Donor approaches to improving the business environment for small enterprises

8/9/2019 Donor approaches to improving the business environment for small enterprises

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Donor approaches to improving thebusiness environment for small enterprises

Working Group on Enabling Environment

Committee of Donor Agencies for Small Enterprise Development

www.sedonors.org

Washington

Simon White

July 2004


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Donor Approaches to Improving the Business Environment for Small Enterprises

Working Group on Enabling Environment ii

Executive Summary

The Working Group on EnablingEnvironment, established by theCommittee of Donor Agencies for

Small Enterprise Development in1992, has taken a closer look at thework of donor agencies in reformingthe business environment for smallenterprise development. This reportpresents the findings of aninvestigation into the concepts,approaches, and practices donoragencies apply in their efforts toimprove the business environment inwhich small enterprises operate.

While all donors share the commonbroad goal of poverty reductionmost

recently expressed in terms of theUnited Nations MillenniumDevelopment Goalsmany arechallenged to find ways to upscaletheir development programs toproduce a greater impact. Smallenterprise development has beenacknowledged as a useful mechanismfor economic development and povertyreduction by both governments anddonor agencies. While there havebeen hard questions asked about theefficacy of financial and businessdevelopment services in this field(leading to substantial improvementsin the way small enterprisedevelopment programs are designedand assessed), many donor agencieshave turned to the broader conditionsin which small enterprises operate inthe search for ways to affect a largernumber of firms and, hence, expandthe benefits of their interventions.Donor agencies are also searching fortools and processes to improve the

capacity of small firms to respond tothe challenges that advancingglobalization and foreign trade brings.

The study presented in this reportwas based on a comparativeassessment of the similarities anddifferences in donor agency practicesin reforming the business environment

for small enterprises. Special attentionis given to the way donor agenciesdefine the business environment andthe role small enterprises play in it.

It was found that donor agencieshave come to this field of work along

different paths. Agencies such as thedevelopment banks have beeninvolved in supporting macroeconomicreforms for sometime. These agencieshave been interested in the businessenvironment in general, but rarelyexamined the importance of thebusiness environment on smallenterprises. In contrast to thissituation, there are donor agenciesthat have a long history of support forsmall enterprise developmentprograms, but have only recently

turned their attention to the broaderenvironment in which small enterprisesoperate.

Donor agencies and smallenterprise practitioners were found toregularlyand often looselyuse theterms business environment,investment climate, business climateand enabling environment. Whileavoiding the dangers of a semanticargument, the study has found it usefulto unpack the concepts and themesthat underlie these terms. A broad

range of elements can be contained inthe business environment. However,this study found many donor agenciesprefer to focus on those elements theybelieve to be most relevant. Thesewere:

Macroeconomic strategies

Governance issues

Policy, legal and regulatoryframework

Organizational framework

While many donor agencies havenot officially defined their view of thebusiness environment, this study citesexamples that display great variation.

In addition to these commonelements of concern, some donoragencies highlight the role of thebroader cultural and value-based


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Working Group on Enabling Environment iii

context of economic and socialsystem. Attitudes to enterprise andmarkets, expectations on the role ofthe State, the value of hard work andindividualism, are broader influencesthat affect societys institutions, andultimately the business environment.

This study also examined theapproaches donor agencies take toassessing the business environmentfor small enterprises. What donorsmeasure in the business environmentand the changes they monitor reflecttheir interests. Interventions designedto improve the business environmentare based on an analysis that givespriority to some issues over others.

Nineteen tools of assessment aredescribed in this report. Each of these

use a different set of informationsources ranging from large-scale firmsurveys, to gauging expert opinion, tostakeholder consultations. Each of thetools described have a specific area offocus and have been designed toaddress areas of interest or concern.To varying degrees each of the abovetools identify bottlenecks or constraintsto private sector or small enterprisedevelopment.

Very few tools focus on the plightof small enterprises in the businessenvironment. Some tools attempt tocapture information that is specific tosmall enterprises, but most have beendesigned with the view that smallenterprise data is too difficult tocapture, too hard to compare acrosscountries, or unnecessary.

All the tools described generateinformation that can inform the designof reform interventions. However, notall donor programs are designed onthe findings of assessments such as

these. Business environmentassessments can be used to create ademand for reform and to identifypoints of concern within the businessenvironment, but the program planningprocesses of donor agencies are ofteninfluenced by a range of other factors.

Reforming the businessenvironment for small enterprise

development brings donors into anumber of new (higher-level) domains.Consequently, there are a number ofnew issues that donors are required tograpple with in this field. Theseinclude:

The need for integrated holisticprograms that deal with a numberof reform issues, rather thanisolated projects

The time-consuming nature ofreform and the demand for longerdonor timeframes

The connection between policy,legal and regulatory reform and therole of markets

Ways to engage small enterprisesas advocates for change andparticipants in the reform process

Finding incentives for change,improving governance and buildingskills

How a decentralized agencystructure can be supported by itshead office in this field

The significance of local-levelreforms

Responding to host governmentdemands and the relevance of fee-for-service reform interventions

Recognising and respecting thepolitical aspects of reform

New ways of working with theprivate sector

Sectoral approaches to reform

Many donors consulted for thisstudy indicated they would appreciateinformation on how to improve theirperformance in these areas. Donorsare eager to learn more about theexperiences of others in the fields ofgovernance, regulatory reform, policy

development and revision, anddrawing small enterprises into socialdialogue.

The difficulties of donorcollaboration are identified. While alldonor agencies agree to theimportance of better collaboration,many experience internal obstacles.Some of the mechanisms that have


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Working Group on Enabling Environment iv

been used to promote collaborativereform efforts are described.

Finally, this report attends to theways donor agencies formulate theoutcomes and impact of their projectsand what indicators they use to

measure these. The frameworksagencies use to assess outcomes andimpact in the reform of businessenvironments is of interest, as are anyinsights that can be gained into theprocesses and experiences of turningplans for reforms into actual donor-supported interventions.

While there are many problemsexperienced by donor agencies in thisfield, all agencies believe this is a fieldthat deserves careful attention. Mostdonor agencies are engaged in

monitoring and assessing theirprogram interventions, but many areaware of the shortcomings of theirefforts.

There are three major problemsexperienced by donor agencies whenevaluating the impact of theirinterventions. The first comes from theembedded nature of many reformprograms. Donor agencies oftenpackage their reform efforts within abroader program of developmentcooperation. This bundling of reformservices can make monitoring andassessment of specific reform efforts(i.e., reform components) very difficult.

Secondly, it is difficult to find waysto attribute specific donor-supportedreforms to improvements or declines inthe business environment when somany other events (both domestic andinternational) can also affect thebusiness environment. Similarly, it isdifficult to prove the counter-factual(i.e., What would have happened if the

donor activity had not taken place?)Thirdly, reforms to the business

environment take time. Whileindividual interventions can createshort-term outcomes the impact ofthese outcomes takes a longer periodof time to eventuate.

It is clear that individual donoragencies and the Committee of Donor

Agencies for Small EnterpriseDevelopment can do much more toimprove the practice of donor-supported reforms in the businessenvironment for small enterprises.While the management of reformprocesses should remain in the handsof host governments and otherdomestic stakeholders, donoragencies can significantly add value tothese efforts.


