the dividends can be quite sizeable.
288. The role of Government is not necessarily to provide the advisory, consultancy or
technical assistance services, but rather to stimulate the private sector and provide some
financial support, leaving intermediaries to actually deliver the services. Entities most
commonly providing such services might be business associations established by groups of
enterprises; professional societies in fields such as accounting or engineering; ad hoc
organizations established jointly by government agencies and business groups; and
international organizations. One advantage in relying on third parties, rather than civil
servants, for the supply of services to the enterprise sector is that they are more likely
to be in tune with market demand and the needs of industry users, and are generally able
to deliver higher-quality services with less delay, greater flexibility and lower cost.
Universities have also fulfilled a useful role in assisting industry, primarily when
specialized bodies have been created that are organizationally and financially independent
of the university.
289. In order to stimulate the supply of domestic services, Governments have used
various instruments. These include direct financial support (e.g. financial assistance to
overcome a shortage of venture capital); fiscal and credit incentives (e.g. exemption from
import duties on equipment, tax exemptions on royalties, accelerated depreciation schemes
or subsidized loans); and deregulation (e.g. modification of the regulatory system to
reduce or remove the boundaries between different services). Other components of the
strategy to promote the supply of such services include incentives for the
"externalization" of locked-in service activities, and the establishment of
service centres or training centres aimed at teaching national staff to render producer
services.
(v) Access to finance
290. Access to credit and equity capital is important for all enterprises, but
particularly for SMEs. Financial institutions tend to favour large enterprises at the
expense of SMEs owing, for example, to difficulties in assessing SME risks or the
relatively higher administrative costs of lending to them. These policies are not helped
by poorly documented loan requests from SMEs caused, for example, by internal difficulties
of SMEs such as lack of skills in assessment of input costs, marketing and the preparation
of proper accounts and a business plan. Often compounding the problem is the lack of
adequate information and understanding of borrowing procedures in the formal financial
sector.
291. One approach which has proved highly successful in Asia is the establishment of
specialized credit institutions for SMEs, including loan guarantee programmes for
commercial banks lending to SMEs. Community-based banks have also been effective, tapping
informal networks of personal contacts that help to reduce the risk and cost of lending to
SMEs. Likewise, linking the information network of the informal sector, such as thrift
societies, with the lending network of the formal sector can help to improve information
flows. The experience of specialized small-scale lending to low-income groups, for example
of Grameen Bank, shows that group solidarity can serve effectively as a form of lending
collateral.
292. Organized stock markets are lacking in much of Africa and the economies in
transition. While international development agencies have established venture capital
facilities in a few countries, these initiatives are by no means adequate. The feasibility
of regional venture capital facilities deserves consideration by international and
regional financial institutions.
293. The international community provides financial support for SME development,
particularly for low-income countries, in several ways. One is through loans and equity
financing, as in the case of IFC. Various developed-country bilateral agencies also
provide such financing in partnership arrangements linked to the internationalization of
their own enterprises. However, it is not clear to what extent SMEs in developing
countries and countries in transition have benefited from such support. The World Bank
provided loans through the formal banking sector for SME development projects in
developing countries from 1973 until 1991, when the traditional SME lending programme was
discontinued for a variety of reasons, including the mixed performance of the projects.
294. However, a small number of "disguised" SME loans, i.e. loans
incorporated in other projects, remain. Recently, a micro-lending programme has been
created to channel micro-loans to the "poorest of the poor" through grass-roots
organizations. So far $200 million have been pledged by the World Bank, regional
development banks and bilateral agencies for the Consultative Group to Assist the Poorest,
which will mobilize resources and coordinate lending. Another form of support or "the
next frontier in SME lending", as the World Bank puts it, is to help Governments
establish well-designed, market-based technical assistance or support services for the
development of SME capabilities, including in the area of finance. These efforts need to
be strengthened through technical cooperation support from organizations such as UNCTAD,
UNIDO and the World Bank.
(vi) Access to information networks
295. SMEs can broaden their markets through cooperative arrangements that disseminate
information on local or regional products and services. Privately managed programmes with
public support are better at sustaining up-to-date information flows to local SMEs. The
success of these efforts depends on the ability of locally-based trade and professional
associations, NGOs, and grass-roots organizations - sometimes working with Governments and
international organizations - to develop demand-driven mechanisms for delivering these
services.
