Private Sector Development and
Small and Medium Sized
Enterprises
Stephanie Vella
University of Malta
Conference on Competitiveness Strategies for Small
States
May 2011
Main Themes
• SMEs as the backbone of an economy
• Private Sector Development and Economic
Resilience
• Performance of Small States in promoting
business (Doing Business Index – World Bank)
• Managing Reform
• The importance of SME policy within the EU for a
• Specific measures adopted in Malta to promote
SMEs
SMEs as the backbone of an
economy
SMEs as the backbone of an economy
•
•
•
By international standards, most firms in small
states would be considered SMEs.
Typically most of the enterprises in small states
are micro enterprises.
SMEs currently account for over 85% of firms
and 60-70% of employment in OECD countries.
SMEs in Malta
Overcoming limitations
• Early economic theory was based on the notion that small
enterprises were at a disadvantage
– Limited capacity in reaping economies of scale
– Limited possibilities of diversification
– High fixed costs of learning about foreign environments
– Difficulties in negotiating with national governments
Fragmentation of production processes and strategic
corporate alliances has made it possible for networks
of small firms to overcome their limitations and to
compete
Positive features of SMEs
• Flexibility in responding the dynamic market
condition and evolving consumer preferences
• Motivation and commitment
• Ability to exploit market niches
• Stronger competitive tendency
Two areas of focus
• Economies of speed
• Strategic corporate alliances, networks and
clusters
Economic Resilience and
Private Sector Development
Economic Resilience
• Globalisation has brought on a new set of
economic challenges for small states (Review of
the Small States Agenda)
– Faster than anticipated preference erosion for
traditional exports
– Globalisation facilitates the extent to which
shocks can be passed from one economy to
another
• These challenges will translate into enhanced risk
unless backed by appropriate resilience policies.
• With appropriate policies these challenges can be
translated into opportunities
Economic Resilience and Private Sector Development
• One of the pillars upon which economic resilience
depends is microeconomic market efficiency.
• The efficiency and effectiveness with which
resources absorb or adjust to economic shocks,
be they positive or negative.
• The efficiency of the market depends on
– Number of economic players in the market
– Absence of externalities
– Extent of flexibility
Economic Resilience and Private Sector Development
Lewis (2004) explains that the key to increasing
productivity and efficiency is through intense, fair
competition which tends to prevail in an
environment where private sector initiatives are
encouraged
Loayza and Soto (2003) also indicate that the
prerequisites for the proper functioning of markets
include private participation and the existence
of competition among private agents
Economic Resilience and Private Sector Development
• ADB encourages private sector development
through three main thrusts
– Creating enabling conditions
– Generating business opportunities
– Catalyzing private sector investment
These thrusts have been anchored in four main
areas which are governance, financial
intermediation, public private partnership and
regional and sub-regional cooperation
Economic Resilience and Private Sector Development
There is a tendency for market failure in the
absence of the conditions required for the
effective operation of the market.
This situation seems to prevail even more so in
small states as domestic markets are often small
and thin (Downes, 2006)
Therefore there are typically only a small number of
players arising in monopolistic and oligopolistic
market structures.
Policy intervention such as competition law is
required to minimise welfare loss.
Economic Resilience and Private Sector Development
The existence of market failure however does not
exclude the role of the private sector nor its
contribution in nurturing the economic resilience
of small states. RATHER it emphasises the
supportive role that government needs to
undertake to spur private sector development.
Performance of Small States in
DBI
Business Reform in Small States
• Doing Business Index published by the World Bank (2010)
– Starting a business
– Dealing with Licences
– Employing Workers
– Registering Property
– Getting Credit
– Protecting Investors
– Paying Taxes
– Trading Across Borders
– Enforcing Contracts
– Closing a Business
Starting a Business
Easing start-up was recently listed by a panel
packed with Nobel laureates as one of the most
cost effective ways to spur development ahead of
investing in infrastructure, developing the financial
sector and scaling up health services.
Experience shows that removing obstacles to
business start-ups is associated with new formal
business, added jobs and more investment
(World Bank, 2006)
Dealing with Licenses
•
•
•
Procedures are typically long and costly thus stifling the
development of SMEs.
In St.Vincent and the Grenadines it takes 11 procedures
to acquire a license over a period of 74 days. Cost of
dealing with licenses is among the lowest at 10.6% of
income per capita.
In Papua New Guinea it costs 110% of income per capita
to deal with licenses and an impressive 1657% of income
per capita in Sao Tome and Principe. It takes over 200
days to deal with licenses in both small states.
Employing Workers
Employment regulations are designed to protect
workers from unfair or discriminatory actions by
their employers.
