1. The economic and social dimensions of the enterprise sector in developing countries
120. The choice of the operation and development pattern for enterprises is determined in the light of the domestic social, political and economic conditions. Both public and private enterprises are key actors in the development process of the developing countries. They are the locus of production and an agent of wealth creation. The enterprise sector is the vital structure for entrepreneurial growth and economic development and spawns new enterprises through demonstration effects.
121. The overwhelming majority of enterprises in developing countries are of small or medium size and their combined economic and social weight is significant. Small and medium-sized enterprises (SMEs) account for more than 90 per cent of all enterprises in most developing countries and a large proportion of non-agricultural employment, exports, sales and value added. Because of their labour-intensive character, they also play an important role in creating employment and in upgrading skills through on-the-job training of workers with limited experience and knowledge. By providing self-employment or wage employment, they add to existing income opportunities, thus helping to fight poverty. SMEs promote rural industry development and play a crucial role in enhancing the participation of women in production and in entrepreneurial activities.
122. Public enterprises are also a major force in the development process of developing countries. Their contributions to industry, public services and infrastructure development as well as the development of sectors of strategic importance, create employment, generate domestic savings and alleviate poverty. Locally run public enterprises are particularly beneficial to the development of their communities. However, in a more market-oriented environment, they are confronted with challenges to reform themselves towards greater market orientation, higher competitiveness and economic efficiency as well as greater profitability.
123. The least developed countries, as a group, have experienced a decline in per capita income as well as in their share in world trade. As a result, these countries have become marginalized in the world economy. Since the enterprise sector can play an important role in accelerating growth and development, assistance should be provided to promote enterprise development in these countries.
124. The Small Island Developing States (SIDS) and land-locked developing countries face serious structural problems in their efforts to integrate into the global economy. Many of these countries are characterized by heavy debt burden, limited institutional capacities, structural rigidities in their economies, and low technological capabilities; and they are susceptible to major natural disasters. Given the important role played by enterprises in economic reforms, these countries also need assistance in the implementation of their enterprise development policies. In addition, high transport costs incurred by land-locked developing countries pose a formidable impediment to the development of, inter alia, their enterprise sectors. Assistance should be provided to them with a view to minimizing these costs through a global framework for transit-transport cooperation between land-locked and transit developing countries and the donor community.
2. The impact of globalization and liberalization on the enterprise sector in developing countries
125. Enterprises play a strategic role in the integration of national economies in the globalizing and liberalizing world economy. They are the principal conduit which carries the interrelated flows of trade, investment and technology among countries. This important aspect of the contribution of enterprises to economic dynamism and development will be enhanced as industrial production processes rely more and more on component specialization and outsourcing, both of which increasingly cross national boundaries. Consequently, globalization of production offers new export opportunities also to enterprises of developing countries which hitherto have focused their marketing efforts primarily on domestic markets. Globalization and liberalization may both harness and sharpen the competitive edge of enterprises, in particular that of the SMEs.
126. Technological change and technological innovations are at the heart of the globalization and liberalization process. Some enterprises in a few developing countries, particularly those engaged in high-tech areas, have taken advantage of the globalization process and begun to set up affiliates abroad. This process is pushed by the need to overcome constraints of relatively small local markets, rising costs and diminished export opportunities. Pull factors include the expectations of having better access to markets and to factors of production; of benefiting from emerging markets and, as the final objective, of strengthening the competitive capacity of the parent company.
127. In a globalizing world economy, advanced electronic information networks provide enterprises, including SMEs, in developing countries with new opportunities both to acquire product, marketing and other related information and to trade their products internationally, particularly in the area of services. The rapid and easy exchange of data may also contribute to enhancing the competitiveness of SMEs by facilitating the development of new forms of enterprise networking and inter-firm cooperation, including clustering, subcontracting, joint ventures and others. However, limited telecommunications capacity, as well as access constraints to networks, such as restrictions on use of equipment, high user costs, complicated procedures of access and other discriminatory practices, are major barriers to a more effective use of information networks by SMEs in developing countries.
