|International Best Practice in Micro and Small Enterprise Development - Working Paper 2 - Micro and Small Enterprise Development and Poverty Alleviation in Thailand - Project ILO/UNDP: THA/99/003 (ILO-ISEP - ILO - UNDP, 2000, 80 p.)|
|3. Business development service instruments|
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.
An example of appropriate technology
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 cooperate 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.