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Foreword

I am pleased to see this series of working papers produced as outputs of the ILO/UNDP Micro and Small Enterprise Development and Poverty Alleviation Project in Thailand. As the UN agency with special responsibility for employment matters, the ILO is concerned about employment in all sizes of enterprises, in both the formal and informal sectors. The ILO is as much concerned about the quality, as the quantity of jobs created. This point is well amplified in the recent report on "Decent Work" by the ILO Director-General, Mr Juan Somavia.

From related studies carried out by the ILO following the financial crisis in East Asia, it is apparent that both the level of employment and the quality of employment conditions in Thailand have been adversely affected by the crisis. Consequently, the work being undertaken by this project is most timely, assessing as it does the role of micro and small enterprise (MSE) development in poverty alleviation and employment creation.

Governments are no longer expected to be the principal providers of jobs - jobs should be and are increasingly being created by successful, well-managed private sector enterprises. However, governments do have a vital role to play in ensuring that the policy environment is 'enterprise friendly'. The path into enterprise should be smooth, and entrepreneurs should be able to receive relevant advice and support (both financial and non-financial) in a highly effective manner from both government and private sector agencies. The needs of the MSE sector should be clearly identified, and linked with a better understanding of the scale and scope of the enterprise sector and its role in national development. At the same time, those employed in enterprises, the organizations that represent them, and the management of these enterprises should be able to mutually consult to ensure decent work and optimum productivity.

A broad range of important aspects of MSE development are addressed in this set of six working papers. Together they provide a substantial body of knowledge and significant inputs for policy-makers and decision-makers in Government, the private sector, those employed in enterprises, international organizations and the donor community, as well as for entrepreneurs themselves.

Given the prominence of the small and medium enterprise sector in Government policy, this information is being made available at an appropriate time. It is also highly relevant, coming as it does at a time when the ILO has recently completed a Country Employment Policy Review in Thailand, as well as providing support to make its Start and Improve Your Business (SIYB) training materials available for extensive use in Thailand.

Rueben Dudley

Officer-in-Charge

ILO/EASMAT

Bangkok, Thailand

February 2000

Preface

This working paper, International best practice in micro and small enterprise development, prepared by Maurice Allal, has been produced as part of the ILO/UNDP Support for Policy and Programme Development project on Micro and Small Enterprise Development and Poverty Alleviation in Thailand (THA/99/003). A full description of this project can be found in the project document, which is available on request.

This series of six working papers is the combined output from the team of national and international consultants engaged by the ILO in Thailand between March and June 1999. Preliminary findings for each of the reports was shared with a group of key informants at a workshop/consultation, held at the Royal Princess Hotel, Bangkok, in May 1999. We are indeed grateful for all comments and feedback received at that workshop. While every effort has been made to ensure the accuracy of the information in these reports, we regret any omission or error contained herein. These working papers are intended as a means of advancing the public debate on the small enterprise sector in Thailand, and the ILO is eager to share this information with the widest possible audience.

The term "micro and small enterprise" (or MSE) is not commonly used in Thailand, as more frequent reference is made to the designation, "small and medium enterprise", or SME. Each of the ILO consultants has made some reference to the issue of definitions of micro, small and medium enterprises, and Paper six in the series is dedicated to this topic. Therefore, to facilitate a clear and unambiguous understanding of these working papers, we have been at pains to make distinctions between different categories of small enterprises. We believe that the issue of definitions is not simply one of semantics.

One basic premise of this project is that there is a significant number of smaller enterprises which do not fit into the conventional enterprise support programmes of the Royal Thai Government. With targeted forms of support, these enterprises could improve their productivity and competitiveness, make a greater contribution to generating wealth and alleviating poverty among the families of owners and workers alike, and create more jobs.

The ILO has been supporting micro and small enterprise development for more than three decades. In 1998, in a significant landmark event for the Organization, the ILO's Conference - at which Thailand was represented - unanimously adopted a new Recommendation on Job Creation in Small and Medium-sized Enterprises (No.189). Because of its extreme relevance to the subject of our enquiry, we have reproduced this Recommendation as an Annex. Particular attention is drawn to sections 11 and 8, dealing with the development of an effective service infrastructure and actions in times of economic difficulties, respectively. In addition, to coincide with this new Recommendation, the ILO launched a global International Small Enterprise Programme (ISEP) to provide technical assistance for member countries, including Thailand. The work carried out under this ILO/UNDP project is also part of the ILO's ISEP programme.

Gerry Finnegan

Senior Specialist & Series Editor

ILO/EASMAT, Bangkok

Table of contents

Forward

Preface

Table of contents

Acronyms

Executive Summary

1. Introduction to business development services

1.1 Guiding principles of best practice in BDS

2. Assessing business development services

2.1 Indicators of good practice

2.2 Assessment of MSE needs

2.3 Assessing performance of BDS providers

3. Business development service instruments

3.1 Training

3.2 Access to information

3.3 Technology development and transfer

3.4 Access to larger and more profitable markets

3.5 Consultancy and counselling services

4. Providing business development services 40

4.1 Types of BDS organizations

4.2 Strengthening the capacity of service providers

4.3 Lessons learnt from international best practice

Annexes

I: List of web sites

II: Bibliography

III: ILO Recommendations concerning General Conditions to Stimulate Job Creation in Small and Medium-sized Enterprises, 1998 (No. 189)

Acronyms

Akili Advance Kenyan industry through local innovation

ApproTEC Appropriate Technology (organization)

BDS Business development services

CEFE Competency-based economies through formation of enterprises

DIP Department of Industrial Promotion (Ministry of Industry)

EASMAT East Asia Multidisciplinary Advisory Team (of the ILO)

EDA Enterprise development agency

EDP Entrepreneurship development programme

ERVET Emilio-Romagna regional support agency, Italy

ESSA Enterprise Support Services for Africa

FIT Farm Implements and Tools

GEMINI USAID-assisted MSE project

GIMPA Ghana Institute of Management and Public Administration

GTZ Technical assistance programme - Government of Germany

IDB Inter-American Development Bank

IDE International Development Enterprises

ILO International Labour Organization

ISEP International Small Enterprise Programme (of the ILO)

IYB Improve Your Business

LIUP Local Industry Upgrading Programme

KAB Know About Business

MSE Micro and small enterprise

NBIA National Business Incubation Association

NGO Non-governmental organization

PCS Business development service provider, Colombia

PROMICRO Regional federation of microenterprise associations, Central America

SITE Strengthening informal sector training and enterprise (Kenya)

SIYB Start and Improve Your Business

SME Small and medium-sized enterprise

SPX Sub-contracting and Partnership Exchanges

SYB Start Your Business

ULI User-led innovation

UNDP United Nations Development Programme

UNIDO United Nations Industrial Development Organization

USAID US Agency for International Development

Executive summary

This working paper is part of a series of six working papers prepared under the ILO/UNDP project on micro and small enterprise (MSE) development in Thailand. It reviews international best practice in the area of business development services ⁽¹⁾ (BDS) and assesses the potential for replication of some of the more promising approaches in Thailand. Readers interested in getting a full understanding of the various issues underlying the supply of and demand for business services in Thailand are encouraged to review this working paper alongside working papers 1 and 5.

The business development services (BDS) covered by this working paper include: access to various types of information of direct interest to micro and small enterprises; consultancy services; skill and business training; marketing services; and technology transfer and development. The main types of business development service providers reviewed and assessed include both institutional, not-for-profit business development service providers (such as government agencies, parastatal organizations, membership organizations, non-government organizations and associations of micro and small enterprises) and commercial for-profit business development service providers, such as consultants, consultancy firms and suppliers.

Various types of bodies provide business development services. These include government agencies, non-government organizations, private sector providers, and micro and small enterprises associations. These bodies may also be organised in networks, and the same services may be offered through a number of channels or sources of BDS. Similarly, the same channel or source may offer a number of services. Therefore, this working paper also reviews and assesses the more promising sources and channels of BDS based on international best practice.

The criteria for assessing the effectiveness of BDS instruments and performance are also described. These criteria relate to the outreach, efficiency, effectiveness and institutional and financial sustainability of the various BDS instruments and business development service providers reviewed in this working paper.

This working paper comes at a particularly opportune time when the Royal Thai Government has adopted a policy to gradually transfer the direct provision of BDS by government agencies to other service providers outside the Government. It is hoped that this working paper will be useful to the Government in deciding which types of BDS instruments and service providers should be promoted.

1. Introduction to business development services

Following the review and assessment of institutional business services development (BDS) providers in Thailand (see working paper 1 prepared under this ILO/UNDP project), this working paper elaborates on the coverage, concepts and issues relating to the design and provision of, and access to business development services and provides examples of international best practice.

Micro and small enterprises (MSEs) require two types of services: financial services and non-financial services - more commonly referred to as "business development services" or by the acronym "BDS". Financial services help existing or would-be entrepreneurs acquire the means for establishing or expanding a business (e.g. finance for machinery, production premises, and working capital). In the majority of cases, these services refer to bank loans or credit made available through wide-ranging credit schemes. In recent years, new types of financial services have been offered to MSEs. These include the leasing of equipment, joint ventures, and special types of subcontracting arrangements. The working paper on financial services (number 4), prepared under the ILO/UNDP project, provides information on financial services available for MSEs in Thailand.

Business development services (BDS) refer to the provision of information, knowledge and skills, as well as advice on the various aspects of a business. This definition of BDS implies a conscious action performed by the service provider for the benefit of the receiver of the service. Thus, the action of an individual using savings for establishing a business may not be considered as a "financial service". Similarly, information obtained inadvertently by an entrepreneur (e.g. on a supplier of materials) may not be considered an "information service". This is an important distinction that is not made by some practitioners who tend to use the term business development services whether a service provider is involved or not.

BDS are provided to help owners of enterprises get new ideas on how to improve their business through, for example, increasing productivity, reducing production costs, or accessing a more profitable market. These services include the transfer of information in various forms through, for example, consulting services or special events (e.g. exhibitions and trade fairs). The impact of this category of BDS depends on how the owners of enterprises make use of the new ideas.

Business development services may also be required for the establishment and operation of an enterprise. Services required in this instance may include legal services (e.g. registration of the enterprise), training of owners and workers, special laboratory services for testing goods produced by the enterprise, and assistance in arranging contracts with larger firms.

Formal BDS are those provided through special arrangements, conditions or contracts between a business development agency and the owner of the business. They include services provided by public and private sector organizations, private sector consultants and consulting firms, as well as services specifically included in a contract between the owner of the enterprise and a supplier or contractor. These services may be provided free-of-charge or for a fee. Informal BDS are those that are not provided by service providers. They include information and advice provided by the relatives, friends or employees of the owner of the enterprise, as well as those services provided in the context of normal commercial transactions with suppliers, clients or contractors. Informal BDS also include information obtained from media programmes (e.g. radio and television). These services are usually obtained free-of-charge. In many situations, these are generally the most important sources of BDS used by MSEs.

