CONTENTS

Introduction

I. The workings of the policy and regulatory environment on SME development

II. A framework for analysing the impacts of policies and implementing instruments on SME development

Analysis of policies in terms of their

impact on the process of enterprise

creation and development

Analysis of policies in terms of their

impact on the inputs and outputs markets

Analysing the legal and regulatory framework

Analysing the impact of structural adjustment programmes (SAPs) on SMEs

Analysing the adequacy of policies and programmes to promote SMEs

III. Guides for designing SME development programmes and projects

Suggested design of an SME development programme

IV. Guides for analysing the feasibility and sustainability of SME development policies and programmes

1. Political feasibility analysis

2. Administrative and technical feasibility analysis

3. Financial feasibility analysis

4. Economic feasibility analysis

5. Socio-cultural feasibility analysis

6. Goal achievement feasibility analysis

7. Infrastructure feasibility analysis

8. Absorption feasibility analysis

References and suggested reading

Annex 1: The components of enterprise culture

Annex 2: Examples of laws and regulations that affect SMEs

Annex 3: Typical problems addressed by SME promotion programmes

Preface

The ILO has been playing an active role in entrepreneurship and small and medium enterprise (SME) promotion for several decades. Its unique tripartite structure and specific mandate within the United Nations system to cover the world of work, has provided it with special opportunities for spearheading international efforts in that area. Numerous resolutions have been adopted over the years by the International Labour Conference concerning the contribution of small and medium undertakings to economic and social progress and to the creation of employment, particularly in developing countries.

The ILO's Management Development Programme has been involved in SME promotion since the inception of technical assistance activities in the early 1950s. Today, SME development is one of the major programmes of the ILO's Enterprise and Cooperatives Development Department. Other technical departments are also involved in various activities to promote the development of SMEs in their particular target areas.

Over the last 45 years or so of SME promotion, one of the major lessons learned by both the ILO and other international and development agencies, is the importance of the policy and regulatory environment for SME development. Not only does the economic and business environment encourage or discourage new enterprise creation, but it also has a crucial effect on the viability and sustainability of existing SMEs. The effectiveness and sustainability of SME development programmes depend entirely on the environment within which they are operating.

There is no universal definition of a small and medium enterprise. Definitions, whether in terms of number of employees, assets, turnover, etc., understandably differ from one country or region to another since operational definitions are linked to the specific level of development of the region or country and to the particular purpose for which the definition is formulated (i.e., whether it is for administrative or development management purposes).

For the purposes of these Guidelines, a small enterprise is understood to be an independent business undertaking where operational and administrative management are in the hands of one or two persons usually the owner(s)/manager(s) who are also responsible for making the major decisions of the enterprise. Medium-sized enterprises are understood to be those which already have a formal organizational structure, where responsibility and authority assignment are clearly defined, and where there is some specialization along the functional areas of marketing, finance, production, etc. Ultimately, however, enterprise size is a relative concept and an enterprise will be considered small or medium-sized depending on the structure and size distribution of enterprises in the sector and in the country concerned. It is therefore essential that the relevant operational definition of SMEs be clarified and understood when undertaking SME development in a specific country or region.

Many of the concepts and approaches used in these guidelines are derived from experiences gained in helping to formulate and design national SME development programmes and in backstopping SME development technical cooperation programmes. Acknowledgement is due to many colleagues in the Entrepreneurship and Management Development Branch and the ILO Multi-Disciplinary Advisory Teams for their valuable observations and comments on earlier drafts and to Evelyn Lansky for making the text and tables more readable.

Introduction

It is now widely recognized that a conducive and enabling policy and regulatory environment is crucial to the development of small and medium enterprises (SMEs). The macro-economic framework and the policies that are aimed at supporting SME development will determine and influence the demand for their products and services and can facilitate or deny access to the markets that are so essential for SME creation and growth.

A policy framework that is biased against SMEs, whether intentionally or not, can restrict access to essential inputs such as start-up and working capital, machinery and equipment, and raw materials. SMEs may be excluded from obtaining space and facilities to set up and run the business, and, even where inputs are available, distortions in the market may make them disproportionately expensive for SMEs.

A legal and regulatory framework which calls for excessively complex registration and licensing requirements and demands tedious and costly reporting practices, imposes unrealistic constraints on trading and business activities and places a heavy burden on entrepreneurs and their businesses. Extensive government participation in the economy and excessive control of markets may dampen entrepreneurial drive. Even educational and training policies and programmes may discourage entrepreneurship and hinder the development of the enterprise culture necessary to nurture viable SMEs.

The study and evaluation of experiences in many countries shows that the policy and regulatory environment also determines, to a very large degree, the success and sustainability of direct assistance to and support programmes for SMEs. In addition to stimulating the creation of new enterprises and fostering their viability and growth, an environment that is supportive to SMEs contributes to making direct support programmes more effective and their impacts more sustainable. If the environment is not favourable, direct support to SME development, such as accessibility to credit and finance, management and skills training, technology upgrading, marketing assistance, and the provision of workshops and facilities will only have a minimal and temporary effect.

A very cost effective way of promoting SMEs, therefore, is by creating a supportive or, at least, a neutral i.e. a "level playing field" for micro, small, medium and large enterprises policy and regulatory environment. Not only will this have a comprehensive coverage and impact, but it will also create the conditions under which direct assistance and targeted programmes are more effective. Many national programmes for promoting SMEs now have as one of their components an analysis and review of macro-economic policies and of the legal and regulatory framework with the objective of making them conducive to, or at least unbiased against, smaller enterprises. Structural adjustment programmes being implemented in many countries are also being monitored in terms of their impact on SMEs, particularly on micro-scale enterprises. However, a level playing field may not be sufficient to accelerate the development of SMEs. Specific support policies and programmes may have to be put in place to address the size-related and situation-specific constraints faced by the target enterprises.

This manual is intended for those involved in various aspects of small and medium enterprise development, such as government officials, policy analysts and consultants, who are reviewing the policy and regulatory environment with a view to making it more SME supportive; designing support programmes for SME development; analysts who are looking at the feasibility, effectiveness and sustainability of SME development policies and programmes; and those who are directly involved in their implementation.

The manual is structured according to the anticipated needs of the users. Section 1 provides an overview of the policy and regulatory environment and its importance for small and medium enterprise development. Succeeding sections suggest approaches to, and an analytical framework for, policy analysis (section 2), support programme design (section 3) and feasibility and sustainability analysis (section 4). Depending on the tasks being focused, the various guides can be used either as a set, or separately. Thus, an analyst engaged in policy and regulatory framework analysis need only use the guidelines in section 2, while someone interested in analysing whether a proposed support programme is implementable and sustainable need only use section 4. A team involved in preparing an integrated national SME development programme will of course find the whole manual very useful. Some key concepts and rationale are therefore occasionally repeated in different sections to make them complete on their own.

I. The workings of the policy and regulatory environment on SME development

In order to fully appreciate how the policy and regulatory environment affects the development of SMEs it is important at the outset to be very clear as to why SMEs are being promoted i.e. to get an answer to the question "for what purpose are small and medium enterprises to be developed?". This is necessary since the underlying reasons and objectives for promoting SMEs and the context in which they are being promoted are the main reference points when analysing the impacts of policies and examining the feasibility and effectiveness of SME support programmes and projects.

SME promotion is one of the viable strategies for achieving national development goals such as economic development, poverty alleviation, democratization of economic participation, employment creation, strengthening the industrial base and local production structure, depressed area development, balanced development among economic sectors and sub-sectors, and a host of other social, economic and political objectives of national development. That is why it is often an integral part of national development plans. The potential economic and social benefits of SMEs are attributed to their capacity to:

create jobs at low capital cost;

contribute significantly to the economy in terms of output of goods and services;

improve forward and backward linkages between economically, socially, and geographically diverse sectors;

create opportunities for developing and adapting appropriate technology;

provide an excellent breeding ground for entrepreneurial and managerial talent;

develop a pool of skilled and semi-skilled workers;

act as ancillaries to large-scale enterprises;

adapt to market fluctuations;

fill market niches which are not profitable for larger enterprises;

lend themselves to development policies favouring decentralization and rural development; and

help alleviate the negative consequences of structural adjustment programmes.

However, the potential of the above advantages and the ability of SMEs to contribute to the attainment of national development objectives are largely determined by the policy and regulatory environment within which they operate. For example, they cannot flourish in a hostile economic and business environment where:

(a) policies are biased whether intentionally or not as when polices aimed at developing other sectors have unintended negative side effects for SMEs (such as unfair competition from large enterprises or from imported products, or by making their access to finance, equipment, raw materials and other inputs costly and difficult);

(b) the business environment is very restrictive and SMEs have great difficulty in starting a business and continuing operations (e.g. registration and licensing requirements are excessively complex; SMEs are prevented from operating in particular markets; or restricted in moving raw materials and finished products; unrealistic limits are set to trading practices; impracticeal building codes, etc.);

(c) certain members of society (e.g. women) are excluded from engaging in viable and sustainable enterprises because of social, cultural and legal norms; and

(d) corrupt practices by officials and organized crime are prevalent.

In such situations it is essential to undertake a thorough review of the policy and regulatory environment and to initiate reforms that will make economic and business conditions encouraging to SME development. In many cases, providing a "level playing field" may not be enough: the smaller enterprises may still be at a disadvantage due to size-related constraints. Particular policies and programmes may have to be put in place specifically to promote and provide positive encouragement to SMEs.

