Challenges of Microenterprise Development

Challenges of Challenges of Microenterprise DevelopmentMicroenterprise Development

By Prof. Ronald T. ChuaBy Prof. Ronald T. Chua

Asian Institute of ManagementAsian Institute of Management

Challenges of Microenterprise Challenges of Microenterprise Development Development

Microenterprises: Growth and Contribution to the Economy

Profile and Characteristics of Microenterprises

Challenges to Microenterprise Challenges to Microenterprise Development InstitutionsDevelopment Institutions

Strategic ChoicesStrategic Choices

Microenterprises: Growth and Contribution Microenterprises: Growth and Contribution to the Economyto the Economy

Share of Total EmploymentShare of Total Employment Numbers and Value AddedNumbers and Value Added Contribution to Household IncomesContribution to Household Incomes Role During CrisisRole During Crisis Response to Positive Economic DevelopmentsResponse to Positive Economic Developments Employment in MicroenterprisesEmployment in Microenterprises

Share of Total EmploymentShare of Total Employment

Non-agri Microenterprises employed a Non-agri Microenterprises employed a significant number of people (1993) significant number of people (1993) – 8.757 Million Workers8.757 Million Workers

– 36% of total Employed Workforce36% of total Employed Workforce

– 66% of Non-agricultural Employment66% of Non-agricultural Employment

– 80% of Total Private Sector Employment80% of Total Private Sector EmploymentSources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households, Census of Small Establishments - 1988; Survey of Household Operated Activities - 1988

Numbers and Value AddedNumbers and Value Added

Microenterprises accounted for over 98% Microenterprises accounted for over 98% of Philippine enterprises in 1988 of Philippine enterprises in 1988

Microenterprises had low gross value-Microenterprises had low gross value-addedadded– Household Operated Activities Accounted Household Operated Activities Accounted

for 12.7% of 1988 Gross value Addedfor 12.7% of 1988 Gross value Added– Household Operated Activities Value Added Household Operated Activities Value Added

per Enterprise: Ps 33,000 to Ps 7,120 (1988)per Enterprise: Ps 33,000 to Ps 7,120 (1988)

Contribution to Household IncomesContribution to Household Incomes

Microstudies showed that microenterprise Microstudies showed that microenterprise income accounted for significant share of income accounted for significant share of client and household incomeclient and household income– 48% of client income in rural area48% of client income in rural area

– 52% to 58% of household income52% to 58% of household income Many of the Poor relied on microenterprises Many of the Poor relied on microenterprises

as important source of incomeas important source of income

Role During CrisisRole During Crisis

Microenterprises served as Safety Net Microenterprises served as Safety Net during hard timesduring hard times– 1991 to 1993 GDP Growth rate: negative 1.3%1991 to 1993 GDP Growth rate: negative 1.3%– Net non-agri employment increased by 2% but Net non-agri employment increased by 2% but

was result of:was result of:» 3% decrease in enterprises w/ 10 or more workers3% decrease in enterprises w/ 10 or more workers» 4% increase in microenterprises (9 or less workers) 4% increase in microenterprises (9 or less workers)

Response to Positive Economic DevelopmentsResponse to Positive Economic Developments

Microentrepreneurs responded Microentrepreneurs responded positively to conducive economic positively to conducive economic climateclimate– 1993 to 1995 GDP growth rate 1.1%1993 to 1995 GDP growth rate 1.1%

– No. of Employers grew by 11%No. of Employers grew by 11%

– No. of Self-Employed people grew by No. of Self-Employed people grew by 4%4%

Employment in MicroenterprisesEmployment in Microenterprises

Non-wage and salary employment Non-wage and salary employment accounted for 52% of microenterprise accounted for 52% of microenterprise employmentemployment

Urban microenterprises accounted for Urban microenterprises accounted for 67% microenterprise employment67% microenterprise employment

More males (55%) than females More males (55%) than females (45%) employed in microenterprises(45%) employed in microenterprises

Employment in MicroenterprisesEmployment in Microenterprises

Higher share of females (over 60% vs. Higher share of females (over 60% vs. over42% for males) in non-wage over42% for males) in non-wage microenterprise employment, mostly self-microenterprise employment, mostly self-employedemployed

Trade sector dominated by self-employed Trade sector dominated by self-employed microentrepreneurs (over 60%) followed microentrepreneurs (over 60%) followed by transport, mining and manufacturingby transport, mining and manufacturing

Microenterprise Employment by Class of WorkerMicroenterprise Employment by Class of Worker (Non-Agricultural, 1993)(Non-Agricultural, 1993)

Unpaid Family Worker

7%

Wage and Salary Worker

48%

Self-Employed42%

Employer3%

Sources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households

Microenterprise Employment by Sex by Microenterprise Employment by Sex by AreaArea

Male-Urban38%

Male-Rural17%

Female-Rural16%

Female-Urban29%

Finance Services3 19

Finance Services3 19


Microenterprise Employment by Sex by Class of Microenterprise Employment by Sex by Class of WorkerWorker

0% 20% 40% 60% 80% 100%

Male

Female

Self-employed EmployerUnpaid Family Worker Wage and Salary Worker


Employment in Microenterprises by Employment in Microenterprises by

Industry SectorIndustry Sector (Non-Agricultural, 1993)(Non-Agricultural, 1993)

Transport12%

Finance3%

Construction11%

Manufacturing18%

Services19%

Mining1%

Trade36%


Microenterprise Employment by Sector by Microenterprise Employment by Sector by Worker ClassWorker Class

(Non-Agricultural, 1993)(Non-Agricultural, 1993)

0% 20% 40% 60% 80% 100%

Self-Employed

Employer

Unpaid FamilyWorker

Wage and SalaryWorker


Profile and Characteristics of Profile and Characteristics of MicroenterprisesMicroenterprises

Classification of Microenterprises by Growth Classification of Microenterprises by Growth PotentialPotential

Microenterprises: A 2nd Look at Risks: Not Microenterprises: A 2nd Look at Risks: Not Really Risky!Really Risky!

