Fostering small business

The state has a role to play in creating a favourable framework and market conditions for the development of entrepreneurship and of enterprises, including SMEs. This implies the creation of a favourable macroeconomic framework for creating business confidence and reducing commercial, financial or investment risks associated with unexpected or sharp tax, interest rate or currency movements. It also implies creating a sound policy and commercial framework for business development, in which markets can function efficiently, through the adoption of appropriate policies, including those relating to factor markets, the organization of the firm and support services, product markets and intellectual property, environment and standards.

Where the state succeeds in creating an environment that enables markets to function properly and efficiently, so that SMEs are not disadvantaged because of their size in relation to large enterprises, the best policy towards SMEs may be one of "maximum openness minimum intervention". However, there may be instances where SMEs need to be provided with particular assistance by the state. Such a need may arise where the cost of compliance, for example with environmental standards, or the increased cost of capital due to bad macroeconomic management is disproportionately higher for SMEs than for large enterprises. In any case, the state, if it cannot be helpful, should at least refrain from making business activity difficult for SMEs by over-regulating or over-taxing them or by favouring large enterprises at their expense, which may force them out of business.

Again, where there are market distortions or failures, for example, where markets or inter-firm networks are controlled by dominant incumbents or where policies favouring large enterprises or the inefficient functioning of product, financial or other markets result in high cost, low quality or unavailability of essential inputs for SMEs, so that newcomers or SMEs cannot compete on a equal footing, the state may need to intervene to help the latter by taking measures to correct or eliminate market deficiencies. One such measure is a loan guarantee programme which can play an important role in changing the attitudes and practices of commercial banks, thereby increasing the access to credit for SMEs. However, such support for SMEs should be limited to creating a "level playing field", with the ultimate objective of fostering competitive enterprises in domestic and foreign markets.

This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities. Agenda 21 recommends promoting appropriate small-scale forest-based enterprises for supporting rural development and local entrepreneurship.

ILO and other agencies have assisted target groups in many countries to establish small and micro-enterprises. To improve the management and performance of existing small enterprises in developing countries, ILO has developed and disseminated training packages for practising entrepreneurs. More countries are now placing emphasis in their development policies on the promotion and development of small enterprises. This has led to the emergence of new types of services and the modernization of various traditional services.

Macroeconomic stability and sound policy and commercial framework are especially vital for SME development, given their relative weakness vis-à-vis the stronger players. Because of the limited resources of SMEs, certain administrative rules (i.e., for the registration of companies) may be simplified and made less time-consuming at little or no cost for small businesses, including micro-enterprises, in order to facilitate their registration and to encourage business start-ups. Furthermore, tax payment procedures may be simplified for small businesses by levying a small lump-sum tax without the need for the filing of tax returns or the keeping of detailed accounts – a system used, for example, in India.

In Japan, subsidized loans by financial institutions created to cater to the needs of SMEs are provided in special cases, such as the modernization of production facilities, the relocation of plant or the conversion of business activities due to structural change.

In some of the transitional economies, the restructuring of large enterprises into smaller, competitive and flexible firms has assumed a particular importance.

Small-scale production units offer advantages in transport, the cheap training of labour and an opportunity for women and youth. A study in Colombia has shown that small-scale units in the brick-making industry require form 10 to 20 times more labour than large-scale plants per unit of production.

It is important that support programmes for SME development be properly designed and contribute to productive activities, so that they will be fiscally neutral and not undermine macroeconomic stability.

Many developing countries promote small firms in the belief that they use more labour per unit of capital than large firms, use capital more productively, and thus combine abundant labour with scarce capital. Research indicates that this may not always be the case. Small firms do not always produce the same products or serve the same markets as large firms. Size has not emerged as a good indicator of efficiency which is more dependent on the nature of the industry and other economic constraints. In most developing economies, the overall trade and industrial policy framework tends to discriminate in favour of large firms. In such an environment, if small firms survive, they tend to do so on account of their higher efficiency or their superior ability in a particular market. But where government policies are biased heavily in favour of small firms, there is substantial risk that this may lead to the establishment of small firms that use resources inefficiently.