It is useful to recognize three types of policies and regulations affecting the development of SMEs:

(a) policies that determine and influence the over-all economic and business environment e.g. market economy policies, fiscal and monetary policies, and trade policies;

(b) policies aimed at supporting and stimulating the development of specific sectors e.g. policies related to public sector enterprises, tax incentives and preferential access to inputs for import substituting industries, and input subsidies for agricultural development; and

(c) a legal and regulatory framework aimed at controlling the operations of enterprises e.g. licensing and registration requirements; reporting requirements for business operations.

A healthy economic and business climate based on market principles is of critical importance for a growing and dynamic small and medium enterprise sector. SMEs are, after all, just like any other participants in the economic and social life of a country. They will develop when the over-all environment is favourable to the growth of the whole economy. Creating an enabling environment for the development of SMEs therefore implies first of all the creation of a favourable overall policy framework for the development of all enterprises and of entrepreneurship (UNCTAD, 1995). Such a framework will need to build confidence among economic actors, including foreign investors, in the management and development of the economy. The policy and business environment must be transparent, consistent and predictable. Policy instruments including instruments on trade, monetary and fiscal policy to achieve macroeconomic stability are essential. Policies to develop human capital and infrastructure are also particularly important.

Well-meaning policies and support programmes aimed at encouraging and stimulating the development of certain economic sectors can have unintended by-products and side-effects that result in biases against SMEs. For example, in the pursuit of import substitution industrial development, preferential access to capital, raw materials, training and other support services are given to large import substituting enterprises at the expense of smaller enterprises. To prop up public enterprises, governments often give them monopoly privileges, allowing them priority access to imported materials and to set up entry barriers against potential competitors including the SMEs. In the interests of promoting agricultural production, the tax free importation of farm implements may be allowed to the detriment of SMEs in light engineering. A review of the impacts on SMEs of these types of policy is therefore warranted.

The improvement of the legal and regulatory framework within which SMEs function is often one of the most important aspects of creating an overall enabling business environment for SME development. It may involve removing or easing regulatory constraints needed in many developed and developing countries; or improving the overall legal framework governing business activities as is the case in many countries in transition to a market economy. Regulatory constraints affect SMEs in different ways. For example, SME proliferation and growth can be constrained by over-regulation creating barriers to certain markets and imposing unreasonable costs in time and money for business start-ups and development. On the other hand, inconsistencies and gaps in the overall framework can also hinder SME development. Gaps in the legal framework leave certain legitimate business practices unprotected. And inconsistencies in the regulations make their application open to arbitrary interpretation (inviting petty corruption) and uneven enforcement. This can lead to even more uncertainty and risk for the SMEs and can deter new entrepreneurs and discourage existing businesses from expanding.

Examining objectives, policies and implementing instruments

In undertaking an analysis of the policy and regulatory framework that SMEs face, it is useful to distinguish between policy objectives, the policies themselves and the instruments for their operationalization and execution. Policies are basically expressions of national goals and strategies. They are statements of general principle, goals and procedures intended to guide and determine present and future decisions. They can be general statements, e.g. "the state will uphold a free market economy and private-sector-led economic development". Or they can be specific and aimed at a particular sector of the economy, e.g. the export sector or the SME sector for that matter. In turn, these policies are implemented through three types of instrument:

legal instruments: laws and legislative acts, e.g. investment incentive laws, labour laws, banking acts, training acts;

administrative mechanisms: rules and regulations such as registration requirements and procedures, export licensing, zoning regulations;

direct interventions and assistance by the government in inputs and outputs markets, e.g. direct provision of credit, equipment, and raw materials; purchase of the products of SMEs; venture capital investment; provision of training and advisory services.

An illustration of the interrelationships between national development objectives, policies and implementing instruments in relation to business creation and operations is shown in Figure 1.

The instruments for implementing policies are very much interrelated and interdependent. Laws are implemented through rules, procedures and regulations. Institutions established by legislative act implement their mandates through administrative instruments and direct interventions and assistance. It is important, however, to understand what instruments are being used to implement policies as each has its rigidity of application and coverage of impacts. Ease of amending or modifying also differs among the various instruments. Legal instruments must be modified or repealed through the legislative processes whereas administrative instruments and direct programmes of assistance can be modified more easily through executive and administrative action. It is also important to note that regulations and incentives are interconnected. In many cases, restrictive regulations are unintentionally created as requirements for the implementation of an incentive scheme, e.g. a complex registration process to qualify for a soft loan or preferential market access.

Much of the work involved in policy and regulatory framework analysis will concentrate on analysis of the workings and impacts of policy instruments on small and medium enterprise development. Many of the constraints and biases faced by SMEs are negative by-products or unintended side-effects of instruments designed to address the needs of a particular sector. For example, legislation aimed at safeguarding depositors' funds in the banking system could complicate lending requirements and conditions, e.g. collateral and debt-equity ratio requirements that do not facilitate access to credit by small enterprises. Anti-usury laws aimed at protecting borrowers could prevent the development of innovative credit schemes with realistic interest rates for micro enterprises. Industrial development investment incentives which allow the tax free importation of equipment and machinery yet restrict the import of components and raw materials may work against domestic small and medium-scale machine building enterprises.

In a similar vein, care must be taken to ensure that there are no negative by-products and unintended side effects on other sectors or parts of society when proposing policy and regulatory reforms aimed at making the environment more supportive to SMEs. For instance, in trying to help SMEs by protecting their markets through product reservations, the development of a healthy industrial sector may be curtailed. To avoid or minimize negative side effects, policy instruments should be focused, transparent, flexible and simple (Cody, et.al., 1990). In the specific case of SMEs, support policies must be:

(a) Directly aimed at and closely related to the SME problem they are intended to solve or to the constraints they are aiming to redress, e.g. lack of access to certain markets, lack of skilled workers, limited access to credit, or lack of access to subcontracting markets. Instruments with wide coverage should be avoided.

(b) Transparent, e.g. the immediate and not so obvious effects and costs to the government, entrepreneurs and consumers should be easily identifiable and traceable;

(c) Flexible, allowing easy adjustments and adaptations in case of changes in economic reality and business conditions.

(d) As simple as possible to facilitate interpretation and understanding by the implementors and the entrepreneurs.

One way of helping to foresee the broader impacts of SME support policies and regulations is to have a sectoral (industry branch) view of the SMEs being targeted. The "ghetto approach" which looks at SMEs collectively as a "sector" should be avoided. SMEs do not exist in isolation but have vertical and horizontal linkages with groups of other sized enterprises within the industry/branch and with enterprises and institutions in other economic sectors. In fact, some of the constraints faced by SMEs are not just internal to the SME "sector" but are due to its linkages with the input and output markets, and to the deficiencies in its vertical and horizontal linkages, i.e with smaller and larger enterprises. In the eagerness to support and "protect" SMEs, care must be taken to ensure that the essential inter-firm and inter-sectoral linkages are not jeopardized. For example, attempts have been made before to link producer SMEs directly with their end consumers in the hope that they will benefit from higher retail prices through the elimination of middlemen only to find that in the end the SMEs were worse off as these trading enterprises provided other services such as working capital financing, marketing and transport services that facilitated production and trade.

II. A framework for analysing the impacts of policies and implementing instruments on SME development

It is important that underlying national development goals and objectives are fully understood before an analysis is made of the SME policy and regulatory environment and of the interventions and programmes aimed at promoting SMEs. It is similarly important to clarify what the SME development is expected to achieve and what assumptions have been used as a basis for the design of the SME promotion programme in question. For example, micro and small enterprise promotion is often used as a strategy for poverty alleviation because their ease of entry, low skills and low start-up capital requirements make them suitable for those targeted: the poor and destitute. On the other hand, SME development that is aimed at building up a competitive manufacturing sector industrial base will reflect a different set of assumptions about the characteristics required in the enterprises to be promoted: for example, they should be effective as ancillaries and sub-contractors to larger enterprises. Policies and support instruments will not be the same for these two SME development programmes because their different objectives will build on different SME characteristics. The policy framework and the strategies and programmes adopted to promote SMEs can therefore only be meaningfully assessed in the light of the development objectives to be achieved through the development of the sector.

As illustrated above, SME promotion aimed at creating balanced industrial development calls for a different policy framework, strategies and programmes from SME promotion aimed at the poverty alleviation of a particular target group. It also follows that a particular policy or regulatory instrument will be different in each case. Alternatively, the impacts of the policy and regulatory framework will be different with respect to achievement of different objectives.

SME development may also be used to contribute to the achievement of multiple national development objectives, such as balanced industrial development, employment creation, and specific area development, in which case, the policy objectives will dictate whether the approach to be used will be through sectoral incentives and promotional programmes, locational incentives, technology choice, human resource development, etc.

It is also important to note that policies may have different impacts on different sized enterprises in different sectors. For example, the impact on very small enterprises in food processing will not be the same as that in construction or any other branch of industry, or on enterprises situated in different geographical locations, etc. In carrying out a policy analysis, it may be important, first, to analyse the sector or the branch of industry concerned. For example, the impacts of structural adjustments, liberalization of trade, and currency deregulation will not be the same in the case, say, of the construction sector, the trade and retailing sector, the transport sector, and sub-sectors of manufacturing. Impacts will also differ according to whether an enterprise is micro, small, medium or large. Interventions aimed at creating an enabling policy and regulatory environment for SME development must also take into consideration the impact these will have on enterprises of different sizes and in different sectors.

