Donor approaches to improving the business environment for small enterprises

Donor approaches to improving the
business environment for small enterprises










Working Group on Enabling Environment
Committee of Donor Agencies for Small Enterprise Development
www.sedonors.org
Washington







Simon White
July 2004

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Donor Approaches to Improving the Business Environment for Small Enterprises

for small enterprises. Special attention
Executive Summary
is given to the way donor agencies

define the business environment and
the role small enterprises play in it.
The Working Group on Enabling
Environment, established by the
It was found that donor agencies
Committee of Donor Agencies for
have come to this field of work along
Small Enterprise Development in
different paths. Agencies such as the
1992, has taken a closer look at the
development banks have been
work of donor agencies in reforming
involved in supporting macroeconomic
the business environment for small
reforms for sometime. These agencies
enterprise development. This report
have been interested in the business
presents the findings of an
environment in general, but rarely
investigation into the concepts,
examined the importance of the
approaches, and practices donor
business environment on small
agencies apply in their efforts to
enterprises. In contrast to this
improve the business environment in
situation, there are donor agencies
which small enterprises operate.
that have a long history of support for
small enterprise development
While all donors share the common
programs, but have only recently
broad goal of poverty reduction––most
turned their attention to the broader
recently expressed in terms of the
environment in which small enterprises
United Nation’s Millennium operate.
Development Goals––many are
challenged to find ways to upscale
Donor agencies and small
their development programs to
enterprise practitioners were found to
produce a greater impact. Small
regularly––and often loosely––use the
enterprise development has been
terms ‘business environment’,
acknowledged as a useful mechanism
‘investment climate’, ‘business climate’
for economic development and poverty
and ‘enabling environment’. While
reduction by both governments and
avoiding the dangers of a semantic
donor agencies. While there have
argument, the study has found it useful
been hard questions asked about the
to unpack the concepts and themes
efficacy of financial and business
that underlie these terms. A broad
development services in this field
range of elements can be contained in
(leading to substantial improvements
the business environment. However,
in the way small enterprise
this study found many donor agencies
development programs are designed
prefer to focus on those elements they
and assessed), many donor agencies
believe to be most relevant. These
have turned to the broader conditions
were:
in which small enterprises operate in
• Macroeconomic
strategies
the search for ways to affect a larger
• Governance
issues
number of firms and, hence, expand
•
Policy, legal and regulatory
the benefits of their interventions.
framework
Donor agencies are also searching for
tools and processes to improve the
• Organizational
framework
capacity of small firms to respond to
While many donor agencies have
the challenges that advancing
not officially defined their view of the
globalization and foreign trade brings.
business environment, this study cites
The study presented in this report
examples that display great variation.
was based on a comparative
In addition to these common
assessment of the similarities and
elements of concern, some donor
differences in donor agency practices
agencies highlight the role of the
in reforming the business environment
broader cultural and value-based
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Donor Approaches to Improving the Business Environment for Small Enterprises
context of economic and social
development brings donors into a
system. Attitudes to enterprise and
number of new (higher-level) domains.
markets, expectations on the role of