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Working Group on Enabling Environment v

Table of contents

Executive Summary ..................................................................................................... ii

List of acronyms......................................................................................................... vii

Chapter 1 Introduction............................................................................................... 8

1.1 Study objective and outcomes ........................................................ 9

Chapter 2 Describing the business environment..................................................... 14

2.1 Donor pathways and motivations for working on businessenvironments................................................................................. 14

2.2 Models and frameworks for practice ............................................. 16

2.3 Beyond the business environment ................................................ 24

2.4 The importance of enterprise size ................................................. 25

Chapter 3 Assessing business environments for small enterprise development .... 28

Chapter 4 The practice of reforming the business environment.............................. 34

4.1 From assessment to project design and implementation.............. 344.2 Donor interventions....................................................................... 38

4.3 Donor collaboration....................................................................... 46

Chapter 5 Creating impact: Outcomes and the measurement of reforms............... 49

Chapter 6 Conclusions............................................................................................ 54

6.1 Models and frameworks ................................................................ 54

6.2 Tools of assessment ..................................................................... 55

6.3 Donor-support reform practices..................................................... 55

6.4 Monitoring and evaluating donor impact ....................................... 55

6.5 Challenges to the Committee of Donor Agencies ......................... 56

References ................................................................................................................ 57

Annex 1: Key donor publications............................................................................... 61

Annex 2: Inventory of diagnostic tools ...................................................................... 67

Annex 3: Terms of Reference ................................................................................... 79

Annex 4: Toward a framework for monitoring change and assessing impact........... 85

Annex 5: Reforming the business environment to achieve MDGs............................ 89


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Working Group on Enabling Environment vi

List of Tables

Table 1: Donor agencies consulted.......................................................................... 12

Table 3: Review of terms used................................................................................. 18

Table 4: Key elements of the business environment for donor agencies................. 22

Table 5: Standardized assessment tools and techniques........................................ 29

List of boxes

Box 1: Effective markets .......................................................................................... 15

Box 2: Asian Development Bank.............................................................................. 19

Box 3: European Commission on Development of the Business Sector ................. 23

Box 4: CIDA and the enabling environment............................................................. 23

Box 5 Enhancing the investment climate ................................................................. 25

Box 6: Some examples of small enterprise-specific concerns found in thebusiness environment ................................................................................ 26

Box 7 The Abuja Manifesto...................................................................................... 41


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Working Group on Enabling Environment vii

List of acronyms

AusAID Australian International Development

BDS business development services

BLCF Business Linkages Challenge Fund (DFID)

CIDA Canadian International Development Agency

Danida Danish Ministry of Foreign Affairs

DFID Department for International Development (United Kingdom)

EBRD European Bank for Reconstruction and Development

EU European Union

FDCF Financial Deepening Challenge Fund (DFID)

FDI foreign direct investment

GTZ Gesellschaft fr Technische Zusammenarbeit

(German Agency for Technical Cooperation)

IADB Inter-American Development Bank

ICA Investment Climate Assessment (World Bank)ILO International Labour Organization

JBIC Japan Bank for International Cooperation

JICA Japan International Cooperation Agency

NORAD Norwegian Agency for Development Cooperation

OECD Organization for Economic Co-operation and Development

PRSP Poverty Reduction Strategy Paper

PSD private sector development

RICS Rural Investment Climate Survey

SDC Swiss Development Agency

Sida Swedish International Development Cooperation AgencySME small and medium-sized enterprise

SOE State-owned enterprise

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Programme

UNIDO United Nations Industrial Development Organization

USAID United States Agency for International Development

WBG World Bank Group

WTO World Trade Organization


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Working Group on Enabling Environment 8

Chapter 1

Introduction

Small enterprise development continues

to challenge governments, donor agenciesand practitioners around the world.Responding to these challenges hasproduced innovations in approaches thatimprove practices and deepen theunderstanding of small enterprises and theirrole in local and national economies. Whilethe advantages of small enterprises and theircontribution to national economic and socialdevelopment are recognised by many, themethods for small enterprise promotion arethe subject of debate and revision.1 In somecases, small enterprises are a symptom of

underdevelopment and poverty, butelsewhere they are indicators of a vibrant,entrepreneurial economy. Both developedand developing countries have come torecognise the importance of the smallenterprise sector and its relationship to largeenterprises and the strategic position thatmany countries are looking for in the world-economy.

Most governments have come to see thatrunning their own businesses is an inefficientendeavour; there are compelling arguments

for the development of a dynamic andcompetitive private sector as a mechanismfor the distribution of resources, goods andservices. For the governments of manydeveloping economies, a new relationshipwith the private sector is being forged.Governments are required to recognise thevalue of markets and ensure they onlyinterfere with them when they have a clearand good reason. Furthermore, globalisationand the removal of barriers to trade haveopened enterprises of all sizes to competitionfrom the world-economy challenging many

national governments to find new ways ofmanaging their economies.

1 The term small enterprises is used to describe awide range of enterprises that are oftendisaggregated into micro enterprises as well assmall- and medium-sized enterprises (SMEs), withthe specific definition depending on the purpose orcountry context.

Governments have taken direct measuresto support the development of smallenterprises. They have establishedincubators, launched training programs,encouraged mentors, given out money,guaranteed the money of others, createdspecial councils or taskforces, adoptedpromotional policies, and even offeredtendering preferences to the small enterprisesector. In some cases, these initiatives havebeen ill informed; they have created orperpetuated market distortions and usuallyonly benefited a handful of enterprises in asporadic and unsustained manner. However,there are also cases where governmentshave promoted small enterprises in a morestrategic, market-oriented mannerwherethey have recognised the role other actorscan perform and sought to facilitate the

development of markets for businessdevelopment services.

Donor agencies have endeavoured towork with governments to address thesechallenges. They have encouraged thesharing of information and experiences, andthe learning of lessons that can improve theirpractices. Over time, donor agencies, alongwith governments, academics and otheractors have established a body of knowledgeto build upon these experiences. TheCommittee of Donor Agencies for SmallEnterprise Development, established in 1976,

has played a significant role in this regard.Innovations in financial services, thepromotion of market-based businessdevelopment services, and an explorationinto ways of improving monitoring andevaluation are examples of the contributionthe Committee has made to practice in thisfield.

This report furthers the work of theCommittee of Donor Agencies in an equallychallenging and innovative field: the creationof a business environment that is conduciveto small enterprise development. Donoragencies have come to realise that thebusiness environment can influence theeffectiveness of financial and businessdevelopment services. Providing support tosmall enterprises where the businessenvironment dampens entrepreneurship andinhibits enterprise growth undermines thepotential of business development services.Moreover, there may be times when certain


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financial and business development servicesare no longer required in a businessenvironment that facilitates enterpriseestablishment and growth. Thus, donoragencies have begun to pay more attentionto the conditions in which financial andbusiness development services are providedand to broaden the scope of theirinvolvement in small enterprise development.

The broader context in which smallenterprise development occurs has becomebetter understood by donor agencies. Therelationship between small enterpriseperformance and trade and investment hasbecome a critical concern for many, as hasthe role small enterprises play in the valuechain within specific industry sub-sectors.Assessing and reforming the businessenvironment in which small enterprises

operate provides an opportunity to considerthese connections and to ensure theseinterrelationships function optimally.Macroeconomic strategies, labour marketpolicies, legal systems, as well as thesystems of governance have all becomemore relevant to the prospects of successfulsmall enterprise development. Similarly,small enterprise development can be astrategy employed by governments toachieve the dynamism and competitivenesstheir economies require.

