Small and Medium Enterprise (SME) Promotion

Transcription

1 Thematic Guidelines Small and Medium Enterprise (SME) Promotion October 2013 Japan International Cooperation Agency (JICA)

2 Preface Private sector development is an approach to the economic development which leverages the vitality of private companies. The private sector growth serves as a source of economic growth, and is expected to contribute to the expansion of employment opportunities for people and the reduction of poverty. In preparing the Thematic Guidelines on JICA s private sector development, we focused on 1) trade and investment promotion which discusses how the private sector in developing countries can reap benefits of globalization in an environment where international production and commercial transactions have become widespread in the global markets, and 2) small and medium enterprises (SME) promotion which discusses how to promote small and medium enterprises that form a large part of the economy of developing countries and play an important role in promoting a sustainable, strong economy and industry and reducing poverty. In many developing countries, the support needs for the development of the private sector as a source of wealth creation, have been increasing to achieve sustainable economic growth and reduce poverty. Above all, with the globalization of economy in recent years, trade and investment promotion brings positive effects to companies, such as the expansion of markets and the introduction of new capital and technology, but at the same time, it also has an impact that accelerates a shakeout of uncompetitive industries and companies. Accordingly, it is an important challenge for the private sector development in developing countries to capture opportunities and reduce risks arising from globalization. Under such circumstances, in the field of private sector development, it is also an important challenge to promote small and medium enterprises that are an important component of economy and industry of each country which play an important role in strengthening industrial competitiveness, creating jobs, and reducing poverty. Thus, in supporting the private sector development field, both trade and investment promotion and SME promotion should be implemented in a consistent manner. In trade and investment promotion and SME promotion, it is important to implement various policies and measures necessary for trade and investment promotion and SME promotion respectively, and at the same time, it is also important to develop business environment as a prerequisite for private companies to conduct business fairly and freely. The former (i.e., various policies and measures necessary for trade and investment promotion) includes measures to reduce trade and investment obstacles, support measures for trade and investment activities of industries, and measures to increase the linkage between companies and corporate competitiveness. The latter (i.e., developing business environment as a prerequisite for private companies to conduct 1

3 business fairly and freely) involves political and macroeconomic stability as well as a wide-ranging complex of conditions, including policies, legal systems, infrastructure development, education and human resources development related to the operation of economic society. Both of the Thematic Guidelines for Trade and Investment Promotion and Small and Medium Enterprises (SME) Promotion describe matters related to the former (direct policies and measures) and matters related to the latter (a wide range of items that have an impact on economic activities). With regard to the latter, in particular, items that are strongly related to the provision of support for each field have been taken up and discussed. In examining the support for private sector development, it is recommended to use both of the above Thematic Guidelines and also other related Thematic Guidelines as needed. The Thematic Guidelines describe and present the current overall situation, trends and approaches of assistance, and other matters related to the field of SME promotion. The situation surrounding developing countries and Japan s ODA has changed from the previous guidelines. In addition to Asia for which a large amount of cooperation has been provided, the needs of Africa, the Middle East, and other regions in this field have increased and partnerships with the private sector, including Japanese companies, in the economic and industrial development of developing countries have also been regarded as important in recent years. Therefore, items concerning these points have been added to these guidelines. Vigorous movements and high support needs exist for the private sector development in developing countries. We hope the Thematic Guidelines are useful in reviewing the content, methods future direction, and points to be noted regarding assistance projects in this field. Hiromichi Murakami Head of the Private Sector Group Industrial Development and Public Policy Department Japan International Cooperation Agency 2

4 Trade and Investment Promotion: Development Strategic Goals Development Strategic Goal 1: Mid-term Objective 1-1: Mid-term Objective 1-2: Development Strategic Goal 2: Mid-term Objective 2-1: Mid-term Objective 2-2: Development Strategic Goal 3: Mid-term Objective 3-1: Mid-term Objective 3-2: Improvement of business environment Improvement of related policies and systems Infrastructure Development Improvement of systems for trade promotion Reduction of trade obstacles Strengthening of international competitiveness Improvement of systems for investment promotion Improvement of investment policies and systems Strengthening of investment promotion functions Small and Medium Enterprise (SME) Promotion: Development Strategic Goals Development Strategic Goal 1: Mid-term Objective 1-1: Mid-term Objective 1-2: Development Strategic Goal 2: Mid-term Objective 2-1: Mid-term Objective 2-2: Mid-term Objective 2-3: Mid-term Objective 2-4: Development of policies and institutions for SME promotion Establishment of SME-related policies and legal system Establishment of institutional arrangements for policy implementation Enhancement of competitiveness of businesses Promotion of collaboration among businesses and related organizations Strengthening of managerial and technical capacities of businesses Improvement of access to finance Development of business and technical human resources 3