Consequently, there are a number of
the State, the value of hard work and
new issues that donors are required to
individualism, are broader influences
grapple with in this field. These
that affect society’s institutions, and
include:
ultimately the business environment.
• The need for integrated holistic
This study also examined the
programs that deal with a number
approaches donor agencies take to
of reform issues, rather than
assessing the business environment
isolated projects
for small enterprises. What donors
• The time-consuming nature of
measure in the business environment
reform and the demand for longer
and the changes they monitor reflect
donor timeframes
their interests. Interventions designed
• The connection between policy,
to improve the business environment
legal and regulatory reform and the
are based on an analysis that gives
role of markets
priority to some issues over others.
• Ways to engage small enterprises
Nineteen tools of assessment are
as advocates for change and
described in this report. Each of these
participants in the reform process
use a different set of information
sources ranging from large-scale firm
• Finding incentives for change,
surveys, to gauging expert opinion, to
improving governance and building
stakeholder consultations. Each of the
skills
tools described have a specific area of
• How a decentralized agency
focus and have been designed to
structure can be supported by its
address areas of interest or concern.
head office in this field
To varying degrees each of the above
• The significance of local-level
tools identify bottlenecks or constraints
reforms
to private sector or small enterprise
• Responding to host government
development.
demands and the relevance of fee-
Very few tools focus on the plight
for-service reform interventions
of small enterprises in the business
• Recognising and respecting the
environment. Some tools attempt to
political aspects of reform
capture information that is specific to
small enterprises, but most have been
• New ways of working with the
designed with the view that small
private sector
enterprise data is too difficult to
• Sectoral approaches to reform
capture, too hard to compare across
Many donors consulted for this
countries, or unnecessary.
study indicated they would appreciate
All the tools described generate
information on how to improve their
information that can inform the design
performance in these areas. Donors
of reform interventions. However, not
are eager to learn more about the
all donor programs are designed on
experiences of others in the fields of
the findings of assessments such as
governance, regulatory reform, policy
these. Business environment development and revision, and
assessments can be used to create a
drawing small enterprises into social
demand for reform and to identify
dialogue.
points of concern within the business
The difficulties of donor
environment, but the program planning
collaboration are identified. While all
processes of donor agencies are often
donor agencies agree to the
influenced by a range of other factors.
importance of better collaboration,
Reforming the business many experience internal obstacles.
environment for small enterprise
Some of the mechanisms that have
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Donor Approaches to Improving the Business Environment for Small Enterprises
been used to promote collaborative
Agencies for Small Enterprise
reform efforts are described.
Development can do much more to
Finally, this report attends to the
improve the practice of donor-
ways donor agencies formulate the
supported reforms in the business
outcomes and impact of their projects
environment for small enterprises.
and what indicators they use to
While the management of reform
measure these. The frameworks
processes should remain in the hands
agencies use to assess outcomes and
of host governments and other
impact in the reform of business
domestic stakeholders, donor
environments is of interest, as are any
agencies can significantly add value to
insights that can be gained into the
these efforts.
processes and experiences of turning