296. Private schemes that bring together SMEs for joint leasing, purchase, or
time-sharing of equipment can increase efficiency and economies of scale. Such cooperative
arrangements can help smaller firms to find inputs from local and regional large-scale
manufacturers. These efforts can be supported through data banks that help entrepreneurs
locate equipment or make licensing arrangements for imported technologies.
(vii) Building technological capabilities at the enterprise level
297. The ability of a country to sustain rapid economic growth in the long run is
highly dependent on the effectiveness with which its institutions and policies support the
technological transformation and innovativeness of its enterprises. While most developing
countries and economies in transition have science and technology policies and
institutions, these are, for the most part, poorly adapted to meeting the needs of
industry. They need to focus not only on scientific research but, more importantly, on the
diffusion of technology, and they also need to create horizontal linkages between the
various actors involved in the diffusion process.
298. In formulating science and technology policies it is essential to have a clear
picture of the network of agents that interact to generate, produce and disseminate
technological innovations. This is because technological innovation does not always occur
through scientific research. Many innovations involve incremental improvements in
technical performance, product quality or product design, or simply learning how to
manufacture an existing product. The design for a new variant of a particular product may
come from the R & D department of a firm which is the buyer of that product rather
than from the manufacturing firm itself. Improvements in quality control procedures could
be worked out entirely by the firm's engineering department; alternatively, the firm could
receive technical assistance from its machinery supplier, from a State-run industrial
technology centre or an engineering consultancy centre, or a combination of the above. In
other words, there is a larger network of agents, together with science and technology
institutions and policies, that influence enterprises' innovative behaviour and
competitive performance. Technology-based incubators, working closely with universities
and research institutions, are an important instrument for commercializing R & D and
for exploiting knowledge spillover arising from location and proximity.
299. Innovation at the enterprise level involves the introduction of a product or a
process that is new to the firm, irrespective of whether it is new to the country or to
the world as a whole. This means that the orientation of science and technology policies
should not be limited to activities or institutions associated with the most advanced
scientific research at the frontier of knowledge but must be more broadly focused on
factors and policies that influence the formation of technological capabilities. Policies
should facilitate interaction among and between both users and producers of knowledge,
including with enterprises and other agents from outside the country.
300. The aim of policy intervention in the R & D systems of economies in transition
differs somewhat from that facing developing countries. The economies in transition have
inherited a critical mass of scientists and engineers able to carry out R & D even if
it is not all relevant to contemporary civilian needs. Nevertheless, in both groups of
countries, policies have centred on steps to commercialize a significant part of the
activities of publicly funded R & D institutes. This serves to increase the amount of
resources available to them for R & D and to improve their effectiveness and relevance
to the needs of industry by subjecting a greater part of their activity to the market
test. More generally, there is a tendency to move away from pure academic research,
without totally abandoning it, and towards the provision of trouble-shooting, engineering,
product development and similar services to enterprises. These services, together with the
establishment of industrial standards, quality controls and certification and testing, all
contribute to the development and greater internationalization of their industrial
sectors.
(viii) Encouraging inter-firm linkages
301. Owing to changes in market demand associated with new systems of globalized
production, inter-firm relationships have changed dramatically in recent decades.
Industrial firms all over the world are finding it necessary to cooperate both vertically
with suppliers and customers and horizontally with erstwhile competitors, i.e. to fortify
and rely increasingly on relationships with other firms, both domestically and abroad.
302. In today's market place, both speed and flexibility in production have become
imperative. The availability of forward, backward and horizontal linkages allows firms to
make more cost-effective decisions in terms of choosing whether to produce a particular
input within the firm or to source it externally. These firms are finding that such
cooperation may be necessary in order to lower their costs and to become more innovative.
However, trust is an important factor in establishing effective inter-firm networks and
cooperation.
303. As traditional determinants of competitiveness are being eroded, technical change
and innovation have emerged as dominant factors contributing to competitiveness of firms
in today's market place. Experience from industrialized countries has shown that
inter-firm relationships play a critical role in the innovation process. Inter-firm
linkages make possible the learning needed for cooperation. Product innovation is highly
dependent on feedback of user-experiences, as the involvement of suppliers in
manufacturing processes gives them an insight into the use of the equipment they produce,
which in turn facilitates process innovation.