5 Table of Contents Preface... 1 Abbreviations... 6 Overall Structure of the Developmental Themes... 8 Summary Chapter 1 Overview of SME Promotion Current status of SME promotion SMEs in the context of socio-economic development Issues with SMEs and their support needs Definition of SME promotion General definition of "SMEs" Definition of "SME promotion" in this guideline Trends in international assistance Donors committee Characteristics of support by international organizations and US and European donors New movements Support trends of Japan Relationship between ODA policies and SME promotion Trends in cooperation seen in international pledges Support by Japanese entities Partnership with Japanese companies The history of SME promotion in post-war Japan Chapter 2 Approach to SME Promotion Objective of SME promotion Significance of SME development and the objective of promotion Factors and actors relating to SME promotion Establishment of development strategic goals Effective approach to SME promotion Basic framework Establishment of mid-term objectives and sub-targets Chapter 3 Direction of JICA s Cooperation Focused undertakings by JICA and points of notice Basic policy on JICA initiative of cooperation in SME promotion Priority issues and initiatives Other points to note Issues for consideration Approaches in line with Japan s economic policy Measurement of effects

6 3-2-3 Other Appendix 1. Case Studies of Major Cooperation Projects Appendix 1-1 History of projects implemented by country Appendix 1-2 Case Studies of Major Cooperation Projects Appendix 2. Major Donors' Efforts for SME Promotion Appendix 2-1 Overall Trend Appendix 2-2 Summary of Activities by Donor Appendix 2-3 Comparison of JICA and Other Major Donors Appendix 3. Basic Check Items Appendix 3-1 Overview of Economy Appendix 3-2 Government Appendix 3-3 Supporting Organization Appendix 4. Overview of JICA Cooperation Projects Appendix 4-1 Changes in Projects by General Economic Issue (cases here only include technical cooperation projects and development studies) Appendix 4-2 Priority Areas by Country List of Reference Websites Glossary Bibliography List of Boxes Box 1-1. English expressions for business environment Box 1-2. BDS Guideline Box 1-3. Value chain Box 1-4. Government involvement with industry: recent arguments Box 2-1. Changes in SME Basic Act in Japan Box 2-2. Informal sector Box 2-3. Proposal for comprehensive SME promotion policies in Indonesia (Urata Report) Box 2-4. Dialogue on industrial policies in Ethiopia Box 2-5. Credit guarantee system in Japan Box 2-6. Cluster Box 2-7. One Village and one Product (OVOP) movement Box 2-8. SME cooperatives Box 2-9. Tools for Kaizen activities Box Points to be noted on the implementation of the two-step loan

7 Abbreviations AfD APEC ASEAN AusAID BDS BOP CIDA CLMV DCED DfID EPA EU FAO G20 GIZ IFC ILO IMF JBIC JETRO JFC MBA METI MDGs MFI NGO ODA OECD PDCA QCD SDC SIDA SME (MSME) SMRJ L'Agence Française de Développement Asia Pacific Economic Cooperation Association of Southeast Asian Nations Australian Agency for International Development Business Development Service Base (Bottom) of the Economic Pyramid Canadian International Development Agency Cambodia, Laos, Myanmar, Vietnam Donor Committee for Enterprise Development The Department for International Development Economic Partnership Agreement European Union Food and Agriculture Organization Group of Twenty Deutsche Gesellschaft für Internationale Zusammenarbeit International Finance Corporation International Labour Organization International Monetary Fund Japan Bank for International Cooperation Japan External Trade Organization Japan Finance Corporation Master of Business Administration Ministry of Economy, Trade and Industry Millennium Development Goals Micro Finance Institution Non Governmental Organization Official Development Assistance Organization for Economic Cooperation and Development Plan, Do, Check and Action Quality, Cost and Delivery Swiss Agency for Development and Cooperation Swedish International Development Cooperation Agency Small and Medium Enterprise (Micro, Small and Medium Enterprise) Organization for Small & Medium Enterprises and Regional Innovation 6

8 TVET TICAD UNDP UNIDO USAID WTO Technical and Vocational Education and Training Tokyo International Conference on African Development United Nations Development Program United Nations Industrial Development Organization United States Agency for International Development World Trade Organization 7

