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Towards effective support for small businesses in developing countries

Date:27 January 2022
A typical example of small-scale entrepreneurship
A typical example of small-scale entrepreneurship

Small-scale entrepreneurship in developing countries is viewed as one of the most prominent solutions to alleviate poverty and reduce unemployment among young people and women. To promote small-scale entrepreneurship, governments, microfinance organizations, UN development organizations, and non-governmental organizations (NGOs) have primarily relied on two types of policy instruments. FEB researchers Désiré Agossou, Clemens Lutz, Pere Argué-Castells and former FEB colleague Jordi Surroca looked at the complimentarity between these two instruments.

Policy instruments

The first type of support, called business capability development (BCD) services, consists of firm-level training programs aimed at enhancing the business skills of small enterprises, such as training programs in marketing, bookkeeping, and quality management. The second type of support is referred to as market infrastructure development (MID) services and consists of broader country or region level programs that provide market-based services and infrastructure to foster firm development. Examples include the provision of a market place, transparent taxes, and clear rules and regulations. Because of the magnitude of the budgets involved and the urgency of addressing issues such as poverty, inequality, climate change, and economic development, the study of the effectiveness of these interventions has received notable scholarly attention.

The need for complementarity

Empirical evidence on the effectiveness of both types of intervention is far from conclusive, raising a lot of concerns about whether these types of interventions are effective instruments to address the grand challenges developing countries face. The researchers argue that inconclusiveness is partly due to the fact that the literature has studied the two types of intervention separately, overlooking potential complementarities between them. In their study of small businesses in the cassava processing industry of Benin, they address the question of how the provision of BCD and MID services may affect the small enterprises’ performance, focusing on the complementarity between them. 

Drawing upon the literature on institutional complementarities, they claim that the role of a service, either BCD or MID, will have a limited impact if the enabling conditions rendered by the other service are not available. For example, small enterprises that have access to only BCD services (training of capabilities) may experience problems when conducting business in an underdeveloped institutional environment (e.g., difficult access to a market place). Likewise, the exclusive access to MID services (e.g., good market access) will unlikely lead to a superior market position if small enterprises lack resources such as a proper training for developing organizational capabilities.

Findings

Their empirical study shows that BCD and MID services reinforce each other. The overall impact, when both services are combined, is higher than the sum of the individual effects. Basically, the role of a service alone, either BCD or MID, has a limited impact because of the lack of the enabling conditions rendered by the other service. 

This finding has important implications for the development programs aiming at promoting entrepreneurship among small enterprises. These programs  generally target and focus on some specific aspects of the challenges these businesses face. While this may be justified for reasons of efficiency and visibility of the actions undertaken, the objective may not be achieved if these actions are not supported by other institutional arrangements. When the context is not supportive to the initiative, results may be difficult to achieve or the positive effects, if any, won’t be long lasting. 

In order to balance the institutional setting that determines the performance of small businesses, NGOs and other development organizations should consider implementing multi-level interventions at firm, industry, regional and/or country level. Failure to do so may nullify any potential positive effect of the business development programs. This means that the provision of business training programs is insufficient if institutional barriers preclude an effective application of the knowledge derived from this training.

In order to make sure that the training is effective, programs should carefully check whether they address the major constraints. Similarly, improvements in the institutional context will only help big players in the market if small businesses cannot develop organizational capabilities required for competing successfully in the market. In short, the institutional intermediaries should be willing to consider ‘business-plus’ programs: design programs that include a combination of BCD and MID services aimed at improving the competitiveness of small businesses. 

For further information, please contact:

Désiré Agossou - s.m.d.agossou rug.nl 

Clemens Lutz - c.h.m.lutz rug.nl 

Pere Argué-Castells - p.arque-castells rug.nl

References:

Dutt, N., Hawn, O., Vidal, E. Chatterji, A., McGahan, A. & Mitchell, W. 2016. How open system intermediaries address institutional failures: The case of business incubators in emerging-market countries. Academy of Management Journal, 59: 818–840.

McKenzie, D., & Woodruff, C. 2017. Business Practices in Small Firms in Developing Countries. Management Science, 63(9):2967-2981