Microenterprise CharacteristicsMicroenterprise Characteristics Context in Broader Economic SystemContext in Broader Economic System

Classification of Microenterprises by Growth Classification of Microenterprises by Growth PotentialPotential

Microenterprise Type %

New Starts 28

Non-Growing 43

Small Growers 12

Graduates 0.6

Source: Liedholm and Mead: 1995. Data from six countries (Africa and Latin America)

Microenterprises: A Classification by Growth PotentialMicroenterprises: A Classification by Growth PotentialEnterprise Type Livelihood Microenterprise

Characteristics Reason for Entry pushed into it for

lack of alternatives pulled by profit

potential & choice Activities Multiple, one of

many

main activity

Importance of Income from activity

supplements family income

main source of family income

skills requirements low, rudimentary require more experience and

skills entry barrier low higher Use of net earnings sustenance,

survival savings for expansion

Potential for growth little / none high

Microenterprises: A 2nd Look at Risks: Not Microenterprises: A 2nd Look at Risks: Not Really Risky!Really Risky!

Risk FactorsRisk Factors– MarketMarket– TechnologyTechnology– SkillSkill– Capital InvestmentCapital Investment– Individual : Individual :

» CharacterCharacter» DecisionDecision

– Household Household VulnerabilityVulnerability

– External FactorsExternal Factors»Government Government

Policy/RegulatioPolicy/Regulationn

»Force MajeureForce Majeure

Microenterprise CharacteristicsMicroenterprise Characteristics

Ease of entry and exitEase of entry and exit Very little or no asset Very little or no asset

requirementrequirement Low skill Low skill

requirementsrequirements Low capital Low capital

requirements, mostly requirements, mostly working capitalworking capital

Mostly into Mostly into trading/buy and selltrading/buy and sell

Short cash cycleShort cash cycle Short planning Short planning

cycles: daily, weeklycycles: daily, weekly Can be seasonalCan be seasonal High return on capital High return on capital

invested (in % but invested (in % but not in peso terms)not in peso terms)

Challenges to Microenterprise Challenges to Microenterprise Development InstitutionsDevelopment Institutions

How to reach more microenterprisesHow to reach more microenterprises How to increase incomes of microenterprisesHow to increase incomes of microenterprises How to generate more employment through How to generate more employment through

microenterprisesmicroenterprises How to ensure provision of effective, How to ensure provision of effective,

relevant, and responsive services relevant, and responsive services How to do it in a sustainable mannerHow to do it in a sustainable manner


Who is Target Client?Who is Target Client?What level of intervention?What level of intervention?Develop Microenterprises or Develop Microenterprises or

Improve Access to Microfinancial Improve Access to Microfinancial Services?Services?

Promote or Provide Services?Promote or Provide Services?


What is Range of Services?What is Range of Services?How Design Services – How Design Services –

Standardized vs. customizedStandardized vs. customizedHow structure?How structure?How Expand Outreach?How Expand Outreach?

Who is Target Client?Who is Target Client?

Poverty Groups or Poverty Groups or Microentrepreneurs?Microentrepreneurs?

Start-ups or Established Start-ups or Established Microenterprises?Microenterprises?– Formation vs. Expansion vs. Formation vs. Expansion vs.

TransformationTransformation Urban or Rural Clients?Urban or Rural Clients?

Who is Target Client?Who is Target Client?

Factor to Consider: Factor to Consider:

–Differing microenterprise types Differing microenterprise types mean differing needsmean differing needs

– Risks involved, capacity to absorb Risks involved, capacity to absorb risk, capacity to minimize riskrisk, capacity to minimize risk

–Add’l inputs needed/ not neededAdd’l inputs needed/ not needed

What Level of Intervention?What Level of Intervention?

Direct Service Provision – Direct Service Provision – Enterprise LevelEnterprise Level

Industry/Subsector Level Industry/Subsector Level Policy, Regulatory, or InstitutionalPolicy, Regulatory, or InstitutionalSupport Services for Service Support Services for Service

Providers Providers

Microenterprise Development or Microenterprise Development or Microfinance?Microfinance?

Microenterprise DevelopmentMicroenterprise Development– Access to Markets, Skills, Information, Access to Markets, Skills, Information,

Finance, etc.Finance, etc.

Microfinance Promotion:Microfinance Promotion:– Improved Access to Financial Services Improved Access to Financial Services

Promoter or Provider?Promoter or Provider?

Promoter:Promoter:– Roles include Building User/Client Managed Roles include Building User/Client Managed

Structures and InstitutionsStructures and Institutions Provider:Provider:

– Role is Responsive, Efficient and Sustainable Role is Responsive, Efficient and Sustainable provider of Servicesprovider of Services

Vision for Client System - Cost and risk Vision for Client System - Cost and risk reduction structure or grassroots reduction structure or grassroots organization?organization?

Range of Services Range of Services

Range of Services Range of Services – Single dominant service Single dominant service

– Integrated package of services?Integrated package of services? How Expand Outreach?How Expand Outreach?

– Setting up Branches Setting up Branches

– Setting up Independent Organizations Setting up Independent Organizations

DELINEATION OF SERVICE DELIVERY TASKS

Service Provider

Clients

RANGE OF SERVICES

Single Money Lender Pawnshops

ROSCAs Simple

STRUC-TURE

Lending Investor NGO Cooperatives

High

Client Skill Level Required

Com-plex

Service Delivery Institution

Low

Service Provider Role

Institution Builder

Multi-ple

Documents

Challenges of Microenterprise Development