1.1 Study objective and outcomes

The business environment for smallenterprise development has been on themind of the Committee of Donor Agencies forSmall Enterprise Development for some time.In 1992, the Committee produced a report,dealing with the ways donor agencies cancooperate in providing support for smallenterprise development at the national level(Committee of Donor Agencies for SmallEnterprise Development 1992). The report

incorporated issues concerning the policyframework for small enterprise development,as well as the organizational framework andthe regulation of competition and markets. In2001, the Committee of Donor Agencies forSmall Enterprise Development established aWorking Group on Enabling Environment. Afirst initiative of the Working Group was tocommission research into the role donoragencies play in promoting an enabling

environment in five countries/regions.2 Thisresulted in the publication of a report entitled,Enabling Small Enterprise Developmentthrough a Better Business Environment(White & Chacaltana 2002). The findings ofthis report were presented during the annualmeeting of the Committee of Donor Agenciesin Turin in September 2002. The reportidentified similarities and differences in donorinitiatives in this field, while describing thecontent, process and outcomes of donorefforts. Some tentative suggestions towardgood donor practices were also presented.However, the need for further information anda better understanding of the role donoragencies can play in promoting reforms to thebusiness environment was clear. White andChacaltana specifically referred to the needfor further research to:

Better understand and further develop thebusiness environment concept and itsinfluence on small enterprises

Assess donor practices and experienceswith initiatives to improve the businessenvironment for small enterprises

Better understand the impact ofinternational development assistance onthe business environment, including thedesign of appropriate tools andtechniques for measuring such impacts

Taking these recommendations into

account, the Working Group commissioned anew study to look more carefully into theseissues. The objective of the study was tobetter understand the way donor agenciesplan and design their initiatives for improvingthe business environment for smallenterprises. It was proposed that this studycontribute to the Committees efforts to deriveprinciples of good practice to enhance futuredonor collaboration and harmonization at thecountry level. See terms of reference inAnnex 3.

While attention is given in this report to

the role of donor agencies in reforming thebusiness environment for small enterprises, itshould be recognised that nationalgovernments are in fact the main drivers of

2 The five countries/regions examined were theBalkans (encompassing Albania, Bosnia-Herzegovina and FYR Macedonia), the Caribbean(specifically Dominica, Grenada, Guyana, andJamaica), Peru, Tanzania, and Viet Nam.


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reform processes. Donor agencies cansupport reform efforts, but it is thegovernment that must take the lead.Furthermore, it is recognised that privatesector representative agencies, includingassociations of small enterprises, canadvocate for change and participate in reformprocessesbut, again, government usuallymanages these processes.

Key findings based on a comparativeassessment of the similarities and differencesin donor agency practices in this field arepresented in this document. Special attentionis given to the way donor agencies define thebusiness environment and the role smallenterprises play in it. As will be shown, donoragencies and small enterprise practitionersregularlyand often looselyuse the termsbusiness environment, investment climate,

business climate and enablingenvironment. Semantic arguments aside, it ispertinent to understand the full meaning ofthese terms. It is especially illuminating toidentify the key elements that comprise theseterms and which are excluded.

The tools and techniques donor agenciesuse for assessing the business environmentare also given attention in this report. Whatdonors measure in the business environmentand the changes they monitor reflect theirinterests. Interventions designed to improvethe business environment are based on an

analysis that gives priority to some issuesover others. This analysis sheds light on thefocus of donor interventions and the sourceof their interests and concerns.

Finally, this report attends to the waysdonor agencies formulate the outcomes andimpact of their projects and what indicatorsthey use to measure these. The frameworksagencies use to assess outcomes and impactin the reform of business environments is ofinterest, as are any insights that can begained into the processes and experiences of

turning plans for reforms into actual donor-supported interventions.

Since the Working Group report in 2002,the speed at which donor agencies haveengaged the business environment has beenrapid. Not only does it appear that moreagencies are now working in this arena, butalso those that were previously involved arenow more active. Thus, there are moreexperiences to learn from and, through the

Committee of Donor Agencies, participatingagencies have more to contribute.

The following themes of donor agencyinvolvement in reforming the businessenvironment for small enterprisedevelopment are addressed:

Definitions and concepts used to describethe business environment

Diagnostic instruments and frameworksused to assess the business environment

Processes for the planning and design ofdonor interventions

Programmes and services provided bydonor agencies to promote reform of thebusiness environment for small enterprisedevelopment

Monitoring and information systems usedby donor agencies in their efforts to

promote reform of the businessenvironment

Collaboration between donor agencies inthe promotion of reforms

Outcome and impact of businessenvironment reforms

Lessons learnt for donor agencyexperiences

This study has involved consultations witha number of donor agencies, either in personor by telephone or email. The table below (


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Table 1) indicates the agencies that participated.


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Table 1: Donor agencies consulted

Agency Office Mode

African Development Bank Abidjan, Cote DIvoire Email

AusAID Canberra, Australia Telephone

Commonwealth Business Council London, UK Email

Danida Copenhagen, Denmark Personal interview

DFID (UK) London, England Personal interview

European Union Brussels, Belgium Email

Finland Government Helsinki, Finland Email

GTZ Frankfurt, Germany Personal interview

IADB Washington, USA Personal interview

ILO (IFP-SEED) Geneva, Switzerland Personal interview

JICA Tokyo, Japan Email

Netherlands Government The Hague, Netherlands Personal interview

OECD Paris, France Email

Sida Stockholm, Sweden Email

Switzerland Government Berne, Switzerland Email

UNCTAD Geneva, Switzerland Personal interview

UNDP New York, USA Email

UNIDO Vienna, Austria Personal interview

USAID Washington, USA Personal interview

World Bank Group: Agriculture and Rural DevelopmentDepartment (ARD)

Washington, USA Personal interview

World Bank Group: Evaluations Washington, USA Personal interview

World Bank Group: Foreign Investment AdvisoryServices (FIAS)


World Bank Group: Investment Climate Department(IC)


World Bank Group: SME Department Washington, USA Personal interview


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Report structure

This report progresses from a review ofthe ways donor agencies approach thebusiness environment for small enterprisedevelopment to the tools, programs and

services they apply in their work, to the waythey evaluate the success of theirinterventions. This progression provides athread that structures the report and allowsthe reader to follow the variations that existbetween donor agencies in this field.

The following chapter (Chapter 2) beginswith an examination of donor agencyapproaches to the business environment.This explores the terminology used andsurveys the elements of the businessenvironment different donors focus on. Someof the contentious issues facing donor

agencies are also reviewed, namely, theimportance of a broader meta-level elementof the business environment on smallenterprise development, and the relativeimportance of enterprise size.

Chapter 3 investigates the tools donoragencies use to assess the businessenvironment for small enterprisedevelopment. It compares a collection ofstandardised tools donors have developedand applied to assess the businessenvironment. It also describes the non-standardised approaches that many donoragencies appear to prefer.

Chapter 4 focuses on the kinds ofprograms and services donors use to reformthe business environment for smallenterprises. It recognises that donors bringdifferent competencies and experiences totheir work in this field, which influences theway they design their interventions. Theassessment tools and processes described inChapter 3 are shown to be less relevant tothe design of programs and services thanmay have been initially thought. Some of the

main approaches donors apply to the reformof the business environment are alsoexamined in this chapter.

The anticipated outcomes of reform arereviewed in Chapter 5, including aninvestigation of the ways agencies measuresuccess in this field. Although this is an issuethat many donors confess to managing

poorly, all agencies stress the importance ofgetting these matters right and the need forworking models and approaches that can beadapted to suit the specific requirements ofeach program. Some of the problems ofmeasuring the impact of donor-supportedreforms are also canvassed in this chapter.

The final chapter is used to drawconclusions from the findings in thepreceding chapters and to propose a wayahead. As described above, this report wascommissioned to contribute to a furtheranalysis of the influences donor-supportedinterventions have on the reform of businessenvironments, as well as to the production ofa toolkit for donor agencies working in thisfield. Thus, the final chapter of this reportpresents some proposals in this regard.


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Chapter 2

Describing the businessenvironment

In recent years donor agencies have paidincreasing attention to the influence thebusiness environment has on the smallenterprise sectors ability to contribute toemployment creation and poverty alleviation.Concurrently, interest in the businessenvironment has also been supported by atrend in interventions leading away from thedirect provision of financial and businessdevelopment servicesas advocated by theDonor Committee (2001). However, there isstill a need for a clear analysis of why andhow donors and governments understand thebusiness environment and its affect on smallenterprises. Furthermore, the relativeimportance of an enabling businessenvironment and its place in an overall smallenterprises development strategy needs tobe more fully understood.