Analysis of policies in terms of their impact on the process of enterprise

creation and development

One approach to analysing the policy and regulatory environment with a view to SME development is to examine the impact that it has on the different factors involved in the process of enterprise creation and development.

An enterprise is created and developed through a process that combines human potential and environmental potential into a business undertaking. The human potential (for example, entrepreneurship, managerial and technical competency) combines with the environmental potential (which includes market opportunities, the availability of inputs, technology and capital) and results in a value-creating and profit-making enterprise. The type of enterprises, the flow of investments towards specific sectors and geographic areas, and the viability and productivity of the enterprises will be dictated by the characteristics and quality of the potentialities of the human and environmental resources.

The process of creation and development of enterprises is thought of as automatic and is often taken for granted as long as it yields what is considered as acceptable results and is seen to be contributing satisfactorily to the attainment of a country's development objectives e.g., employment creation, improvements in standards of living, income distribution, and over-all economic growth and development. Concern about the need for policy and direct interventions arises when the intensity of the process of enterprise creation and development falls short of expectations or does not contribute sufficiently to the achievement of particular development objectives, for example when investments are not being made in the "right" economic sectors or geographic areas, or when the enterprises being created and developed are not bringing about the desired level of economic participation by a particular target group. When this type of situation arises, specific interventions are called for at policy, programme and project levels to promote and stimulate the process of enterprise creation and development.

SME development is supported when the policy framework and the over-all business environment strengthen the human and environmental potentialities and create the catalytic conditions which intensity and facilitate their combination into SMEs. Policies and programmes may be analysed, therefore, in terms of their contribution to:

(a) strengthening the entrepreneurship culture and competencies;

(b) developing managerial competencies and technical capabilities;

(c) improving access to and development of markets; creating a demand for SME products and services; and improving the profitability of SME products and services;

(d) availability of inputs, such as raw materials, energy, equipment, etc., and the creation of facilitating institutions, rules and regulations;

(e) creation of supportive institutions that facilitate starting a business and making its operations viable;

(f) development of supportive relationships, for example with suppliers and customers; by promoting mutually beneficial ancillary relationships between large enterprises and SMEs; interlinkages within the industry branch and sector; interlinkages with other economic sectors; alliances and collaboration among SMEs, etc.

Human potentialities

Entrepreneurs are people with the ability to see and evaluate business opportunities, gather the necessary resources to take advantage of those opportunities, and initiate actions to ensure business success. In a number of cases, entrepreneurs even create the opportunities for business. Entrepreneurship is a behavioural pattern shaped by the attitude of society towards business and nurtured by a "culture" that values and regards highly success in business. This type of "enterprise culture" sees entrepreneurship as a way of achieving economic, social and political success and provides the social, financial, technical and market support networks that facilitate people's entry into and conduct of business. Young people growing up in this type of culture are exposed and immersed in business operations in their formative years. Annex 1 indicates the components of enterprise culture. The economic and business environment can be assessed in terms of how it contributes to the development of these components.

The ability of an entrepreneur to mobilize resources and combine them into a viable business undertaking depends on his/her education and training received both outside and inside the formal educational system. Educational policy and a curriculum content that emphasizes practical business skills, such as technical skills, engineering, accounting and finance, marketing, and human resource management, will contribute to providing potential entrepreneurs with the basic managerial skills needed to start and run a business. Problem solving, creativity, decision making, communications and leadership are entrepreneurship skills that may be partly built up through the educational system. The incorporation of entrepreneurship in school curricula and an exposure to actual business practice may make students aware of entrepreneurship as a viable alternative career option.

Workers with productive competencies constitute part of the human potentialities upon which successful business enterprises are built. They are essential partners of the entrepreneurs and managers in a successful business undertaking. Formal technical and skills training systems, together with apprenticeships both formal and informal in existing businesses enable skills to be acquired and the necessary work attitudes to be developed. Education and training policies and programmes are most supportive of SMEs when they lead to the development of skills and attitudes that are consistent with and relevant to the opportunities present in the environment.

Environmental potentialities

The opportunities and incentives which will decide entrepreneurs and investors to venture into business are provided by the possibilities present in the environment. A real demand for products and services will create the market opportunity which is the sole basis of business viability. The demand for the products of a specific sector is influenced by macro-economic policies. Agricultural development policies, for example, can stimulate demand in rural areas for simple consumer goods and farm implements and increase agricultural surpluses for post-harvest processing. Incentive schemes designed to develop a particular sector may also create market opportunities for SME development. Export development policies and programmes are promoted to open up international markets; policies and programmes which encourage subcontracting and other linkages between large enterprises and SMEs may also create new markets for the products of SMEs.

The availability of inputs is crucial in determining the success of a business enterprise. International and domestic trade policies will have a direct bearing on small firms' access to raw materials. The impact that trade policies have on SMEs will depend on their degree of dependence on imports for their production operations. Monetary, credit, and fiscal policies can facilitate or hinder SME's access to finance. Education and training policy and labour laws and regulations will influence the availability of skilled human resources. SME's ability to obtain equipment and technology will depend not only on trade and finance policies and practices, but also on research and technology policies that favour the development, acquisition and diffusion of technologies appropriate to the SMEs' products and operations. Policies concerning investment in infrastructure development can determine SMEs' access to power, utilities, communications and transport.

Laws and regulations can have positive and negative impacts on the start up and successful operation of SMEs and influence the environmental potentialities for enterprise creation and development. Tax and investment incentives for the development of specific sectors could provide opportunities for the establishment of SMEs both through the creation of new markets and by making it easier to access the inputs needed. Incentives may be set in place to encourage the local processing of primary materials rather than exporting them raw and unprocessed. Or they could be intended to develop a particular sector, for example light engineering. Traditionally, however, incentives usually favour large enterprises and capital-intensive operations. Even when they are intended to support SMEs, the procedures and documentation involved may be so complicated that only larger enterprises are able to avail themselves of the benefits. Laws and regulations concerning business registration and licensing and the required reporting of business operations can be so complicated, time consuming, and costly, that the potential entrepreneur is put off from even starting a business or registering his enterprise formally, thus disqualifying it from available financial and technical support and other services.

Zoning regulations and building codes may deter SMEs from setting up good workshops and facilities. On the other hand, laws and regulations concerning property ownership and contracts may be protective of SME operations.

Support institutions that facilitate starting a business and making its operations efficient and effective are important in enterprise development, particularly for SMEs. There are size-related constraints that affect SMEs' access to markets and inputs that make support programmes particularly important to their creation, survival and growth. These support institutions are not always government agencies. In fact, private sector organizations and enterprises can provide some support services more efficiently. Institutions providing access to finance for long-term investment in capital goods and short-term financing for the purchase of raw materials or other items of working capital are essential for enterprise creation and development. The availability of assistance in the selection and acquisition of technology is a valuable service when investment decisions have to be made when starting a business or in the case of business upgrading and growth. Management development and productivity upgrading institutions are essential to the continued viability and growth of enterprises.

One very important area to examine is how the policy and regulatory environment encourages or discourages the development of mutually supportive relationships between large enterprises and SMEs, or between SMEs themselves. Such supportive inter-firm linkages play a very significant role in the development of SMEs or of a whole branch or sector of industry. Through collaborating in marketing, product and technology development, finance, and management and skills development, for example, SMEs can overcome any size-related constraints as demonstrated by the Industrial Districts in Italy. Positive commercial, managerial, technical and even financial relationships between large and smaller enterprises are mutually beneficial as experience in Japan, for example, shows. Such vertical and horizontal linkages are vital to SME development.

Analysis of policies in terms of their impact on the inputs and outputs markets

Another perspective in analysing the effects of policies and their implementing instruments on SME development is from the level of their impact and influence on the output and input markets, and the degree of ease with which SMEs are able to start up and do business. In this connection, policies can be analysed by assessing their effects on:

(a) creating effective demand for SME products and services and improving their access to domestic and export markets;

(b) access to, and availability of, competitively priced inputs needed by SMEs for business start-up and viable operations; and

(c) ease of initiating and running a small or medium enterprise.

SME development is very much affected by a country's over-all macro-economic and sector-specific policies and implementing instruments. An illustrative list of these policies is given in Table 1. Their relative importance and degree of influence in the development of SMEs will depend on the political and economic institutions in a particular country. Given the broad list of policies that have an impact on SMEs, it is necessary to establish the priority and focus of the analysis. A comprehensive review of the various macro-economic policies may be required to make a quick assessment of their impacts on SMEs. A more detailed analysis can then be carried out on those that introduce biases and constraints against the development of SMEs.

1. Over-all development policies

(a) Industrial development policy

(b) Agricultural development policy

(c) Human resource development policy

(d) Income distribution policy

(e) Differential pricing of inputs and outputs among sectors

(f) Private sector participation policy

(g) Market economy

2. Trade policies

(a) Exchange rate policy

(b) Foreign exchange control

(c) Import control

Import quotas

Tariff system

Import licensing

(d) Export taxes and subsidies

(e) Price control

(f) Product standards and certifications

3. Monetary and credit policies

(a) Inflation and money supply policy

(b) Interest rates policy

(c) Rediscount rates policy

(d) Requirements on collateral and security

(e) Banking and financial intermediation laws

(f) Exchange rates and controls

(g) Mandatory allocation of credit resources to SMEs

(h) Policies on specialized credit schemes, the informal finance market, and involvement of private voluntary organizations and non-governmental organizations in credit and finance for SMEs.

