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Paper presented at the FMC Conference “Changing Paradigm of Cluster Development” Delhi, 20 February 2014
What determines MSE upgrading?What determines MSE upgrading?Evidence from India, Egypt and the Evidence from India, Egypt and the PhilippinesPhilippinesDr. Aimée Hampel-Milagrosa Dr. Markus LoeweCaroline Reeg
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Outline
1. Research question
2. Definitions & conceptual framework
3. Research methodology
4. Results
5. Conclusion and Policy Recommendations
2
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Research question
3
What are the most important factors of upgrading?What are the main constraints for MSE upgrading?Why do some firms succeed to upgrade while others do not?(What are the critical success factors?)
How does the process of MSE upgrading unfold? (What kind of growth trajectories are suggested?)
micro
small
medium
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Definition: Upgrading
4
Innovation(qualitative improvement)Process innovationProduct innovationFunctional innovationMarketing innovationSectoral innovation
UpgradingUpgrading
MSE growth(quantitative improvement)in terms ofemploymentsalesreturn of investment assetsturnover
What are the determinants?Extensive literature is offering manifold explanations:
New to the market
=> innovation rent
Entrepreneur characteristics
Enterprise characteristics
Social networks
Business networks(inter-firm linkages)
Business environment
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Business Environment
Business Networks
Social Networks
Factors of upgrading: the ‚onion model‘
6
The Enterprise
The Entrepren
eur
• Human capital• Family
background• Work experience• Personal
qualities• Gender• Social capital• Social class
• Personal relations with core family, relatives, friends, neighbours etc.
• Membership in business organisations
• Relations with buyers and suppliers (value chains)
• Relations with competitors(clusters)
• Infrastructure (access to electricity, transportation, telecommunication)
• Financial and political stability
• Access to finance (credit, leasing, insurance)
• Corruption and politics
• Laws and regulation
• Location• Size• Degree of
formalisation• Workforce
characteristics(e.g. training)
• Product portfolio• Strategy• Market
orientation• Portfolio
diversification
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Definition of MSME based on employment
Employment figures are1. easy to observe and easier to remember2.do not change over time due to inflation or
productivity increases3. Employment numbers reflect the sustainability of
enterpise growth (maturity of the enterprise).
Micro Small Medium
Egypt: 1-9 empl.
India: 1-9 empl.
Philippines: 1-5 empl.
Egypt: 10-49 empl.
India: 10-19 empl.
Philippines: 6-10 empl.
Egypt: 50-99 empl.
India: 20-99 empl.
Philippines: 11-99 empl.
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Methodology
Primary objective is to learn from successful cases
Therefore, PURPOSIVE and EXPLORATIVE! Gather rich stories that show the longitudinal dynamics of upgrading
Capture whole picture of evolution and growth of entrepreneur and enterprise
Capture qualities of entrepreneur’s environment (networks and business environment) that MATTER
+ Gathered additional quantitative information for confirmation
8
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Method: Tracing Back Success Stories
99
41
17
6
15
69
26
1015
73
Number of
employees
TimeStart-up
2012
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Sampling
11
Identification of upgraders by:
– ‚quantitative‘ criteria: (i) grown fast in relative terms(at least 10% annually over a period of
5/10 years)
(ii) passed threshold
– ‚qualitative‘ criteria: (i) any kind of innovation(product, process, functional,
marketing, inter-sectoral)
(ii) grown faster than competitors(new to the market: innovation rent)
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Identification of SMEs for interviews
12
Egypt India Philippines
102 93 150
Company registries and other representative lists:
Near-to representative lists:
Recommendation by experts, business associations or lead firms in sector:
‚Walking the street‘ (especially in geographic clusters):
2330
29
19
-10
34
49
7-
19
124
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Composition of core sample (descriptives)
13
Egypt India Philippines
Total: 80 93 112
Upgraders:Non-upgraders:
4040
4251
2191
Garment & textile :Leather & footwear:Food processing:ICT:
42-
2614
2937-
27
313249-
Formal at start:Informal at start:
5921
2865
3082
Female entrepreneur:Male entrepreneur:
1565
489
5854
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Methodological tools
14
Qualitative:
• Stories of interviewees: growth trajectories
Quantitative:
• Main constraints for upgrading: structural factors
• Main success factors in upgrading: differences between upgraders and non-upgraders