304. There are many different types of inter-firm linkages, including formal networks
for knowledge exchange (such as relations with universities, centres of higher learning, R
& D institutes, government laboratories), informal relations among firms (both
domestic firms and TNCs) and with suppliers, and other social relations that affect
learning. Communication and interaction between firms with different capabilities and
complementarities are a very important source of creativity and innovation. Interaction
with foreign affiliates operating in an economy and with foreign firms through outward FDI
can be a particularly important source of learning.
305. In addition to the kinds of policies and institutions for promoting enterprise
capabilities already discussed, Governments can promote inter-firm collaboration in R
& D and other areas by facilitating the transfer of technology between firms and
assisting in the formation of national and international strategic alliances,
collaboration agreements, sub-contracting or OEM (original equipment manufacturing)
arrangements and/or technological partnerships, including the participation of
universities and local governments. They can also help to promote collaboration in R &
D among firms and research institutes and to commercialize R & D by the establishment
of technology-based incubators.
(ix) Regional cooperation
306. A useful complement to national efforts is regional cooperation, which can enhance
the access of SMEs to information, technology, finance, technical know-how and skills.
Regional efforts have been successful in Asia and should be drawn on in framing similar
approaches in Africa.
307. A recent example is the ASEAN Programme of Action on SME Development, which
provides for the networking of national support agencies to exchange information and to
pool resources and expertise for SME development in the region. Areas for cooperation
include the possibility of establishing new financing mechanisms for SME development;
joint training programmes to upgrade the capabilities of entrepreneurs, managers and
technical workers; joint technological development in particular industries; and
cooperation in marketing and in collective promotion efforts in the form of joint trade
exhibitions for particular products.
308. Proposals are also under consideration in APEC for cooperation on access to
information (private/business sector networking and electronic commerce) and finance (APEC
venture capital investment scheme to facilitate the globalization of SMEs in the region).
In the area of human resources development and technology, an APEC Centre for Technology
and Training for SMEs has been established.
309. TECHNONET Asia, set up in the early 1970s, is an outgrowth of various
donor-supported projects for SME development. It groups together 14 participating
organizations - principally SME support agencies -from 12 countries in Asia and the
Pacific. Its programmes are primarily supported by international and bilateral donors and
focus on four main areas: dissemination of industrial information; provision of industrial
extension services; facilitation of technology transfer or sharing; and development of
indigenous entrepreneurs and enterprises. The establishment of similar schemes in other
regions deserves consideration.
* * *
310. The elements of a strategy for enterprise development outlined above will have
practical application only to the extent that they can be adapted to a variety of
different country contexts and, also, integrated with other overriding national policy
imperatives, such as poverty alleviation and structural change. Moreover, successful
implementation will require that the orientation of enterprise development is towards
tapping the potential opportunities presented by the larger globalizing and liberalizing
trends in the world economy. Furthermore, international support, ranging from technical
assistance to financing, will be required, particularly for the least developed countries.
Finally, any strategy needs to take account of larger systemic issues, which may need to
be addressed through multilateral action, aimed at creating an appropriate international
framework that provides opportunities for firms from all countries.
C. Facilitating enterprise operations in a
global economy: the need for international action
311. National strategies for enterprise development need to be supported by actions at
the international level. These actions can take two forms, as part of a global strategy
for enterprise development.
1. Global supporting activities
(a) Fielding of enterprise development missions, especially in LDCs
312. While the vast majority of enterprises in any country are small, they can develop
into dynamic and technologically sophisticated companies, and a significant and increasing
number also internationalize. The process is not automatic, nor should it be.
Entrepreneurship involves a high degree of risk and many start-up enterprises fail within
the initial three years of operation, in all economies. This is in part a matter of market
selection, and is necessary for the preservation of a nation's long-term industrial
strength. At the same time, enterprise survival rates during incubation and in later years
are not insensitive to the overall business climate. It is also true that the life-span of
enterprises is longer - and their growth in size and activities over the life-cycle is
greater - in countries where infrastructure, market institutions and the regulatory
environment (e.g. property, liability, bankruptcy and monopoly laws) are more highly
developed. In developing countries, especially LDCs, where these conditions vary
considerably and are generally less hospitable, policies and technical cooperation
programmes must address a very wide set of country-specific issues for effectively
tackling enterprise development.