9 Overall Structure of the Developmental Themes Development strategic Goal Mid-term Objective Sub-target Approaches to assistance Completed Outlook 1. Development of 1-1 Establishment of - Development of policies for industrial policies and institutions SME-related policies promotion and supporting industries for SME promotion and legal system 2. Enhancement of competitiveness of businesses 1-2 Establishment of institutional arrangements for policy implementation 2-1 Promotion of collaboration among businesses and related organizations 2-2 Strengthening of managerial and technical capacities of businesses Enhancement of capacities for formulating industrial policies and related laws and regulations Enhancement of capacities for formulating SME promotion policies and related laws and regulations Improvement of the financial system Capacity development of related public administrative organizations Enhancement of capacities for organizing and analyzing related information Dissemination and awareness raising of policies Strengthening of horizontal and vertical relationships among industries strengthening of value chains Strengthening of activities of local businesses, cooperatives and other economic groups Development of institutional arrangements for supporting businesses/enhancement of capacities of supporting human resources - Improvement of other related policies and institutions - Development of related laws and policies such as SME basic law - Planning and development of business support policies and institutions (e.g. strengthening of technological capacities, start-up business, managerial innovation, business stabilization, support for overseas development) - Elaboration and operationalization of institutional finance system - Development and operationalization of credit guarantee system - Development of credit risk database - Strengthening of institutional arrangements for collaboration among ministries/agencies - Simplification of registration and licensing procedures - Organizing of industrial/sme statistics - Preparation of SME white paper - Preparation of SME support measures guidebook - Strengthening of business matching functions - Promotion of supporting industries and clusters - Promotion of local industries (One Village One Product (OVOP), support in organization and activity promotion of producers groups) - Support for cooperatives management - Strengthening of functions of chambers of commerce and industry and industrial associations - Promotion of Business Development Services (BDS)/Enhancement of capacities of public testing/technology organizations - Standardization and capacity enhancement of consultants - Establishment and introduction of certified SME consultant system 8

10 2-3 Improvement of access to finance Enhancement of management skills of enterprises Enhancement of technologies of enterprises Enlargement of opportunities for financing - Business plan formulation/accounting - Enhancement of marketing knowledge and skills - (Basic) business start-up support - Enhancement of manufacturing technologies - Enhancement of quality management and productivity - Enhancement of design and packaging technologies - Food hygiene management (e.g. HACCP) - Enhancement of appraisal capacities of financial institutions (including micro finance institutions) - Provision of two-step loans 2-4 Development of business and technical human resources Training entrepreneurs and business human resources/acquisition of know-how - Enhancement of businesses capacities to prepare business plans and financial statements - Organization of basic business manner training - Organization of business start-up training Training of engineers and technicians - Training of engineers at universities and technical colleges - Training of technicians and workers at industrial high schools and vocational training institutions * The level of "completed" is judged by the number of related projects already completed (the more circles there are, the better). The level of "outlook" is judged by the statuses of recent requests from various countries and trends in projects and by the view of the Private Sector Development Group regarding the effectiveness of cooperation (the more circles there are, the more likelihood for expansion). 9

11 Summary Chapter 1: Overview of SME Promotion 1-1 Current status of Whether in the advanced world or in developing countries, small and SME promotion medium enterprises (SMEs) account for a bulk of each country's economy in terms of the number of companies, workers and offices as well as the proportion of added value, commanding an important position. Some SMEs function as part of what is known as "supporting industry," boasting a high level of technological prowess and management capability and supplying products such as indispensable components to exporters and large corporations including foreign-capital firms. Moreover, they provide employment opportunities, and hence function as social stabilizers by reducing poverty and vitalizing local economies and communities. One factor that works against the starting or growth of SMEs is the fact that, because SMEs are small, they are subject to constraints that come from external factors (lack of capacity to respond to complex administrative procedures, physical difficulty in accessing the processing venue due to great distance, inaccessibility of bank loans, etc.). In resolving such difficulties, involvement of the government is indispensable. There are also constraints from internal factors such as insufficient knowledge of the business owner, substandard levels of the employees' techniques and skills, shortage of operational and capital investment funds, and lack of information channels, and support by entities like BDS providers 1 is indispensable in tackling these issues. As stated above, while SMEs play an important role in the economic growth and poverty reduction in developing countries, they are vulnerable at the same time. This is why governments around the world, regardless of the area, treat SME promotion as an important policy issue. 1-2 Definition of SME promotion means providing support that contributes to strengthening SME promotion competitiveness and/or improving business environment of companies defined as SMEs. The definition of an SME differs from country to country (at times from ministry to ministry), but it is usually constituted with specifications in such aspects as the number of employees, sales amounts and total assets. In this 1 BDS (business development service) provider: An entity, either publicly or privately owned, that provides services for the improvement of corporate strengths. It can also refer to an individual such as an SME consultant. 10