However each point of regulation tends to create a
restriction on the company’s ability to use its
workforce effectively.
Small states usually experience fluctuations in
demand and therefore there is scope for business
reform by allowing flexible working hours.
Registering Property
• Defining property rights is one of the most
important prerequisites required in developing the
private sector.
• When it is too burdensome to go through official
channels, owners transfer ownership informally.
– loss in tax revenue for the government
– owners lose clear title to their land thus making
financing more difficult.
Getting Credit
• Access to credit is critical to ensure strong
business growth.
• Areas for reform include:
– Weaknesses in the regulations which affect the
legal rights of borrowers and lenders.
– Weak credit information systems and weak
collateral laws.
Protecting Investors
• This variable measures the strength of minority
shareholder protection against misuse of corporate assets
by directors for their personal gain.
• Most small states fair reasonably well in this indicator
including Antigua and Barbuda, Dominica, Fiji, Grenada,
Samoa, St.Kitts and Nevis, St.Lucia and St.Vincent and
Grenadines.
• Most of these small states score highly in terms of liability
of self-dealing and possibility of suing but low in terms of
transparency of transactions.
Paying Taxes
• High progressive income tax rates tend to
discourage private initiative.
• Type of tax systems and complexity of the
system.
• Compliance costs
• In Antigua and Barbuda it takes 528 hours per
year to comply with business taxes. There are 3
different payroll taxes which must be paid each
month, in person, and at 3 different locations.
Trading Across Borders
• This category includes the extent to which
international trading is encouraged.
• In Singapore it takes 6 days to export and import
and the average cost per container is about $375
container.
• In Guyana it takes approximately 60 days to
import and export and the cost per container
averages at $1600 thus discouraging the extent of
trade.
Enforcing Contracts
• Commercial courts should be fast, fair and
affordable and efficient in their operations.
• In Jamaica, it takes 415 days to enforce the
contract the costs of which are over a quarter of
the debt.
• In Trinidad and Tobago it takes over three and a
half years to enforce the contract
• In Papua New Guinea the cost of enforcing the
contract is 110% of the value of the debt.
Closing a Business
• This topic identifies the weaknesses in existing
bankruptcy law and the main procedural and
administrative bottlenecks in the bankruptcy
process.
• Most small states do not have procedures for
closing a business
• In all OECS countries, creditors rank behind
government debt – including taxes, employee
benefits etc. This reduces the likelihood that
creditors will ever recover anything.
D
ea
lin
g
Name of Indicators
os
in
g
ct
s
es
s
nt
ra
de
rs
109
us
in
Co
aB
ng
sB
or
80
Cl
or
ci
rs
Ta
xe
s
to
t
80
En
f
g
In
ve
s
in
g
Pa
y
tin
Cr
ed
i
83
Ac
ro
s
ot
ec
tin
g
er
s
pe
rt y
or
k
Pr
o
W
its
114
di
ng
Pr
g
in
g
in
Pe
rm
es
s
51
G
et
is t
er
pl
oy
n
us
in
es
s
60
Re
g
Em
aB
Bu
s in
89
tio
rti
ng
oi
ng
100
Co
ns
tru
c
St
a
eo
fD
120
Tr
a
w
ith
Ea
s
Average
Ranking
Ease of Doing Business Rankings
Average Ranking for SIDS
140
111
123
80
56
68
40
20
0
Source: Doing Business 2009
Managing Reform
•
•
•
•
•
Excessive Regulation and ‘Dead Capital’
Establishing the ‘optimal level’ of regulation
Prioritising reforms
Reform is required to build economic resilience
Small states simply cannot afford to fall behind in
reform.
Reform
Econom
y
Guyana
Dominic
an
Republic
Mauritiu
s
St. Kitts
and
Nevis
TimorLeste
Tonga
Singapor
e
GuineaBissau
Vanuatu
Antigua
and
Barbuda
Marshall
Islands
St. Lucia
Fiji
Dominic
a
Jamaica
Ranking of SIDS
Ease of
Ease of
Chang
Doing
Doing
e in DB
Busine
Busine
rankin
ss
ss
gs
Index
Index
betwee
2006
2009
n 2006
Ranki
Ranki
and
ng
ng
2009
133
105
28
114
97
17
Number of Reforms
Chang
e in
rankin
gs and
numbe
r of
reform
s
DB0
6
DB0
7
DB0
8
DB0
9
DB0
6 to
DB0
9
0
1
1
2
0
3
0
4
1
10
29
27
32
24
8
2
2
6
3
13
21
85
67
18
0
0
0
0
0
18
174
170
4
1
0
1
0
2
6
46
2
43
1
3
1
0
1
0
0
1
0
2
2
3
3
6
4
173
179
-6
0
1
1
0
2
-4
54
33
60
42
-6
-9
0
0
0
2
0
0
1
1
1
3
-5
-6
86
93
-7
0
0
0
0
0
-7
27
29
65
34
39
74
-7
-10
-9
0
1
0
0
0
0
0
1
0
0
0
0
0
2
0
-7
-8
-9
48
63
-15
3
1
0
2
6
-9
Econom
y
São
Tomé
and
Principe
Comoros
Hait i
Cape
Verde
Micrones
ia
Seychell
es
Maldives
Grenada
Kiribati
St.
