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A Critique of SME-led Approaches to Economic Development - May 2003

3. Which focus for policy?

The focus of SME related policy depends on two major factors, namely whether promotion of SMEs is seen as a distinctive, central and legitimate goal of policy, and the role policy is understood to play in development.

The first question that seems to be important to discuss is whether policies should be developed to help SMEs or to help the starting and dynamic growing of "sunrise" businesses and capabilities, and the structural adjustment of "sunset" businesses and capabilities. This is not only an issue of semantics, but mostly of content and direction of policy. One thing is to support firms because of their scale; another is to support specific industrial capabilities, including firms and networks, to develop according to perceived opportunities, pressures and potential development linkages. One thing is to discriminate in favour of a particular scale of whatever firms emerge; another is to favour specific industrial capabilities, sets of linkages and required institutions (be it large firms or equivalent industrial organizations) irrespectively of the scale that may be achieved.

These different directions and focuses of policy have strong implications for the definition of the patterns of growth and development and the role of the state. They also respond to, and try to address, different pressures and problems. It might even be possible to combine elements of different approaches - for example, favouring the growth of networks and industrial associations instead of the creation of gigantic firms. What matters most is that the focus of economic policy is not put on ideological definitions of optimum scale, but instead on the fundamental economic and industrial capabilities to create, manage and develop; linkages to take advantage of; agents to mobilise and deal with; industrial and labour relations to develop; and what the political, social and economic implications of all such policies might be.

Mainstream, neo-liberal economic theories assume that SMEs reflect factor endowment based comparative advantages better than larger firms, are more market friendly and better for promoting competitive market conditions that lead to higher economic and social efficiency. Therefore, they argue that a minimalist state is better for SMEs. This means that the main role of policy is to remove market barriers (trade and administrative barriers), facilitate business operations, and provide a general enhancing environment in which SMEs may thrive.

However, if economic dynamics are not in line with the development of SMEs (as is the case in Mozambique, were large FDI projects linked with the minerals-energy complex of South Africa are dominant), the minimalist state approach may yet prevent SMEs from developing.9

Nonetheless, even such theories acknowledge that SMEs, particularly in LDCs, face serious market failure. Some even argue that addressing market failure10 - for example, market segmentation and information failure, failure in allocation of property rights such as in the case of public goods and externalities - is one crucial reason to promote SMEs.11 In the case of market failure, policies become slightly more specific, typically involving the provision of, or support to, access to markets, technology, information, finance, training and infrastructures. According to such theories, policies to address these (and other) issues should be demand driven and market conforming, such that they help, rather than substitute, the market mechanism. As such debate fails to address exactly and precisely what problems are to be addressed, for what purpose and how, the role of SMEs in addressing market failure, or the set of policies to address market failure that prevents SMEs from developing, become blurred if not entirely ideological.

It is not surprising, thus, that many SME support programs are directed at firms that have a history of relative success, know what they need, and have the means to share a significant part of the cost of the supporting activity. These are not starting, sunrise businesses, nor adjusting, sunset ones.

On the whole, most SME driven programs try not to have to address the more general dynamics of the economy, either because of the assumption that markets know better, or because SMEs are seen as a way to balance the power of more general dynamics; or simply because such dynamics are not understood.

An interesting example of this is the Mozambican industrial policy and strategies approved by the Council of Ministers in 1997. This document claims that the priorities of the Government of Mozambique (GOM) for industry are SMEs, national entrepreneurship and diversification of productive capabilities, output and exports. Only a couple of very vague paragraphs mention foreign direct investment (FDI) and the regional and international contexts of industrial development in Mozambique.12 This document does not establish any instruments that would allow the government to implement its policies and mobilise the cooperation of the private sector, and the policies and strategies written have very little relevance given the general context under which industrial development takes place in Mozambique.13

As a result, between 1998 and 2002 some 40% of SMEs owned by national entrepreneurs have closed down, industrial investment is almost exclusively made by foreign owned or foreign associated firms, production and exports have become significantly more narrowly specialised, and the dynamic sectors of industry, with rare exceptions, are found almost exclusively amongst large, FDI driven firms. More generally, there is no strategy to address and provide a strategic framework to development of SMEs within the context of dynamic, large scale FDI. For example, Mozambican firms have consistently failed to take advantage of opportunities for industrial linkages to develop with large FDI based projects not only because they lack crucial capabilities, but also because there is no clear strategy to address such weaknesses. In very rare, individual cases, some Mozambican firms have managed to establish and benefit from such linkages, mostly because they either have associated themselves with foreign partners, or they are only affiliates of foreign firms. In any case, they do not work as small firms, because they tend to be the single firms operating in very specific markets. In other words, they operate as large firms with small or medium scale.

Private enterprise supports programs, mostly directed at SMEs, usually lack clear industrial strategies and clear sets of priorities in capacity building. Apart from providing training and some institutional facilitation to those firms that are interested, these programs have generally done little more. In most cases, it is not known what the real impact of training and institutional facilitation is, as most SMEs find it difficult to move from training and knowledge acquisition into real business practice. There are, obviously, some exceptions, such as the case of the cashew processing plants in the province of Nampula, which have not only received training but have also benefited from highly subsidised business services that include the making of business and financial plans, medium term technical assistance, technical support in the choice of, and even design, of technology and layout of the plants, access to equipment, etc.

Generally speaking, and with due notice to rare and welcome exceptions, nobody (entrepreneurs included) really knows how to promote SMEs in Mozambique and what to do with them once they have emerged.

  1. See Castel-Branco 2003, 2002a and 2002b.
  2. Of course, market failure is identified whenever economic predictions or mechanisms based on perfectly competitive models, or any model of neo-classical inspiration that is based on methodological individualism, fail to operate as prescribed by the theory.
  3. See, for example, World Bank 1994, 1993 and 1989, Stewart, Lall and Wangwe 1992, Stiglitz 1998 and 1996.
  4. See GOM 1997.
  5. See Castel-Branco 2002a, 2002b and 2003.
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