12 1-3 Trends in international assistance 1-4 Support trends of Japan Thematic Guidelines, micro enterprises are regarded as SMEs as well unless otherwise specified. Promotion of SMEs does not exclude micro enterprises and producers' associations. Similarly, in cooperation conducive to strengthening business links, above all in cooperation for promoting supporting industries such as components manufacturing, it is important to consider benefits for not only SMEs but also large corporations. Importance of SME promotion is discussed among major donors at platforms such as Donor Committee for Enterprise Development (DCED) and these donors are actively taking actions in this field. Generally speaking, support by US or European donors is characterized by emphasis on enhancing business environment, active use of market mechanism and private-sector resources, and emphasis on strengthening value chains. From the aspect of access to finance, focus is on the promotion of microfinance, which emphasizes helping the poor have better access to funds, and the necessity of financial stabilization and consumer protection through improvement of policies and systems. There are new moves including the promotion of public-private partnership to make a more extensive use of private-sector resources, reaffirmation of the importance of industrial policies that have a great impact on respective SME promotion measures, and further efforts for addressing youth unemployment. ODA-related policies surrounding SME promotion: In addition to poverty reduction and economic development through SME promotion, which are seen from the perspectives of human security, sustainable growth and peacebuilding, there are mounting expectations for mutually-beneficial development and growth in partnership with SMEs and industries of Japan. Through measures like support for BOP market cultivation, there is growing attention on ODA's benefit on Japanese companies and support for Japanese SMEs' overseas expansion. International commitment: There has been a high degree of commitment in private sector support centering on SME promotion; the importance of SME promotion has been confirmed at international stages such as WTO ministerial meetings, and support for industry promotion in such regions as Asia Pacific and Africa has been emphasized at such occasions as APEC and TICAD meetings. Use of experiences of Japan's SME promotion: Throughout the post-war era, Japan has, at each point in time, reviewed the business conditions for SMEs and implemented appropriate promotional measures. Support was once 11

13 provided from the perspective of addressing low wages, low productivity and narrowing the gap with large corporations, but in recent years the focus has shifted to supporting strong SMEs that contribute to creation of new industries, strong market competitiveness and regional revitalization. It is necessary to, upon fully comprehending the status of developing countries, consider referring to and making use of such experiences. Chapter 2 Approach to SME Promotion 2-1 Objective of The objective of SME promotion is to help SMEs, which are important SME Promotion private-sector players, overcome their problems and bring out the best in them. The main objective of support is institution building and capacity enhancement, which enable the administrative bodies and related organizations of the country to provide solutions to the SMEs problems. In addressing issues deriving from the factors external to SMEs, governmental involvement is imperative such as creation and improvement of policies and systems related to company activities. With regard to SMEs internal issues, there are many instances where the problem cannot be overcome solely with self-reliant efforts by SMEs, so support is given by both public and private entities to reinforce SMEs' management resources. Every developing country has its own issues. In providing support, it is necessary to get a firm grip of what issues the SMEs of the country face, make reference to the whole picture and individual items of the Overall Structure of Developmental Themes, and consider support that best suits the country. 2-2 Effective Structure of developmental themes approach to SME Development strategic goal 1: Development of policies/institutions for SME promotion promotion Mid-term objective 1-1: Establishment of SME-related policies/legal system Mid-term objective 1-2: Establishment of institutional arrangements for policy implementation Development strategic goal 2: Enhancement of competitiveness of businesses Mid-term objective 2-1: Promotion of collaboration among businesses/related organizations Mid-term objective 2-2: Strengthening of managerial/technical capacities of businesses Mid-term objective 2-3: Improvement of access to finance Mid-term objective 2-4: Development of business/technical human 12

14 resources Points in the structure of developmental themes The level of development strategic goals -These are categorized into "development of policies/institutions for SME promotion", which responds to the factors and issues external to SMEs, and "Enhancement of competitiveness of businesses", which corresponds to SMEs internal factors and issues. The level of mid-term objective - In "development of policies/institutions for SME promotion," attention is paid not only to the improvement of SME-related policies/legal system but also to the establishment of institutional arrangements for policy implementation. - In "enhancement of competitiveness of businesses," themes were categorized into 1) promotion of collaboration among businesses/related organizations (with a view to strengthening transactions and links) and, with a view to helping reinforce management resources of human resources, goods/services and capital, 2) strengthening of managerial/technical capacities of businesses (goods/services), 3) improvement of access to finance (capital) and 4) development of business/technical skills (human resources). The level of sub-targets -In tackling development of policies/institutions for SME promotion, the following approach is taken. 1) With a view to establishing SME-related policies/legal system, we help appropriately direct industry policies which form the basis of a country, and help create and improve related legislation which are the foundation of various business activities. 2) In order to establish a system, we help enhance institutional arrangements and capacities for formulating policies/laws/regulations, enhance capacities for preparing/analyzing relevant information, and disseminate policies. -In tackling enhancement of competitiveness of businesses, the following approach is taken. 1) With a view to promoting collaboration among businesses/related organizations, we help strengthening of horizontal/vertical relationship among industries, and strengthening of activities of local businesses/related organizations. 2) So as to strengthen managerial/technical capacities of businesses, we 13