• Comparison between characteristics of upgraders and non-upgraders: differences between them
• Egypt: econometric analysis of representative panel data from two rounds of MSME surveys: differences between upgraders and non-upgraders
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Common constraints (of upgraders and non-upgraders in the three case studies)
15
Egypt India Philippines
Entrepreneur characteristics
•Low education and training of entrepreneurs•Limited readiness to take risks
•Low education and training of entrepreneurs
Enterprise characteristics
•Lack and high turn-over of workers•Lack of market information
•Lack and high turn-over of workers
•Lack of worker motivation•Lack of market information
Social networks
Business networks
•Delay in Payments by clients/ buyers
•Unstable relationship with suppliers
Business environment
•Difficulties in access to finance•Deficits in law enforcement
•Difficulties in access to finance•Difficulties in under-standing/ predicting laws and regulations•Corruption
•Difficulties in access to finance•Difficulties in accessing markets
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
What makes an upgrader? (Success factors:
explaining differences in the likelihood to upgrade)
16
Considerable impact in all three
countries
No major impact in any of the
three countries
Divergent results
Entrepreneur characteristics
•Human capital(quality education and training, international exposureand work experience)•Availability of own finance•Motivation
•Gender * •Readiness to take risks•Social origin
Enterprise characteristics
•‘Employee welfare‘(training, benefits, care, treatment, participation)•Systematic R&Dand market research
•Degree of formalisation
•Market orientation•Portfolio diversification•Location
Social networks
•Social networks
Business networks
•Value chains(esp. power structures)
•Clusters•Business organisation
Business environment
•Registration, licensing•Taxation, customs•Corruption
•Access to land•Political stability•BDSs
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
What makes an upgrader? (Success factors: explaining differences in the likelihood to upgrade)
17
Egypt India Philippines
Entrepreneur characteristics
•Readiness to take risks •Social origin
(socio-economic stratification)
•Readiness to take risks
•Social origin
Enterprise characteristics
•Portfolio diversification •Market
orientation
•Location
•Portfolio diversification
Social networks
•Social networks •Social networks
Business networks
•Clusters
•Membership in (quality) business organisations
•Membership in (quality) business organisations
Business environment
•Access to land •Access to land
•Political stability
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Takeaways
1. MSEs in India, Egypt and Philippines face very similar constraints to upgrading
• Deficit in owner’s education and experience• Lack of and high turnover of trained workers• Difficulties in accessing finance/Lack of market information• Deficits in rule of law
2. Upgrading is possible – for some MSEs – despite constraints! • Found more upgraders than expected• Some upgraders contracted in size
3. Upgrading depends critically on few specific “individual” factors• Upgraders better endowed with human capital, more motivated• Willing to take risks, invest more in HRD and R&D• Have personal or family wealth, integrated in GVCs (many through clusters)
18
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Takeaways
4. Upgrading requires a combination of factors• Upgraders combine factors to create strategies to overcome constraints
• Combination of factors/strategies are sector-specific
5. Most combination of factors are corner-stoned on entrepreneur• The entrepreneur matters
• Other success factors are contingent on entrepreneur
6. Glaring inequality of opportunity for MSEs to upgrade
19
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Combination of Factors
20
The Entrepre
neur
The Business Environm
ent
The Business Networks
The Social
Network
The Enterpris
e
Finance
Labour
Markets
Technology andcreativi
ty
Security
Challenges
personal
savings
inter-national exposur
e
personal labour
quality educatio
n
readiness to
accept risk
incentives for
workers to stay
employees as
shareholders
own market researc
h
R&D
Portfolio diversification
family savings / Friends
family labour
personal outreach
exchange of
ideas
mutual support
cash-advanc
e
pooling outsourc
ing
(global) value chains
value chains
insurance
bank loan
availability of
(skilled) workers
published market informati
on
Availability of
external training
economic
stability, rule of
law
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
Policy Recommendations
1. Education
2. Work experience
3. Human resource development
4. Access to markets
5. Access to finance
6. Rule ofLaw
21
© 2012 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
22
Thank you for your attention!
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