4. Fiscal policies

(a) Differential taxation

(b) Investment and tax incentives

(c) Business taxes systems

(d) Taxes applying on starting and operating a business

(e) Capital based taxes

(f) Income based taxes

(g) Taxes on major inputs, e.g. labour, power and utilities, raw materials, equipment and machinery, real estate, etc.

(h) Public expenditures on infrastructure, power, utilities, industrial estates, workshop facilities

(i) Public expenditures on business assistance and support.

5. Labour policies

(a) Wage policies

(b) Labour legislation

(c) Skills training systems

6. Regulatory and control policies

(a) Registration requirements and procedures

(b) Permits and licensing laws

(c) Laws and regulations applying when:

Choosing the business activity

Choosing the business form (single proprietorship, partnership, corporation, cooperative)

Setting-up the business

choice of business location

choice of production processes and machineries

building design

recruitment of workforce

Acquiring financing

Conducting the business and trading

(d) Product standards and certifications

(e) Health and environmental standards

(f) Centralization/decentralization of administration and control, delineation of national and local regulations

(g) Rationalization and coordination of regulatory systems and their administration.

7. Education and training policies

(a) Inclusion of self-employment training and entrepreneurship education in the training and education system

(b) Training incentives

(c) Policies on informal apprenticeship schemes

(d) Public investment on training.

8. Technology policies

(a) Public investment in research and product development

(b) Public investment in technical advisory services

(c) Research and development incentives

(d) Policies on local content and value-added

(e) Technology transfer policies.

1. Impact on the markets for the products and services of SMEs

(a) Volume of effective demand for the product or service.

(b) Access to domestic market (local, regional or national).

(c) Access to export market.

(d) Ease of entry to subcontracting and ancillary relationships.

(e) Cost competitiveness with locally produced products.

(f) Cost competitiveness with imported products.

(g) Competitiveness in quality.

(h) Access to market information.

2. Impact on the access to, availability and prices of the inputs needed by SMEs

(a) Access to capital and funds.

(b) Access to machinery and equipment.

(c) Access to skilled labour.

(d) Access to inputs of raw materials and semi-manufactured inputs.

(e) Access to land, workshop space, utilities.

(f) Access to entrepreneurship and business management training.

(g) Access to advisory services.

(h) Access to information.

(i) Access to other particular inputs.

3. Impact on ease of starting a business and and doing business

(a) Ease of complying with the regulatory system.

(b) Ease of strategic planning, forecasting.

(c) Sense of societal recognition and rewards.

(d) Availability of support services in marketing, sourcing of inputs, production upgrading, management development, productivity improvement, etc.

An example of a worksheet for analysing the impact of policies on SMEs is given in Figure 2. Entries in the different cells could be short descriptions of the nature and intensity of the impacts and even include a list of actions that can be taken to minimize if not eliminate the constraining effects of the policy.

A summary of the impacts of policies on SMEs (adapted from Hansom, 1994) is shown in Table 2.

Analysing the legal and regulatory framework

Another criterion for analysing the policies, programmes and regulations affecting SMEs is the ease with which the procedures, regulations and incentives can be met or obtained by the SMEs. There are cases and situations where the procedures and paperwork required to meet a regulatory requirement or take advantage of an incentive scheme are so complicated and involved that only large enterprises with their specialized staff can satisfy the requirements or obtain the benefits of the policy and implementing instruments. Small-scale enterprises, although qualified, may not have the time and manpower to deal with the requirements and therefore may opt out, or get left out, of the incentive scheme. The end result is that SMEs do not benefit from the development support policy.

The legal and regulatory framework can create problems and constraints for the entrepreneur starting a new business and affect the ease with which business operations are carried out. An illustrative list of legal and regulatory requirements affecting SMEs is given in Annex 2. The problems they cause may be analysed according to whether they are due to:

(a) over-regulation preventing SMEs from taking advantage of market opportunities and accessing certain inputs at competitive prices;

(b) inadequate legal protection, such as ambiguous property rights and non-enforcement of contracts;

(c) complex, time-consuming requirements and procedures; multiple form filling; layers of government agency hierarchies to go through; excessive reporting requirements; too many obligations to be met; unrealistically high financial costs;

(d) procedural multiplicity, duplications and inconsistencies;

(e) poor communications, faulty interpretation, different applications, the enforcers' and the entrepreneurs' ignorance.

Once the constraints and burdens imposed by the laws and regulations on SMEs are understood, an analysis based on the approaches used in methods improvement and systems and procedures improvement studies can be applied. Each regulation and requirement would be subjected to a questioning approach which asks the following:

(a) Is the requirement/regulation really necessary? What were the reasons for it in the first place? Is it a side-effect of (an)other regulation(s)? Could it be eliminated? What alternative mechanism/approach could be used to obtain the information required and to encourage the business behaviour desired?

(b) If the regulation is necessary, could the requirements and procedures be simplified? Could some steps be eliminated? Could some forms be simplified and made easier to complete?

(c) Could not some requirements be combined with others in order to minimize duplication and repetition? Could not several regulations be met with only one submission? Would it not be possible to meet the requirements by dealing with only one government agency?

(d) If the burdens on entrepreneurs and their businesses are caused more because of misunderstandings, how could the regulations be better communicated in order to avoid time-consuming and costly errors?

(e) What action needs to be taken to make the changes identified as a result of the above questioning process? Will they require legislative, executive or administrative action? Who or which institution should initiate the change process? Can the affected entrepreneurs participate in making the changes?

Analysing the impact of structural adjustment programmes (SAPs) on SMEs

Much attention is currently given to the impact of structural adjustment programmes (SAPs) and policy reforms on the development of SMEs. Although there is general agreement that structural adjustment and liberalization is a good thing in the long run, there are differences in opinion with regard to how long the period of transition should take. There are those who favour "shock therapy" arguing for rapid adjustment. Conversely, there are others who believe in a more "gradualist approach" favouring a longer transition period in order to allow the necessary market mechanisms to be put in place, a more open and competitive economy to function effectively, and to give vulnerable enterprises time to grow stronger in preparation for a more competitive environment. However, it is generally agreed that there is a need to minimize the economic dislocations and the social costs of the adjustment process. What is required, therefore, is an analysis to be made of the policy and institutional framework and of the level of development of the market mechanisms in order to obtain an informed view of the positive and negative impacts of the SAPs on SMEs. It is essential that the enterprises are not so disabled by the transition process that they are unable to take advantage of the expanded opportunities that will become available under the new policy regime.

The analytical framework and approaches presented above may also be used to analyse policy reforms and programmes involved in the structural adjustment of the economy. The effects of SAPs and of economic liberalization polices and instruments can be analysed in terms of their impact on SMEs':

access to and competitiveness in the domestic and export markets for SME products and services;

access to, availability of, and cost of the inputs they need, such as raw materials, semi-manufactureds, equipment and machinery, finance, power and utilities; and

ease of running their business operations under the new policy and regulatory regime.

The actual impact of SAPs on SMEs and on enterprises in general will be a function of the state of development of market mechanisms and institutions that facilitate the adjustment of enterprises to the new supply and demand situation. In the analysis, it is also vital to keep in mind that the policy and implementing instruments created in view of SAPs and economic liberalization will have varying effects and impacts depending on the economic sector or branch of industry concerned. Different sized enterprises even within the same industrial branch will be differently affected by the changes in the policy and regulatory environment. It is therefore important that this heterogeneity of SMEs be taken into consideration when doing the analysis.

Structural adjustment programmes usually refer to changes in the role of the government in the economy and to policies and institutional changes undertaken to make the national economy more flexible, effective and efficient; in short, to improve over-all national productivity. Initially, structural adjustment referred to changes made to remove the underlying causes of a country's balance-of-payment difficulties. Nowadays however, SAPs mean the policy reforms and institutional changes put in place to improve economic management in order to achieve a satisfactory rate and pattern of growth.

Typically, the policy reforms involved in structural adjustment and economic liberalization will take place within the major areas listed below (Koppel, 1992).

(a) Measures to liberalize trade and make national economies more open to competitive participation in the world economy (import and export policies). These will usually include specific measures to allow competitive market forces to determine the volume, composition and price of imported and exported commodities, instead of relying on quantitative and tariff protection measures. The trend towards more liberalized global trading arrangements should accelerate with the completion of the Uruguay Round and the establishment of the World Trade Organization.

(b) Monetary reform and financial liberalization measures to strengthen competitive market-based processes in monetary and financial systems. These will typically include measures to correct distortions in exchange rates and interest rates caused by inappropriate government interventions.

(c) Market deregulation (dismantling price controls, removing limitations on product ranges, etc.) thereby reducing the role of government in regulating the participation and performance in specific markets.

(d) Privatization measures aimed at reducing the role of government as a direct and competing participant in the economy through state-owned and state-protected enterprises. These measures usually involve (ultimately) divestment and sale of state-owned corporations and of significant equity holdings in private companies, and the removal of special protection granted to these types of corporations. At the very least, this will involve steps to make public enterprises more internally efficient and more market-based in their operations.

(e) Fiscal policy measures to reduce the budget deficit and the deficit financing of public investment. These include specific measures to rationalize and reduce budget expenditures and to improve the government's revenue generation capability.