15 Chapter 3 Direction of JICA s Cooperation 3-1 Focused undertakings by JICA and points of notice help strengthen capacities and ensure quality of public and private-sector support organizations such as BDS providers and help improve business skills in areas such as management and marketing, and technologies in areas such as production management and manufacturing technologies, where Japan has high level know-how. 3) So as to improve access to finance, we help construct a smooth financial system by helping to improve the credit appraisal abilities of financial institutions, to enlarge financial resources with the use of such products as two step loans, and to develop credit risk information and credit guarantee system. 4) So as to develop business/technical human resources, we work at training entrepreneurs, managers, engineers and technicians. Basic stance in cooperating for SME promotion JICA looks to, through SME support activities, contribute to "Inclusive & Dynamic Development," which is JICA's vision. From the perspective of dynamic development, SME promotion is important as it contributes to diversification and sophistication of industries and enhancement of international competitiveness. It is also important from the perspective of inclusive development in that it provides employment opportunities, helps reduce poverty and stabilizes socio-economy. Dynamic economic growth and inclusive benefits are the core principle of support in this field. Issues and undertakings to be focused on - Japan has a wealth of experience and comprehensive measures in SME promotion, and therefore we will provide support, as our forte, in formulating and implementing policies and measures, while paying close attention to the circumstances and context of respective developing countries. - Japan also has extensive know-how in terms of reinforcement of management resources of people, goods and capital for boosting competitiveness. There is an accumulation of knowledge in the areas of production management and quality management such as 5S and "kaizen, and various element technologies. Making use of this advantage, we will advance support in this field. - In providing support, we will ensure high-level cooperation by placing emphasis on collaboration with the private sector, i.e., both Japanese and local companies, at design and implementation phases. - We should draw on experiences and resources in Southeast Asia, where Japan has provided extensive support to date, in providing support to other areas such as Africa, thereby exerting another comparative advantage of 14

16 3-2 Issues for consideration Japan s cooperation. We will promote support that goes along with the economic policies of the Japanese government. In working for the industrial promotion of developing countries, we look to realize mutually beneficial cooperation that also contributes to the overseas expansion of Japanese SMEs, in collaboration with related organizations such as Japan External Trade Organization (JETRO) and the Organization for Small & Medium Enterprises and Regional Innovation (SMRJ). It is also important to keep track of the effects of our support, and it should be considered how to measure such effects. In SME promotion, gender and undertakings for reducing the environmental impact are also important issues. The percentage of women workforce is rather high in SMEs, so SME promotion should contribute to the empowerment of women, and the perspective of the gender issue to encourage women, whose great potential has not been put to full use, to take more active roles will also be a plus to SME promotion. Moreover, in sustaining and furthering the remarkable industrial development of developing countries, efforts to reduce environmental impacts will become more important than ever. 15

17 Chapter 1 Overview of SME Promotion 1-1 Current status of SME promotion SMEs in the context of socio-economic development In the process of a country's development, as the economy grows and the ground is set for private-sector companies to start operating actively, the role and importance of the private sector is newly acknowledged and expectations mount for promotion of SMEs, which represent an overwhelming majority of the private sector. The following three points are the reasons why SMEs have a significant place in the economy and society of a country and are said to play important functions and roles. 2 Firstly, SMEs carry a great weight in a country's economic activities. SMEs occupy a significant position in many countries in terms of the number of companies, employees and offices as well as the generation of added value 3, so are worthy to be called major players in the respective countries' economic activities. In terms of the number of companies, SMEs account for over 99% in most countries whether an advanced nation or a developing country. As for the percentage in the total number of employees and generated added value (manufacturing), Japanese SMEs account for 69% and 53% 4 respectively. On average, SMEs' share in added value in manufacturing among OECD member countries is around 50% 5, but among developing nations, the figure for Indonesia for instance is 38% 6. This ratio is much lower than those in advanced countries, and it can be attributed to the fact that the gap between SMEs and large corporations is much larger in developing nations than in advanced nations, and therefore the promotion of SMEs is much more important in developing countries. Secondly, we will look at the roles SMEs play in the economic development of a country. SMEs play a wide variety of roles, and some boast a high level of technological prowess and management capability and export their products and supply components to large corporations including foreign-capital firms, playing the indispensable role of "supporting industry" for such corporations. Active promotion of such SMEs ones that merit to be called "leading companies" contribute to a steady economic growth, diversification and sophistication of the industry, and ultimately to the improvement in international competitiveness. Also, it is often said that SMEs are more agile and 2 The definition of SMEs in this guideline will be described in detail in the next section. 3 Refers to the yearly profit of a company. Derived by adding back personnel and depreciation costs to the operating profit. (There are different ways of deriving it.) 4 From the website of the Small and Medium Enterprise Agency, based on 2006 figures. 5 Ardic, etc. (2011) 6 BPS (2007) 16