313. There is no shortage of policy approaches and technical cooperation programmes for
enterprise development. At the macro level, the World Bank, IFC and other institutions
provide advice on implementing an enabling environment for enterprise development, usually
focusing on policy and institutional reforms, and the removal of obstacles to the conduct
of business. At the micro level, the focus is on providing support and training to
enterprises of all kinds, ranging from traditional cottage industry, rural and urban
micro-enterprises and SMEs, agro-business and, of course, large-scale industry, including
firms with overseas facilities. Not all these elements are in place in all countries, and
when global support is forthcoming it is not always country-specific.
314. There is thus a need to field enterprise development missions, especially in LDCs,
with a view to formulating country-specific strategies and implementing integrated
technical cooperation programmes for enterprise development. In countries where structural
adjustment programmes are under way, the enterprise development missions could consider
ways to facilitate efforts by enterprises to respond to adjustment measures (see next
section).
315. These integrated programmes should ensure continuity of global supporting
activities across the enterprise development continuum, as firms grow from micro- to
medium-sized enterprises. As previously noted, enterprise development has an important
global dimension. New technologies have encouraged transnational corporations to globalize
their production and disperse activities geographically, to take advantage of local
conditions. With appropriate support, small businesses in developing countries can be
players in the world market-place by linking with foreign companies as suppliers, service
firms and joint venture partners. An example of such support is EMPRETEC 21, a new
programme developed by UNCTAD to provide SMEs with an integrated package of services to
enhance their entrepreneurial drive, their technological capability, their eco-efficiency
and their ability to export. The programme builds on the highly successful EMPRETEC
programme (jointly implemented by UNCTAD and DDSMS), which has benefited over 2,500
entrepreneurs in Africa and Latin America over a six-year period.
316. The relevant international institutions should come together to formulate a more
systematic approach to the multiple needs of low-income countries in a number of areas,
including inter alia: provision of policy advice or technical expertise in the
creation of favourable framework and market conditions, especially a sound policy and
commercial framework for the development of well-functioning institutions and markets;
enterprise development, particularly SMEs; strengthening of institutions for providing
market-based support services to SMEs, and the networking of support agencies at both
regional and interregional levels; development of the institutional requirements of an
effective policy dialogue between the Government and private-sector organizations,
including SME associations; and networking of firms of developed countries with those of
developing countries and countries in transition in order to promote mutually beneficial
forms of enterprise, technological and trade development.
(b) Ensuring that structural adjustment programmes include strong measures in favour
of enterprise development
317. Programmes of structural adjustment in low-income countries were initially
introduced in response to severe external shocks and in order to correct policy
distortions which were deemed to impede the development process. They were designed as a
finite process of policy reform, supported by external financial assistance. The overall
expectation was that macroeconomic stability would provide an environment in which
privatization and the freeing up of markets would unleash the forces of growth.
318. Experience to date has not borne out these expectations. While the precise
pathology varies considerably among countries, it would appear that, owing to structural
features and the embryonic stage of the development of markets, managers and
entrepreneurs, as well as the lack of a reasonable period for adjustment by enterprises,
the expected response of producers to liberalization and deregulation has often failed to
materialize. Indeed, the African experience suggests that too rapid exposure to import
competition may have deterred some firms from making the kind of restructuring investments
that take time to yield results.
319. Failure of liberalization to bring forth adequate responses by producers,
difficulties in reforming public sector revenue systems and the lack of sufficient
external support have meant that budget deficits have had to be dealt with primarily
through cut-backs in expenditure. A major new effort needs to be set in motion to
strengthen structural adjustment by addressing, in consultation with the private sector,
the need to include strong supply-side developmental measures for enterprise development.
These measures should enhance the supply response to other adjustment measures and promote
employment. Adequate attention should be given to the link between producer services and
adjustment in manufacturing and agricultural sectors.
(c) Activities aimed at enhancing enterprise competitiveness
(i) Capacity-building for producer services
320. The support of the international community is required to assist developing
countries and countries in transition in formulating development strategies encompassing
the aspects described above. Sectoral and country-specific studies examining these issues
should provide these countries with useful inputs and guidelines in considering policy
options for capacity building for producer services. The technical assistance being
carried out in the field of services has concentrated on developing an awareness of the
importance of the producer service sector, including as a means for promoting SMEs. In a
number of countries - for example, China - questionnaires submitted to manufacturing firms
were used as a basis for measuring the quality of service inputs and assessing service
needs. Such an approach, originally tested in Latin America, has been used in several
developing countries and would be of particular relevance to countries in transition.