Business development services can be provided by commercial, for-profit agencies, or by institutions that are not-for-private-profit organisations. Those services provided on a commercial basis include the services made available by private consultants and consulting firms, as well as those provided under contract in the context of commercial transactions with suppliers, contractors or firms offering specialised services (e.g. repair and maintenance of equipment). The fees applied in these cases cover the full cost of the services. Making profits is the main motivation of these service providers. These services are demand-driven and client satisfaction plays an important role in the growth of these service providers. BDS provided on an institutional basis includes those made available by private sector organizations (e.g. chambers of commerce), government organizations and institutions or associations of MSEs and NGOs, under various arrangements and conditions. These services are usually provided free-of-charge or at subsidised fees, for non-private-profit motives, as part of the organization's mandate to promote the MSE sector. These services may or may not be demand driven. Indeed, good quality BDS providers respond to quantifiable demands of the MSE sector.

In most developing countries and emerging economies, those involved in MSE development usually pay more attention to financial services than to the non-financial BDS. Working paper 1 indicates that this is also the case in Thailand. This emphasis, however, is often misplaced. Many studies show that the large majority of micro-enterprises, and to some extent small enterprises, use their own savings for establishing a business or their accumulated profits for expanding an existing one. They do not attempt to obtain finance from external sources. Furthermore, MSEs are often discouraged by banks from applying for finance, and available credit schemes usually only reach a small proportion of the total population of MSEs. A large proportion of people wishing to establish a business are doing so, therefore, without the benefit of financial services.

Few existing or potential entrepreneurs can establish or expand a business without access to some form of business development services, as defined earlier. These may be formal or informal services, provided through commercial or institutional sources. The proportion of MSEs that never use development services of one sort or other is very small. Most MSEs need some information and training, whether this is provided through formal or informal channels. They may also need to deal with contractors or intermediaries if they are involved in subcontracting, or the services of a technician may be required for major repairs to their equipment. Access to quality BDS by MSEs can boost the growth and competitiveness of the enterprises. It can also increase the impact of existing financial services and improve the capacity to repay loans.

The impact of BDS depends on the proficiency of the service provider and on the use made by MSEs of other services. BDS should be demand driven, and the owner of the enterprise should recognise the need for BDS assistance. However, the service provider may also have a role in helping the entrepreneur to identify the specific problems of the enterprise, and in offering appropriate assistance. This sould ensure that the BDS services are relevant.

Service providers should be sufficiently qualified to provide good quality services. Consulting services should be based on a good understanding of the problems faced by the enterprise. The entrepreneur should have confidence and trust in the BDS provider, and this should increase the chances of the entrepreneur adopting and applying the relevant advice of the service provider.

MSE owners and managers are a mixed group. There are those that exhibit a high degree of initiative and who are able to actively seek and take full advantage of information. There are those who are more passive. Studies in several countries have shown that the former group comprises only five per cent of MSE owners, although this group contributes to over 50 per cent of new jobs. They manage what is called "growth-oriented firms", and are frequently referred to as the "gazelles". Therefore, a large proportion of the total impact of BDS could be attributed to this small group of entrepreneurs. If this is true, it can have important policy implications in relation to the provision of institutional BDS. Due to their limited resources, current providers can only reach a small proportion of all entrepreneurs. Therefore, they need to decide to give priority to the "gazelles" among entrepreneurs, or to assist any entrepreneur seeking such services.

The provision of BDS to this small group of entrepreneurs exhibiting a high degree of entrepreneurial spirit could be justified according to the criterion of maximum impact. However, from an ethical and political point of view, a formal policy on this issue may not be feasible. Furthermore, it can be a difficult, if not impossible task, to identify and find these "gazelles" or "winners".

The involvement of government and non-government organizations in the provision of subsidised BDS is prevalent in many developing countries and countries in economic transition. Few governments in industrialised countries are involved in the direct (or even indirect) provision of BDS. Some NGOs are involved in these activities, but they are few and mostly deal with vulnerable groups in society.

In industrialised countries, the provision of BDS is largely the job of the private sector, and is manifest in many forms. In relation to technology transfer, equipment manufacturers compete with each other in order to increase their share of the MSE market. They constantly develop equipment that is more advanced and use aggressive advertising to attract MSEs. The equipment is made available through a wide network of dealers, which also provide maintenance and repair services. Leasing of equipment is also available to interested entrepreneurs who may fear that equipment may quickly become obsolete. Innovators develop more advanced production technologies and sell their patents to larger firms for their commercialisation. Entrepreneurs subscribe to a wide range of technical magazine which provide information on the latest technologies and equipment. They visit specialised fairs and exhibitions where they can get first hand information on developments in their trade. Thus, it can be seen that many of the most important aspects of technology transfer are dealt with by the private sector.

The same applies to marketing information. In industrialised economies, many owners of MSEs tend to subscribe to various specialised magazines which provide the latest market information on their field of business. They become members of trade associations or chambers of commerce which represent the MSE sector. These organizations carry out research on market trends and manage information centres, which provide up-to-date market information to their members. This information can also be obtained from specialised fairs. A well-developed network of wholesalers and retailers, and good telecommunications, transport and financial networks facilitate commercial transactions and the quick processing of orders. More recently, many MSEs are making use of electronic commerce (called "e-commerce") through the Internet. However, such marketing information is not so easily accessed in developing countries.

The situation in the area of consulting services is somewhat different as MSEs in both industrialised and developing countries do not appear eager to use the services of consultants. A recent study in one part of Switzerland shows that a very small proportion of MSEs have used the services of a private consultant or consulting firm in order to find a solution to a particular problem or to get advice on how to improve their business. However, there are a few important differences between industrialised and developing countries in this respect. The majority of owners of MSEs in industrialised countries use the services of an accountant to help them prepare their yearly statement for the relevant authorities. Accountants also help in assessing the financial situation of the enterprise. Another difference is in the increasing use that MSE owners make of software to carry out various assessments of the enterprise, and to help decide on the best course of action. This software may be partly considered as a substitute for consultants.

Linkages between MSEs and larger enterprises, as well as among MSEs themselves offer additional possibilities for access to BDS. These linkages can take the form of joint ventures, subcontracting arrangements, technology transfer and marketing contracts. Such linkages are essential for the growth and international competitiveness of the larger enterprises, particularly in the face of globalisation and trade liberalisation. They also contribute to the development and growth of MSEs.

Similarities and differences between BDS in industrialised countries and developing countries and countries in economic transition can be found. The main similarity is that the large majority of MSEs access BDS from the private sector - either formally or informally. Studies carried out in a number of developing countries show that one of the most important sources of business services for MSEs are their suppliers and clients, as well as larger firms with which they have established subcontracting arrangements. Approximately five per cent of MSEs access business services provided by government agencies and NGOs. Another similarity is the infrequent use of consultants, the main difference being that accountants are generally used by MSEs in industrialised countries. However, the main difference between industrialised countries and developing countries is that MSEs in industrialised countries make a greater use of formal business development services. Furthermore, the average educational level of owners of MSEs in industrialised countries is generally higher than that of developing countries and emerging economies. These higher educational levels facilitate a more effective use of available services, especially those with a literacy requirement - such as many forms of training.

There are more sources of information in industrialised countries than in developing countries. Thus, entrepreneurs in industrialised countries are quickly informed about new technological changes, market trends, etc. This can help the entrepreneurs to make quick adjustments in the enterprise and maintain their competitive edge.

In contrast to MSEs in developing countries, those in industrialised countries are generally considered as equal players with the larger ones. They are associated to the larger enterprises through a dense web of linkages, which significantly increase the inter-dependence between all sizes of enterprises. These strong linkages facilitate further access by MSEs to a wide range of services. Furthermore, MSEs are well represented in private sector organizations and can play an important role in decision-making within these organizations. On the other hand, these linkages are still weak in developing countries, and few MSEs are members of private sector organizations.

In industrialised economics, many large equipment manufacturers and suppliers of raw materials and intermediate inputs are aware of the importance of the MSE market, and are active in responding to demand for capital goods, services and inputs from this market. In developing countries, large enterprises are less responsive to this market for reasons not clearly established. Thus, MSEs are frequently obliged to depend on suppliers of expensive imported equipment or sub-standard second hand equipment. Furthermore, maintenance and repair services are not easily available for this type of equipment.

Investment in education by both governments and the private sector should promote a new breed of better-educated entrepreneurs capable of competing with their counterparts in industrialised countries, and capable of using new information and other technologies in their business. Promoting more use of new information technologies and the facilities provided by the Internet for e-commerce or for accessing all types of information of interest to MSEs is also essential.

In expanding the role of the private sector in BDS provision, private sector organizations should promote a broader membership base to increase the representation of MSEs. They should take measures to strengthen, expand and diversify linkages between all sizes and types of enterprises. Larger firms should be encouraged to review their current strategy for growth to determine whether such strategy pays sufficient attention to possibilities for expanding and strengthening linkages with MSEs, and improving the business performance of their "smaller" (MSE) business partners.

