This blog post is the second of a series centred on innovation and enterprise. Nada has over 7 years of experience in private sector development, primarily supporting micro, small and medium enterprises through a number of interventions. These range from direct delivery of business support services in areas of partnerships, access to new markets and capital, to engagement with business associations and government agencies to improve the enabling environment for business to flourish.
Micro, small and medium enterprises (MSMEs) are the engines of growth in developing countries. They constitute over 95% of all businesses and almost 80% of the labour market in sub-Saharan Africa and south Asia. Despite their importance, 70% of MSMEs in emerging markets claim that their ability to grow and expand is restricted by access to finance, with the ‘finance gap’ being particularly wide in Asia and Africa.
Given their importance, why is it that most MSMEs struggle to access finance? And in what ways can MSMEs be supported to access finance and in turn grow?
It’s important first to make a distinction between smaller and larger enterprises within the MSME category. The majority of MSMEs in developing countries are smaller with over 80% of MSMEs being micro. These generally employ up to 10 people, generate less than $50k per year and require smaller amounts of finance to scale, between $50k and $250k.
However, most available finance is targeted at larger MSMEs due in part to an inherent assumption that smaller enterprises are more early stage. Although this may be true for age, it’s not always true for their ability to run their businesses. In fact, our recent experience of delivering the Connect to Grow programme, funded by the UK Department for International Development (DFID), shows instances where smaller enterprises are further along in their business thinking than larger ones. However, their low market penetration and lack of sufficient proof of concept makes them less attractive to investors, who are at the end of the day looking for the least risk for a given level of return. Investors who do adopt higher-risk, longer-term approaches and are willing to invest in smaller businesses are few and far between.
To determine how smaller enterprises can be supported, it’s important first to understand how they grow. Ansoff’s matrix states only four routes to growth an enterprise can explore:
Market penetration: sell the same offering to the same market.
Product development: sell a new offering to the same market.
Market development: sell the same offering to a new market.
Diversification: sell a new offering to a new market.
These routes apply regardless of whether an enterprise is small, big, commercially motivated or socially motivated. The objective behind all four routes is to exploit a market opportunity. But given that smaller enterprises are resource-constrained, how can they pursue these routes? And more importantly, how can the international development community support them?
Four ways to help small companies to grow
In the most basic of definitions, innovation means ‘doing something better’ (see blog ‘Removing the fluff around innovation’). To explore any of the four routes to growth mentioned above, innovation is necessary, whether it be in the process, technology or product. However, innovating takes time, expertise and funds, which most MSMEs do not have. Encouraging enterprises to think more creatively, increasing visibility of innovation which exists elsewhere and offering targeted finance to decrease the risk enough for the enterprise to innovate, can all be helpful to promote MSME growth. Another support mechanism involves facilitating innovation transfer, so that MSMEs can benefit from innovation when they weren’t the originator of that innovation. The Connect to Grow programme for the first time tested the potential of innovation transfer from Indian MSMEs to MSMEs across south Asia and Africa.
Although it is widely recognised that partnerships are important for growth, this form of collaboration is rare between MSMEs. Partnerships can be a good way for effective innovation and expertise transfer, especially if each partner is truly invested into making the partnership work. Moreover, MSMEs can also gain through the aggregation of other resources such as finance, staff, infrastructure or markets, which ultimately places them in a better position to innovate and grow. However, it is worth bearing in mind that partnerships can only work if the growth potential for a given level of effort exceeds what each partner is able to achieve independently.
3. Business Development Services
Traditional, though underused, approaches to business counselling and business development services (BDS) can also be highly effective in building MSMEs. Embedding business advisors for longer periods is particularly useful for smaller enterprises that often lack capacity and expertise of business fundamentals. Our experience with Connect to Grow shows that early stage MSMEs needed support to articulate the market opportunity, define their model, manage and report finances, effectively forecast market and sell their offering, and plan, monitor and report their activities.
Helping MSMEs to test some basic assumptions related to their market or product can allow them to prove enough of their concept and in turn attract investment. For enterprises, pilots can be useful to demonstrate actual or potential viability with limited time and resources. Within the DFID-funded Frontier Technology Livestreaming project, IMC has been conducting work in smaller batches, also known as ‘sprints’, to test the potential of new technologies in tackling development challenges. This has allowed for speedy validation of specific objectives and the ability to learn and adapt based on on-the-ground findings.
Given the sheer volume of MSMEs in emerging markets and their ability to contribute heavily to a country’s economic and social development, there exists a huge opportunity for support programmes to focus their efforts more on this underserved segment of business. This blog presented four approaches to do just that.
Cover photo: One of the 20 partnerships built by the DFID-funded Connect to Grow programme brings water ATMs, manufactured by Indian firm Akshay Swach Jal, to Kampala through Ugandan importer Sparkles. These water ATMs offer access to safe affordable water with cash or prepaid cards.
Key performance indicators increase donor accountability, hold multilateral development banks to account and ensure money goes to projects that are likely to work. However, they are not a silver bullet and are sometimes discarded for political reasons.