321. The Coordinated African Programme of Assistance on Services (CAPAS) aims to
provide the participating countries with the tools to assess their national economic
policies in the area of services. In the process, the programme has also stressed the
development of an endogenous analytical capacity not limited to the government machinery
but involving also the national academic and consulting communities and representative
organizations from the private sector. Where requested, technical assistance should be
provided with respect to the reform and liberalization of international transactions in
services and the strengthening of the domestic capacity of developing countries in the
area of services, so that their enterprises may benefit from the increasing participation
of foreign service providers in the domestic economy through investment, cross-border
trade, and other modes of service delivery.
(ii) Capacity-building in trade efficiency
322. Most advanced technologies can successfully contribute to the trade
competitiveness of developing countries' enterprises if an appropriate strategy for the
mobilization of local and international resources is adopted. Examples of successful
programmes in the area of trade facilitation include Customs automation (ASYCUDA) and the
Global Trade Point Network (GTPNet), a worldwide system providing trade- and
investment-related information and transactional tools, especially targeted at SMEs.
323. The application of information technologies has made a significant contribution to
the improvement of customs revenues in a context of tariffs reduction. It is helping to
reduce corruption and to simplify trade, particularly for SMEs. Similarly, the main users
and beneficiaries of a Trade Point are small and medium-sized enterprises. Such programmes
are practical tools which can contribute to reducing the cost of integration in global
trade. International support will now be particularly important for the provision and
improvement of local infrastructure such as national and subregional Internet servers,
which will allow an even greater degree of interactivity and flexibility in exchanges
among Trade Points and their business users.
324. One proposal which could usefully receive attention from the Conference would be
to enhance the capacity of Trade Points to function as information and training centres
for SMEs with regard to new trading opportunities and requirements. Thanks to the links
between Trade Points and local business communities, such an effort could assist the
private sector in adapting to, and benefiting from, Uruguay Round commitments.
(iii) Science, technology and innovation policy reviews
325. Developing countries and countries in transition require considerable assistance
from the international community in framing technology strategies to meet their particular
needs. Building on experience in developed countries, UNCTAD, in liaison with the
Commission on Science and Technology for Development, has been called upon to work on
science, technology and innovation policy reviews adapted to the needs of developing
countries and countries in transition (pursuant to Economic and Social Council resolution
E/1995/4 of 19 July 1995). The purpose of science, technology and innovation policy
reviews is to help participating developing countries and economies in transition evaluate
the contribution of science and technology policies and institutions to the development of
their enterprises - including their international competitiveness - in order to strengthen
the relevance of such policies and institutions to the needs of the industrial sector. By
enriching knowledge of how these policies are designed and applied, the reviews will help
other developing countries and economies in transition to improve their own policies,
while at the same time opening opportunities for greater international cooperation.
(d) Diffusing "best support practices" for enterprise development
326. Identification of "best practices" regarding market-based governmental
support for enterprise development may be facilitated through exchanges of lessons learned
from countryexperiences. The UNCTAD Ad Hoc Working Group on the Role of Enterprises in
Development highlighted a number of "best practices" gleaned from country
studies and exchanges. Among them were measures to:
(a) Facilitate business start-ups or the "formalization" of small businesses,
by providing incentives (for example, in the form of access to finance and other benefits)
for small business registration, as in Ecuador, and simplified tax payment procedures for
small businesses in the form of a small lump-sum tax without the need for the filing of
tax returns or the preparation of accounts, as in India;
(b) Produce skills to meet the needs of the job market through a system which combines
apprenticeship, theoretical education at specialized institutions and on-the-job training
on the shop floor, as in Germany, or through demand-driven, market-related job training
programmes, as in several Latin American countries;
(c) Promote export development by helping first-time exporters to set up an export
business, as in Canada and Norway, by providing an integrated package of services in
one-stop shops, as in the United Kingdom, as well as by supporting mutually beneficial
enterprise, technological and trade development through the twinning of firms of
cooperating countries, such as Germany and India;
(d) Reduce the risk and cost of lending to SMEs or to enhance such lending by building
up networks of personal contacts (which can also help to mobilize savings) through
community-based banks, as in Bangladesh and Nigeria; by providing specialized or
policy-based lending, as in Japan and the Republic of Korea; by using mutual credit
guarantee societies or insurance schemes funded by banks and small enterprises, as in
France; and by creating an export credit facility which provides credit to SMEs which are
subcontractors of larger exporting firms, as in Mexico.