This chapter examines some of the majormotivations that were found to underlie thework of donor agencies in this field in aneffort to clarify the expectations and overallobjectives of donor activity in the businessenvironment. It also examines the range of

elements that make up the businessenvironment and the extent to which donoragencies focus on these.

Later in this chapter, the currentchallenges faced by donors whenapproaching the business environment forsmall enterprise development will beidentified.

2.1 Donor pathways and motivations forworking on business environments

Because donor agencies come to the fieldof the business climate for small enterprisedevelopment on different pathways they bringto this issue a variety of issues forconsideration. The World Bank Group, forexample, has been involved inmacroeconomic interventions for many years.However, the promotion of small enterprises

has rarely been considered at this level;indeed, the relative importance of smallenterprises within this context has been thesubject of debate. In contrast, a number ofbilateral donors and development agencies(e.g., GTZ, Danida, DFID, USAID) have beeninvolved in the promotion of small enterpriseson a sectoral basis for some time at the microand meso levels, sponsoring the use offinancial and business development servicesto improve the competitiveness of smallenterprises. Over time, these agencies haveshifted their focus toward the macro-level.Some have moved from interventions thatonce targeted small enterprises directly to thesupport of meso-level organizations and thedevelopment of markets for businessdevelopment services. Progressing in thisdirection, greater recognition has been

assigned to the role of the businessenvironment in small enterprise development.

Most donor agencies are motivated byimpact. They want to be able to show thatthey have been able to achieve maximumbenefit for their target groups for the fundsspent. How they assess this impact is thesubject of Chapter 5, but it is clear that donoragencies have become more sensitive toquestions regarding the results of their work.Many bilateral donor agencies, for example,express the need to be able to furnish theirministers with information on the outcomes

and impact of their work; taxpayers in donorcountries are demanding more information onwhat is happening with their contributions tointernational aid and whether this is justified.

Greater impact is one of the majormotivations behind the increasing interestdonor agencies are showing in the businessenvironment for small enterprises. There is atrend among donors to raise the level of theirinvolvement from specific small enterprisedevelopment interventionswhere donoragencies were directly involved in theprovision of financial or businessdevelopment servicestoward meso- andmacro-level responses.3 This is primarily aconsequence of the desire among donor

3 This trend has been documented by the Committeeof Donor Agencies for Small EnterpriseDevelopment in its previous reports, see(Committee of Donor Agencies for Small EnterpriseDevelopment 1997, 1992)


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agencies to broaden their influence, therebyincreasing the impact of their intervention. Itis also motivated by a better understanding ofthe role of markets in small enterprisedevelopment. Donor interventions, like thoseof government, should not perpetuate themarket distortions that disadvantage smallenterprises, but should ensure that marketswork effectively. Markets can provide asustained and efficient mechanism for thedevelopment of small enterprises and thereduction of poverty. See Box 1 as well asDFID (2000b), UNDP (Commission on thePrivate Sector and Development 2004) andWorld Bank (2002a).

Greater efficiency, more investment andbroader participation in marketsbothinternational and domesticare outcomes ofimprovements in the business environment.Small enterprises within an improvedbusiness environment will face fewerobstacles (including biases), whileresponding to more diverse and competitivemarkets. Improvements in enterprisecompetitiveness and the removal of externalobstacles to enterprise development will helpunleash the potential of the small enterprise

sector as a mechanism for employmentgeneration and wealth creation. Thus, donoragencies have come to recognise the causalsequence that links improvements in thebusiness environment to the reduction ofpoverty and economic growth. Greaterattention is being paid to the causal linkbetween enterprise development and povertyreduction (see Ayyagari, Beck et al. 2003;

Beck, Demirg-Kunt et al. 2003; Biggs 2002;McKinley 2001). While not establishedthrough empirical research, many donoragencies justify their involvement in this fieldwith the view that small enterprisedevelopment is a contributor to povertyreduction and economic growth, and thisunderpins donor efforts to support the reformof the business environment.

Small enterprise development is seen asa mechanism by donor agencies fordevelopment in a range of fields (seeCommittee of Donor Agencies for SmallEnterprise Development 1997). Many donoragencies consulted for this study expressedtheir desire to ensure their programscontribute to the ultimate aim of reducingpoverty. Many donors have expressed theirsupport for the United Nations Millennium

Development Goals (MDGs) and havealigned their interventions so as to be able tomonitor and assess their programs within thiscontext. Agencies such as Danida, GTZ andthe Government of the Netherlands havetaken steps to demonstrate the ways in whichtheir interventions contribute to theachievement of the MDGs. The creation ofmore and better jobs, while a key mandatefor an agency such as the ILO, is also anobjective shared by many agencies in anoverall effort to reduce poverty (i.e., throughthe promotion of livelihood activities).

Improving the competitiveness andproductivity of the private sector in generaland small firms in particular is anotherobjective shared by many donors. Indeed,many donors take the view that the higher-level objective of poverty reduction andeconomic development can only successfullybe achieved through enterprise promotionthat enhances competitiveness andproductivity.

A list of some of the source documentsdonor agencies draw from to justify their work

in the business environment is provided inAnnex 1. These documents reflect a varietyof interests and starting points in donoragencies efforts to reform the businessenvironment for small enterprises.

Donor motivations for engaging in thebusiness environment inform the design oftheir interventions. Donors have been carefulto explain the differences between the

Box 1: Effective markets

Large parts of economic activity are best organized inmarkets. Markets have proven effective in creatingopportunity for citizens to obtain jobs, increasingincomes based on productivity growth, and producingthe goods that people want to buy. Functioning marketsare thus a critical mechanism to help reduce poverty.

Key to effective markets is an investment climate thatprovides i) sound rules for the market, ii) theexpectation that the rules will be adhered to both bymarket participants and the state, and iii) physicalaccess to the market. Macro-economic stability, well-defined property rights, a sound judicial and contractingsystem, a reasonable level of certainty aboutgovernment policy, functioning financial institutions anda good physical infrastructure, such as a transportsystem, are all ingredients of a sound investmentclimate.

SOURCE: World Bank (1999, p. 3)


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underlying rationale for intervention and thestrategies they employ. Poverty reduction, forexample, does not necessarily imply a needto work with the poor. Instead, povertyreduction can be achieved though market-oriented interventions that grow the privatesector and create a greater demand for localjobs and services. Hence, donor interventionsthat help medium and large-scale enterprisesto grow may contribute more to the reductionof poverty than helping the poor start-up theirown businesses.4 However, this is adebatable issue. Some donor agencies striveto ensure that the poorer sectors of societyare better able to participate in the economyand are not only the final (passive)beneficiaries of development activities inother sectors. Note, for example, thefollowing quote from DFIDs Enterprise

Development Strategy:It is useful to distinguish between twodifferent but complementary approaches toenterprise development. On the one hand,there are interventions targeted directly atpoor micro-entrepreneurs in the informalsector. On the other hand, there are moreleveraged interventions targeted atsomewhat better-resourced small andmedium-scale enterprises and largerenterprise, that by virtue of their linkages toand impact upon lower income groups canoffer significant indirect benefits for the poor(DFID 2000a, para. 3.4.1).

Another reason for donor involvement inthe business environment is a consequenceof the constraints on other donor-supportedinterventions. In its assessment ofinternational development assistance, theWorld Bank found that many of its programsfocused too narrowly on projects and did nottackle such fundamental constraints to PSDas the appropriate role of the state, financialsector reforms, institutional, legal andregulatory bottlenecks, and the policyenvironment (World Bank 2001). Thus, by

broadening the scope of interventions toaddress constraints in the businessenvironment donors can affect the conditionsin which all kinds of development assistance

4 Many donor agencies distinguish between theneeds and capacities of micro enterprises (many ofwhich operate in the informal economy) and thoseof SMEs.

occur. The Netherlands Ministry of ForeignAffairs and the German Gesellschaft frTechnische Zusammenarbeit (GTZ) alsoindicated during consultations that they sawthe benefits of an improved businessenvironment flowing to other areas ofdevelopment assistance (de-Waard, Fortuinet al. 2004; Prey 2004).