1.1 Guiding principles of best practice in BDS

These guiding principles are based on international best practice in the delivery of quality business services to micro and small enterprises. Several practitioners have shared their experiences and ideas at a series of workshops and other similar events over the past few years. The driving force behind these guiding principles is the Committee of Donor Agencies for Small and Medium Enterprise Development, which is made up of a large number of international donors, UN agencies (including the ILO) and international NGOs. These guiding principles are considered to be sufficiently elaborated for application under most socio-economic environments. They are summarised below.

i. Ensuring that BDS services are provided to the right clientele: The main objective of facilitating access to good BDS by MSEs is to help them to grow and become more competitive and profitable. This objective implies that BDS should be provided to those who exhibit good entrepreneurial characteristics and can make a good use of the services. Whether full fees are charged for the services or not, the provision of BDS should be considered as a commercial transaction between the entrepreneur and the service provider. Both the client and the provider of services should be satisfied with the transaction. Therefore, a clear distinction should be made between this type of business transaction and one based on social welfare considerations involving individuals with no real capacity to establish and run a business. (Such is the case with many income generating activities intended for people who would otherwise have been forced to depend on charity or welfare for their livelihood.)

ii. Ensuring that BDS are demand-driven: Experience shows that institutional service providers often neglect to assess the type of services needed by their clients. In these cases, services (especially information services and training) are mostly supply-driven and do not reflect the real needs of the clients. Under normal commercial conditions, service providers would make a loss because clients would not pay for services that do not correspond to their needs. In cases where services are free of charge or highly subsidised, clients may accept the service although it may be of little use to them. This is often found in training, when trainees are provided with financial or other incentives for participating in training courses. Thus, ensuring that services are demand-driven presents two advantages: it can create a greater and more positive impact on the business, and it can encourage clients to start paying for the services they value.

iii. Ensuring a strong sense of ownership: International experience shows that the best business providers are people working in environment, which induce commitment and a strong sense of ownership. This is often found amongst not-for-profit organizations or commercial firms where the managers and staff members have a clear idea about the objectives of the organization and long-term plans for growth within the organization. These conditions do not generally apply to large bureaucracies where staff rotation may be the norm, achievements are not always recognised and goals not clearly defined.

iv. Ensuring maximum outreach: MSEs have always been able to access some basic services without the assistance of institutional service providers. Most studies show that 90 to 95 per cent of MSEs receive BDS services as part of their commercial transactions with clients, suppliers or contractors. They get useful information from friends, relatives or people in the same business. Owners and workers are often trained on-the-job. This does not mean that these services are all of the best quality. They are, however, sufficient for their immediate needs. Therefore, the objective of maximum outreach--in terms of helping MSEs all over the country to obtain good quality services that have a positive impact on their business--should be established. This is often best achieved by strengthening private sector service providers, creating better networks between service providers, and promoting informal systems of learning.

v. Ensuring integration of BDS and financial services: Whilst there are differences in opinion as to whether the same organization should provide both BDS and financial support services, it is generally agreed that integrating these supports is essential. One approach to achieving this is to accommodate both services in the same organization, whilst ensuring that the unit in charge of financial services operates independently from the one providing BDS. Also, it is generally agreed that clients should not be forced to pay for business services in order to get a loan.

vi. Ensuring cost-effectiveness: Any enterprise strives to control costs to remain competitive or increase profits. This should also be the case for service providers, whatever their legal status. Achieving maximum cost-effectiveness yields many positive effects. More clients can be served with the same available resources and the cost of services can be reduced. The reduction of costs may be achieved in a number of ways. There may be improvements in working procedures or in the introduction of office automation. Staff productivity may be enhanced through performance-based bonuses. Some services can be sub-contracted, and preference may be given to providing services to groups or associations of MSEs with a view to simultaneously reducing costs and reaching a larger number of clients.

vii. Ensuring that BDS services achieve the greatest impact: The growth of an enterprise can depend, among other things, on the entrepreneurial spirit and qualifications of its owner and on the quality of BDS services it can access. Service providers should be concerned with the impact of their services on the enterprise and, therefore strive to provide services that are responding to demand and of sufficient quality. It is important that BDS providers regularly assess the impact of their services. This can be done through a variety of ways and can be complemented by the development of performance indicators to measure the desired impact.

viii. Ensuring financial sustainability: Sustainability in BDS can be defined at two related levels. Firstly, sustainability is concerned with the delivery of effective, demand-led services to MSEs on a sustainable basis. This means building the institutional capacity of service providers as well as their financial viability. Secondly, sustainability is about ensuring that the MSEs themselves are sustainable, making long-term contributions to the generation of high-quality employment, and to economic growth. However, the term "sustainability" is most often associated with the financial sustainability of the service provider. When used in relation to the enterprise that benefits from BDS, this term refers to the long-term impact of the services on the enterprise.

2. Assessing business development services

A large number of studies, reports and guidelines were used for this review. However, the main source of information is a report published by the Donor Committee on Small Enterprise Development that is made up of representatives of the major international agencies, donors and non-government organizations involved in MSE development. This Committee commissioned the preparation of guidelines on the issue of BDS, based on an extensive review and analysis of the approaches used in the area of BDS by the members of the Committee (Business Development Services for Small and Medium-Sized Enterprises: Preliminary Guidelines on Donor-Funded Interventions). These Guidelines were published in 1998 by the ILO, which was assigned the responsibility for this task. Following the publication of these Guidelines, the Committee organised two regional workshops for a further exchange of ideas and experiences relating to the provision of and access to BDS by MSEs: in Harare (Zimbabwe) in 1998, and in Rio de Janeiro (Brazil) in 1999. Papers presented at these two workshops were also used in the preparation of this working paper. Other major reports on the issue of BDS were also reviewed.

Some of the examples of best practice reviewed here are also based on a number of technical assistance projects (completed or on-going) implemented by the ILO in a large number of countries in Asia, Africa, Latin America and Central Europe.

In the context of this working paper, the term "international best practice" refers to a range of approaches for promoting access to quality and sustainable BDS, which have been successfully applied in a number of countries or have been proven particularly promising. It should be stressed that these approaches would not necessarily succeed in other countries or even replicated in the country where they were originally developed for a number of reasons. Firstly, the structure of the economy and cultural factors largely determine whether an approach may succeed or fail. Secondly, experience shows that potentially good approaches are more likely to succeed if they are initiated by individuals who exhibit drive, motivation, honesty, and inventiveness.

Therefore, it is possible that the replication of some of the approaches that have been successfully applied in other countries may not succeed in Thailand if the economic structure and cultural factors are not conducive to replication. In other cases, the approaches may need to be adapted specifically to the Thai environment. In all cases, the successful replication of promising approaches can depend to some extent on the choice of the individuals assigned the task of replication.

The main objective to facilitating access to quality BDS by MSEs is to help them improve their overall performance. Achieving this objective should lead to their growth - that is, that they employ more workers and become more profitable. Good practice, therefore, has to be seen in relation to this overall objective.

2.1 Indicators of good practice

This section discusses the meaning of good practice and the use of benchmarks for assessing the performance of service providers. Good practice in BDS interventions is defined here with respect to four essential levels of impact and four broad performance criteria. The impact should be measured at the enterprise level (i.e. changes in the behaviour and capacity of the owner of the enterprise); the meso or service provider's level (i.e. changes in performance); the household level (improvements in living conditions resulting from the better performance of the MSE ); and at the macro level (changes to the policy and regulatory environment resulting from the provision of sustainable and better quality BDS). However, this working paper will focus on impact at the enterprise and meso levels only.

The main performance criteria used to measure good practice are:

- Outreach--i.e. number of enterprises and organizations reached by the interventions;

- Efficiency--i.e. how resources are used by the service provider for implementing its interventions;

- Effectiveness--i.e. whether or not the interventions achieved their stated objectives; and

- Sustainability--as previously defined in Chapter 1.

It may be difficult to measure the performance of business development service providers based on the above criteria, especially because there may be conflicts between some of the criteria (e.g. strong outreach may be achieved to the detriment of impact at the enterprise level).

Given the above criteria, it is necessary to develop qualitative and quantitative indicators of good practice. One may choose one or more indicators when taking into consideration the specific objective. While it is possible to find long lists of indicators in the literature, it will be necessary to develop practical indicators that reflect local circumstances.

There are two main types of indicators. Firstly, there are those pertaining to the service provider (internal indicators), such as efficiency and outreach, which measure the performance of the provider but may not give useful information on the impact of its services on the actual enterprises. Secondly, there are those pertaining to the ultimate objective of the provider's intervention, such as the creation of large numbers of growth-oriented enterprises.

While quantitative indicators (e.g. the number of enterprises serviced each year) may be easier to apply and to use in evaluations of the service provider, they can be misleading. For example, while the logbooks of a provider may show that contacts were established with thousands of entrepreneurs, it is plausible that only a few actually benefited from the services. The contrary could also be true - the number of entrepreneurs may be low, but most of them may have benefited significantly from the services.

Qualitative indicators are more difficult to apply, but can yield extremely important findings on both the business development service providers and their clients. These may include changes in behaviour, which could have important long-term effects on the enterprise than, for example, a short-term assistance in marketing. While one can find a large number of examples of indicators in the literature, it is best to develop one's own indicators to reflect local circumstances, intervention objectives, and the characteristics of the clients.

Responsibility should be assigned to the business development service providers to develop indicators of business development, although they could also benefit from technical assistance from specialised organizations. In assessing the service providers themselves, it may be necessary to involve relevant government departments or donors to decide which indicators to use. These "outsiders" may also use their own staff or consultants to assess the performance of the BDS service providers. In addition, the business development service providers may also wish to assess their own performance, whether they benefit from subsidies and external support or not.

2.2 Assessment of MSE needs

The importance attached to assessing the needs of MSEs before designing the development has been increasing over the past ten years, in parallel with economic and political liberalisation. People must express their wishes and be full participants in programmes that affect them directly. Some donors have been active proponents of this policy and apply it systematically in their technical co-operation programmes. The terms 'demand-driven' or 'demand-led' can now be found prominently in most project documents.

Another phenomenon, which may also explain the increased focus on needs assessment, is the gradual transfer of the business development activities from government to the private sector or semi-private bodies. Thus, business development services are being viewed as commercial activities, especially in the context of the increasing pressure to achieve financial sustainability. Consequently, business development service providers are beginning to behave like the owners of successful enterprises who pay special attention to market research, i.e. through carrying out market or needs assessments.

Needs vary according to a wide range of variables, including location, size of the enterprise, sex of the owner, type of sector, etc. Good practice means that the service provider should try to be as precise as possible in the assessment of needs.

Before describing various approaches to assessing the needs of MSEs, it is important to clearly define what is meant by MSEs' needs. In summary, there are three types of needs. These are:

- felt or perceived needs based on the entrepreneur's own assessment of the problems and potential solutions;

- logical or real needs, which are the result of the service provider's own analysis of the situation; and

- demand, as expressed by the entrepreneur who is willing to pay for assistance to solve a problem or pursue an opportunity.

Many donors and local service providers have carried out studies aimed at identifying the felt needs of entrepreneurs in countries such as Kenya, Dominican Republic, Zimbabwe and Malawi. Although the priority needs were not the same in the countries surveyed, all respondents in these countries mentioned three major service needs: credit, training and marketing.

In view of the three types of needs mentioned above, the consensus has been that business development agencies should respond by giving priority to the felt needs of the entrepreneurs, as well as their willingness to pay. However, this should not prevent the service providers from educating entrepreneurs about other "logical" needs they may have, but are not be aware of, or about the existence of new, more effective interventions. Many successful examples of service providers who decided to respond to the felt needs of the entrepreneurs clearly constitute examples of good practice. Two service providers in Kenya, ApproTEC and SITE, were able to recover 100 per cent and 50 per cent of their training and other costs respectively, partly because the trainees were ready to pay for services they regarded as being particularly important to them.

Various approaches to needs assessment have been developed and used in different countries. The more successful ones make use of five guiding principles ⁽²⁾

- The individual in charge of the needs assessment should be psychologically close to the MSE client. Such a person usually has a crucial influence in determining which needs will be assessed and, ideally, is also be in charge of the planned interventions.