Economic structural change, on the other hand, refers to changes in the composition of national economic activities. This could mean changes in the location, origin, or geographic distribution of economic activities (e.g., changes in the regional distribution of industrial activities); changes in type of activities (e.g., changes in the relative contribution of primary extraction, agriculture, industry and services); changes in who undertakes the activities (e.g., the relative contributions of the private and public sectors); a shift from production for local to production for national markets, or from domestic to export markets, or from less efficient to more efficient activities. Structural changes are brought about by a number of factors, such as:

(a) policy changes and the corresponding implementation instruments (policy reforms and structural adjustment programmes mentioned above);

(b) technology changes (i.e., changes in production structures due to the rapid development of computer and information technology);

(c) population and demographic changes; and

(d) changes in human and natural resource endowments.

The broad purpose of policy reforms, institutional reforms and structural adjustment programmes is to make the economy more market oriented. Trade and financial liberalization, openness, deregulation and privatization are all intended to lead towards greater reliance on market mechanisms and competitive forces which are assumed to lead to a more efficient and effective national economy. They are intended to create a healthy economic and business environment conducive to the development of enterprises of all sizes. In the process of structural adjustment, however, SMEs may be subjected to adverse impacts in the short run, and if the transition process is not properly managed, may create heavy social costs for those who depend on these enterprises for their living. It is therefore crucial for countries implementing structural adjustment programmes and economic liberalization to be aware of the short and long-term impacts of these changes on SMEs and to put in place the measures necessary to minimize the negative impacts.

When analysing the impacts of structural adjustment programmes, therefore, it is imperative to understand the various factors that will influence the actual effects of the policy and institutional changes on the SMEs. The consequences will differ from one country to another, depending, for example, on industrial structure and capacity, import dependence, share of domestic and export markets, etc. For example, it has been argued that trade and exchange liberalization (i.e. currency liberalization) can help developing countries, including the least developed among them, to diversify production and exports. However, a study of 22 least developed countries has shown that there is no hard evidence to establish this relationship. The study in fact indicated that for four of the countries real currency appreciation had improved exports and general economic performance. Further, the study found that for countries with little or no industrial capacity, specific measures to increase supply capacity appeared to be more appropriate than trade policy reforms (UNCTAD, 1995a). Generalizations based on invalid assumptions of homogeneity of countries and of SMEs should therefore be viewed with caution.

Analysing the adequacy of policies and programmes to promote SMEs

The establishment of a conducive policy environment and a level playing field are usually not enough to support the development of SMEs. Most often, specific SME promotional programmes are required to offset the size-related constraints of SMEs, to address the specific requirements of a particular geographical area, or to meet the requirements of a particular disadvantaged group. The adoption of SME development as a strategy for achieving national development objectives requires a national SME development programme consisting of various components each addressing specific policy and regulatory environment deficiencies, particular weaknesses in the supportive institutional framework, the SMEs and the entrepreneurs themselves.

A starting point for the design of a SME development programme is the analysis of the adequacy of the promotional policies and of the various instruments and programmes for their execution. This adequacy analysis could be based on the following criteria/questions.

(a) Do the promotional policies and programmes address SMEs major needs?

(b) Are the promotional policies and incentives really operational and not just "on paper" (statements of good intentions); and are the desired benefits actually reaching the intended beneficiaries?

(c) Are the promotional and support programmes actually delivering the intended support and services to the target SMEs?

(d) Are they sustainable?

A suggested matrix for analysing the adequacy of a national programme is presented in Figure 3. To be able to complete this matrix, a thorough situation and needs analysis of the target groups, geographic areas, and of the target SMEs is essential. Only when the needs and

constraints faced by the SMEs and the target groups are fully characterized that relevant assistance and support interventions can be identified. Existing support programmes and services can then be assessed to see whether they meet adequately and effectively the requirements of SME development.

The following section outlines the variables that may be used in a problem analysis, while Annex 3 lists some typical problems that may have to be addressed in designing SME development programmes. These lists are just illustrative and not necessarily exhaustive. The situation in specific countries or target groups will dictate the factors that warrant attention.

The gaps and deficiencies in current SME development programmes are identified and characterized on the basis of an adequacy and effectiveness analysis. A strengthened national SME development programme can then be formulated and operationalized. The following guides are intended to help in the design of SME development programmes and in the analysis of the feasibility and sustainability of the proposed support policies and programmes.

III. Guides for designing SME development programmes and projects

Small and medium enterprise development programmes⁽²⁾ are undertaken to achieve specific development objectives, address particular target groups, and cover definite geographic areas of implementation. SME development programmes may be in line with a general national objective of industrial development and be national in coverage; directed at developing a specific sector (e.g. food processing); or aimed at poverty alleviation of a particular vulnerable group in a specific community. The strategies, approaches and specific components and activities of a particular SME development programme will be determined by the underlying objectives that the programme aims to achieve; the characteristics of the target groups; and the particular situation of the geographic area where the programme will be implemented. Even the industrial sectors to be promoted and the sizes and types of enterprise to be encouraged and assisted will be determined by these situational variables.

It is therefore necessary that the following variables are fully characterized and considered in designing the programme:

1. The specific objective(s) of the SME development programme

(a) The primary national development objective that the SME development programme is to contribute to (e.g. industrial base development, export base development, employment generation, balanced industrial development, poverty alleviation).

(b) Major assumptions made concerning SME characteristics and strengths that led to the adoption of SME promotion as a strategy in the attainment of the specific national development objective. Alternatively, which assumed SME characteristic formed the basis of the decision to use SME promotion as a strategy in the attainment of the particular development objective? For example, are SMEs being promoted because of their ease of entry characteristics, or their linkage effect with large enterprises?

2. The target group(s)

(a) Present economic activity, production activities, products and services produced, sources of revenue and income, major items of expenditure, etc.

(b) Poverty level (in the case of small enterprise development programme for poverty alleviation).

(c) Present access to markets for produce or for products and services to be produced.

(d) Access to inputs (e.g., finance, equipment, raw materials, energy, etc.).

(e) Educational background and preparation.

(f) Skills and other competencies.

(g) Entrepreneurial background and qualities.

(h) Existing programmes of assistance to target groups.

3. Geographic area where the programme will be implemented

(a) Local economy (e.g. economic activities, local and external trade, level and distribution of income, distribution of wealth, demography, etc.).

(b) Infrastructure available (e.g., transport, power, communication, utilities, etc.).

(c) Linkage with and access to external output markets.

(d) Linkage with and access to external input markets.

(e) Local output market characteristics (e.g. effective demand, size, etc.).

(f) Local resource availability (e.g. natural resource endowments, local finance markets, skills availability, etc.).

(g) Local institutions and programmes supporting SME creation and development.

(h) Laws and regulations affecting the conduct of business in the area.

(i) Local cultures, traditions and social institutions related to entrepreneurship and business activities.

(j) Local politics and decision-making processes.

4. Characteristic of the sectors or industry branches to be promoted

(a) Type of activity (basic extraction, agriculture, manufacturing, trade, service).

(b) Structure of the sector or industry branch in terms of distribution by size of enterprises.

(c) Level of technology in the sector.

(d) Linkages of the sector with its input markets and markets for its outputs.

(e) Linkages between the various enterprise-size groups in the sector (e.g. marketing relationships, subcontracting, operational alliances, associations).

(f) Policy support for the sector.

(g) Specialized institutions supporting the sector.

(h) Existing programmes for the development of the sector.

5. Types and size of enterprises to be promoted by the programme

(a) Size and scale of the enterprises (micro, small or medium).

(b) Ownership structure.

(c) Technology mix.

(d) Production system.

Suggested design of an SME development programme

A strengthened national programme for SME development can be formulated based on the above characterizations and on the adequacy and effectiveness analysis (see section 2) of existing support interventions. A programme design, set out in a programme document, must clearly specify the development and immediate objectives that it is aimed to achieve, clearly indicate the expected impacts and results the programme will have, clearly explain the strategies and approaches to be used, specify the outputs to be produced, and clearly present what will be done, how much will be done, how it will be done, who will do what and when, and with what inputs. A well-prepared programme design should serve as a good communication tool to inform the stakeholders the government, the implementors, the target groups, the public at large, and (if the programme requires external assistance) the donor community everything about the programme.

A national SME development programme should generally include descriptions of the following:⁽³⁾

1. The overall national development objectives to which the SME development programme is intended to contribute (e.g., balanced industrial development, employment generation and/or empowerment of a particular target group).

2. The context within which the SME development programme is being implemented

(a) Analysis of the country situation which the national development objectives including the SME development programme are intended to improve.

(b) National policy and strategies towards the attainment of the development objectives.

(c) Existing programmes contributing to the attainment of the national development objectives.

(d) Existing programmes (locally funded or donor funded) aimed at the development of SMEs.

(e) Major SME development institutions and their target groups and programmes.

3. Problem definition and analysis

(a) The present situation of the target groups; constraints being faced; and difficulties encountered in initiating and running SMEs.

(b) Present situation of the target industry branch(es) or sector(s).

(c) The present situation of the geographic area of coverage of the programme.

(d) Desired situation of target group sector or geographic area at end of programme.

(e) Major causes and/or factors affecting the problem situation (e.g., lack of skills, constraining legal and regulatory framework, poor infrastructure, lack of access to finance and other inputs, and lack of access to domestic or foreign markets). Key factors that prevent the target group or the area from already being at the end-of-programme situation.

(f) Objectives to be achieved by the end of the programme and the indicators of their achievement.