18 flexible than large corporations. 7 They are more likely to break even with smaller production volumes, and can more easily find niches in every nook and cranny of people's lives. As we can see, SMEs play a major role in terms of industry sophistication and market creation, and as such are often referred to as the nursery bed of market competition. 8 Thirdly, SMEs provide employment opportunities to workers, and thus function as a social stabilizer that helps reduce poverty and revitalize regional economies and communities. There are not many SMEs in developing nations that are capable of contributing to the sophistication of economy as described above, but there are a wide variety of SMEs (including micro enterprises, producers' associations and residents' groups), that play a vital role as providers of means of living to workers that include the poor, youth and the socially vulnerable, 9 and the growth of such companies will lead to the development of regional economies and communities. Also, in local communities, finding stable positions in companies or starting a business by their own efforts means none other than participating in society and finding the means for self-realization. SMEs are an important presence from the perspective of human security. To see the points above in the light of "Dynamic and Inclusive Development," JICA's vision, promotion of SMEs contributes to "dynamic development by leading to the sophistication of a country's economy, and "inclusive development (comprehensive development that benefits all) by leading to stable employment and self-fulfillment of all walks of life, thus constituting to an important developmental theme Issues with SMEs and their support needs As we have seen above, SMEs have important roles, but there are many problems in promoting SMEs. We will take a close look at them later on, but such problems are diverse, and an important point in promoting SMEs is to help developing nations tackle such problems in order to enable SMEs in those nations to perform their inherent roles. Most countries, regardless of the region, raise SME support as a key policy item, so there are many needs for support. As one of such problems in promoting SMEs, we can point to the constraints that derive from external factors because SMEs are small. Some of the examples are a lack of capacity to respond to various complex administrative procedures, physical difficulty in accessing the processing venue due to great distance, 10 loans. 11 and inaccessibility of bank To address such external problems, it is imperative that the government 7 Levy and Powell (2005) 8 Ministry of International Trade and Industry (2000) 9 Mead and Liedholm (1998) 10 Tybout (2000) 11 Nichter and Goldmark (2009) 17

19 becomes involved along the lines of establishing policies and legislation as a foundation of the business environment, and schemes and measures for enforcing them. In developing nations, however, there are cases where the capabilities of government employees are not up to standard to establish and enforce necessary policies and laws, and in such cases the government inadequacy can impede company activities. As another problem, we need to raise constraints coming from internal factors such as insufficient knowledge of the business owner, substandard levels of employees' techniques and skills, 12 shortage of operational and capital investment funds, 13 and lack of channels for gathering information. 14 For example, if a SME is unable to produce and provide a good product at a proper price, it can be due to a lack of competitiveness on the part of that company. If another SME is able to produce a product of a decent quality, it may be that the product is priced too high. It may yet be due to the lack of opportunity for consumers to get to know the product. Or, it may be that the product is not quite what consumers want. In these cases, there is a bottleneck somewhere in the management resources people, equipment, product, capital, or information resulting in an inability to bring about solid earnings. Large corporations are more likely to be capable of solving problems of these sorts on their own. However, management resources of SMEs are limited and more often than not, they are unable to tackle these problems by themselves. Therefore, public organizations or private-sector BDS providers (Business development service: public and private entities that provide services for reinforcement of company abilities. It can also refer to individuals such as SME consultants), financial institutions like commercial banks and microfinance institutions (MFI) have an important role to play. It may be added that, while needs for BDS are many, some SMEs cannot afford to hire private-sector BDS providers, pointing to the need for an involvement of public entities such as subsidies or public business assessment. In recent years, there have been noticeable trends around the world such as cross-border investment by multinational firms in the context of economic globalization, removal of protective measures under pressure from foreign governments (e.g. abolishment of import restrictions), market dominance by dual-nationality groups such as overseas Chinese and Indian, influx of population into cities, growth of the informal sector, and global impacts of financial/currency/economic crises, and impacts from such trends are huge for SMEs in developing nations saddled with problems described above. To make for growth of developing economies and reduction of poverty, it is more important than ever for SMEs to strive to improve their abilities, for the public sector of 12 Freel (2000) 13 Beck and Demirguc-Kunt (2006) 14 Lybaert (1998) 18