- The MSE client should participate fully, both in the needs assessment and the design of interventions based on the assessment. This should yield better intervention design and develop a stronger sense of client ownership.

- A needs assessment exercise should not be a one-off activity. The service provider should visit clients periodically to determine if further assistance is needed.

- It is important to develop a tight focus, and problems and interventions should be described in detail. Generic interventions based on general statements are not normally very useful.

- It is very important to explain how support interventions should be delivered and carried out - for example, there may be few clients for a training course that is held at the wrong hour or the wrong day of the week.

These guiding principles have been used in the development of a number of needs assessment techniques, two of which are described below.

i. Needs assessment based on a sub-sector analysis

The success of this needs assessment technique depends on a number of factors. First, it is important to choose the right sub-sector, based on discussions with representatives of the entrepreneurs in the sub-sector. Second, one should produce an accurate sub-sector "map" - a detailed description of the major characteristics of the sub-sector. Third, it is very important to understand the sub-sector dynamics: who are the main actors and what are the driving forces? What are the challenges, constraints and opportunities? Fourth, it is necessary to develop a sub-sector development strategy, and then plan the interventions accordingly. Examples of successful programmes based on this sub-sector approach are described with some detail later in this working paper.

ii. Action-research

Action-research is based on cycles of action, followed by reflection, then by further actions. Local service providers can learn by doing and they can share their new knowledge with their own clients. Since MSE owners and managers are more likely to be able to take account of the complexity of their own particular situations, the solutions that they themselves generate should be more sustainable. Action-research projects should come to an end once the approach developed through the project becomes operational and can be easily replicated by other business development service providers.

2.3 Assessing performance of BDS providers

A good assessment should be based upon solid monitoring of the BDS support. The cost of an assessment should not be excessive, and it should not exceed ten per cent of the total project budget. The assessment exercise should be both rigorous and practical, with clear recommendations for further actions.

While many manuals are available on how to assess the performance of organizations in general, assessing the performance of BDS service providers is a complex undertaking not normally catered for in such manuals. There are three major effects which are difficult to assess, and which could considerably reduce the reliability of the assessment. The first is that business development services are only one factor among many that affect the growth and competitiveness of enterprises. It is, therefore, necessary to isolate the effects of BDS, and this can usually be done by the use of a control group. However, many evaluators are reluctant to use this technique for ethical and cost reasons. Secondly, it is difficult to estimate the "snowballing" effect of the BDS, where other entrepreneurs who are not formally covered by the intervention obtain information and ideas from the same intervention. Finally, business services provided to an entrepreneur by a government agency or not-for-profit organization may actually have a negative effect on another entrepreneur who did not benefit from these services (e.g. cases of excess production of the same good in a limited geographical area), thereby creating a displacement effect. Thus, any negative effects should be set off against the positive ones.

The difficulties mentioned above clearly show that assessing the performance of a BDS service provider is very complex. It requires highly qualified staff and can be somewhat expensive. These kinds of assessments are very important in view of the large amount of money spent every year on promoting business development service providers. Countries cannot afford to ignore this issue and, therefore, government agencies and other organizations should carry out some extremely professional and in-depth assessments to determine whether the public investment in this area is justified. The assessments should not only focus on specific business development service providers, they should preferably cover the raange of different BDS approaches used by a number of providers.

3. Business development service instruments

Access to quality BDS by MSEs implies the existence of various business development instruments and channels through which these services can be provided. This chapter describes the following business development instruments:

(1) training;

(2) access to information;

(3) technology development and transfer;

(4) access to larger and more profitable markets; and

(5) consultancy and counselling services.

The methods used for describing and assessing business development instruments are based on those used in the business development service guidelines prepared under the overall responsibility of the Committee of Donor Agencies for Small Enterprise Development ⁽⁴⁾ The following examples of instruments are taken from these guidelines, as well as from a number of reports published by various international organizations, such as the ILO, the UNDP, the UNIDO and the USAID. Many of these reports have been presented at regional or international meetings on business development services, such as the regional meeting in Harare (Zimbabwe) in 1998, and the international conference in Rio of Janeiro in 1999. A few examples are also based on technical co-operation projects implemented by the ILO.

It should also be noted that most service providers offer a range of services, using some of the BDS instruments described here. Thus, they may excel in the provision of some services, while achieving limited results with others. This is the reason why some MSE development practitioners suggest that service providers ought to specialise in a small number of services.

3.1 Training

The main objective of training is to help owners of MSEs acquire new technical and business skills or improve their current skills. It is generally provided to groups, although one-to-one training is at times practised. Another important objective of training is to teach the MSE owner to analyse and find solutions to problems, and to identify where to obtain specialised assistance. This second objective of training should ultimately reduce the need for the owner of the enterprise to obtain the services of a consultant.

In industrialised countries, most MSE owners and their workers get their basic training in educational institutions, including public and private vocational training schools. On-the-job training within the enterprise usually complements this training, where the trainees acquire the additional specialised skills required for the job. In many developing countries, the large majority of MSE owners and their workers do not benefit from the basic training provided by public training institutions, although institutional training is becoming more prevalent. Thus, most of them (especially the older generation of MSE owners) acquired their skills from on-the-job training in enterprises. Such training is generally of limited scope and variable quality. Consequently, governments, as well as semi-private organizations and non-government organizations, have had to invest heavily in training programmes aimed at improving the skills of a large numbers of MSE owners and their workers. Indeed, before the recent predominance of micro-finance support interventions, training was the most important service provided by these organizations. Large training centres were established and mobile training used in many countries to reach isolated communities.

Box 1: Impact of a semi?generic training product developed by CEFE The Competency?based Economies, Formation of Enterprise (CEFE) approach to SME development was first developed in Nepal in the 1980s by GTZ and has since been adapted and implemented in many other countries. The general CEFE 'model' focuses on developing the capabilities, motivation and resources of people either already in business or aspiring to start in business (there are different programmes for each). CEFE emphasises the importance of the local adaptation of its approach, depending on the local needs and environment. However, the broad framework of the programme is common to all. A recent evaluation of CEFE's pilot activities world-wide, focussing on its start?up programme (not including follow?up activities), found that an average of 45 per cent of the trainees had started a business. In long?term projects (including post?training services), the corresponding figure is more than 50 per cent. Financial contributions from trainees typically average around 30?50 per cent of direct costs.

A number of evaluations of national training programmes, particularly those provided by public organizations, point to weaknesses in terms of efficiency and impact. Training is often too generalised and does not respond to the specific needs of the trainees. It is supply-driven and delivered in a top-down fashion, whilst the qualifications of the trainers are often inadequate. Finally, there is often little concern for cost-effectiveness, and follow-up of the trainees is rare.

A number of national and international organizations have developed new training approaches to overcome these weaknesses. Some noteworthy examples, which will be further discussed later, are the ILO Start and Improve Your Business (SIYB) Programme; the GTZ Competency based Economies for Formation of Enterprise (CEFE) Programme (see Box1); and the Entrepreneurship Development Programme (EDP), originally started in India and replicated later in a large number of countries. Some countries have made significant adaptations to these training programmes. There are also programmes aimed at specific groups of MSEs, such as programmes for the benefit of growth-oriented enterprises, originally developed in the United Kingdom.

3.1.1 Lessons learnt from past and current practices in training

A number of lessons have emerged from past and current MSE training programmes. The most important ones are briefly discussed below.

- Training should be business-oriented. Training services for MSEs are often viewed as an extension of the basic general educational system. However, the objective of MSE training is different. Training should aim at helping the MSE owners and their workers to acquire specific skills for running their businesses profitably. Training should be provided in a business-like manner, with the trainers treating the trainees as clients rather than having a teacher-student relationship. Business development training should be based on a good knowledge of MSE markets and needs. Training programmes should be designed in line with these needs and ensure that the trainers are qualified for the job. Furthermore, they should provide training in ways that are acceptable and agreeable to their clients (e.g. period of the day for training). These principles should apply whether the service provider is a private sector firm or semi-private or non-government organization.

- Avoid mixing training and financial services. This issue is not yet fully resolved and there are those who believe that the same service provider should not provide these two types of services, arguing that mixing these services may force only those MSEs interested in getting a loan to enrol in a training course. Others argue that it is possible to keep each service operationally and financially separate, without putting any additional pressure on the MSE owner.

- Training should be designed on the basis of the clients' needs. While some generic training may require minimal adaptation to the clients' characteristics (e.g. a service provider may only need two different packages of training materials for training in accounting), clients usually expect specific training related to their business. The level of training also depends on the basic qualifications of the clients. Problems arise when one-to-one training is too expensive and the mixing of clients with different needs and characteristics within the same training course, may not prove effective. A solution could then be to provide training to homogeneous groups of clients, such as members of the same MSE association, who may have similar training needs and characteristics. Another solution would be for training providers to specialise in a few training areas or with specific groups of clients, and to advertise themselves accordingly.

- Training should be delivered to maximise its impact. Training should not be delivered according to traditional approaches, such as classroom lectures; it should simulate real MSE situations and actively involve the trainees; and it should be practical and problem-oriented. Training exercises should require trainees to apply their training in solving some of their current problems. Training should be provided at times of the day convenient to the trainees.

- Trainees should consider trainers as 'one of their own'. Studies show that trainers who are very close to the trainees in terms of their values, language and other characteristics, provide the most effective training. Ideally, they themselves should have been owners of MSEs or have come from a family of entrepreneurs.

- Maximise the outreach of training. This is an important objective that partly overlaps with that of efficiency. Service providers should be geographically close to their clientele. Clients should be able to reach the training centre, by bus or other means, within two hours (at most). Trainers may also move from one venue to another, using premises provided by local organizations, whenever training does not require specialised equipment that cannot be transported. Training may also be provided to associations of MSEs in their own premises. Mobile training has also been particularly effective under some circumstances.

- Monitoring and feedback. If training is to be conducted in a business-like way, regular monitoring and responses from the clients should be an important part of the process. In most cases, trainees are asked to complete a post-training evaluation sheet. However, while these sheets may provide some interesting responses immediately after the training course, follow-up checks by the service provider are very important for assessing the real value of the training and its longer-term impact on the MSEs.

- Training commitment and charging fees. Achievement of the objective of training requires a strong commitment on the part of the trainees. Selecting trainees according to their sense of commitment at the time of enrolment is difficult, and it may not be possible to turn away some trainees. One solution, therefore, would be to charge training fees that should ensure some level of commitment. The fee should be more than a nominal one that would not represent any financial sacrifice for the trainee. On the other hand, it does not necessarily need to cover the full training costs. There are many examples showing that this is a very effective solution to ensuring commitment. In any case, the practice of paying an attendance fee to the trainees should be avoided.