128. Globalization and liberalization also bring with them the globalization of competition. Enterprises are no longer sheltered from the world market, because even domestically oriented enterprises sell to firms that are competing internationally and are therefore affected by what is going on in the global economy. Moreover, the removal or lowering of entry barriers to once protected markets and market segments encourages new business start-ups or the diversification of established firms, and makes it easier for foreign competitors to penetrate domestic markets.
129. The enterprises of the developing countries are also confronted with difficult challenges concerning the financing of their development, marketing activities, access to international markets, the introduction of advanced technology and the promotion of managerial skills, quality and production. Indeed, most of the enterprises in developing countries are SMEs that suffer from backward technologies and lack of adequate human resources, capital and competitiveness. They are in an inferior position in comparison with those of developed countries. In addition, even new communication technologies cannot prevent the high transit costs incurred by land-locked developing countries in cross-border trading of goods from adversely affecting their international competitiveness.
130. In view of the increased competitive pressures on the enterprise sector brought by liberalization, assistance would be required in the areas of finance, availability of information, training and marketing, so that they can benefit from their adaptability to swiftly changing market conditions and to new technological developments, as well as from their process flexibility. Moreover, necessary adjustment of enterprises from developing countries to globalization and liberalization effects is helped by improved conditions for market access, transfer of technology, and exchange of information, while duly respecting intellectual property rights.
1. National policies
(a) Creation of an enabling environment
131. The role of governments in creating an enabling environment for enterprise development and entrepreneurship and for formulating related policy guidelines and for directing and orienting enterprises, especially SMEs, is crucial. Macro-economic stability is a fundamental component of such an environment. Stabilization policies, including monetary and fiscal, as well as industrial and trade policies, are necessary to create business confidence among entrepreneurs, both domestic and foreign, and to reduce commercial, financial or investment risks associated with unexpected or sharp tax, inflationary, interest rate or currency movements. Macro-economic stability, combined with fiscal incentives and financial market regulations, is also conducive to the mobilization of savings, the development of financial institutions and markets, as well as the promotion of investment, both domestic and foreign.
132. The design of a legal and regulatory framework that is clear, stable, predictable and effective, as well as conducive to business activities is of utmost importance for the promotion of the enterprise sector. Other policies which governments need to pursue for an enabling environment relate to the creation of an institutional framework that enterprises need in order to be able to operate, including those concerning factor markets, the entry and the exit of enterprises, competition, support services, product markets and intellectual property rights, environment and technical standards and other policy instruments that ensure the proper and efficient functioning of markets in general. Human resources development and the modernization of the physical infrastructure are also important for the long-term viability and competitiveness of the private sector. Unfortunately, such budgetary expenditures have often been adversely affected by structural adjustment or stabilization programmes.
133. It is equally important to encourage the establishment and strengthening of independent business institutions and associations, which will act as a catalyst between the government and the private sector. Such intermediary organizations are indispensable in encouraging and smoothing participation of a greater number of private entities in economically viable productive investments, especially when know-how and market-related guidance are needed to illuminate the future path. The dialogue between the government and the enterprise sector will be enhanced by governments' encouraging enterprises to organize themselves and ensure that they are well represented in government-business consultative bodies.
134. For the successful formulation and implementation of policies that enable the entrepreneurial initiative to prosper and enterprises to compete on equal terms, there are signs that the best approach towards the enterprise sector may be one where government intervention is focused on creating a "level playing field" with the ultimate objective of establishing competitive enterprises in domestic and foreign markets to the minimum extent needed to sustain such conditions. Where market distortions or failures prevail, governments may need to intervene to help SMEs by taking measures to correct or eliminate market deficiencies.
(b) Public enterprise reform, privatization and enterprise development
135. Public enterprise reforms have been pursued in many developing countries with the objective of increasing the efficiency and productivity of public enterprises, without transferring public ownership rights to the private sector, or as a preparatory step for privatization at a later stage. Concrete reform measures have varied widely and have included restructuring, commercialization and corporatization, privatization of management, contracting out and joint ventures. These measures have the common aim of introducing commercial principles into the management and operations of public enterprises, exposing them to the rigours of the market and, in the case of later privatization, enhancing their market value.