327. The identification and exchanges of "best practices" regarding policy
and institutional support for enterprise development can benefit from cooperation among
developing countries and cooperation between them and developed countries, including
through the networking of support agencies and the establishment of procedures for
exchanges based on particular areas and on agreed standards for information exchange.
There is considerable scope for further work to build on the results achieved so far by
the Ad Hoc Working Group on the Role of Enterprises in Development in order to identify
policy elements for national action and international cooperation.
2. Issues for intergovernmental action
328. By its very nature, the process of liberalization and globalization of the world
economy brings with it the internationalization of enterprises - large and small, from all
groups of countries - through trade, investment, licensing and a range of other
modalities. This means, in turn, that an increasing number of issues related to
enterprises take on an international dimension as well, including, for example, questions
related to product liability, consumer protection, competition policy, restrictive
business practices, access to R & D funds, illicit payments, accounting standards,
environmental regulations, professional qualifications, access to closed user-group
networks, the operation of stock markets, taxation, transfer pricing, bankruptcy,
protection of intellectual property rights and responsibilities of banks for their
branches abroad. What all of these issues share is recognition that the nature of the
liberalization and globalization process increasingly reduces the ability of individual
countries to tackle them effectively unilaterally.
329. As globalization proceeds, the need for multilateral approaches to issues
connected with the internationalization of enterprises will become more pressing. Action
will not necessarily take the form of comprehensive multilateral negotiation on enterprise
internationalization - a microeconomic Uruguay Round, so to speak. Rather, it may well be
a piecemeal process in which issues that are particularly pressing will be dealt with, one
at a time, by various competent international organizations.
330. Be that as it may, the nature of the globalization process necessarily puts the
implications for national regulatory frameworks of enterprise internationalization on the
agenda. UNCTAD can play a central role in helping to understand better this aspect of the
globalization process, its implications for development, the role of enterprises in it,
the range of issues this brings to the international agenda and the policy options that
Governments may need to consider in this respect. In particular, UNCTAD can play a role in
identifying and building consensus on the most urgent enterprise internationalization
issues that require multilateral attention. In so doing, UNCTAD would, of course, pay
special attention to the requirements of enterprises from developing countries, especially
the LDCs. When UNCTAD was called upon to do just this in the area of trade some 25 years
ago, it developed the GSP. In today's world economy, the challenge is much broader and, if
anything, more important.
3. Establishment of a Global Advisory Committee
331. The policy dialogue process operating within UNCTAD should be inclusive and
open-ended, seeking to involve not only all Governments but also a representative range of
those non-governmental actors playing an increasingly important role worldwide in many
aspects of public life, nationally and internationally. NGOs are today active in many
areas of interest to UNCTAD: for instance, development per se, the environment,
human rights (including labour and gender issues), technology issues, and disarmament.
Profit-orientated business groups, representing national and regional sectors, are
likewise also actors of growing significance for an international institution such as
UNCTAD. How to harness the energies, fresh ideas, and grass-roots links of NGOs and
companies, individually or collectively, so as to inject elements of the civil society
into the work of UNCTAD and provide a "quick response",two-way channel of
information on developmental questions is an issue for the Conference to consider.
332. NGOs, too, are being affected by the globalization process, and their reaction to
it will increasingly influence the public policy responses. In addition, they are
important sources of inter-disciplinary experience and expertise which can help policy
makers see the broader implications of their decisions. In turn, NGOs can play a valuable
role in helping translate and interpret to the people concerned those actions and
decisions that further the cause of development. To provide a forum for this interchange
between the civil society worldwide and international organizations, a Global Advisory
Committee consisting of representatives of business, trade unions, academia and other
relevant parties might be established to advise UNCTAD and other international
organizations concerned on all matters related to enterprise development.
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