3.1.2 Some examples of best practice in training

Successful or promising approaches are being used or tested in a number of countries. These approaches are briefly described and discussed below.

Box 2: Empowering SME clients: the training voucher scheme in Paraguay The starting point for this scheme (supported by the IDB) is the view that creating a successful system requires it to be demand?led and market?oriented. Although external subsidies are required for micro enterprise training, they should be provided in such a way as to strengthen the market relationship between training customers and suppliers. In this system, micro enterprises can purchase vouchers from government offices at a subsidised rate and use these to pay for training programmes at institutions which have been approved by the government. Institutions can exchange vouchers only after programmes are completed and only if participants have attended more than 75 per cent of the classes. In the first 20 months of operation, 11,324 micro entrepreneurs participated in 696 training programmes with an external cost of only $220,000 (a relatively modest subsidy). Empowered by the purchasing power of vouchers, entrepreneurs are exercising their choice and there are already signs that institutions are having to become more responsive to their needs. Furthermore, entrepreneurs are re?evaluating their own attitudes to training. This may result in a further reduction in the external subsidy.

a) Training vouchers

The use of vouchers in Paraguay is described in Box 2 and many countries have applied this approach. The voucher system consists of providing the owners of MSEs or would-be entrepreneurs with vouchers, which allow them to select a training institution (public or private) and purchase the training they need free of charge in exchange for the voucher. Presenting the voucher to the government agency which manages the voucher system, means that the training institution gets paid. There are many variations on this system. The entrepreneur may be given the voucher free of charge or may pay a small fee. There can be restrictions on where the voucher can and cannot be used, and vouchers may be provided to any entrepreneur or may be attributed only to some groups.

The voucher system presents many attractive features. Firstly, it helps select entrepreneurs who are interested in training, although the payment of a fee is more effective in ensuring commitment on the part of the entrepreneur. Secondly, the system should stimulate higher quality training since the clients are free to choose the training institution they prefer. Trainers will, therefore, attempt to attract the largest number of trainees by paying greater attention to the quality of training. Thirdly, the system should increase the supply of private sector trainers. Finally, vouchers are particularly useful in regions where government training centres are not available, and where only private sector trainers provide training. The system can, however, lead to some abuses by trainees or trainers. It is therefore important to monitor it closely and to use external auditors from time to time.

b) Promoting the organization of group training

The merit of this approach is that it facilitates training that is adapted to the client needs at an affordable cost. Organising training groups from the same sub-sector (e.g. 20 to 50 group members at a time) will considerably reduce the cost per trainee. Furthermore, the group may negotiate with the trainer on the type of training it requires. Peer pressure should also ensure greater commitment on the part of the trainees. It should be possible to use the voucher system in conjunction with group training.

c) Provision of training along with other services

It was indicated earlier that training could be provided by an organization which is also involved in micro finance. The dangers of combining BDS with financial services were also discussed. However, training may also be provided along with other business services, such as consulting and information services. Indeed, this mix of services is already being provided by many business centres (see later). In general, the possibility of conflicts between the various functions of the service provider should be more manageable than in the case where business and financial services are mixed.

One of the merits of this approach is that the trainer should be more aware of the problems of MSEs (e.g. if also involved in the provision of consulting services), and should therefore be able to design training programmes more adapted to their needs. The establishment of one-to-one relationships between the trainees and the trainer in relation to other business services should also increase the commitment of the trainees, as well as their confidence in the trainer.

d) Tapping the local training capacity

FIT Uganda Ltd is a private BDS provider established with ILO technical assistance and initial funding from the Government of the Netherlands and the Austrian Development Service. The objective of FIT Uganda Ltd is to reach financial sustainability within a period of five years by charging of fees for its services and subcontracting with donors. A business plan was prepared at the time FIT Uganda was established to determine whether this objective can be realistically achieved. Thus, the issue of financial sustainability was clearly taken into consideration from the start of the project.

FIT Uganda found out through a survey that there was a relatively large number of private, for-profit trainers and training organizations, which do not receive any government or donor funds. There was also a high demand for training amongst MSEs. These trainers provided training to MSEs at low fees, but also needed to handle other jobs because revenues from training were not sufficient. The quality of training was also variable. FIT Uganda decided to tap the local training capacity by providing training in two specific areas relating to technology transfer and marketing, and on how to run a training business and develop the market for training. A pilot phase involved 12 trainers who benefited from a five-day training course at a cost of US$ 42 per person. Subsequently, the 12 trainers started training MSE clients. Five hundred such clients were trained over a period of six months. However, the fees paid by the clients were not sufficient to cover the full cost of training, although the trainers did their best to cut costs. Therefore, the training courses were partly subsidised by FIT Uganda. The subsidy per trainee is, however, lower than that required by formal training institutions. While this initiative is still in the pilot phase, it is a promising one because it is deeply embedded in the local market for services. (See Box 3 on FIT's activities - Kenya.)

Box 3: Enterprise visits to promote exchange and learning in Kenya In Kenya, partner BDS organizations of the FIT programme organised enterprise visits for SMEs (informal sector jua kali businesses) aimed at providing them with a real opportunity to learn and exchange information and to develop commercial linkages. The process had several stages. First, the BDS organizations selected the sub-sector that would be the focus of the programme and assessed its main needs and, on this basis, laid out an initial programme. Second, the participating entrepreneurs were selected. Care was taken to ensure that they did not include direct competitors to facilitate the free exchange of information. A workshop then followed, during which the participants were introduced to the programme's objectives and assisted in setting personal goals and formulating a work plan for the exchange visit and later activities. Baseline data was collected on the enterprises. Visits were mostly in groups, accompanied by someone from the organization. After the visit, one-to-one advisory services on product design, development and skills upgrading were provided. Further learning was facilitated by later joint workshops with the entrepreneurs, which also helped to assess impact. Enterprise visits appear to have had some success in terms of new practices and skills acquired by the enterprises. Direct costs of the visits were covered by the SMEs. There is also some indication that entrepreneurs who did not participate but learned about these visits, organized their own similar visits without support, which in itself is a useful indicator of perceived impact.

Enterprise visits to promote exchange and learning in Kenya

In Kenya, partner BDS organizations of the FIT programme organised enterprise visits for SMEs (informal sector jua kali businesses) aimed at providing them with a real opportunity to learn and exchange information and to develop commercial linkages. The process had several stages. First, the BDS organizations selected the sub-sector that would be the focus of the programme and assessed its main needs and, on this basis, laid out an initial programme. Second, the participating entrepreneurs were selected. Care was taken to ensure that they did not include direct competitors to facilitate the free exchange of information. A workshop then followed, during which the participants were introduced to the programme's objectives and assisted in setting personal goals and formulating a work plan for the exchange visit and later activities. Baseline data was collected on the enterprises. Visits were mostly in groups, accompanied by someone from the organization. After the visit, one-to-one advisory services on product design, development and skills upgrading were provided. Further learning was facilitated by later joint workshops with the entrepreneurs, which also helped to assess impact. Enterprise visits appear to have had some success in terms of new practices and skills acquired by the enterprises. Direct costs of the visits were covered by the SMEs. There is also some indication that entrepreneurs who did not participate but learned about these visits, organized their own similar visits without support, which in itself is a useful indicator of perceived impact.

e) Using technology to improve outreach and the quality of training

The education system is already using technology to improve the quality of teaching, reach isolated communities or handle large increases in the student population without an equivalent increase in teaching resources. These technologies include computer-based learning and distance learning. Many countries are now using these and other technologies for MSE training with a view to increasing outreach and reducing training costs. However, there is little documentation of progress achieved todate, although this is a promising idea.

f) Start and Improve Your Business (SIYB) Programme

The ILO's SIYB Programme has been in operation for more than ten years. This is a world-wide programme, covering over 70 countries and implemented in a large number of languages. It is a good example of how an international organization, such as the ILO, can reduce the need for its member countries to develop costly training materials, while at the same time putting at their disposal materials which have been successfully used in a wide range of environments. The following description of the programme is based on the development of SIYB in Eastern and Southern Africa, located in Harare.

The Start Your Business (SYB) and Improve Your Business (IYB) programmes are separate but complementary. SYB focuses on start-up training needs while IYB focuses on the training needs of growth businesses. The two programmes have a number of linked training materials. A third programme, KAB (Know About Business), is an entrepreneurship training package for vocational and technical training institutions which is still under development. The training assistance is provided through carefully selected non-government organizations and private consulting firms (user organizations) that are involved in business creation activities, have the capacity to sustain the training activity after initial assistance from ILO, and have linkages with other support institutions.

The beneficiaries of SIYB training are carefully selected and must have a concrete business idea. They must possess, or have access to, relevant vocational skills and be able to read and write in the language of training. They must also be able to make simple calculations. SIYB is meant for entrepreneurs who want to start or expand businesses with growth potential, and not for "survivalist" entrepreneurs. The programme places great emphasis on ensuring that programme users reach the right target group. Target group selection methods are therefore regarded as very important.

g) Market driven and sector-based training

Two examples are described of business training programmes initiated in Kenya by Akili and SITE. These two programmes provide BDS to informal sector micro-enterprises in the metal, wood, and textiles sub-sectors. Before the start of these programmes, these sectors were stagnating and the MSEs were facing saturated markets where competition was high and profit margins low. Vertical growth was inhibited by enterprises lacking the technical and managerial skills necessary for business expansion and diversification. Both SITE and Akili share the objective of stimulating enterprise growth by providing services to upgrade skills, improve product quality, identify and develop new products, and improve marketing techniques.

To ensure that services are market driven, both programmes attempt to serve the demand of micro-entrepreneurs and of their clients. However, since micro-entrepreneurs are usually not aware of their own training needs, an important aspect of the programmes involves stimulating demand for the programmes' services. Both programmes identify specific training needs by looking at market opportunities and working backwards. By demonstrating the returns to be made from the training, this stimulates demand. This also involves good marketing of the programme, linking training to tangible and immediate benefits, and demonstrating the market opportunities that the training will help clients access.

Both Akili and SITE use a sub-sector approach that allows them to focus their support on production skills, new products, and quality improvements within a specific sector. As client inputs are important in ensuring the relevance of the assistance provided, courses take place as close to participants' workshops as possible, and at convenient hours. This also helps minimise the opportunity costs associated with training.

The services provided by Akili focus on innovative, low-cost products that have the potential to serve niche markets. Akili provides a comprehensive set of services to help entrepreneurs think in new ways about their products and markets. It interacts regularly with its clients, using their ideas, skills and motivation to determine the direction of the programme's technical assistance phase. The training includes group training and individual follow-up technical assistance in product development, on accessing new markets, and on costing.