136. Privatization assumes a particular significance since, under appropriate conditions, it could both help to diminish budgetary deficits and serve as an instrument of change for the promotion of improved economic efficiency and performance by altering the balance between the public and private sectors in the economy. Privatization may influence enterprise development in a number of ways, for example by rendering the enterprise sector more competitive, by generating additional private investment, both domestic and foreign, and by drawing on the proceeds of privatization to encourage entrepreneurship.
137. In the process of transferring ownership rights from the public to the private sectors, SMEs may have a particular role to play in ensuring the success of such privatization programmes in developing countries. Privatization-related enterprise restructuring in terms of breaking up large public enterprises into smaller units or of spinning off particular sectors of monopolies to the private sector has generated many SMEs. Public services in several developing countries have been contracted out to private operators, often SMEs. The promotion of competitive market structures and of competitive enterprises - a major objective of privatization - requires a dynamic small and medium-size enterprise sector. Thus, the extent to which SMEs are able to develop and to play their role of stimulating competition, providing competitive products and services, generating investment, including greenfield investment, and creating employment is of fundamental importance for the success of the privatization process.
138. Participation of private entities and entrepreneurs, cooperatives and semi-public corporations in improving infrastructure and/or management of public utilities may have a positive impact on the quality, price and availability of inputs of enterprises and on their competitiveness. Central and local governments could encourage the participation of the private sector by formulating adequate organizational and legal frameworks - through Build-Operate-Transfer (BOT) schemes for example - and sensitize the private sector to the ultimate benefits it will get from its contribution to social and infrastructural projects.
139. TNCs can provide part of the necessary financial resources for the purchase of public enterprises, thus bridging the gap between domestic savings and investment needs that can be an obstacle to effective privatization in many developing countries. TNCs can also encourage private entrepreneurship through demonstration effects, and the creation of forward and backward linkages. New opportunities for South-South cooperation created by privatization need to be fully exploited, especially through joint ventures.
140. The transformation of public assets into private property invariably generates social effects for those concerned. The impact of privatization on employment is probably the most difficult, most sensitive and most visible issue which those who are affected by privatization in the first line - workers, technocrats and managers of public enterprises - and policy-makers and privatization practitioners are confronted with. Government policies for the promotion of labour mobility, entrepreneurship and self-employment, combined with training, skill-upgrading and reorientation programmes, may help to cushion against adverse social consequences of privatization.
(c) Financing of enterprises
141. In order to promote the access of SMEs to formal financing sources, governments should encourage the provision of loans and low-cost funds by financial institutions. In this regard, there is a need to design mechanisms to facilitate institutional financing of SMEs. Consideration should be given to, inter alia, mechanisms for small businesses to raise finance through the equity markets and other private financial non-banking institutions and to develop more efficient local financial intermediaries. The forms under which Government support can be provided depend on the specific conditions prevailing in the country concerned. As a matter of principle, support measures should favour long-term investment in productive sectors over speculative ventures. In this context, fiscal and non-fiscal incentives are both useful. Fiscal incentives include tax measures to encourage the creation of new enterprises, investment in infrastructure, research and development activities, etc. Non-fiscal incentives include the establishment of refinancing and rediscounting facilities, special financial institutions lending to SMEs, credit guarantee banks and insurance schemes, venture capital, etc.
(d) Human resources development for the promotion of entrepreneurship
142. The promotion and development of entrepreneurship is of critical importance for a dynamic process of enterprise creation and growth. Government policies need to address a wide range of issues in this context. The provision of modern universal education is a basic prerequisite. The thrust of the educational system should give more emphasis to the training of job creators and entrepreneurs with modern managerial skills. In addition, skills needed by the business world should be developed through formal training and retraining programmes, including vocational and apprenticeship training. Useful advice and assistance in training can often best be provided by the suppliers and customers of enterprises, but governmental vocational training programmes can also be adapted accordingly. On-the-job training may be encouraged through fiscal incentives, grants and stipends to cover part of the costs imposed on entrepreneurs in inculcating and upgrading craft skills. To prevent a mismatch between educational and training programmes and the needs of the business world, better consultation between the vocational training institutions and the private sector is most useful. Furthermore, complementarity between government measures and private sector activities concerning the development of human resources may yield better results in terms of resource efficiency and skill development.