plans for reforms into actual donor-

supported interventions.

While there are many problems

experienced by donor agencies in this
field, all agencies believe this is a field

that deserves careful attention. Most
donor agencies are engaged in
monitoring and assessing their
program interventions, but many are
aware of the shortcomings of their
efforts.
There are three major problems
experienced by donor agencies when
evaluating the impact of their
interventions. The first comes from the
embedded nature of many reform
programs. Donor agencies often
package their reform efforts within a
broader program of development
cooperation. This bundling of reform
services can make monitoring and
assessment of specific reform efforts
(i.e., reform components) very difficult.
Secondly, it is difficult to find ways
to attribute specific donor-supported
reforms to improvements or declines in
the business environment when so
many other events (both domestic and
international) can also affect the
business environment. Similarly, it is
difficult to prove the counter-factual
(i.e., What would have happened if the
donor activity had not taken place?)
Thirdly, reforms to the business
environment take time. While
individual interventions can create
short-term outcomes the impact of
these outcomes takes a longer period
of time to eventuate.
It is clear that individual donor
agencies and the Committee of Donor
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Donor Approaches to Improving the Business Environment for Small Enterprises

Table of contents


Executive Summary ..................................................................................................... ii
List of acronyms ......................................................................................................... vii
Chapter 1 Introduction............................................................................................... 8
1.1 Study objective and outcomes ........................................................ 9
Chapter 2 Describing the business environment..................................................... 14
2.1 Donor pathways and motivations for working on business
environments................................................................................. 14
2.2 Models and frameworks for practice ............................................. 16
2.3 Beyond the business environment ................................................ 24
2.4 The importance of enterprise size ................................................. 25
Chapter 3 Assessing business environments for small enterprise development .... 28
Chapter 4 The practice of reforming the business environment.............................. 34
4.1 From assessment to project design and implementation .............. 34
4.2 Donor interventions ....................................................................... 38
4.3 Donor collaboration ....................................................................... 46
Chapter 5 Creating impact: Outcomes and the measurement of reforms ............... 49
Chapter 6 Conclusions ............................................................................................ 54
6.1 Models and frameworks ................................................................ 54
6.2 Tools of assessment ..................................................................... 55
6.3 Donor-support reform practices..................................................... 55
6.4 Monitoring and evaluating donor impact ....................................... 55
6.5 Challenges to the Committee of Donor Agencies ......................... 56
References ................................................................................................................ 57
Annex 1: Key donor publications............................................................................... 61
Annex 2: Inventory of diagnostic tools ...................................................................... 67
Annex 3: Terms of Reference ................................................................................... 79
Annex 4: Toward a framework for monitoring change and assessing impact ........... 85
Annex 5: Reforming the business environment to achieve MDGs ............................ 89

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Donor Approaches to Improving the Business Environment for Small Enterprises
List of Tables
Table 1: Donor agencies consulted.......................................................................... 12
Table 3: Review of terms used................................................................................. 18
Table 4: Key elements of the business environment for donor agencies................. 22
Table 5: Standardized assessment tools and techniques........................................ 29
List of boxes
Box 1: Effective markets .......................................................................................... 15
Box 2: Asian Development Bank.............................................................................. 19
Box 3: European Commission on Development of the Business Sector ................. 23
Box 4: CIDA and the enabling environment ............................................................. 23
Box 5 Enhancing the investment climate ................................................................. 25
Box 6: Some examples of small enterprise-specific concerns found in the
business environment ................................................................................ 26
Box 7 The Abuja Manifesto ...................................................................................... 41

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Donor Approaches to Improving the Business Environment for Small Enterprises
List of acronyms

AusAID
Australian International Development
BDS
business development services
BLCF
Business Linkages Challenge Fund (DFID)
CIDA
Canadian International Development Agency
Danida
Danish Ministry of Foreign Affairs
DFID
Department for International Development (United Kingdom)
EBRD
European Bank for Reconstruction and Development
EU European
Union
FDCF
Financial Deepening Challenge Fund (DFID)
FDI
foreign direct investment
GTZ
Gesellschaft für Technische Zusammenarbeit
(German Agency for Technical Cooperation)
IADB
Inter-American Development Bank
ICA
Investment Climate Assessment (World Bank)
ILO
International Labour Organization
JBIC
Japan Bank for International Cooperation
JICA
Japan International Cooperation Agency
NORAD
Norwegian Agency for Development Cooperation
OECD
Organization for Economic Co-operation and Development
PRSP
Poverty Reduction Strategy Paper
PSD private
sector
development
RICS
Rural Investment Climate Survey
SDC Swiss
Development
Agency
Sida
Swedish International Development Cooperation Agency
SME
small and medium-sized enterprise
SOE State-owned
enterprise
UNCTAD
United Nations Conference on Trade and Development
UNDP
United Nations Development Programme
UNIDO
United Nations Industrial Development Organization
USAID
United States Agency for International Development
WBG
World Bank Group
WTO
World Trade Organization

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Donor Approaches to Improving the Business Environment for Small Enterprises
Governments have taken direct measures
Chapter 1
to support the development of small
enterprises. They have established
Introduction
incubators, launched training programs,
encouraged mentors, given out money,