Thus, donor agencies see the businessenvironment as a means of improving theeffectiveness and impact of their work, bothin small enterprise development as well as inother fields.

2.2 Models and frameworks for practice

There is a range of models andframeworks donor agencies use when

approaching the business environment and todescribe the elements of interest or concern.The term business environment, usedthroughout this report, for example, is notused by all agencies. Others use the terminvestment climate or business climate.

The Working Group set a rather narrowdefinition of the enabling environment forsmall enterprises for the purpose of thisstudy. In its terms of reference it indicatedthat the study should focus on initiatives thatsupport legal, regulatory and administrativereforms for small enterprises, adding that

aspects regarding the business environmentfor the private sector in general will be treatedin this study only in regard to their relevancefor small enterprises. There are goodreasons for this, not the least of which is thewide range of issues that can be includedwithin the term business environment. Theconcept of a business environment may bebroadly defined, but for donor agenciesdealing with the practiceof reform, there is aneed to clearly demarcate the most relevantfactors.

Donor agencies focus their limitedresources on the issues they think matter andthe ones they can do something about.Because not all elements of the businessenvironment will satisfy these criteria equally,donor agencies are required to prioritise andfocus their attention on those elements thatdo. Thus, this section reports on how donorsdefine the business environment and


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identifies the elements they considerimportant.

Some donor agencies are very precisewith their use of terms in this field. Agenciessuch as the World Bank have focussed onthe term investment climate, principally,

because it is investmentboth domestic andforeignthat is the end result of a successfulor enabling environment. The GTZ claim touse the term investment climate becausethere is precision when looking at investment;investments can be measured and are,therefore, an indicator of how well theeconomy is performing (Prey 2004).However, GTZ also uses the term enablingenvironment to describe its work in this field.

The Danish Government have a particularconcern with the use of terms in this field,which is due mainly to their own historical

project formulations. The term businesssector development has been used todescribe a holistic approach to working withthe business sector, just as when workingwith the health sector or the education sector.This approach involves dealing with bothinternal and external elements of thebusiness sector, at national, meso and locallevels.

The term business environment is usedin this report as a generic term. It is lessprecise that investment climate, but certainlyincludes these elements. Thus, the businessenvironment refers to a wide range ofelements that are external to the enterprise.

The table below (Table 2) summarisesthese terms and indicates the agencies thattend to use them.


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Table 2: Review of terms used

It is dangerous to review the terminologyused by different donor agencies. It can leadto semantic and theoretical debates that canbe both distracting and fruitless. However,just as the Committee of Donor Agencies forSmall Enterprise Development has led theway in terms of the use of financial servicesto small enterprises and businessdevelopment services to describeapproaches to small enterprise development,so too can it facilitate processes in this field.Common terminology aids informationsharing and the development of goodpractices. As shown throughout this report,donor activity in the business environment isa new field of engagement for many donoragencies; it is the newness of these issues

that affect the way donor agencies assessthe business environment, designinterventions to reform it, and attempt tomeasure the impact of their work. Thisdemands a consistency by donor agencies inthe way they understand and apply theirinterventions to this field.

The size and variety of divisional interests

found within many donor agencies was aproblem when attempting to assign officialdefinitions of the business environment tospecific agencies. While this is more feasiblein bilateral agencies, large multilateralagencies contain a diverse range of views.This problem arose in consultations with theILO, UNCTAD, UNIDO, and the World BankGroup. Each of these agencies have units,

Term Business environment

Used by ILO, JICA, UNCTAD, World Bank SME Department, DFID

Comment This term is used to cover a broad range of external elements that affect the growth and performance ofsmall enterprises.

Term Investment climate

Used by Government of Switzerland, GTZ, UNIDO, World Bank,

Comment Those promoting this term emphasise its value in focussing on a key aspect or indicator of theconditions in which enterprises operate, i.e., domestic and foreign investment into the private sector is abottom-line measure of how well an economy is working.

Term Enabling environment

Used by AusAID, Donor Committee on Small Enterprise Development, DFID

Comment This term appears to be most suited when describing the purpose of donor activities, i.e., interventionsthat promote an enabling environment. As an adjective, the term enabling describes a quality of theenvironment. Thus, a enabling environment would be better described as an enabling businessenvironment; the aim is to reform a poor (disabling?) business environment into an enabling businessenvironment.

Term Business climate

Used by Government of the Netherlands, Government of Denmark (Danida)

Comment The term climate appears to be synonymous with environment.

Term Business sector

Used by Government of Denmark

Comment This term is used is the same way the health sector is used. It describes a sectoral approach tobusiness development that covers external issues (such as those covered in the terms describedabove) as well as internal issues (e.g., capabilities and constraints) faced by the business. This term isnot synonymous with the private sector because it can include State-owned enterprises.

Term Private sector

Used by All agencies

Comment This term is used is to refer to all privately owned enterprises (from very large, multinational or domesticfirms, to small, informal ones). Private sector enterprises do not include State-owned enterprises as thebusiness sector does.


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departments or programs that focus on smallenterprises, but other sections of theseorganizations also work with large enterprisesand other constituents, which can affect theirapproach to this topic. The ILO InFocusProgram SEED (Boosting employmentthrough small enterprise development), forexample, has a particular interest in smallenterprises, but the approaches and interestsof this program are not necessarily shared bythe Bureau for Workers' Activities (ACTRAV)or the Bureau for Employers' Activities(ACTEMP), each of which typically representlarge firms and the organized workersmovement. Similarly, the World Banks SMEDepartment has a view on businessenvironments that, while broadly shared bythe Investment Climate Department or theAgriculture and Rural Development

Department, is contested at times on specificissues (e.g., the importance of enterprisesize); the SME Branch of UNIDO can take aposition on business environments thatpossibly differs from those branches dealingwith industrial firms in general, just as theTechnology and Enterprise Branch ofUNCTAD can take a different perspective onsmall enterprises and trade than othersections of the organization. Thus, it isdifficult to present a World Bank View orUNIDO View on this topic. Whether this is aproblem of policy and program coherence

within these agencies or a healthy outcomeof diversity and dialogue is an arguable point.Scott Kleinberg (2004) described how USAIDuses a number of terms to describe theseissues: Legal and Institutional Reform; theBusiness Environment; and the EnablingEnvironment are all used, at timesinterchangeably. There arent really formaldefinitions for these types of programs, andtheir form may depend as much on the age ofthe program manager as anything else.

Defining the business environment wasalso problematic in bilateral agencies. Thereare very few bilateral agencies with a cleardefinition that set parameters for their work inthis field. While some agencies take anextremely broad approach (e.g., the business

environment refers to any external influenceon the enterprise), others have a narrowerset of concerns and focus only on a fewelements of the business environment5. Aseries of boxes are presented in this chaptercontaining different examples of how donorsview the business environment.

While very few donor agencies have astandard or formal definition of the businessenvironment, they do apply models or tools tothis issue, which reflect their understanding ofthe term and the concepts it denotes. This

general understanding of the businessenvironment involves a number of differentelements that describe specific componentsof the broader business environment. Someof the elements that arose in the course ofthis study included the following:

Generic issues: In some cases, donoragencies indicated that the businessenvironment was a general term used todescribe all those elements that areexternal to the enterprise. Thus, whileinternal issues such as human, financialand physical resources are internal

elements found within the enterprise, thebusiness environment referred toeverything that affects enterprise

5 Because most agencies do not have an officialdefinition that clearly defines the businessenvironment and its elements, the analysis providedin this report draws from an examination of donorpractices.