143. The issue of management training also has to be addressed. The lack of managerial capabilities in areas such as accounting, project design and supervision, marketing and strategic decision-making explains to a large extent the lack of entrepreneurial success in some developing countries, particularly concerning SMEs. On the other hand, proper training in order to expose managers and entrepreneurs to new techniques through a process of continuous learning has usually yielded positive results in terms of enhancing entrepreneurial capability and hence strengthening the competitiveness of the enterprise concerned. Managerial ability is lacking in many LDCs. Thus, human resources development for creating a pool of entrepreneurs and training programmes for managers of industries will be of particular interest to LDCs.
144. In some countries, grassroots organizations, including national NGOs, play an important complementary role to efforts undertaken by governments to promote entrepreneurship. Related NGO activities can be particularly useful in the area of business and commercial training for the development of local entrepreneurial capacity and in facilitating the identification and the transfer of technology appropriate for SMEs of developing countries.
(e) Strengthening enterprise competitiveness
145. Strengthening enterprise competitiveness relates both to enterprise-specific issues, such as corporate culture and governance, and to policies at the national and international levels. Enterprises which have learned how to compete successfully in a competitive environment are normally better prepared to face international competition, both in domestic markets and abroad, provided that they are not faced with obstacles to competition, including RBPs. Conversely, long-standing and heavy tariff and other barriers as well as the protection of non-competitive or monopoly markets weaken the competitiveness of the enterprise sector. As a result, enterprises in many developing countries have been caught unprepared for economic liberalization measures and the arrival of foreign competitors, often leading to a substantive shrinking of business activities and large numbers of bankruptcies. Industries badly affected by the liberalization process in developing countries, particularly in LDCs, need to be supported.
146. Governments of developing countries have a responsibility in strengthening the competitiveness of the enterprise sector in their countries. Government policies should aim at promoting modernization and new technological solutions, improving quality and design of goods, better marketing, as well as diversification toward higher value-added products and encouraging export-orientation of domestic enterprises. In this context, access to technology would also play a crucial role. The development of export-oriented enterprises would be promoted by establishing industrial zones.
147. While several developing countries have promulgated competition laws or have revised existing ones, there is a need for a measure of flexibility in applying such laws so as not to impede efficiency, growth or development goals. Such flexibility is particularly needed where demand, cost or technological conditions or the small size of the market, or a combination of these factors, serve as effective barriers to the entry of additional competitors.
148. Enterprises from developing countries can test their competitiveness abroad only if they have access to foreign markets. While the signatory countries to the Final Act of the Uruguay Round of Multilateral Trade Negotiations have agreed on substantive reductions in market access barriers, tariff escalation and substantial NTBs continue to exist and impede market access for enterprises from developing countries, preventing them from realizing their competitive advantage.
(f) Market-based support measures and incentives for the development of enterprises
149. Support programmes for enterprise development should be market-based and prepared in consultation with the private sector. They should tap and build on the expertise, capabilities and resources available in the private sector and thus complement rather than duplicate them. Areas that would benefit from support programmes are market information, business advice, export marketing, access to finance and technological upgrading. The provision of such services can be costly; there is thus a need to ensure that they are cost-effective and that the charges for them reflect their real market value. Business advisory services for first business start-ups are most useful.
150. In many developing countries, there is a need for improving the policy and commercial framework for enterprise development by identifying market deficiencies and regulatory constraints to business development and suggesting the modalities for improvement. Governments should remove policy measures which discriminate against certain enterprises, particularly SMEs, simplify regulations and administrative procedures for business start-ups and development and enact new legislation to deal with gaps or inconsistencies in business laws.