(g) Programme strategies, approaches and areas of intervention.

(h) Programme components and elements.

4. Design of a specific programme component

(a) Specific objectives to be achieved by the completion of a component and their relation to the achievement of the over-all objectives of the programme. The indicators of component objectives achievement.

(b) Implementation strategy for achieving the component's specific objectives.

(c) Main outputs or results (how much and where) of the component, with specifications of when these are to be produced and be available.

(d) Activities (in a time-based plan, i.e what, where and when) to be undertaken in order to produce the outputs or results.

(e) Main inputs (what, how much and when to be made available) required to implement the activities to produce outputs and results.

(f) Coordination/linkages with the other components of the programme.

(g) Responsibilities for the component implementation (who will do what, where and when).

(h) Budgets (how much will be needed and when).

5. Programme implementation arrangements

(a) Institutional framework for policy coordination and interphase with other development programmes of the country.

(b) Programme implementation structure, and responsibilities for over-all programme management and coordination.

(c) Field level coordination mechanisms.

(d) Monitoring and evaluation.

IV. Guidelines for analysing the feasibility and sustainability of SME development policy and programmes

In many countries, particularly in developing ones, the promotion of SMEs is an explicit part of national development plans. In countries faced with severe unemployment, and wide income gaps, SME promotion is seen as a viable strategy for employment creation and poverty alleviation. Countries aiming for rapid economic development see SME development as essential for balanced growth. Specific policy pronouncements and national and local programmes for the active promotion of SME development are thus made as key components of national, regional and local development plans.

In many cases, however, policy statements in support of SMEs remain mere statements of good intentions and desires, as the instruments for their implementation and the direct SME support programmes for their operationalization could not be put in place for political, administrative, financial and technical reasons. Decision makers and institutions who are key players in policy execution and programme implementation may not have agreed on priorities and strategies or even on the sharing of responsibilities. Political and institutional rivalries get in the way. Or, possibly, the target groups themselves do not support the priorities and approaches proposed. Even where there is full agreement between the key stakeholders, the government may not have the finances to initiate the programmes.

There are also cases where support and incentive programmes (e.g., registration requirements for obtaining tax incentives and financial support) turn out to be bottlenecks as the agencies supposed to administer them do not have the administrative or technical capabilities necessary to perform the tasks involved efficiently. Many SME technical cooperation programmes are "successful" while external support and technical expertise are present, but then proved unsustainable when local institutions take over without the necessary financial or technical capabilities to continue and sustain the SME support interventions. The economic activities, the technologies and the organizational forms introduced by the SME development project may be so alien to the cultural experience and background of the target group that the new economic venture is immediately abandoned once the external influence is withdrawn.

It is therefore crucial, when a direct SME support policy is being contemplated and when direct support programmes are being planned, that their feasibility and sustainability are analysed before any emotional and financial investments are made. This will prevent raising undue expectations and enable realistic decisions to be made on the scale, scope and complexity of the SME development programme. A smaller, more manageable and sustainable programme is preferable to a grandiose, un-implementable one.

Feasibility and sustainability of SME support policies and programmes can be assessed based on the following criteria: the degree of political support; administrative and technical feasibility and sustainability; whether the financial requirements and impacts can be supported and sustained by the fund providers and by the implementors; whether the benefits are justified in view of the short- and long-term costs; cultural acceptability of the interventions and innovations being introduced by the policy and programmes; the technical soundness of the programme design; the availability of the required physical infrastructure and market linkages; and the ability and capacity of those who will continue the policy and programme to absorb the innovations and technology being introduced.

1. Political feasibility analysis

A political feasibility analysis examines the power and control relationships among the key actors and stakeholders, and among implementing institutions with respect to policy or SME development programme adoption and implementation. It is crucial to identify all the key actors and stakeholders and assess their degree of support or opposition to the policy or programme. Their degree of influence on the decision-making process is also assessed. If a key actor with strong influence is likely to act against the policy or programme then its political feasibility is weak. The policy may not be adopted at all or, if adopted, will not be implemented and will just remain "on paper".

In listing the organizations or individuals involved, it is useful to categorize them as key actors or key stakeholders. Actors are those with direct influence and involvement in taking decisions concerning the adoption of the policy or programme and in the way it will be implemented. Stakeholders are those who will be affected positively or negatively by the policy or programme. It is possible for individuals or organizations to be both actors and stakeholders with respect to a specific policy or programme.

Guide questions

(a) Who is (are) the key proponent(s) in the adoption of the policy and/or the undertaking of the SME development programme? What are their key motivations for proposing the idea? Who is the key person behind the idea? Will the person's institution continue to support the programme in the event that the person leaves the organization?

(b) Who are the key decision makers concerning policy execution and programme implementation? What are their attitudes towards the policy or programme? Do strong differences of attitude exist among the key decision makers? What could their actions be concerning the policy or programme? What relative degree of influence on the decision-making process exists among these key decision makers?

(c) Which institutions are key actors in the execution of the policy/implementation of the programme? Within these institutions, who are the key decision makers? What are their attitudes concerning the policy/programme? What actions are they likely to take concerning the execution of the policy or the implementation of the programme (block it, support it, take no action)? What is the relative degree of influence among these key actors in the decision making process within the institution? What is the relative degree of influence of the key institutions in decision making concerning the policy or programme?

(d) Which government agency will be primarily responsible, or lead agency, for the execution of the policy or for programme implementation? Are its mandate and sector coverage consistent with the proposed scope of the policy or programme? Does it have a high enough level of authority to influence policies and programmes touching on various factors affecting SME development? Does it have sufficient influence to mobilize resources for policy execution and/or programme implementation?

(e) If the SME development programme is to be housed in an existing organization (governmental, non-governmental or private), what is the attitude of the key officials of this organization towards the proposed programme? Are the programme's operating principles and approaches consistent with the organization's philosophy, mission statement and target groups? Does this organization have the credibility and confidence of key actors and stakeholders of the programme whose support is critical to the programme's effectiveness?

(f) Who will be affected by the policy or programme? In what way will they be affected (positively, negatively, or both)? What are their attitudes towards the policy or programme? What is the relative degree of influence among these key stakeholders in the decision-making process concerning the particular policy or programme?

(g) Have the target groups or target beneficiaries been involved in problem identification and definition and in the formulation of the programme and its component strategies and approach? How will the target beneficiaries participate in programme implementation, monitoring and review?

(h) Do local leaders and opinion leaders support the programme? What are their roles in the programme's design, implementation, monitoring and evaluation?

2. Administrative and technical feasibility analysis

An administrative feasibility analysis examines whether the requisite administrative, technical and other competencies exist among the organizations involved in the implementation of the policy or programme. Administrative competence is assessed in terms of how the organization's decision-making structure, processes, systems, procedures, and operating rules will facilitate or hinder the execution of the policy or the implementation of the SME development programme. It also examines whether the institution will be able to absorb and carry out the additional workload generated by the new policy or programme. The technical competence of the persons involved is assessed in relation to the requirements of the programme. Also examined here is whether the organization that is to implement the programme has the authority and mandate to cover the areas of concern of the programme.

The organization's competencies should be examined not only for purposes of the initiation of the programme, but also for its long-term sustainability. If the competencies are insufficient, the feasibility of the organization acquiring or developing such competencies should be examined.

If the institution does not have the required administrative mechanisms and competence, authority, or technical competence, then the feasibility of the policy or programme is very weak. For example, if no administrative or technical capacity exist to undertake the processing and evaluation of loan applications, then a soft loan programme will not be feasible.

Guide questions

(a) Which institutions will be primarily involved in the execution of the policy or the implementation of the programme? What are the respective roles and responsibilities of these institutions? Does each one of them have the requisite administrative capability and capacity to carry out the tasks required (e.g., timely collection and processing of data, evaluation of applications for obtaining incentives, loans appraisal and follow up)?

(b) How will the programme be governed? Who will set and determine its philosophies, operating policies, priorities and direction?

(c) What degree of administrative, financial, and technical autonomy will the programme need to be effective? How much flexibility will it require? Do the organizations involved have this degree of autonomy?

(d) Who will manage the day-to-day operations of the programme? What should be his/her degree of managerial autonomy and authority? To whom will the person be reporting?

(e) How will the programme's organization be structured? What will the structural and operational linkages be among its various components? What is the logic behind the proposed division into components, functional units or project teams? Will the structure allow for flexibility and coherence of purpose?

(f) What will be the primary role, services to be offered, functions and activities of the programme?

(g) What will be the programme's operating philosophy and character? Will it build up only the core competencies and rely on networking for specialized competencies and expertise? How will it relate to other SME development programmes implemented by governmental and non-governmental organizations? Given the operating philosophy, what attitudes and competencies will be required of the persons managing the networking and linkages?

(h) If the programme is to be implemented by an existing organization (governmental or non-governmental or by a private sector service provider), or if the implementing organization is to be created by transforming the functions of an existing organization, what are the attitudes and competencies of the incumbent staff? Does the organization have credibility among the key actors and stakeholders of the programme?

(i) Based on the programme's strategies and workplans, what competencies will be required for its effective and efficient implementation? Is there a sufficient number of people available with these competencies for assignment or recruitment to the programme? What will be required to recruit and retain them? What physical facilities and equipment are needed for the programme implementation? How are they to be acquired?

(j) Will the programme have sufficient administrative and financial autonomy and the flexibility to recruit and retain technically competent staff?