guaranteed the money of others, created
Small enterprise development continues
special councils or taskforces, adopted
to challenge governments, donor agencies
promotional policies, and even offered
and practitioners around the world.
tendering preferences to the small enterprise
Responding to these challenges has
sector. In some cases, these initiatives have
produced innovations in approaches that
been ill informed; they have created or
improve practices and deepen the
perpetuated market distortions and usually
understanding of small enterprises and their
only benefited a handful of enterprises in a
role in local and national economies. While
sporadic and unsustained manner. However,
the advantages of small enterprises and their
there are also cases where governments
contribution to national economic and social
have promoted small enterprises in a more
development are recognised by many, the
strategic, market-oriented manner––where
methods for small enterprise promotion are
they have recognised the role other actors
the subject of debate and revision.1 In some
can perform and sought to facilitate the
cases, small enterprises are a symptom of
development of markets for business
underdevelopment and poverty, but
development services.
elsewhere they are indicators of a vibrant,
Donor agencies have endeavoured to
entrepreneurial economy. Both developed
work with governments to address these
and developing countries have come to
challenges. They have encouraged the
recognise the importance of the small
sharing of information and experiences, and
enterprise sector and its relationship to large
the learning of lessons that can improve their
enterprises and the strategic position that
practices. Over time, donor agencies, along
many countries are looking for in the world-
with governments, academics and other
economy.
actors have established a body of knowledge
Most governments have come to see that
to build upon these experiences. The
running their own businesses is an inefficient
Committee of Donor Agencies for Small
endeavour; there are compelling arguments
Enterprise Development, established in 1976,
for the development of a dynamic and
has played a significant role in this regard.
competitive private sector as a mechanism
Innovations in financial services, the
for the distribution of resources, goods and
promotion of market-based business
services. For the governments of many
development services, and an exploration
developing economies, a new relationship
into ways of improving monitoring and
with the private sector is being forged.
evaluation are examples of the contribution
Governments are required to recognise the
the Committee has made to practice in this
value of markets and ensure they only
field.
interfere with them when they have a clear
This report furthers the work of the
and good reason. Furthermore, globalisation
Committee of Donor Agencies in an equally
and the removal of barriers to trade have
challenging and innovative field: the creation
opened enterprises of all sizes to competition
of a business environment that is conducive
from the world-economy challenging many
to small enterprise development. Donor
national governments to find new ways of
agencies have come to realise that the
managing their economies.
business environment can influence the
effectiveness of financial and business

development services. Providing support to
small enterprises where the business
1 The term ‘small enterprises’ is used to describe a
wide range of enterprises that are often
environment dampens entrepreneurship and
disaggregated into micro enterprises as well as
inhibits enterprise growth undermines the
small- and medium-sized enterprises (SMEs), with
potential of business development services.
the specific definition depending on the purpose or
Moreover, there may be times when certain
country context.
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Donor Approaches to Improving the Business Environment for Small Enterprises
financial and business development services
environment in five countries/regions.2 This
are no longer required in a business
resulted in the publication of a report entitled,
environment that facilitates enterprise
Enabling Small Enterprise Development
establishment and growth. Thus, donor
through a Better Business Environment
agencies have begun to pay more attention
(White & Chacaltana 2002). The findings of
to the conditions in which financial and
this report were presented during the annual
business development services are provided
meeting of the Committee of Donor Agencies
and to broaden the scope of their
in Turin in September 2002. The report
involvement in small enterprise development.
identified similarities and differences in donor
The broader context in which small
initiatives in this field, while describing the
enterprise development occurs has become
content, process and outcomes of donor
better understood by donor agencies. The
efforts. Some tentative suggestions toward
relationship between small enterprise
good donor practices were also presented.
performance and trade and investment has
However, the need for further information and
become a critical concern for many, as has
a better understanding of the role donor
the role small enterprises play in the value
agencies can play in promoting reforms to the
chain within specific industry sub-sectors.
business environment was clear. White and
Assessing and reforming the business
Chacaltana specifically referred to the need
environment in which small enterprises
for further research to:
operate provides an opportunity to consider
• Better understand and further develop the
these connections and to ensure these
business environment concept and its
interrelationships function optimally.
influence on small enterprises
Macroeconomic strategies, labour market
• Assess donor practices and experiences
policies, legal systems, as well as the
with initiatives to improve the business
systems of governance have all become
environment for small enterprises
more relevant to the prospects of successful
• Better understand the impact of
small enterprise development. Similarly,
international development assistance on
small enterprise development can be a
the business environment, including the
strategy employed by governments to
design of appropriate tools and
achieve the dynamism and competitiveness
techniques for measuring such impacts
their economies require.
Taking these recommendations into
account, the Working Group commissioned a
1.1 Study objective and outcomes
new study to look more carefully into these
issues. The objective of the study was to
The business environment for small
better understand the way donor agencies
enterprise development has been on the
plan and design their initiatives for improving
mind of the Committee of Donor Agencies for
the business environment for small
Small Enterprise Development for some time.
enterprises. It was proposed that this study
In 1992, the Committee produced a report,
contribute to the Committee’s efforts to derive
dealing with the ways donor agencies can
principles of good practice to enhance future
cooperate in providing support for small
donor collaboration and harmonization at the
enterprise development at the national level
country level. See terms of reference in
(Committee of Donor Agencies for Small
Annex 3.
Enterprise Development 1992). The report
While attention is given in this report to
incorporated issues concerning the policy
the role of donor agencies in reforming the
framework for small enterprise development,
business environment for small enterprises, it
as well as the organizational framework and
should be recognised that national
the regulation of competition and markets. In
governments are in fact the main drivers of
2001, the Committee of Donor Agencies for