SITE uses a participatory approach in defining the training course agenda and schedule. Through discussions with its clients on specific market opportunities, product quality, product diversification, design skills, and business management the course facilitators seek agreement with clients on training needs, topics to be covered by the course, frequency and timing of classes, and on fees. Courses usually cover product specific skills training, along with business management topics. Improved apprentice training techniques are integrated into the course design.

Neither of these two programmes considers the achievement of full financial sustainability to be a high priority. The focus for both has been on developing methodological approaches and an appropriate mix of services, as well as on building demand from and credibility with clients. Through careful monitoring of experience and action research, both programmes hope to develop appropriate pricing policies that will gradually permit cost recovery over time. In 1998, SITE was recovering 75 per cent of the direct costs of providing training courses. It had 420 business owners and 1,700 apprentices as clients. Early indications are that the MSEs' profits have increased by 25 per cent on average, and that there has been a 20-30 per cent increase in apprenticeship training.

Both programmes face the challenge of closing the gap between "perceived" and "real" training needs. Entrepreneurs may think that they do not need training and thus the demand does not exist in a form ready to be tapped by the training programmes. This implies that the programmes have to place emphasis on stimulating demand by showing clients market opportunities they are missing; making an up-front investment in the careful selection of first time clients who will then act as "role models" and help sell the programme; and demonstrating the tangible benefits to be gained.

The sub-sector approach used by both programmes provides additional lessons. It is effective in ensuring that assistance is relevant to the clients' needs. However, it does have some limitations. Firstly, staff must have a thorough knowledge and technical competence in the sub-sector. This tends to limit the number of sectors that can be covered. Secondly, the approach limits cross fertilisation between sectors, which can be important in promoting innovations based on market opportunities. Finally, the approach could limit outreach, and thus overall sustainability.

3.2 Access to information

The objective of information services is to facilitate access by MSEs to information that is of value to them in either written or spoken form. In this sense, there is clearly an overlap with training and counselling since both include some level of information transfer.

Many studies carried out by the ILO and other organizations show that the majority of owners of MSEs use "informal" sources of information, such as relatives, friends and employees. Information is also accessed through commercial transactions with clients and suppliers. These sources constitute over 90 per cent of all information sources accessed by MSEs. This demonstrates that formal information sources are rarely used. Some public and private organizations have established costly information centres for the benefit of MSE enterprises, but few MSE owners use them. Thus, the unit cost of information used in these centres is relatively high.

Public and private organizations have initiated programmes to facilitate access to information by MSEs. These include the organization of trade fairs; one-stop-shops providing information of interest to MSEs in addition to other services; the preparation and dissemination of various technical publications; the operation of information centres where MSE owners can consult specialised publications; and the publication of newsletters. More recently, some private sector organizations have started to disseminate information through their own Internet sites. Finally, there are a number of television and radio programmes that broadcast special programmes of interest to MSEs.

Although no business can really flourish and grow without relevant and reliable information, public and private organizations involved in MSE development have invested relatively little in the development of effective information sources. Information services rank at the bottom of almost all services in terms of investments. The fact that MSEs mostly use informal sources of information may explain this pattern.

3.2.1 Lessons learnt

The fact that MSEs mostly use informal sources of information or information obtained through commercial transactions, demonstrates that these are either preferred sources of information or that there is little awareness of other formal sources. Studies indicate that the first explanation is more common. Entrepreneurs prefer to get information from people they trust and from those who are knowledgeable about their business, such as clients and suppliers. The information they get through these sources is also more directly relevant to their needs, especially that obtained through commercial sources.

However, MSE owners also face difficulties in obtaining particular types of information, especially in relation to production techniques and suppliers of materials. Others may be unaware that such information could help them to improve their business. This is indicative of the inadequate promotion of formal information sources and shows that minimal efforts are made to raise awareness amongst entrepreneurs about the importance of information.

MSE owners with a more entrepreneurial attitude tend to place value trade fairs and exhibitions, and attend them whenever they can. They also appreciate media on programmes or newspapers that provide information on their business. However, few subscribe to trade magazines, either because they cannot afford them or because they believe that they do not provide the type of information of interest to them.

There is emerging evidence that MSE owners are willing to pay for information of particular importance to them, such as information on new models and designs in demand by their market niche (e.g. a foreign market). The information market in industrialised countries is a very active and expanding one, with thousands of specialised magazines in circulation. Many MSE owners subscribe to some or other of these publications. They participate in numerous workshops, trade fairs and exhibitions often organised by their trade organizations. The Internet is also becoming an important source of information used by computer-literate MSE owners.

2.1.2 Current interesting innovations

Current interesting innovations include promoting exchange visits and meetings between MSEs operating in the same sector, but in different areas. There is some evidence to suggest that MSEs will organise these visits themselves after an initial sponsored exchange (see Box 3). Bringing together producers and customers for a frank exchange on how products might be improved to make them more useful and more attractive has also created some positive impact, as has the publication of technical booklets, including drawings, with the finance coming from customers and advertisements (see Box 4).

Box 4: Information services for SMEs: Experiences from ILO technical co-operation projects in Kenya and Benin These two projects initiated activities aimed at promoting access by MSEs to useful information. Three particularly promising approaches have been test-piloted: (1) The facilitation of opportunities for SMEs to discuss product design, quality and price with their customers in a neutral setting (User-Led Innovation or ULI); (2) The sale of information to SMEs through street hawkers; (3) The use of existing extension networks to provide a question-and-answer service. All of these services were provided in a 'minimalist' fashion, drawing on indigenous sources of information, rather than external experts, to keep costs low. Information booklets were sold through street hawkers for $1.70; this price included a mark-up of 100 per cent on the production costs. While only 50 were sold, much was learned about the buying habits and preferences of SMEs; for example, almost all of the booklets were bought at the beginning or end of the working day. It remains possible that the publication of information booklets could be profitable, if the information was carefully designed and marketed. In the six months of operation, the question-and-answer service has generated 127 questions. For each question, the SME pays $2; the answer is also paid for at a rate of five times the cost of the photocopying required. This has generated revenue that has covered 30 per cent of the costs of answering the questions. It is hoped that scaling up the service will lead to several SMEs asking the same questions. Costs will thus stabilise, while revenue will continue to increase. User-Led Innovation (ULI) seems to have had a substantial impact on the product range and revenues of participating SMEs. One group of 9 metalworkers developed 7 new products, and improved on 2 existing designs. Consequently, they generated additional sales worth $4,500 over the following six months. In another ULI pilot activity, the 8 participating SMEs developed eleven new products, generating additional sales worth $8,200 over the following year. One SME increased its sales by 180 per cent.

Many organizations maintain Internet sites that provide potentially interesting information for MSEs. While the volume of such information many still be limited, MSEs should be encouraged to use it. The problem is that most MSE owners cannot afford the acquisition of a computer and the subscription to an Internet server. Many of them may not be computer literate. A solution to this problem would be for business development service providers to provide an Internet service to MSEs for a modest fee. They could, for example, install a couple of computers at their own offices and show MSE owners how to access information. It will be shown later that Web sites may also be used for consulting services.

The mass media (radio and television) are accessible by the large majority of MSE owners. They could broadcast special programmes for MSEs relating to some less technical domains, such as marketing, sources of finance, new government incentives for MSEs, etc. It is probable that the cost effectiveness of this source of information is very high.

3.3 Technology development and transfer

The purpose of technology transfer and development is to improve enterprise productivity and the quality of the goods produced by enterprises to help them withstand local and international competition. This applies to all types and sizes of enterprises and to all sectors of the economy, but more particularly to the manufacturing sector.

Policies for increasing the technological capacity of the country should not simply focus on the larger enterprises only, they should encompass all enterprises, whatever their size. In particular, technological gaps between the MSEs and the larger enterprises should be reduced. Medium and large firms may not be able to achieve a sufficient level of competitiveness unless they can establish strong linkages with MSEs that are also technologically advanced. In industrialised countries, the technological gap between small and large firms has been considerably narrowed, with small firms being able to take over some of the technology development activities of the larger firms.

The technological advancement of any country requires action by both the private and public sectors at many levels. Firstly, it is necessary to raise awareness about the importance of technology. Secondly, the flow of information within a country and access to information from foreign countries must be improved. Thirdly, innovation by individuals and all sizes of firms should be encouraged. Fourthly, public and private investments in research and development should be expanded. Finally, the capacity of the machinery production sector should be increased with a view to reducing dependence on imported equipment.

Over the past 20 years, the technological efforts of many developing countries were limited to improving the technology used by MSEs. This was the result of the achievements of the appropriate technology movement initiated by international organizations and non-government organizations, and subsequently replicated by local organizations. MSEs were the beneficiaries of the incremental technological improvements, rather than active participants in this process. Local and foreign experts developed the technologies, and they identified small tools and equipment manufacturers needed for the production of the improved tools or equipment, and provided training in the use of the improved technology. While this approach to technology development achieved some success, it did not have a significant impact on the technological capacity of developing countries.

3.3.1 Lessons learnt from practices in technology development

This section will focus mostly on lessons learnt in relation to technological development outlined above, rather than in relation to the appropriate technology approach.

- The technological development of MSEs should be viewed in the overall context of the technological development of the country. The appropriate technology movement focussed on the incremental technological development of MSEs, without any reference to the overall technological development of a country. While this may be justified for some countries, it has been generally found that where there is a significant industrial base, the technological development of MSEs should be part and parcel of an overall national technology development plan.

- Increasing awareness about the potentially profitable technology market. In many developing countries, there is little evidence of an active technology market. It is necessary to increase awareness about the importance of shifting to other modes of production, based on a higher content of locally produced inputs and capital goods, and relying much more on local technological capacity. For example, large metalworking firms can be made aware of the potentially large market for tools and equipment required by MSEs, and devote more resources to developing, producing and marketing such tools and equipment. This should also reduce dependence on imported tools and equipment which many MSEs may not be able to afford, and which frequently forces MSEs to use sub-standard or second-hand equipment.

- Encouraging and promoting a market for innovations. The technological and industrial achievements of advanced economies are, largely, the result of a myriad of innovations developed by individuals and all sizes of firms. These innovations are then actively marketed, and a large number of them adopted by the innovators themselves or those who acquire the patent rights. Many countries organise "innovations fairs" to facilitate deals between innovators and manufacturers. Services are provided by the state to facilitate the establishment of patents which protect the innovator. In developing countries, the innovations market is fairly under-developed for a number of reasons. This includes a lack of awareness of the potential importance of this market; limited industrial capacity to bring innovations to the production stage; and difficulties faced in protecting one's own innovation.