3. Financial feasibility analysis

Financial feasibility is examined from two sides: (a) are the financial resources to launch the programme available, and (b) will the programme be financially sustainable through continued external funding, through income generation, or through a combination of both. To determine this it is necessary to make a projection of financial requirements and sources and uses of funds. On a broader scale, some promotional programmes (e.g. tax incentives) for SMEs may lead to a reduction in government revenue. If the effect on local and national revenue is substantial, it may be worth examining these financial impacts since they may provoke the unsustainability of the incentive scheme.

If sufficient funds cannot be assured to start a programme and the generation of operating funds is uncertain, then its implementation is questionable. Even if funds are there for the initial phases of the project, if the generation of funds for its intended continuation are uncertain, then the project's likelihood of sustainability is very low. An alternative design may have to be developed.

Guide questions

(a) How will the proposed capital expenditures and operating budget be financed through external support or government funding? If the government is to provide the funding, what is its financing capability to provide a budget (including any necessary foreign exchange) for the programme's initiation and sustained operation? What has been the experience of similar programmes in the past?

(b) Does the implementing organization have sufficient funds to finance the programme's initiation and sustained operations?

(c) Is the programme expected to generate revenue? What are its main revenue generating activities and services? What are the revenue projections during the programme's initial period of implementation? If it is to be a continuing programme, what are the projections for the next five years? Are these realistic estimates? Who will "buy" the programme's services? Why will they "buy" them?

(d) Does the programme (or the implementing organization) have the financial autonomy to allocate and disburse funds generated by its operation? Or will the revenues be part of the government's general funds and subject to general budgeting and auditing procedures?

(f) If the programme is to be institutionalized (i.e., made an integral part of the programmes and services of the implementing organization), what is the organization's capacity to sustain the funding of this particular programme? What is its funding strategy to sustain this programme?

(g) What is the likelihood that the programme will be sustained after the withdrawal of external funding support?

(h) What are the impacts of the programme's incentive schemes (e.g. tax incentives, fees exemptions) on national and local government income? If there is a reduction can such reduction be absorbed or compensated for? Will it cause political resistance to the programme?

4. Economic feasibility analysis

This analysis examines the cost-effectiveness of the programme and its internal efficiency. The programme is considered efficient and effective if it produces the desired outputs and achieves the desired results at minimum cost. The costs of running the programme are compared to the benefits derived by the target entrepreneurs and their SMEs, the ultimate beneficiaries and other target groups, and any intermediary organizations. It is essential that all the costs involved are identified and all the benefits are recognized. Costs and benefits must be quantified as much as possible.

In conducting the economic feasibility analysis it is useful to have as broad a concept as possible of the costs and benefits involved and to include negative and positive impacts on the ecological environment and on the social relations of the people in the communities covered.

Guide questions

(a) What are the developmental and immediate objectives of the programme? What are the expected results? Who are the immediate and ultimate beneficiaries of the programme? What and how much will these benefits be?

(b) What are the direct and indirect costs to be incurred in obtaining the desired programme results? Will the results and benefits justify the costs incurred? What will be the consequences (negative and positive) if the programme is not implemented?

(c) Could the same results be obtained using a different strategy and approach? What would be the estimated costs of this alternative strategy? How do these costs compare with those to be incurred by the current programme?

(d) Are there any social costs involved? What sacrifices need to be made to obtain the future benefits? Will the policy or programme benefit one particular target group at the expense of another?

(e) What will the impact of the policy or programme be on the environment?

5. Socio-cultural feasibility analysis

This analysis assesses the acceptability to society (including actors and stakeholders) of the policy or programme with respect to cultural norms. If the policy/programme itself or its approaches, strategies and methodologies do not conform to the value systems and norms of the society or the specific target group, then problems may arise during the course of policy/programme implementation and its sustainability will also be in question.

It is useful to carry out this analysis on two levels: at the level of the nature of the policy or programme and at the level of implementation strategy and methodology. Sometimes a programme is culturally acceptable, but the way it is implemented conflicts with certain norms. This is sometimes encountered in programmes to promote the entrepreneurship of women where the notion of women's increased participation in business may be acceptable but the training arrangements may not be and deter many of them from participating.

Some policies and programmes are intended to contribute to cultural change (e.g. develop an entrepreneurial culture in a specific target group), and in such cases, it is essential that the cultural milieu is recognized and that appropriate programme strategies are adopted. For example, traditional village heads and opinion leaders could be involved in an entrepreneurship programme.

Guide questions

(a) What has been the dominant economic system in the country's, or the programme's, area of operation - a centrally planned or a market economy? How much appreciation and awareness is there of market mechanisms, competition, quality, and cost-effectiveness? What are the more common success role models of the society: progression and achievement in government bureaucracies, success in political party politics, success in business undertakings, or the recognition given to innovation and enterprise?

(b) Who are the target groups of the SME development programme? Do they have particular social norms, cultural traditions, or religious beliefs and practices that may adversely affect the successful implementation of the programme? What features of the programme builds on or take into consideration these particular social, cultural and religious norms?

6. Goal achievement feasibility analysis

In the goal achievement feasibility analysis, the policy or programme is assessed to determine whether it will indeed contribute to the attainment of the intended goals and objectives. The linkages between the development objectives (e.g. economic growth, employment generation), the immediate objectives (e.g. management development of SMEs, strengthening a small enterprise development institution), the programme strategies, outputs, activities and the resource inputs are analysed. If there are no clear relationships or correspondence between them, then the likelihood of the policy or programme achieving its objectives is doubtful. Here, questions are asked concerning whether the programme is addressing the underlying causes of a problem, and how, assuming that the proposed policy/programme is implemented as designed, it will contribute to solving the problem or achieving the end goals.

Guide questions

(a) What are the objectives of the policy or programme? Are the indicators of their achievement clearly defined? Are the programme's goals and targets realistic given the time frame and the resources available?

(b) Are the key factors (e.g. market availability, inputs availability, target group competence, infrastructure, communications, local political economy, etc.) which will determine the successful achievement of the programme's objectives adequately recognized and analysed? Are they adequately addressed by the programme's strategy and approach, and by the different programme components?

(c) What key assumptions form the basis of the programme strategies, approaches and components? How valid are these assumptions? Will they still be valid if there is a change in the economic and business conditions or if there is a change in political leadership?

(d) What are the specifications of the expected outputs of the programme and its components? Are the proposed quantities and timing adequate? How will these outputs contribute to the achievement of the desired impacts, results and objectives of the programme?

(e) What activities will be undertaken to produce the planned outputs? Do they constitute the most efficient way (given the operating circumstances) of producing the outputs? Are there any preconditions and prerequisites called for to ensure the effectiveness of the activities in producing the outputs? Realistically, can these prerequisites be met?

(f) Are the resources (inputs) appropriate and adequate for the activities planned and the outputs desired. Can they be provided when required by the programme's workplan?

(g) What could go "wrong" that would prevent the programme from achieving its objectives? Is there any event that might be "unforeseen" and could negatively affect the programme? What is the probability of such an event taking place during programme implementation? What contingency plans have been made?

(h) Has a system of programme monitoring and review been included? Could such a system pick up and assess any changes in operating conditions or deviations from the original plan in time to allow for corrective actions to be taken?

7. Infrastructure feasibility analysis

Here, the availability and adequacy of the necessary institutional and physical infrastructure is assessed. In order to succeed, a SME development programme will need access to certain support services. For example, a rural enterprise creation programme will require roads and transport to get the products to market, power, communications facilities, etc. Similarly, the access and proximity to sources of finance, technology, market information, etc., will affect the effectiveness and success of the programme.

The availability and adequacy of institutional and physical facilities for the delivery of the programme's services to the target groups must also be assessed. For example, the outreach and coverage of training and extension services can be obstructed if adequate transport facilities are not available to reach the target groups.

Guide questions

(a) Where will the programme and its components be implemented? Are the road network and transportation facilities adequate? How about communication facilities, and the availability of power and water?

(b) Can the produce of the SMEs easily reach the target markets?

(c) How about access to inputs such as finance, raw materials, technology and equipment?

(d) Does the implementing organization have a adequate network of offices and field workers to reach the target groups and provide the services envisioned in the programme? Does the organization have adequate transport and communications facilities to implement the various components and activities?

8. Absorption feasibility analysis

If it is intended that the target group (e.g. credit scheme through a mutualist credit association) or counterpart organization (a local SME development institution or a non-governmental organization) will eventually take the programme over, their capacity to do this must be assessed. The appropriateness of the programme and its technology for the resource endowment, competencies, organizational dynamics, attitudes and orientations of the target group or target institution will determine, to a large extent, whether they will be able to continue and sustain the programme. If the target group/institution does not have this absorptive capacity, questions need to be asked about whether the programme's design and implementation strategies will enable them to acquire this capacity.

Guide questions

(a) Will the programme provide real benefits (tangible and intangible) to the target group and intermediary institutions? Are the proposed benefits substantial enough to encourage them to make the necessary time, financial, social and emotional investments to enable them to assimilate the innovations introduced and to continue the programme's activities?

(b) What are the present economic activities of the target group and/or of the organizations to be involved in implementing the programme? Are the types of business and economic activity to be introduced by the programme related to current activities? Are new attitudes, knowledge and skills required by the target group and the participating organizations? Are these easy to acquire and develop? Could they be acquired by the target group and participating organizations during the programme's period of implementation?

