SME Development Agencies

SME Development Agencies

Over the last few months, I’ve provided advice to a number of government funded national SME (small and medium-sized enterprise) development agencies. Such agencies are very popular among governments, but less so among enterprise development specialist. While they can focus government efforts on supporting the small business sector, they can easily become expensive bureaucracies that have little impact on the broader economy.

There are inherent dangers in the SME agencies. In there worst form, they are politically motivated instruments, designed to appease and appeal to base political interests. Governments want to show their small business constituents they understand and are responding to their problems. However, not all SME agencies are the same and there are good, solid, justifiable reasons for creating these facilities.

Best practice suggests that sustainable and impactful business development should be market driven. Commercially designed and delivered services often work best: they are responsive to client needs and provided at no or little cost to government. However, there can be market failures in these arrangements. Market systems often need to be transformed to better service the needs of the small business sector. This can provide a rationale for government engagement. However, governments should take care not crowd-out the business services market with free, supply-oriented business advisory and training services. Instead, they should support the development of business service markets.

This market-provision view needs to be balanced with the understanding that governments often want to and should support the small business sector. While the creation of an SME agency might not be the only or best way of doing this, it can play an important role in the overall government response to small business concerns. SME agencies can help to focus government efforts and create a mechanism for business development that is both accountable and strategic.

Because SMEs are a major source of job creation, many governments have established agencies to support business start-ups and growth. These vary greatly in terms of their institutional structure, mandate, operational arrangements, and the range of programmes and services they offer. There is no single blueprint for success and the most effective models reflect the economic, social, political, legal, and cultural context. The better models are based on an objective diagnosis of the business sector, which should include a mapping and gender-sensitive assessment of all other public, private and community service providers.

A successful SME agency will distinguish between its role as a public service provider and a market actor.

The public service role of SME development focuses on how government programmes and services are designed and delivered. This involves the transformation of government systems, rather than market systems. Government systems include information on and support for legal and regulatory compliance, tax administration, and access to incentives and subsidies, such as export incentives or training subsidies. Within this context, an SME agency can become a specialised one-stop-shop (OSS) for the small business sector.

Jana Kunicová at the World Bank describes how ‘modern reform-minded governments try to re-imagine public service delivery from the point of view of service users’. They constantly ‘look for ways to improve administrative service delivery’. They highlight the needs and expectations of citizens, while striving for minimal wait times, treating citizens politely and reducing red tape and corruption. This is an important role for an SME agency; one that improves the delivery and accountability of government services to the small business sector, while become more aware of and responsive to small business experiences.

A 2017 World Bank and United Nations Development Programme report on OSS, titled Re-inventing Service Delivery Through One-Stop Shops, finds four common features among the many different OSS models:

  1. Increasing access to services by supplementing brick-and-mortar centres with electronic and mobile services;
  2. Personalising services by providing targeted information based on citizen’s interests and needs;
  3. Speeding up responses by reducing transaction times, which often involves re-engineering and simplifying processes and procedures; and
  4. Improving interaction by engaging citizens throughout the process from co-designing services to receiving feedback on how the services can be improved.

The most effective OSS is based on a clearly defined policy problem, visionary leadership at the highest levels, a clear link to an underlying public administration reform programme or strategy, and a well thought-out programme of reform sequencing, with high-level coordination across all governments agencies.

The market development functions of an SME agency require a different set of partners and programmes. They deal with the provision of business and financial services, such as business advice, training, mentor support, and business coaching, as well as a wide variety of credit and equity financing instruments. Typically, there is a high, unmet demand for these services across the small business sector. However, SME agencies should not treat this as a reason to dive in and begin directly providing services, no matter how politically attractive this might be to the minister or the government. Instead, they need to assess the markets for these services and take care to understand how government interventions affect these markets in both positive and negative ways. There are many resources that can be used to so this (see here, here and here).

Where SME agencies do decide to intervene, they can provide services that are well defined and clearly targeted at specific types of enterprises. They can monitor and assess the impact of these services on the broader business sector and the economy as a whole, and they can devise an exit strategy that incorporates measures to sustain service delivery by market actors over the long-term. This allows the agency to move on to addressing other market failures or problems experienced by small businesses. Where private sector service delivery is not possible, governments can clearly define the value of their subsidy in the long-term and the anticipated impact this will have.

The International Labour Organization recently produced a comparative analysis of the regulatory, institutional and operational frameworks used to establish SME agencies in Brazil, Chile, South Africa, South Korea, Spain, and the USA. This report recommends that SME agencies be established in line with the long-term national economic policy; they should be embedded in the national enterprise promotion system and aligned with other support organisations. The ‘highest level’ of government support should be given to the agency to ensure its mandate is clear and it has political and institutional ‘clout’. However, political appointments should be avoided. Preferably, SME agency boards should include male and female representatives from both the public and private sectors. The report also recommends that agencies develop a long-term financial plan, which describes how its programmes and services will be financed. This may include annual budget support, the commercialisation of business and financial services, managing agent models of delivery, and sponsorship from large business organisations.

Small business is a politically contested terrain in most countries. This makes it difficult to apply pure technical solutions to the problems business owners and their workers face. But by clearly distinguishing between government and market systems and roles, it is possible to ensure SME agencies play to their strengths and provide demand-driven, long-term benefits to the business sector and the economy.

Some related posts you might want to check out:

Supporting Local High-Growth Entrepreneurship

The global economy drives SME growth and job creation

How micro-businesses are changing the way we live and work