Box 2: Asian Development Bank

Under the Private Sector Development Strategy, thereform agenda will seek to achieve the following:stable macroeconomic management; investment,trade, and price liberalization; reduced barriers tocompetition; well-functioning financial and capitalmarkets; flexible labour and land markets; good

physical, social, and technological infrastructure;equitable tax systems; and legal and judicial systemsthat protect property rights, enforce contracts, andprovide for dispute resolution. Improving the businessenvironment for SMEs will be part of the reformagenda.

SOURCE: ADB (2000, p. 12)


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performance from outside (e.g.,corruption, policies, laws, culture,infrastructure). See Box 2, Box , and Box.

Governance issues: This is a broad termthat refers to the ways in whichgovernments administer and manage

society and the economy. It includesissues such as the rule of law,government administration, corruption,security, accountability, etc.

Policy framework: This refers to thepolicies that are used to address theissues of small enterprises, as well asbroader macroeconomic policies, sectoralpolicies, employment policies, etc. SeeBox 3.

Legal and regulatory framework: Thisrefers to the full range of legal andregulatory instruments governments

introduce for small enterprises and for theeconomy as a whole. Often the concernhere is with the costs of compliance withlaws and regulations, but the quality anddemand for good laws and regulationsalso emerges in this field. Donors havedifferent interests in the legal andregulatory framework. For example, some

are more interested in labour laws andregulations, while others in intellectualproperty and patenting. There has been agrowing interest by donor agencies in theparticipation of small enterprises in themarketplace, and in particular ininternational markets. Hence, the need forbetter trade regimes that can be used tofacilitate access to new markets is animportant element of the businessenvironment for many donors.

Organizational framework: Sometimesreferred to as institutional framework,this element concerns the matrix of social,economic and cultural organizations thataffect the regulation, promotion,monitoring, representation, andcoordination of small enterprises.6 Thisincludes the interest in ensuring there areorganizations that can represent smallenterprises and advocate on their behalfto government. It can also include aninterest in ensuring the workers of small

enterprises are adequately represented. Organizational capacity: This refers to

the capacity of organizations in thebusiness environment to perform thefunctions required of them. There a manyorganizations that can be considered inthis elements, such as regulatoryagencies that are required to enforcespecific laws and regulations, judicialauthorities, small business representativeorganizations, etc.

Access to infrastructure: For someagencies the business environmentembraces the access small enterpriseshave to the infrastructure they require to

6 The term organizational framework is used inpreference to institutional framework based on thedistinctions made by North (1989) on this matter.Institutions provide the rules of the game for thebusiness environment, while organizations are theplayers.

Box 3: OECD and the enabling environment

The term enabling environment refers to theeconomic, physical, legal, regulatory and institutionalframework within which business operates. It

encompasses: Macroeconomic policies fostering growth and

stability

Legislation and policy reform to facilitate theability of local people to establish and protectproperty rights

The creation of efficient markets in a competitivesetting

The provision of appropriate and efficientinfrastructure

Rational legal and regulatory policies thatbalance legitimate controls and protection withconcerns regarding efficiency, simplicity,impartiality, and legal redress

Appropriate fiscal policies and effective collectionprocedures

A policy and institutional setting that facilitatesempowerment, private initiative and risk-taking

Institutions and distribution systems fordisseminating information about markets,enterprises and government policies

Support services for business

SOURCE: OECD (1994)

Box 4: Danida and the business climate

A favourable business climate is a basic preconditionfor being able to create positive long-term businessdevelopment. In this context the term favourablebusiness climate should be understood very broadlyas denoting the framework conditions within whichactors in the business sector operate.

SOURCE: Danida (2001, p. 15)


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do business. Small enterprises in ruralareas, for example, may have inadequateroads to transport their goods to largermarkets, which dampens theircompetitiveness.

Cost of infrastructure: The cost of

infrastructure is another element of thebusiness environment that some donorsconsider important. Thus, the cost ofelectricity or telecommunications is afactor to be assessed when determininghow the business environment affects thecompetitiveness of small enterprises.

Access to finance: While the demand forfinance could be considered an internalcharacter of small enterprises, the accessthe enterprise has to external sources offinance can be considered an element ofthe business environment.

Cost of finance: Some donors are lessconcerned with the availability of financeto small enterprises as a feature of thebusiness environment, and moreinterested in the cost of finance.

Macroeconomic policies andstrategies: The broad economicdevelopment strategies adopted bycountries is considered an importantinfluence on the business environment forsmall enterprises. Policies that forexample promote competition,

privatisation, private sector development,and the liberalisation of domestic marketsare often considered a precondition for abusiness environment that favours smallenterprise development.

Social conditions and services (e.g.,education, health): The human and socialcapital contained in the businessenvironment is a broader concept of thebusiness environment that some agencieshave considered. Within this view, thepotential of small enterprises to competeeffectively is supported by social

conditions in which the enterpriseoperates. The better the countrys level ofliteracy, basic and vocational education,health services and even its social safetynets, the more able the enterprise will beto compete in national and internationalmarkets.

Cultural, attitudinal influences: Finally,the general attitudes and cultural normsthat form the social and economicfoundation of the business environmentare often considered important. Countrieswith a strong dependence on agriculturemay be seen as being lessentrepreneurial than those that have atradition of trading and mercantilism.Attitudes of government officials towardsthe private sector and in particular thesmall enterprise sector are also aconsideration here. The table below(Table 3) displays those elements of thebusiness environment that donoragencies consider the most significant;donor agencies either include theseelements in their definitions of thebusiness environment or focus specifically

on these elements in their work (as thefollowing chapters describe).


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Table 3: Key elements of the business environment for donor agencies

Donor agency A B C D E F G H I J K L M N

AusAID

Danida

DFID*

European Commission

GTZ (PSTP)*

IADB*

ILO (IFP-SEED)

JICA*

Netherlands*

OECD

SIDA

Switzerland

UNCTAD

UNIDO*

USAID*

WBG (ARD)

WBG (FIAS)

WBG (IC)

WBG (SME)

* Note: the elements identified for these agencies reflect those units that deal specifically with smallenterprise development and not necessarily the whole agencys approach to this issue.

Legend:

A General

B Macroeconomic strategies

C Governance issues

D Policy framework

E Legal and regulatory framework

F Organizational framework

G Organizational capacity

H Access to infrastructure

I Cost of infrastructure

J Access to finance

K Cost of finance

L Social conditions

M Cultural, attitudinal influences

N Support services

The above chart should not be interpretedas a precise indicator of the elements donorsfocus on when considering the businessenvironment. Its purpose is to show a range

of potential elements and indicate thoseelements that donors have shown specialinterest in. Because the businessenvironment covers such a range ofelements, donors are required to focus onthose elements that are of most interest tothem. Many donor agencies deal with a widevariety of issues affecting the business

environment and small enterprisedevelopment is usually only one of theseissues. Indeed, there is often rigorous debatewithin donor agencies concerning the

importance of small enterprises and therelevance of some of the elements of thebusiness environment presented in the abovetable.

Using the above table to compare donoragency interests in the businessenvironment, it is possible to identify thoseelements that are common to all.


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Macroeconomic strategies, governanceissues, as well as policy, legal and regulatoryframeworks are clearly the elements thatmost agencies focus on when considering thebusiness environment. In addition, theorganizational framework used to implementand enforce policies and laws as well as thecapacity of these organizations to performtheir duties are also elements of interestshared by many donor agencies.

As the following two chapters shows,there are a number of agencies that havefocussed on these issues specifically for tworeasons. Firstly, these agencies believe thatthe issues of governance and the policy, legaland regulatory framework are the mostrelevant to small enterprises. It is in thesefields that hold the greatest potential forconstraint. Indeed, the impact of the removal

of these constraints is considered by many tobe substantial. Thus, the reform ofgovernance and the policy, legal andregulatory framework can lead to substantialbenefits to small enterprises.