- Promoting an integrated approach to technology development. Individual enterprises find it difficult to raise their level of technology in isolation. There is a need for close collaboration between a wide range of partners who can contribute to various aspects of technological development and transfer. This includes the MSEs themselves - especially the suppliers of machinery and inputs - and universities and research institutes; government organizations responsible for developing standards and for the protection of intellectual property; training institutions; and financial institutions. Collaboration between these organizations is essential for the successful development and commercialisation of technological innovations. Many countries have promoted the establishment of structures which facilitate interaction between these actors listed above. Some of these structures include technology parks, incubators, industrial districts (similar to the successful Emilio Romania in Italy), or regional development models (such as the Valencia model in Spain) which facilitate interaction between enterprises, universities and local authorities. Some of these examples are described briefly later. (See Box 5 on technology development in Bangladesh.)

- MSEs' capacity to invest in new equipment. Most owners of MSEs face great difficulties in accessing loans from banks which enable them to invest in new equipment that is more productive. The available micro credit schemes do not provide sufficient financial resources for this purpose. Without a change in the current policies of the micro finance and lending institutions, little can be achieved in this area.

Box 5: An example of appropriate technology development: Marketing the treadle pump in Bangladesh The treadle pump was designed by an NGO in the early 1980s. Although it was sold commercially, there was also significant subsidised distribution by NGOs. International Development Enterprises (IDE) became involved when the design had been finalised. They set about changing the existing approach to transferring the technology, arguing that this should not be a subsidised process and that the most effective way of reaching the largest number of people was a self-sufficient, private network of manufacturers and retailers. Eventually, after resistance from the charitable instincts of some NGOs, this view prevailed. IDE then set about a process of selecting village dealers and agreeing on terms with them (among which was a requirement that they had to set up a demonstration pump), training village well dealers and advertising through a variety of means, including village theatre and a film. The result of this effort has been that over 1 million pumps have been sold - around 4 times the initial target - and according to an external evaluation the ratio of benefits to costs is over 40:1.

3.3.2 Interesting innovations

Many of the recent interesting innovations focus on the establishment of linkages between different groups of partners, such as MSEs on the one hand, and the larger firms on the other. Some of these innovations are briefly described below.

a) Technology-based business opportunities

Low levels of innovation and inadequate technical skills are significant constraints to MSE growth. ApproTEC believes that many entrepreneurs fail to identify or realise viable technology-based business opportunities to manufacture and sell new products, resulting in a market dominated by homogenous, often low quality products. ApproTEC's response to these constraints is to develop technologies that can be used by dynamic entrepreneurs to establish profitable, growing MSEs, and assisting them in business opportunity identification, technology choice and marketing.

ApproTEC does not work with the poorest MSEs, and its clients are those who are in a position to make use of technologies effectively. These are people who have sufficient skills, capital and networks. In particular, they are people who are willing to make a business investment in ApproTEC technologies. Clients can be split into two groups: manufacturers and users.

ApproTEC has a "corporate" approach (i.e. akin to that of a large commercial organization) to technology development and transfer. This approach emphasises the importance of professional technical expertise, its application in a demand-driven process, and the need for strong marketing capacity. This approach is in contrast to approaches to technology development based on the development of technologies by MSEs themselves. ApproTEC charges fees for some services, such as training and tool production, and ensures that relationships with MSEs are defined by contractual agreements, thereby establishing the parameters of responsibilities and obligations. It is recognised that by trying to recover the direct costs of certain services, contractual agreements are cemented, and the commitment of MSEs is enhanced. However, ApproTEC does not yet have an objective of becoming fully financially sustainable.

Other than facilitation and marketing, ApproTEC's most significant role in this supply chain is quality control. A 'quality plate' is awarded to manufacturers for each press produced to specified quality, giving the product the very marketable ApproTEC brand name. ApproTEC has developed a practical means of getting technologies to final users and has done so on an extensive scale through the private sector. It has also successfully placed technology development in a market context, by developing technologies that are based on business opportunities and feeding into a commercial supply chain.

The ApproTEC example proves that it is feasible to use a corporate approach to technology development by putting technology in the market place; by using a demand-led and business oriented approach to the process of identifying a market niche through to sales and distribution; and making technologies self-financing after initial development costs.

b) Financial instruments for the acquisition of equipment

In addition to loans, MSEs may use other types of financial instruments in satisfying their needs for both fixed and working capital. Subcontracting has been used for this purpose over a relatively long period, while other instruments are of more recent origin.

- Sub-contracting: There are various types of subcontracting arrangements. One arrangement involves the transfer of equipment by the contractor to the subcontractor. In this arrangement, the contractor also supplies the materials and technical assistance to the subcontractor. The latter may in fact be considered as an informal affiliate firm of the contractor. Under this arrangement, the subcontractor does not have to seek loans from banks for investments in equipment and working capital.

- Leasing: The leasing of equipment to MSEs is used in many countries. This approach provides a number of benefits for the MSEs and avoids taking loans in order to acquire a piece of equipment and, therefore, having to deal with banks - which usually require collateral. Normally, the leasing firm provides repair and maintenance services, something often neglected by the entrepreneur. Leasing contracts may include terms that require the entrepreneur to look after the equipment and, in the case of a business closure, the equipment can be given back to the leasing firm without the need for the entrepreneur to continue paying back the loan. The regular payment of a leasing fee ensures that the entrepreneur will take due consideration of the cost of using the equipment in the output price (a cost often neglected by the entrepreneur).

- Technical services: The production process in some MSEs may require the use of very expensive equipment which cannot be afforded by the MSE, or the acquisition of which may not be justified if the utilisation rate is relatively low. Under these circumstances, MSEs may establish a contract with medium or large firms to use their equipment where excess capacity exists in these larger enterprises. For example, an MSE producing furniture may rent equipment by the hour from a large enterprise in the same industry.

c) Business incubators

Incubators appeared in industrial countries in the early 1980s, and they are now several years old and reaching maturity. In contrast, those in industrialising countries are of more recent origin. Their numbers are growing rapidly in People's Republic of China, Brazil, Turkey, the Republic of Korea, and Indonesia, as well as in many of the economics in transition to more open market systems.

Incubators generally provide affordable workspace, shared facilities, counselling, training, information, and access to external networks for entrepreneurial groups, thereby helping promote venture creation and economic development. Some incubators target clusters of technology-based sectors, such as biotechnology and computer software, but most have mixed tenants. The survival rate of firms in these incubators is much higher than that of firms outside the incubators (e.g. three to four times in the USA, compared to those starting outside the incubator). A 1998 survey of incubation by the National Business Incubation Association (NBIA) in the USA, indicates that current tenants and graduates at north American incubators have helped establish 19,000 viable companies and created 245,000 new jobs. The average incubator occupies 36,000 square feet, with 24 tenants, and helped establish 20 companies within a period of six years. Average residence time in the facility is 2.3 years. State and city governments sponsor the majority of the incubators in the USA, while around 15 per cent are private, for-profit units. Many incubators take equity in tenant companies and serve affiliates outside the incubator. About one-fourth of the incubators have a technology orientation.

A recent impact study of 50 incubation systems (Business Incubation Works, 1997, NBIA) shows that about 80 per cent of the programmes received some sort of operating subsidy. On an average annual operating budget of US$278,240, the subsidy was US$86,254. The average number of jobs created over a seven-year period was 702, including indirect employment of one-half job for each direct job in the incubator. This resulted in a public subsidy cost of $1,109 per job. The tax revenue generated was $4.96 per dollar of subsidy.

The majority of incubation programmes world-wide can be characterised as 'public-private partnerships' in which initial (and often continuing) financial support is provided by the government. Many governments consider them as part of the business infrastructure, and the evidence indicates that the annual taxes and other benefits from new economic activity more than offset the capital and operating cost subsidy. The private sector participates when it sees that the programme will lead to greater business opportunities and promote spin-offs.

The evaluation of incubators in relation to the main BDS performance criteria (in particular, in relation to outreach, effectiveness and financial sustainability) shows that they have largely succeeded in meeting these criteria. These performance criteria were assessed in relation to two incubators in Brazil: the ParqTec and Biominas incubators. The assessment shows that they had a significant impact on the economies of the states where they are located through the nurturing of entrepreneurs and creating sound enterprises with good survival rates. ParqTec has generated employment with a public subsidy of around US$3,258 per job, excluding jobs in affiliates. The estimated return in the form of taxes is six dollars (US) per dollar of public subsidy.

The linkages to universities and research institutes have resulted in the commercialisation of some technologies. The sponsors and tenants at both incubators have expressed satisfaction with the results achieved, particularly the help in marketing, business planning, and securing government permits. Both are helping their government sponsors in promoting technological development together with other social aspects, such as promoting an enterprise culture and co-operation between universities and businesses.

d) Partnerships between the state and other stakeholders

Although the following examples are not exclusively focussed on technology development, they present many interesting features which should help such development. Throughout Europe, many MSE development programmes are initiated through interaction between different levels of private sector and interest groups with the government playing the role of a broker, ensuring a smooth integration of the various contributions. Many countries subsidise technology acquisition and training, especially in Ireland, France, Norway, Portugal, and Sweden. Many Asian countries, such as Japan, have adopted an integrated approach to MSE promotion by providing, among others, incentives to large firms to co-operate with the smaller ones.

Singapore promotes inter-firm linkages between multi-national enterprises (MNEs) and local micro, small and medium-sized enterprises through the Local Industry Upgrading Programme (LIUP) which encourages MNEs to 'adopt' local enterprises and upgrade their technical and management capabilities. Experienced engineers from MNEs (whose salary is paid by the Economic Development Board) who identify areas for focussed assistance are the people who manage LIUP on a rotating basis. This system uses market forces as an incentive, since the expertise that is transferred to the MSEs should, in turn, make them more effective suppliers and partners of the MNEs.

Emilia-Romagna, an Italian province, is particularly known for having initiated a very innovative small and medium enterprise development approach. Emilia-Romagna is considered one of the ten wealthiest regions in Europe. In the 1980s, the province decided to have its industries focus more on quality than quantity. It adopted the industrial district approach where enterprises focus on specific sub-sectors. The greatest success has been achieved in knitwear, ceramic tiles, machine manufacture and other engineering and metal products intended for other industries, such as footwear and food processing. The factors that contributed to the Emilia-Romagna success include a readiness of firms to co-operate, especially vertical co-operation between firms at different stages of the production process; the collective organization of services and the promotion of specific industries; and a willingness of individuals and firms to exchange information. Emilia-Romagna is also well known for an interventionist policy on the part of the regional government that helps small firms modernise and upgrade by providing a supportive institutional structure of service agencies. The service centres include industrial research; the dissemination of information on markets, fashion trends, standards and regulations; services for the upgrading and transfer of technology; training; testing; and certification services.