(c) What new technologies, work methods, work organization, social structures and other innovations will the programme introduce to the target group and participating institutions? Do they have the necessary skills, education, social structure and traditions to enable them to assimilate these innovations easily?

(d) How do the resource requirements of the innovations compare to the resource endowment, or accessible resources, of the target group and participating organizations? Will the resources available sustain the programme innovations and activities when the external support is withdrawn?

References and suggested reading

Asian Development Bank (1988): Emerging issues in Asia and social cost benefit analysis, Manila.

Austin, J.E. (1990) Managing in developing countries, Free Press.

Cody, J.; Kitchen, R.; Weiss, J. (1990): Policy design and price reform in developing countries, London, Harvester Wheatsheaf.

Dembinski, P.H.; Volery, T. (1994): Small enterprise development: Taxonomy of intervention schemes applied to the Swiss case, Geneva, ILO.

Gibb, A.A. (1988): Stimulating entrepreneurship and new business development, Geneva, ILO.

Hansom, D. (1994): Economic policy framework for the promotion of small and medium scale enterprises in Africa, paper presented at the Senior Policy Workshop on Stimulating and Sustaining Small and Medium Scale Enterprises through Effective Outreach Programmes, Access to Finance and the Improvement of Legal and Regulatory Environment, organized by the United Nations Economic Commission for Africa, Addis Ababa, Ethiopia.

ILO (1995): Design, monitoring and evaluation of technical cooperation programmes and projects: A training manual, Geneva.

ILO (1986): Promotion of small and medium-sized enterprises, Geneva.

Koppel, B.M. (ed.) (1990): Structural adjustment and policy reform: Impacts on SMEs in Asian economies, Tokyo, Asian Productivity Organization; and Honolulu, Hawaii, Institute for Economic Development and Policy of the East-West Centre.

Mahajan, V.; Dichter, T.W. (1990): "A contingency approach to small business and microenterprise development", in Small Enterprise Development, Vol. 1, No. 1, Mar. 1990.

Overseas Development Administration (1988): Appraisal of projects in developing countries, London, Her Majesty's Stationery Office.

Steel W.F. (1991): Analysing the policy framework for small enterprise development, paper presented at the Conference on Small and Micro Enterprise Promotion in a Changing Policy Environment: Special focus on Africa, The Hague,

Theocharides, S.; Tolentino, A. (1991): Integrated strategies for small enterprise development: A policy paper, Geneva, ILO.

Tolentino, A.; Theocharides, S. (1992) Strengthening existing small enterprises, Geneva, ILO.

UNCTAD (1995a): Creating an enabling environment for the development of enterprises, particularly small and medium-sized enterprises, Geneva.

UNCTAD (1995b): The role of small and medium-sized enterprises in export development, Geneva.

Annex 2

Examples of laws and regulations that affect SMEs

The following list is not comprehensive nor exhaustive. The range of laws and regulations that affect businesses will be particular to specific countries. Also, the degree of constraints and the administrative burden they impose on SMEs will differ from country to country and even from one region to another within a country. When doing an analysis of the legal and regulatory environment it is best to get the views and opinions of those who are directly affected by them, i.e. existing SME entrepreneurs and managers and even those contemplating starting a business and those deterred from starting one.

A. Laws that affect in general the ability of people to start and engage in business

(a) Laws on business forms and other forms of associations.

(b) Laws concerning the conduct of commerce and trade.

(c) Laws on property rights and rights to enter contracts particularly as they relate to women or a particular target group.

(d) Laws concerning obligations and contracts.

B. Legal and regulatory requirements related to starting a new business

(a) General licence requirement to engage in business, occupation or trade.

(b) Specific licences and permits required to operate and trade in particular industry branch or sector e.g. in food services, transport, construction, chemical processing, hotel and accommodation, natural resource exploitation and processing, etc.

(c) Licences required by zoning regulations and building codes.

(d) Permits and licences required to acquire and handle particular machinery and materials.

(e) Permits for the installation of power and utilities and for waste disposal.

(f) Registration and administrative requirements related to employing people in the business, e.g. social security, health insurance requirements, etc.

(g) Special registration requirements to access SME support programmes and incentives, e.g. soft loans and credit guarantee, participation in incubation programmes, lease purchase arrangements for equipment, access to particular markets like government contracts, etc.

(h) Registration requirements related to national and local taxation.

C. Legal and regulatory requirements related to running a business

(a) Reporting requirements related to taxation.

(b) Reporting requirements related to specific licences and permits to engage in business in specific branch or sectors of industry.

(c) Licences and permits required to transact business in a particular market, e.g. subcontracting, importing, exporting.

(d) Licences and permits to transport goods and raw materials.

(e) Periodic clearance requirements, e.g. safety and health, building inspection, waste disposal and handling.

(f) Reporting required in connection with employees, e.g. hiring and lay-off, social security schemes, health insurance, training levy, etc.

(g) Reports required by particular government ministries or agencies, e.g. ministry of industry and trade, of labour, of the environment, of national planning, etc.

(h) Reports required by local ordinances.

(i) Reports required by support programmes and incentives schemes.

Annex 3

Typical problems addressed by SME promotion programmes

This list which is neither exhaustive nor comprehensive of typical problems encountered in SME promotion does not provide generalizations about the problems faced by SMEs. These enterprises are so varied in terms of business operations, resource structures, technology profiles, market profile, etc., that generalizations are not possible or justified. The list, therefore, is only illustrative and intended to provide the consultant or analyst with an idea of the problems that may be identified during an analysis of the SME environment. Problems identified during the analysis carried out at the preparatory phase prior to the formulation of a SME development programme will reflect the specific situation of the target group and of the geographical area. Problems may be symptoms of underlying weaknesses. It is therefore most important to consult with and involve programme target groups, implementors and policy makers, in identifying the priority problems and in uncovering their underlying causes.

Problems faced by SMEs in general

Very shallow technological level

Limited product range

Too much concentration on trading activities

Limited linkages to domestic input and output markets

Too much dependence on imports for raw materials and sub-assemblies

Lack of subcontracting and other linkages with large firms

Lack of interfirm linkages among SMEs

Lack of representation and participation in policy matters

Problems at enterprise level

Difficult to raise the capital required (fixed and working capital) to start a business

Lack of collateral

Cash flow problems

Hand-to-mouth financial existence, lack of financial reserves

Difficult access to formal credits, banks prefer larger borrowers

Credit too expensive

Difficult access to market

Products of poor quality

Difficulty in meeting clients' delivery requirements

No information on market demands and new products

Too much dependence on large firms or on a single client

Difficult to compete with large enterprises and with imports

Small number of clients, very irregular sales

Too much competition from new businesses that are coming-up

High vulnerability due to limited product lines

High costs of inputs

Raw materials not available

Excessively high costs of operation

No profit

Too many rejects and wastes

Very old equipment and inappropriate machinery and processes

Very difficult to find and retain competent employees

Too many fees and taxes to be paid

Problems by owners and managers of SMEs

Business grown too complex to manage

Not enough time to attend to the various aspects of the business

Lack of business experience

Lack of technical know-how

Too much interference by family members

Unable to separate business finance from family finance

New production and technology too complex

Nobody to take-over the business

Lack of access to training

Problem on laws and regulations affecting the SMEs

Lack of information on the target SMEs

Absence of clear development strategy and policy for SMEs

Discriminatory regulations

Too many regulations to observe

Harassment by local officials and regulation enforcers

Too many licenses to get

Regulations impose excessive paperwork

Enforcers and entrepreneurs not knowledgeable on applicable regulations

Business contracts cannot be enforced

SME prevented from transacting business in desired locations

Too many rules to satisfy when hiring or firing workers

Many fees and taxes to pay

It takes too long to get the registration and licences to operate

Licences and permits obtainable only in the capital city

Problems of support programmes and institutions

Lack of coherence and coordination

Impossible to recruit and retain competent and motivated staff

Difficult to raise funds for the SME support programmes

Too much duplications

Programmes are determined more by donor preferences rather than actual needs of target groups

Programmes do not address the underlying constraints faced by SMEs

Insufficient geographical coverage

Institutions are managed like bureaucracies

inconsistent operating policies e.g. in interest rates of credit schemes

Costs of assistance per beneficiary too high

Intervention methods not suited to the requirement and absorptive capacity of target group

Too much interference by government

Problems of technical assistance from donor community

Volume of assistance insufficient

Unhealthy competition among donors and programmes

Lack of donors' coordination

Lack of focus

Too many conditionalities

Conflicting objectives for SME development

Unclear criteria of project performance assessment

Too much interference in project implementation

Frequent changes of donor's technical officer looking after the project

1. Taken from Managing in developing countries by J.E. Austin, London, The Free Press, 1990.

2. A programme is a coherent framework of action to achieve certain development objectives. It is comprised of separate sets of activities (grouped under different components or sub-programmes and operationalized in terms of projects) which are oriented towards the attainment of specific immediate objectives. A national programme for the development of small and medium enterprises can be aimed at achieving one of the development objectives listed in section 1(a) and have, for example, as components the setting-up of a supportive legal and regulatory framework, the establishment of sustainable SME development financing schemes, technology upgrading, and entrepreneurship and managerial development.

3. The information required is arranged according to Sections of a programme document. Various governments and donor agencies have their own format requirements for a programme document. When a programme document is being prepared for a donor, it is necessary to ascertain whether a particular format should be followed.