The second reason that many donorsfocus on these elements of the businessenvironment is because reforms to theseelements are achievable. For some agencies(e.g., small bilateral donors), macroeconomicpolicy reform is too difficult or requiresspecific instruments that they dont have(e.g., structural adjustment loans) and it is

better to focus on specific issues concerningregulatory reform. For others, the provision ofinfrastructure is a costly and inappropriateelement for them to deal with, so it is better topromote policy reforms. Thus, governanceand the policy, legal and regulatoryframework provide a practical platform fordonor intervention and, as a result, donors

focus specifically on these elements whenconsidering the business environment.

Many donors have expressed the viewthat because it is such a broad field, workingat the level of the business environment isboth significant and challenging because itaffects all aspects of their agencys work.Many donor agencies believe that thebusiness environment can affect the success

of their efforts in the health, education andsocial services sectors. Thus, those workingin the small enterprise promotion units of theirdonor agencies were eager for others in theagency to recognise how efforts to improvethe business environment affected thesuccess of programs in these other sectors(Clemensson 2004; deWaard, Fortuin et al.2004; Prey 2004).

The World Banks private sectordevelopment strategy recognizes that privatesector development is not a sector, but a

crosscutting issue. It is about a way of doingthings that can have relevance for any sectorsuch as energy or agriculture. And the pursuitof private sector development is not a goalbut a means to do things better (World Bank1999, p. 44).

For some agencies, the crosscuttingnature of business environment work has ledthem to re-evaluate the need for aspecialised small enterprise program; if thebusiness environment is fundamental toenterprise growth and the effectiveness ofother development programs, then maybe

work at this level is enough. Maybe there isno need to focus specifically on the needs ofsmall enterprises.

There are two notable contested issuesthat emerged during consultations with donoragencies concerning the businessenvironment for small enterprisedevelopment. This first concerned the

Box 3: European Commission onDevelopment of the Business Sector

The Communitys actions in this area will aim at

creating a policy framework, at the national andregional level, which supports and fosterscompetitiveness, market economy and goodgovernance. This would encompass technicalassistance in support of reforms, particularly in thefields of legislation, banking and finance, taxation,public expenditure, customs procedures and tradefacilitation measures, institution building,administrative efficiency.

SOURCE: Schwarz (2004)

Box 4: CIDA and the enabling environment

Critical for private sector development is the creationof an "enabling environment". An enablingenvironment is defined as the existence of acompetitive internal market which is connected to theglobal economy, guided by a well-defined legal andregulatory framework, and served by a strong and

growing human capital base and a viableinfrastructure.

SOURCE: CIDA (1999)


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importance of a higher level of influence inthe business environment, while the secondhas to do with the relevance of enterprisesize and the business environment. Theseissues are only introduced below. Thediscussion is taken forward throughout thisreport because these issues underlie much ofthe way donors approach the assessment ofbusiness environment and the interventionsthey apply to make business environmentsmore enabling for small enterprisedevelopment.

2.3 Beyond the business environment

The first issue concerns the relativeimportance of the elements of the businessenvironment as presented above. While thetable of comparison (Table 3) shows thatmany donor agencies focus on issuesconcerning governance and the policy, legaland regulatory framework in which smallenterprises operate, there is some debateregarding the greater importance of thebroader context in which these elements arelocated. GTZ, for example, places a greatdeal of attention on what it calls the meta-level of the business environment. Thisrefers to the basic social attitudes and valuesystems within which the businessenvironment operates (Prey 2004).

Meta-level influences have emergedwithin the discussions of industrialcompetitiveness. GTZ and other Germanacademics and research agencies havepromoted the concept of systemiccompetitiveness, in which meta-levelinfluences are described:

Three elements are important at the meta-level: first, a social consensus on theguiding principle of market and world-market orientation; second, a basic patternof legal, political, economic, and overallsocial organization that permits the

strengths of the relevant actors to befocused, sets in motion socialcommunication and learning processes, andbolsters national innovative, competitiveand growth advantages; and third, thewillingness and ability to implement amedium- to long-term strategy ofcompetition-oriented techno-industrialdevelopment. Competitive strength calls forhigh levels of ability in organization,

interaction, and strategy on the part ofgroups of national actors, who, in the end,will have to strive to realize a systemsmanagement encompassing all of society(Esser, Hillebrand et al. 1995).

While not conceptualised in the sameway, other agencies refer to this broaderelement of the business environment as acultural or social framework in which socialorganizations operate. In some cases, thesesocial norms are referred to as the institutionsthat set the rules of the game. Thus, there isa range of social norms that set theframework for the other elements of thebusiness environment. Policies, laws andregulations, for example, are agreed uponand adhered to because (and when) they areconsistent with the broader social norms andpractices of society, as contained within

social and economic institutions (North 1989;Sida 2001).

The promotion of entrepreneurship couldbe considered a representation of thiselement of the business environment. TheILO, for example, describes entrepreneurshipas the attitude and capacity to innovate andtake initiative. Thus, it lies beneath the laws,organizations and other physical elements,reflecting a cultural and attitudinal platform onwhich other elements of the businessenvironment are built. While the term can beapplied to a range of economic and social

innovations designed to solve problems,meet needs, or supply products and services,the ILO focuses on entrepreneurship as thecombination of initiative, innovation andcalculated risk-taking associated withidentifying market opportunities, mobilizingresources, and managing them efficiently inthe operation of productive, viable, andsocially responsible enterprises (ILO 2004).

The Global Entrepreneurship Monitor(GEM) is an annual report that views withbusiness environment through the eyes ofentrepreneurship. The primary focus of theGEM is on understanding the impact ofentrepreneurship on national economicgrowth. As shown in the next chapter (as wellas in Annex 2), the GEM is interested in awide range of elements of the businessenvironment and obtains views from manystakeholders and experts (Reynolds, Bygraveet al. 2002).


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donors surveyed. However, the role of thebusiness environment in small enterprisedevelopment creates some more searchingresponses by the donor community.

The various positions are clear. On theone hand, there are donor agencies that

argue for a universal approach to businessenvironment issues: Enterprise size is adistraction, the relative differences in thecosts of compliance for a small enterprisecompared to large enterprises are minimaland a function of the market. Furthermore,considerations of enterprise size can leaddangerously to a response (i.e., a reform ofthe business environment) that distorts themarket further by making special provisionsfor small enterprises, which can lead togrowth traps.

On the other hand, there are donors that

claim that the disadvantages smallenterprises experience in the businessenvironment are too significant to beoverlooked. Small enterprises are poorlyrepresented in political and legislativeprocesses; they are hampered by artificial(i.e., non-market) biases that makecompliance difficult and create an unevenplaying field (see Box 6 for some examples).Moreover, small enterprises require specialattention becausethey are responsible for somuch employment and provide one of theonly mechanisms for private sector

development. The extremely large size of theinformal economy in many countries is seenas symptomatic of weaknesses in thebusiness environment for small enterprises.

Most donor agencies find a positionbetween these two positions. However, thisposition is not necessarily static and manyagencies appear to be reviewing theirapproach to these debates. GTZ, forexample, suggested that if reforming thebusiness environment improved thecompetitiveness and productivity of

enterprises of all sizes, then maybe a specialemphasis on small enterprises was no longerrelevant.

The importance of enterprise size hasbeen the subject of much debate withinUSAID. While many technicians tend tofollow a universal approach to this issue,those in the Washington headquarters viewthe entire spectrum more coherently and

promote the value of an ecology of firmsmost appropriate. USAID is developingarguments on whether one needs to usepolicy analyses that are attenuated to smalland micro firms to develop policy programswhich treat all sectors fairly and beneficially.Moreover, USAID is shifting its emphasisfrom the enterprise level to the macro policylevel, and have begun to focus more onissues such as trade and WTO accession ascritical drivers for economic development(Kleinberg 2004).