151. Governments should facilitate the access of enterprises to essential inputs and services commonly needed by enterprises. Measures to overcome deficiencies in markets for supplying such inputs can play an important role in enhancing their availability to enterprises. Related measures entail changing zoning regulations that tend to restrict the access of SMEs to well located sites, providing common facilities and making equipment and spare parts more readily available to enterprises in need, particularly if they have to be imported.
152. Governments should also encourage inter-firm linkages among SMEs and between them and larger firms in order to contribute to increase skills, business information and production, quality control, export marketing and sales opportunities. Clustering or subcontracting to provide trade, investment and technology linkages can create synergies for the modernization of the enterprise sector. It also exposes domestically operating enterprises to the rigours of international competition and to the workings and demands of the international market place. Networking of enterprise associations or their institutions can help to promote the development of inter-firm linkages and thus contribute to the development and modernization of enterprises. The existence of networks of enterprise agencies among such agencies, as for example in several Asian countries, may also provide a basis for interregional cooperation concerning the promotion of enterprises.
153. Governments should promote regional plans or frameworks for the development of enterprises, particularly SMEs, in order to facilitate inter-firm cooperation in production, trade and other areas, including through the establishment and networking of enterprises associations.
154. The coordination of support services may be entrusted to a lead agency. Such agencies should have the participation of both the public and private sectors in the executive boards. Coordination of the lead agency's activities with those of specialized institutions, such as in the areas of automation applications, science and technology, information technology, productivity improvement and standards and industrial research would help to ensure the availability of such services.
155. Governments should formulate policies on science and technology development, encourage the development of new technologies and extend them to a wider use. At the same time, they should also encourage enterprises to acquire advanced technologies and managerial skills. Governments should reorient domestic R&D institutes to make them more demand-driven through, inter alia, the provision of extension services that would be of particular benefit to SMEs; the streamlining of organizational structures, with a special focus on marketing and outreach units; strengthened linkages with universities as regards both R&D and extension services; the promotion of networking, alliances and partnerships; and the involvement of R&D institutes in promoting technology transfer agreements.
2. Policies and measures at the international level to strengthen the enterprise sector of developing countries
156. The governments of the developing countries have the primary responsibility for the development and the promotion of the domestic enterprise sector in their own countries. However, appropriate policies and measures at the international level, including the identification of "best practices" and the provision of targeted technical assistance to these countries by the donor community to strengthen domestic enterprises, are needed to support and facilitate this process. These should include policies and measures:
(a) to provide effective access to information networks by enterprises, or
enterprise associations, of developing countries through the provision of
technical as well as other support for related investments;
(b) to facilitate appropriate electronic communication among scientific and
technical institutions engaged in the development, expansion and maintenance of
such information networks;
(c) to enhance the transfer of technology to the developing countries through
FDI, international trade and economic cooperation. The bilateral and
multilateral agreements on the protection of intellectual property rights,
environmental issues and other conditionalities should not constitute barriers
to the access to - nor to the diffusion of -technological knowledge;
(d) to encourage TNCs and other enterprises of developed countries to invest
in developing countries, through various incentives, including investment
guarantees;
(e) to provide various financing schemes by the financial institutions of the
developed countries to contribute to the growth of enterprises in developing
countries;
(f) to strengthen support for R&D systems in developing countries,
particularly in the least developed countries, through the enhancement of
linkages with enterprises, universities, foundations, research institutes,
scientific laboratories, trade and professional associations, and other
appropriate channels and mechanisms;
(g) to assist enterprises of developing countries, particularly SMEs, to
identify their technological needs and to take advantage of new technologies;
(h) to contribute to regional and interregional cooperation on enterprise
development by providing support for the development and networking of
enterprise support agencies, as well as in particular areas of regional
cooperation such as policy analysis and human resources development.
(i) to provide technical cooperation in favour of enterprise development in
developing countries in the above areas.
157. In addition, technical cooperation should also be provided in the following areas:
(a) improvement of the macro-economic, policy and commercial frameworks for
enterprise sector development and foreign investment, i.e. the improvement of
the legal and financial infrastructure, simplification of business laws and
regulations, etc.;
(b) development of human resources;
(c) policy and institutional support for enterprise development.