Small Enterprise Development established a
Working Group on Enabling Environment. A
2
The five countries/regions examined were the
Balkans (encompassing Albania, Bosnia-
first initiative of the Working Group was to
Herzegovina and FYR Macedonia), the Caribbean
commission research into the role donor
(specifically Dominica, Grenada, Guyana, and
agencies play in promoting an enabling
Jamaica), Peru, Tanzania, and Viet Nam.
Working Group on Enabling Environment
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Donor Approaches to Improving the Business Environment for Small Enterprises
reform processes. Donor agencies can
Committee of Donor Agencies, participating
support reform efforts, but it is the
agencies have more to contribute.
government that must take the lead.
The following themes of donor agency
Furthermore, it is recognised that private
involvement in reforming the business
sector representative agencies, including
environment for small enterprise
associations of small enterprises, can
development are addressed:
advocate for change and participate in reform
• Definitions and concepts used to describe
processes––but, again, government usually
the business environment
manages these processes.
• Diagnostic instruments and frameworks
Key findings based on a comparative
used to assess the business environment
assessment of the similarities and differences
in donor agency practices in this field are
• Processes for the planning and design of
presented in this document. Special attention
donor interventions
is given to the way donor agencies define the
• Programmes and services provided by
business environment and the role small
donor agencies to promote reform of the
enterprises play in it. As will be shown, donor
business environment for small enterprise
agencies and small enterprise practitioners
development
regularly––and often loosely––use the terms
• Monitoring and information systems used
‘business environment’, ‘investment climate’,
by donor agencies in their efforts to
‘business climate’ and ‘enabling
promote reform of the business
environment’. Semantic arguments aside, it is
environment
pertinent to understand the full meaning of
• Collaboration between donor agencies in
these terms. It is especially illuminating to
the promotion of reforms
identify the key elements that comprise these
terms and which are excluded.
• Outcome and impact of business
environment reforms
The tools and techniques donor agencies
use for assessing the business environment
• Lessons learnt for donor agency
are also given attention in this report. What
experiences
donors measure in the business environment
This study has involved consultations with
and the changes they monitor reflect their
a number of donor agencies, either in person
interests. Interventions designed to improve
or by telephone or email. The table below (
the business environment are based on an
analysis that gives priority to some issues
over others. This analysis sheds light on the
focus of donor interventions and the source
of their interests and concerns.
Finally, this report attends to the ways
donor agencies formulate the outcomes and
impact of their projects and what indicators
they use to measure these. The frameworks
agencies use to assess outcomes and impact
in the reform of business environments is of
interest, as are any insights that can be
gained into the processes and experiences of
turning plans for reforms into actual donor-
supported interventions.
Since the Working Group report in 2002,
the speed at which donor agencies have
engaged the business environment has been
rapid. Not only does it appear that more
agencies are now working in this arena, but
also those that were previously involved are
now more active. Thus, there are more
experiences to learn from and, through the
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