20 developing nations to provide appropriate policies and measures, and steps should be identified to support SMEs including an active use of private-sector BDS providers Definition of SME promotion General definition of "SMEs" The definition of an SME differs from country to country, but it is normally defined by such figures as the number of employees, sales amount and total assets depending on the industry. For example, in terms of the number of employees, micro enterprises are often defined as companies with up to five to ten employees, small enterprises are defined as those with up to 20 to 50 employees, and medium enterprises are defined as those with up to 100 to 250 employees. Advanced countries are more likely to adopt larger numbers, and the majority of OECD member countries define medium enterprises as companies with up to 250 employees. Some countries like Japan apply different definitions according to the industry, such as manufacturing, wholesale, retail, and service. Moreover, there are cases where multiple definitions exist in one country depending on the government organization. In such cases, it can happen that multiple SME related organizations practice inefficient promotional measures without any coordination among themselves, creating little synergy and causing unnecessary confusion on the part of SMEs. Therefore, defining SMEs is an important, indispensable part of policy making and enactment Definition of "SME promotion" in this guideline In principle, "SME promotion" refers to the promotion of companies that are regarded as SMEs in the country in question, but measures for SME promotion do not necessarily exclude large corporations and micro enterprises (including producers' associations) from their targets. For example, undertakings aiming at establishment or improvement of business environment will benefit not only SMEs but also the business community as a whole including large corporations. The roles and presence of large corporations are essential in considering SME promotion, and measures that make for reinforcement of business linkage as in the case of supporting industries will benefit large corporations as well. As we can see, aiming for win-win relationships between SMEs and large corporations is an inseparable part of SME promotion. Large corporations are not positioned as major targets of SME promotion measures, but we do not need to completely exclude policies and measures that may benefit large 15 Hallberg (2000) 19

21 corporations in terms of economic revitalization in a mutually complementary manner. SME promotion is targeted at smaller, more unstable companies in comparison with large corporations, and some countries meticulously define their policies as targeting micro, small and medium enterprises (MSMEs). In this guideline, we will refer to all these as "SME promotion" unless otherwise specified. 16 As stated at the outset, SME promotion in JICA is part of private-sector development. Rather than defining SME promotion and enforcing measures single-handedly, it is desirable that it takes actions in a coordinated manner in the framework of a larger undertaking of private-sector development which includes trade and investment promotion. 1-3 Trends in International Assistance Donor committee The Donor Committee for Enterprises Development (DCED) 17 serves as the central platform for the donor community to discuss private-sector development (SME promotion). DCED convenes a meeting every year, and discusses important issues for donors to take into consideration. Theme groups are formed surrounding topics such as result measurement, business environment reform, PSD 18 in conflict-affected environments, green growth, and women s entrepreneurship, and providing the venue for the donor community to discuss matters in the respective fields. Incidentally, DCED used to be known as the Committee of Donor Agencies for Small Enterprise Development, but the word "Small" was removed from its name, indicating it has evolved into a committee for "Enterprise Development". It goes to show that the committee is more interested, rather than doggedly focusing on promoting "small and medium" enterprises, in addressing issues in company promotion on a whole (or private-sector development) regardless of the size. Summit meetings also take up small and medium (micro) enterprises in the agenda. The discussions typically center on access to financing, which have been discussed several times since 1997, when a microfinance summit was held in the United States. In the G20 meeting in 2009, leaders adopted a statement "Strengthening Support for the Most Vulnerables," declaring their focus on improving the poorest segment's access to 16 For example, support in formalizing companies pointedly addresses micro enterprises, while public subsidies do not normally target informal micro enterprises which have not yet been regist ered but benefit SMEs in the narrow sense of the term. However, these are matters that should be addressed in the context of individual measures, and here we will deal with SME promotion in a broader sense of the term. 17 The full members are 23 nations and institutions including France (AfD), Australia (AusAID), Canada (CIDA, International Development Research Center), UK (DfID), Germany, (GIZ), Sweden (SIDA), FAO, IFAD, ILO, OECD, UNDP, UNIDO, World Bank (IFC). JICA is an observer. The URL is 18 Private Sector Development 20

22 financial support. In the 2010 G20 summit meeting in Seoul, leaders adopted the "Principles of Innovative Financial Inclusion," urging improvement in the policy and regulatory environment and proclaiming necessity of financial stability and consumer protection. The 2010 summit also committed itself to the launch of "SME Finance Challenge (Presentation of Innovative Models) and Financial Inclusion Support Framework." The APEC members have also been discussing financial inclusion in recent years, and the report adopted in the Kyoto APEC finance ministerial meeting in November 2010, "Growth Strategy and Finance", incorporated "finance to small and medium enterprises". The 2012 Los Cabos summit also addressed supporting growth to create high-quality employment and opportunities and promoting stability in financial markets Characteristics of support by international organizations and US and European donors Support in SME promotion (and private-sector development) by international organizations and US and European donors can be characterized by emphasis on improving business environment, active use of market mechanism and private-sector resources, and emphasis on strengthening value chains. As regards emphasis on improving business environment, starting in the 1990s when structural re-adjustment programs by the World Bank and IMF were at their peak, most institutions with the exception of some like the ILO and UNIDO have emphasized improvement of the business environment (refer to Box 1-1) as an external factor (meso level in Figure 2-1) for companies. Of particular note is the Doing Business ranking released every year by the International Finance Corporation, which is used as an informative reference in understanding the state of respective countries' business environment. The use of such ranking stems from the realization that, before a government can take any active support measures, miscellaneous regulations and procedures concerning registration, licensing and tax payment are too cumbersome (especially for SMEs with limited resources) and need to be simplified and facilitated IFC (2010) 21