Vincent
and the
Grenadin
es
Trinidad
and
Tobago
Belize
Samoa
Suriname
Solo mon
Islands
Palau
Papua
New
Guinea
Ease of
Doing
Busine
ss
Index
2006
Ranki
ng
167
Ease of
Doing
Busine
ss
Index
2009
Ranki
ng
176
Chang
e in DB
rankin
gs
betwee
n 2006
and
2009
-9
DB0
6
DB0
7
DB0
8
DB0
9
DB0
6 to
DB0
9
0
0
0
0
0
Chang
e in
rankin
gs and
numbe
r of
reform
s
-9
141
136
125
155
154
143
-14
-18
-18
0
0
0
0
0
0
0
1
0
0
1
0
0
2
0
-14
-16
-18
105
126
-21
0
2
1
0
3
-18
83
104
-21
0
1
1
0
2
-19
49
63
58
42
69
84
79
66
-20
-21
-21
-24
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2
0
0
0
2
-20
-21
-21
-22
55
80
-25
0
0
2
0
2
-23
51
36
119
61
78
64
146
89
-27
-28
-27
-28
0
0
0
0
0
0
0
0
0
0
0
0
0
1
0
0
0
1
0
0
-27
-27
-27
-28
57
53
91
95
-34
-42
0
0
0
0
0
0
1
0
1
0
-33
-42
SME Policy in the EU
Special Reference to Malta
SMEs Policy in the EU
Small Business Act (SBA) for Europe - 2008
A comprehensive SME policy framework,
promotes entrepreneurship and anchors the
“Think Small First” principle in law and policy
making to strengthen SMEs’ competitiveness.
Both the European Commission and the Member
States committed themselves to set out the
necessary measures to improve the regulatory,
administrative and business environment and to
support European SMEs.
SME Policy in the EU
The main focus was, and remains, structured
around three areas:
• Ensuring access to finance,
• Taking full advantage of the Single Market and
• Smart regulation.
SME Policy in Malta
Entrepreneurship
Entrepreneurship through Education, the aim of which is to promote
entrepreneurial qualities amongst students.
Enterprise Award Scheme which included also a separate category for Local
Councils to encourage initiatives in support of business at the local level.
Think Small First
Developing the Maltese Public Sector’s capacity to implement Better Regulation
– which seeks to reduce the administrative burden, establish standards for
regulating bodies and provide training for public officials.
The Consultative Council for the Enterprise was established in 2010 to serve as a
forum between Government and Authorities.
‘Consultation Exercise with Stakeholders’ which ensures that all ministries,
departments, agencies and entities of the public administration abide by a set
of ‘Parameters for Consultation Exercises with Stakeholders’ as established
by MEU.
Specific services offered online are useful in reducing the administrative burden.
SME Policy in Malta
Responsive Administration
The establishment of a clearing house for all surveys conducted by the public
sector so as to reduce chances of requesting SMEs the same type of
information.
Business One has been proposed to ensure that all relevant information for
SMEs is provided through a single contact point.
Public Procurement and State Aid
An e-procurement strategy is currently being set up by the Department of
Contacts and the Malta Information Technology Agency (MITA) which is to be
implemented by end of 2011.
Access to Finance
Interest rate subsidies to selected sectors
Micro invest
Micro finance
Tax Exemption on Royalty Income from Patents
SME Policy in Malta
Skills and Innovation
Research and Development Clusters is a measure supporting collaboration
between businesses through the participation of innovative clusters.
Business incubation services to highly innovative start-ups through a business
incubation programme.
Environment
In order to make full use of support allocated to eco-friendly products through
Cohesion Policy. Euro15 million have been earmarked for renewable energy
and energy efficiency projects.
Internationalisation
Gateway to Export Measure aimed at assisting entrepreneurs interested in
exporting their goods and services.
Organisation of international events
Franchising Programme
Thank you for your attention