In another twist, the ILO has highlightedthe challenges it faces in the field ofemployment legislation for small enterprises.While many countries report low rates ofcompliance with labour laws among smallenterprises, some countries have createdspecial provisions for small enterprises within

their labour legislation. For example, inPakistan, small enterprises with fewer thanten employees are not required to complywith labour legislation. However, the creationof a special category of laws for smallenterprises creates disincentives for

Box 6: Some examples of small enterprise-specific concerns found in the businessenvironment

Barriers to entry and non-competitive behaviour inmarkets where small enterprises are potentiallycompetitive

Expensive and time-consuming regulatory

requirements such as licensing and registration

Official and unofficial levies that discourage smallenterprises from growing and becoming formal

The legal framework for commercial transactionsand the resolution of disputes, that can affecttransactions with unknown firms

Laws governing the protection of business andintellectual property, and the use of property ascollateral

Tax structures that distort incentives anddiscriminate against small firms

Government procurement procedures thatdiscourage successful bidding by smallenterprises

Zoning regulations that restrict small enterpriseoperations and entry into high-income markets

Labour market rigidities that make hiring and firingworkers difficult and expensive, and limit theflexibility and mobility of the labour force

Infrastructure that opens access to informationand markets, particularly transportation, marketfacilities, and communications infrastructure

SOURCE: Hallberg (2001)


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enterprise growth. A one-law-fits-all approachto labour legislation doesnt work. There is aneed to focus on the employment concerns ofsmall enterprises, especially given theextremely high number of people in the smallenterprise sector, mostly in unsafe, insecureand poorly paid employment (Reinecke &White 2004).

Small enterprises hold a strong popularappeal in most countries. Governments thatare eager to please the populous will oftenintroduce small enterprise developmentservices to show support for this sector, butsuch efforts are not always useful in the longterm. Donor agencies often fear marketdistortions and financial and businessdevelopment interventions by governmentthat perpetuate rather than address thisconcern. Similarly, the establishment of

parallel legal and policy systems that treatsmall enterprises differently worries manydonor agencies. Thus, the challenge is torecognise the variable influence the businessenvironment has on enterprises of differentsizes, but to respond to this without creatingparallel systems that give undue support oradvantages to small enterprises.

While this issue revives some oldarguments, it is relevant to the Committee ofDonor Agencies. Donor efforts for reform ofthe business environment have beenoccurring for some time. What is new is the

focus on small enterprises in the businessenvironment. This is the reason the topic hasdrawn so much interest among smallenterprise development practitioners inrecent years. There is a need to betterunderstand the influence that changes in thebusiness environment have on theperformance of small enterprises. Thus, if theCommittee of Donor Agencies is to assist itsmembers and improve the practice of smallenterprise development, then it should facethis issue directly and identify thecontributions business environment reformscan make to small enterprise development.


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Chapter 3

Assessing businessenvironments for smallenterprise development

This chapter deals with the tools donoragencies apply when assessing the businessenvironment for small enterprises. Naturally,the way donors assess the businessenvironment is in large part a consequence ofhow they describe it (as reviewed in theprevious chapter). Thus, this chapterdeepens our understanding of what donorsare interested in and how they go aboutmeasuring this.

Two kinds of approaches to assessing the

business environment for small enterpriseshave been identified. The first is where donoragencies develop standardised instrumentsfor assessing the business environment. Thesecond is where donor agencies rely on theexpertise of their field staff and consultants toundertake assessments, rather than apply astandard instrument. Each of theseapproaches is examined below.

A number of donor agencies havedeveloped standardised tools and techniquesfor assessing the business environment.While the World Bank Group dominates thisfield with the number of standardised tools ithas developed and the scale on which manyof these tools are applied, there are a numberof smaller agencies that have taken initiativein this field.

The decision to design and apply astandardised assessment tool appears to beguided by a various interests. Firstly, astandardised assessment tool reduces therisk of subjectivity in assessments,particularly subjectivity of the personnel whoare undertaking the assessment. Tools that

provide sampling frames, survey templatesand reporting outlines, along with proceduralguidelines, provide specialists (whetherinternational or national consultants, orproject personnel) with little room formisinterpretation. They promote consistencyand encourage quality in a variety of settings.

Secondly, a standardised assessmenttool produces results that can be comparedacross different countries. Tools that applycommon sampling frames, indicators andbenchmarks encourage comparisonsbetween countries and sometimes betweensub-national regions. For many donors,comparative data is useful because itprovides the opportunity to assess (i.e.,Country A has a more enabling businessenvironment than Country B), but alsobecause this information can be a powerfulmotivator for reform (e.g., Country B decidesit must instigate reform measures so that nexttime it can score better than Country A).

Thirdly, as implied above, standardisedassessment tools can be used to promotecomparisons over time so that improvementsor declines in the business environment can

be measured. As explained more fully inChapter 5, comparisons over time areconsidered by some donor agencies as auseful way to measure the impact of reformprocesses.

The fourth benefit of a standardisedassessment tool is the function it can performin building capabilities among nationalstakeholders (e.g., enterprise associations,governments). Tools of this kind can helpnational stakeholders do their job better.Through the use of standardised assessmenttools, stakeholders can develop the skills and

techniques required to monitor and assessthe business environment themselves.

Fifthly, standardised assessment toolsencourage assessments to focus on specificaspects of the business environment, ratherthan be distracted by broader or moregeneral concerns. As the previous chapterdemonstrates, the business environment forsmall enterprises contains many elements,which can lead assessments into genericfindings that are limited in their analyticalcontent. Thus, a standardised assessment

tool will help assessors focus on the mostimportant elements.

Finally, a standardised assessment toolcan be a cost efficient means of assessment.Although an initial investment is required toproduces the standardised tools andtechniques for assessment, the later cost ofundertaking assessments can be reducedbecause consultants and other assessors


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can follow the assessment protocol ratherthan create a new one every time.

Not all the assessment tools used bydonor agencies enjoy these advantages.However, the benefits of this approach areclear. The table below (Table 4) summarises

the range of tools used by donor agencies toassess the business environment for smallenterprises. Annex 2 contains a moredetailed description of these tools.

Table 4: Standardized assessment tools and techniques

Donor agency Assessment tool Brief description

CommonwealthBusiness Council

Business EnvironmentSurvey

A survey of private sector views on the environment for businessand investment in 31 countries against 16 key indicators.

European Bank forReconstruction andDevelopment

Business Environmentand EnterprisePerformance Survey

The BEEPS is a large dataset providing indicators about thebusiness environment and the performance of enterprises. Thebusiness environment is multi-dimensional and includes keyaspects of governance provided by the state, such as: businessregulation, taxation, law and order, the judiciary, infrastructure,and financial services

Legal Indicator Survey A perceptions-based tool used to measure and analyse countries'legal systems. It takes a snapshot of legal reform as perceived bylocal lawyers. It assesses the extent to which key commercial and

financial laws reach international standards, are implemented andare enforced.

Ewing MarionKauffmanFoundation

Global EntrepreneurshipMonitor

Endeavours to understand the impact of entrepreneurship onnational economic growth. The notion of an entrepreneurial societyis used to reflect many of the elements that reflect an enablingbusiness environment.

Gesellschaft frTechnischeZusammenarbeit(GTZ)

Assessment ofInvestment Climate

This tool is currently in development and has not yet been applied.

Inter-AmericanDevelopment Bank

Small Business PolicyAssessment Guide

A tool to help consultants review and assess policies affectingsmall businesses

International

LabourOrganization

Guide for assessing the

influence of the businessenvironment on smallenterprise development

Prepared for national consultants and ILO Constituents to assess

the influence of policies, laws and regulations on small enterpriseemployment.

Survey kit: micro andsmall enterprises

A generic questionnaire and guide for national consultants andILO Constituents to assess the influence of policies, laws andregulations on the employment decisions of small enterpriseowner-managers.

Business ClimateAssessments

Documents

Donor approaches to improving the business environment for small enterprises