158. Apart from technical assistance, substantial financial assistance will be required for setting up new enterprises in the developing countries, particularly in LDCs.
C. Recommendations for future UNCTAD activities for the promotion of enterprise
development and competitiveness
159. UNCTAD should continue and strengthen its activities for the promotion of enterprise development and competitiveness in developing countries, including the LDCs, in the following three areas:
1. Policy analysis: further analysis and consideration of the following issues should be undertaken by UNCTAD with a view to making concrete recommendations for policy actions at the national and international levels:
(a) Techniques and objectives of public sector reforms;
(b) Possible national and international measures to support infant
industries to cope with globalization and liberalization;
(c) Nature and causes of market imperfections which inhibit the viable
development of enterprises, in particular SMEs;
(d) Projections of critical needs in terms of labour, skills, technologies
and information for the development of enterprises;
(e) Forms and mechanisms of inter-firm co-operation, including clustering,
subcontracting, joint ventures and others, which enhance the competitiveness of
the enterprise sector and open new markets;
(f) The impact of non-tariff trade barriers, including environmental, health
and labour regulations, to market access opportunities for enterprises,
particularly SMEs, of developing countries;
(g) Special problems faced by LDCs, SIDS and land-locked developing countries
in their efforts to promote enterprise development;
(h) The impact of TRIPS and similar agreements on the transfer of technology,
in particular technologies appropriate for enterprises of developing countries;
(i) The relationship between TRIMs and investment incentive measures for
enterprise development;
(j) Cost and benefit analysis of incentive structures and programmes, such as
policy-based lending and credit guarantees, for enterprise development;
(k) Competition policy, including restrictive business practices, (e.g.
access to electronic networks);
(l) Analysis of issues related to the nature of a possible framework for FDI,
assisting especially developing countries in the entire range of issues related
to this subject;
(m) Measures to be included in structural adjustment programmes in favour of
enterprise development, with a view to enhancing the supply response to other
measures contained in such programmes;
(n) The feasibility of establishing regional or subregional venture capital
funds aimed at promoting technological innovation and R&D in the enterprise
sector.
2. Intergovernmental dialogue With a view to promoting understanding of issues related to enterprise development and "best practices", the following measures should be envisaged:
(a) Organization of an international policy dialogue among development
actors for the purpose of assessing the challenges and opportunities for
enterprise development arising from new forms of technological cooperation
created by the emerging new economic environment, including the post-Uruguay
Round, as well as on diffusion of technological advances, particularly
information technology, and on the protection and dissemination of
technological assets;
(b) Organization of an international policy dialogue, with the participation
of the private sector, in order to address the effects of government policies and
market mechanisms and practices (both national and international) on the
development of enterprises, particularly SMEs, and their links to trade,
investment, technology and finance;
(c) Organization of seminars for decision-makers to give them an opportunity
to discuss substantive matters related to FDI, including an international
framework. Two sets of seminars could be useful in this respect: (i) in Geneva,
for delegations assigned to UNCTAD and WTO; (ii) in the regions of the developing
world for decision-makers in capitals;
(d) Ways and means should be found to enhance participation in relevant UNCTAD
meetings of representatives from the business sector, academic institutions,
trade unions and relevant NGOs to assist in identifying important issues for
intergovernmental co-operation in the areas related to globalization and
liberalization having a strong impact on enterprise development.
3. Technical cooperation activities, with a view to promoting enterprise development in developing countries:
(a) Establishment of a programme of country reviews, combined with multi-agency country missions as appropriate, in order to assist developing countries
to develop a system or strategy for enterprise development;
(b) Establishment of a programme for regional cooperation on the development
of SMEs;
(c) Continuation and expansion of existing relevant technical assistance
programmes managed by UNCTAD, such as TRAINFORTRADE, TRANSTECH and EMPRETEC 21;
(d) Strengthening UNCTAD's advisory services on issues related to FDI,
science and technology, TNCs and other financial schemes, including improvement
and diversification of the financial sector, in order to promote enterprise
development;
(e) Assisting in the formulation of national strategies for enterprise
development and competitiveness.