Micro, small and medium-sized enterprises are encouraged to become members of those centres serving their particular industrial sector and they pay a membership fee. A regional organization, ERVET, covers part of the operational costs of the service centres. Because it is funded and owned by the regional government, ERVET has the authority to work closely with producers in the framework of a regional strategy. Thus, an integrated public policy mix is secured at the regional level.

3.4 Access to larger and more profitable markets

Marketing services cover a wide range of services, including information on local and foreign markets; assistance in undertaking a market appraisal study; assistance in accessing foreign markets and in using distribution channels; and technical assistance in developing designs in line with market demand and packaging materials. Marketing services may also be classified according to whether they are provided during the input phase (e.g. product development and design, raw materials supply) or during the output phase (e.g. quality control, packaging, transport).

In contrast to other services, there are fewer organizations providing services to MSEs in the area of marketing. The only MSEs that do manage to get help are those involved in the production of handicrafts. Non-government organizations, government agencies and subcontractors who market the output of the craft workers provide this assistance. International non-government organizations that promote fair trade are also present in many countries, and provide technical and marketing assistance to groups of craft workers.

The following observations and lessons from international practice are worthy of note.

- A market with limited growth potential. MSEs mostly supply the immediate local market. Very few are able to access the regional or national market, and even fewer can directly access the export market. Only those involved in subcontracting indirectly access foreign markets. This explains, to some extent, why MSEs are predominantly represented in the trade and services sectors, which are better suited to supplying local markets.

- Production aimed mostly at the consumer goods market. Most MSEs in the manufacturing sector produce consumer goods. Very few produce intermediate inputs or capital goods, which require a much larger market than the one they are able to access. The limited business linkage with the larger firms partially explains why MSEs are not involved in non-traditional subcontracting arrangements.

- Limited or no attempt to investigate new market opportunities. Micro and small enterprises do not usually have the necessary skills for simple market research, and they may not be tempted to investigate new markets if they feel that they cannot expand production.

- Subcontracting potential and problems. In many countries, the main market outlets for a large number of MSEs are through contractors. Subcontracting is usually restricted to a narrow range of products including for example, garments, leather goods and footwear, electronic assemblies, and handicrafts. There are many types of subcontracting arrangements such as those where the subcontractor produces the finished product without any input from the contractor (this is mostly the case of handicrafts), to those where the contractor is closely involved in all aspects of the production (these are mainly the equivalent of labour contracts where the subcontractors provide mostly its labour). In some cases the motives of the contractor are to avoid the minimum wage and other labour legislation since many subcontractors are part of the informal sector. Subcontracting is not usually viewed by the contractor as a form of a mutually beneficial business linkage with smaller firms, which should be nurtured into a long-term relationship (e.g. the type of relationships established between contractors and subcontractors in Japan). Some contractors use intermediaries who keep for themselves a substantial part of the contract payment.

The following promising initiatives for expanding the MSEs' market potential provide some solutions to the above questions.

3.4.1 Facilitating access to larger markets

The following examples illustrate some new and effective ways of improving access to larger markets.

a) Providing a mix of marketing and ancillary services

This example is based on an IDB project implemented in Colombia by a business development service provider (PCS) which was previously established with IDB assistance. It shows how a marketing service provider can help MSEs overcome various constraints which prevent them from accessing larger and more profitable markets through the provision of a mix of marketing and ancillary services, such as financial services and training. This example also shows that it is possible to achieve almost full cost recovery.

PCS works with approximately 1,000 micro-enterprises (less than ten workers), with 50 per cent being women and 50 per cent being informal sector enterprises. These enterprises produce a variety of consumer goods for the local and national markets. The approach is based on the premise that for producers wishing to penetrate new markets or improve their position in the current market, the use of an intermediary may significantly reduce marketing costs, provide important consumer feedback, and open up access to a larger client base. The time-consuming tasks assumed by marketing service providers include identifying new clients or markets; consolidating existing ones; sourcing good raw materials; and figuring out how to ship various kinds of goods to different destinations by various means of transportation. From working in specific sectors, marketing service providers often become experts in relevant issues, such as consumer preferences, and new trends and designs. This expertise translates into important suggestions and ideas for the producers in terms of what to produce and how.

The issue of sustainability was considered from the beginning of the project. In relation to buying, selling or brokering (i.e. the standard functions of a marketing service provider), the issue of sustainability is a relatively simple one, and it uses a simple mark-up mechanism. However, it was also felt that clients also needed some ancillary services, such as training and financing, without which the marketing services would have little impact. The cost recovery for these services is not feasible in the short-term for a number of reasons, although it may be possible to achieve it in the long-term. Therefore, it was possible to achieve a high, overall level of cost recovery through subsidising the non-profitable ancillary services by revenues from the profitable marketing services. Thus, by end 1998, PCS was able to cover its full operational and administrative costs. In addition to profits derived from the buying and selling activities, PCS was able to increase revenues by playing the role of an intermediary in subcontracting arrangements. An important ingredient in the success achieved by PCS is the elaboration and application of a long-term marketing strategy based on an in-depth investigation of the sectors that it covered. Based on this strategy, PCS was then able to decide which clients it should serve, which services it should provide, and how they should be provided.

b) Improving subcontracting arrangements for the benefit of subcontractors.

In the simplest form of subcontracting, the subcontractor independently produces the goods at the request of the contractor, using its own equipment and materials. Payment is made once the goods are delivered. In the other extreme, the contractor is fully in charge, using the subcontractor simply as a source of labour - sometimes "cheap" labour. Apart from handicraft production, this type of subcontracting is more prevalent in the garment industry. Subcontractors are generally financially weak and cannot afford to wait until they have finished processing the orders before they can be paid. Some principals take advantage of the situation by imposing very low prices on the goods.

Financial services provided by the contractor may take various forms, depending on the subcontracting arrangement. The contractor may provide the materials needed for producing the goods and may also provide some advance payments to cover labour costs, or provide both the materials and the advance payments. In labour subcontracts, the contractor is in full control of the production, providing the technology, designs, tools and equipment, as well as the materials. Subcontractors are used in these cases mostly because the cost of labour is lower than the cost of the contractor's own employees.

In many countries, subcontracting has given rise to abuses by contractors--squeezing the price down by playing large numbers of subcontractors off against each other. Subcontractors are usually not able to use legal means in the event of the contractor refusing to pay the contract amount for one reason or another. Subcontractors can strengthen their bargaining power vis-à-vis the contractor if they form subcontractors' associations on a sectoral basis.

In the Philippines, the ILO provided assistance to subcontractors involved in garment making and in the production of footwear and leather goods by helping them to establish associations in these two sectors and by training the managers of these associations in various aspects of subcontracting. The assistance may take various forms.

- The government may adopt specific legislation on sub-contracting with a view to protecting both the principals and the sub-contractors (mainly the latter under current conditions) in the case of unfair practices or conflicts.

- To promote the establishment of sub-contractors' associations in each of the most important sectors where sub-contracting is prevalent. The role of these associations will be to provide information to members on sub-contracting arrangements; provide legal aid to members in the case of conflicts with the contractor; train members in negotiating and following up sub-contracts; adopt policies for an appropriate range of sub-contract prices in order to avoid pressures from the principals to lower prices and train members in relation to quality control avoiding delays, and other key topics.

- Through information and workshops, the government could induce the principals to establish more positive relations with the subcontractors. The impressive growth of the industrial sector in Japan can be partially attributed to the very positive relationship established between principals and their sub-contractors.

c) Promotion of subcontracting and partnerships

Various types of linkages are considered essential for the growth of small and medium enterprises as it is recognised that without such linkages large enterprises may find it difficult to achieve global competitiveness. There are two major types of linkages: up-stream linkages with suppliers and contractors, and down-stream linkages with the distribution and marketing channels.

Industrial subcontracting and out-sourcing are modern and efficient ways of organising industrial production. New forms of industrial subcontracting, referred to as "industrial partnerships", are based on the complementary nature of the large contracting and assembling enterprises and the various specialised subcontractors and suppliers, as well as on the necessity of involving them from the early stages of the production cycle (design, testing and developing prototypes). Moreover, MSEs frequently co-operate closely with each other in order to complement their activities within the production cycle by forming production associations or clusters and, increasingly, through networking arrangements. These new forms of collaboration among enterprises tend to become more stable and more lasting with a more equitable distribution of responsibilities (risks and profits) between the various partners. In fact, such subcontracting and partnership linkages enable the MSEs to concentrate on their field of specialisation.

Box 6: Production of hammocks by Ecohamaca Ecohamaca is a network of 11 enterprises operating in the hand-made hammock sector. While the network members compete against each other in the local market, they have decided to collaborate with a view to accessing foreign markets. Previously, none of the local producers had direct exporting experience. With the project's assistance, the producers were able to standardise their production in order to collectively produce sufficient quantities for export and at the same time improve the quality and design of the products. The network also adopted a pricing policy. The group selected an ecologically friendly strategy in their production process to respond to international concerns about the environment. This strategy proved to be successful since it permitted the group to penetrate important markets like the EU and USA. In order to consolidate results and increase collaboration, the group has acquired a legal status and has hired a manager whose functions include the identification of more formal training schemes for the workers, the search for other technical and financial assistance from a variety of local SME support institutions, and improving the group's marketing strategy. Ecohamaca maintains a Web site on the Internet.

In order to increase the chances of success, these linkages often call for other complementary forms of linkages, such as the provision by the main contractor of special raw materials, specialised equipment, moulds, technical assistance, training, know-how and licence agreements. In some cases, equity participation or joint investments are established between the partner firms, and the traditional subcontracting relationship becomes a fully-fledged partnership.

With a view to assisting countries to promote subcontracting and partnership arrangements, the UNIDO has developed a new programme, entitled "the Subcontracting & Partnership Exchanges", known as "SPXs". These are technical information, promotion and match-making centres for industrial subcontracting and partnership agreements between main contractors, suppliers and subcontractors, aiming at the optimal utilisation of the manufacturing capacities and capabilities of the affiliated industries. SPXs should preferably be organised as non-profit industrial associations run by qualified entrepreneurs. They perform a number of core functions, including collecting and disseminating information; identifying subcontracting and partnerships opportunities; assisting in organising production clusters and associations, and in negotiating agreements with main contractors; etc. More recently, SPXs have started to provide other services, such as training and financial services.

The services are provided either directly by the SPX in the form of surveys, advice, training, awareness seminars and industrial fairs, or by referring the enterprises to other specialised organizations. Countries interested in establishing SPXs may use various instruments developed by the UNIDO for this purpose (guidelines, computer programmes for data base management, legal statutes for establishing SPXs, etc.). Over 50 SPXs have been established with UNIDO's assistance in 30 countries since 1984. The total number of companies registered in these SPXs is close to 16,000.

d) Networking

Networks or association of MSEs usually provide a wide range of serv