23 Box 1-1. English expressions for business environment There are numerous expressions to refer to "business environment" in the English language. A common idiom is "level playing field," which means a situation that is fair to all companies. "Enabling environment" is also a common expression, meaning a situation that allows companies to stand on their own feet. In recent years, "climate" has been as frequently used as "environment," and the term "eco system" has not been limited to the natural environment but been applied to the business environment as well. These donors are generally disinclined to offer low-interest loans or subsidies saying such measures can distort market mechanisms in considering support to enterprises, thus, tend to use private-sector resources to enhance market mechanism. They also take the stance that BDS services can be offered by the private sector, and that public intervention is undesirable as it may impede the growth of the BDS market. The guideline by DCED clearly refers to this point (refer to Box 1-2). The guideline was created mainly by the World Bank Group, ILO, GIZ and SDC. The approach that favors market promotion through competition among private-sector BDS providers often manifests itself in the use of BDS for strengthening value chains 20 described next. Box 1-2. BDS Guideline 21 Published by the DCED in 2001, BDS Guideline covers principles of how a donor should intervene when providing BDS support. Most characteristically, the guideline states in the Vision section, "...the State has a role in providing an enabling environment, but not in the direct provision of private goods...bds can be provided on a commercial basis even for the lowest-income segment of the entrepreneurial SE sector." As a new concept, the guideline introduces BDS facilitators which serve as intermediaries between the donor and private-sector BDS providers and work to build provider capacity. The guideline says BDS facilitation can be carried out by NGOs, industry and employers' associations as well as government agencies and others. The third characteristic observed in international organizations and US and European donors is their emphasis on strengthening of value chains. In cases of value chain support by US and European donors, focus is typically placed on promoting partnerships encompassing farmers who produce raw materials on the upstream and super markets and stores that engage in retailing on the downstream. The intention is to help boost added value by improving the quality of products and raising the level of 20 There is also a term "supply chain management," but "value chain" tends to be preferred from the sense that the latter goes beyond simple cost reduction by managing the flow of goods. 21 CDASED (2001) 22

24 management resources that are not visible 22 such as organizational power, abilities of workers and brand recognition 23 (refer to Box 1-3 and description of sub-target 2-1-1). Box 1-3. Value chain First proposed by Michael E. Porter 24, the concept of value chain breaks downs enterprise activities into primary activities such as procurement, manufacturing and sales, and support activities such as technological development and human resources management, thereby analyzing the enterprises strengths and weaknesses by looking into which segments creates added value and determining the strategy where more resources should be put in. "Value chain" makes for, in addition to maximizing profits by raising added value from different processes and by organically combining such added value, providing customers with goods and services with more added value New movements (1) Promotion of private-public partnerships The UN General Assembly in September 2010 adopted a declaration, "Bilateral Donors' Statement in Support of Private Sector Partnerships for Development ", clearly stating that the private sector is the engine for economic growth and development and that its roles and impacts are of the essence for the achievement of MDGs. It was stressed that private-sector entities like SMEs and public organizations need to work on strengthening relationships as equal partners (Japan participated in the declaration as well). The emphasis is placed on market-oriented solutions, private-public policy talks and promotion of private-sector investment in pushing ahead private-public partnerships in developing nations, and such advantages can be expected as the realization of continuous improvement in SMEs' abilities and active use of private-sector funds. (2) Re-evaluation of industry (promotion) policies Donors' stances toward industry policies are changing as well. Starting in the 1980s, when the failure of planned economy systems in communist countries like the Soviet Union was brought to the fore, inefficiency and ineffectiveness of industry support (or protection) by the government has been the undertone of global discussions. However, in 2008, the Growth Report by the Commission on Growth and Development secretariat by the World Bank shined a more positive light on government support. It has affected the standpoints of donors, some of whom are taking a renewed look at industry policies. On the back of the sea change are positive views by renowned researchers on industry 22 Itami (1984) 23 FIAS (2007) 24 Porter (1985) 23