Introductory Note
The objective of this document is to provide a review of existing literature on the subject of
SME capacity building and to further clarify direct and indirect transmission channels from
IFC’s product Farmer and SME Training (FAST) to poverty reduction.
Background I: IFC Advisory Services – Farmer and SME Training (FAST)
Entrepreneurs implement new business ideas, or adopt profitable ideas from others to local
circumstances to start new businesses, or they experiment with new materials and
processes to expand their business.i However, SME owners and managers often face major
challenges to performance improvement due to lack of access to relevant (and affordable)
information and training that would help to improve their knowledge and skills. Likewise,
local start-ups, aspiring entrepreneurs and fresh graduates face similar challenges and are
actively seeking advice and training to develop their business skills. ii Therefore, farmers and
small business owners – especially in rural and underdeveloped regions – need affordable
access to information and advice on regulation, accessing markets, and how to start and
operate their businesses.iii
IFC’s product Farmer and SME Training (FAST), which encompasses two IFC business
management products, Business Edge and SME Toolkit, responds to the need of farmers,
SMEs, entrepreneurs and job-seekers in developing countries by providing them with
affordable access to localized business management information, interactive tools, and
training.iv
-
Business Edge offers clients applicable management training solutions through a
comprehensive set of study books and training modules adapted to the local business
context, delivered by a network of local franchised providers and certified trainers.v
Importantly, Business Edge does not aim to displace local training capacity, rather it
aims to add value to the local offering.vi
-
SME Toolkit, is a free online business portal with business content for SMEs
(launched in 2001), that leverages the latest information and communication
technologies, and works with global partners (e.g. IBM) and a network of local
distribution partners, to provide SMEs access to on-line business management
information, interactive tools, and training resources.vii
IFC’s Business Edge is complementary to the SME Toolkit. Both tools are currently managed
globally by the same platform. IFC's own experience in markets where both Business Edge
and SME Toolkit are offered is that synergies are generated where the two work together.
Background II: IFC Portfolio of FAST projects (Volume and regional coverage)
IFC's Farmer and SME Training teams aim to build up farmer and SME capacity to enhance
their productivity by working through local intermediaries. To date, intermediaries sold
Business Edge training to more than 160,000 participants in 27 countries in frontier markets.
Over 68 local training firms were accredited to distribute Business Edge. 680 trainers were
accredited and 350,000 Business Edge workbooks were sold.viii
Further, 34 country-specific SME Toolkit websites with content available in 18 languages
were established, attracting 6.6 million visitors in 2011. Since its launch in 2001, the Toolkit
generated more than 30 milion vists, over 18 million unique visitors and close to 100 million
page views. To date, more than 90.000 users registred and close to 515.000 business1 are
listedix.
Out of 56 active projects in the FAST product line, 18 projects (32%) are located in the SSA
region. LAC and SA regions account each for 11 projects (20%), EAP and MENA regions
account each for 6 projects (11%), and ECA region accounts for 3 (5%) of overall active
projects. Additionally, a world-wide project is adding to the current portfolio. x
Contribution to government revenues, regulatory environment and business landscape
In almost every country, small and medium enterprises (SMEs) are major contributors to
economic growth, providing on average 16% of GDP in low income countries, 39% in middle
income countries and 52% in high income countries. In this context, SMEs are categorized as
formal sector entities. When informal sector contributions are included, the combined
SME/informal sector contributions to GDP are 62% in low income, 70% in middle income and
64% in high income countries. SMEs also create employment, contributing 32% of jobs in low
income, 55% in middle income and 65% in high income countries.xi
The SME sector is important to national economies not only because it contributes
significantly to employment and GDP, but also because its growth is linked with the process
of formalizing an economy. The SME sector’s contribution to GDP also confirms its economic
importance. In low-income countries, SMEs play a sizable role, though the informal economy
is more dominant. xii
The fact that the role of SMEs in an economy appears to increase with country income level
might indicate that SMEs are themselves a driver of economic growth. In other words,
higher-income countries — where SMEs contribute more to GDP — have smaller informal
sectors. If informality has created inefficiencies related to operating “underground,” then
the transformation of informal firms into registered SMEs can boost economic growth.xiii
Interventions for the broader BOP and trickle down effects to the absolute poor
Increases in economic growth are expected to benefit the poor due to their participation in
economic activities, and lead to higher tax revenues and higher government expenditures,
which might include transfers to the least well off as well as increasing access to services
such as health and education. This is defendant on growth exceeding population growth and
on a stable distribution of income.xiv
1
Data from India represents total outlier accounting for over 505.000 business listings. Without this special
effect, around 10.000 businesses are listed.
Participation in a training program draws economically important and statistically significant
changes in the probability that individuals open a new business or expand an existing one
(Klingern and Schündeln, 2011). The likeliness of opening a business after receiving formal
training increases by four to nine percentage points, and for expanding a business by 25 to
56 percentage points.xv Bruhn and Zia (2011), in a study in Bosnia Herzegovina, find that
training programs can significantly improve business practices and trigger investments.
Teaching entrepreneurs the value of capital investment encourages them to change business
practices, allowing for greater innovation and making personal investments in the
business.xvi
The following example of a small business owner in Bangladesh illustrates how capacity
building enables personal investment. Mr. Mizanur Rahman Khan Jahangir is engaged in the
trade of industrial raw materials for more than 3 years. In order to get financing to extend
his business and meet growing demand for his products, Mr. Rahman needed to draft a
business plan which he would present to potential lenders. Not experienced in writing such
plans, Mr. Rahman turned to IFC’s SME Toolkit. Working with an associate at an SME Toolkit
knowledge center, Mr. Rahman used the accounting and finance tools to prepare his
financial statements and was then able to successfully apply for a term loan of US$5,000 and
an overdraft line of $3,000 for working capital enabling him to further invest in his
business.xvii
How IFC’s intervention addresses development outputs, outcomes and poverty
In many countries, the majority of jobs are provided by SMEs. In the 30 high-income
countries of the Organization for Economic Cooperation and Development (OECD), SMEs
represent over two-thirds of formal employment. In low-income countries, this figure tends
to be smaller, especially where the informal sector is large; but it is still significant. xviii
Therefore, capacity building and enhancing managerial capacity as well as overall
entrepreneurial spirit lead to growth of formalized business operations. This in turn has
positive effects on the companies’ performance - especially on sales, profit and
productivityxix - and thus arguably on job creation and job security. An IFC capacity building
program for small agribusiness enterprises in the context of the Minera Yanachocha SME
Linkages Program for instance generated 54 new jobs and tripled aggregate sales of these
businesses to more than $2 million over the previous 15-month period.xx
Another aspect of the impact of IFC interventions can be seen in wage effects due to a
higher level of education and innovation. Michaelsen (2011) concludes in a study on wage
differentials that an increase in innovative activity […] raises wages for graduates much more
than less educated workers’ wages.xxi Modern outsourcing strategies, like business process
outsourcing (BPO) for example, create sustainable jobs that can generate step-function
income improvement for those at the base of the pyramid. These BPO activities aim to
provide formal employment or supplementary income to individuals in low income areas of
cities and rural towns with limited alternative employment opportunities.
BPO is context specific because it provides work in areas where it is otherwise scarce. Casestudy based evidence shows that impact sourcing positively affects the educational and
regulatory landscape and leads to higher employment rate in rural areas. Data further
suggests that employees benefit from income increases between 40 percent and 200
percent. In addition to formal and stable employment, research also indicates that
employment increases family investment in health care and education.xxii
In Kenya, IFC and Standard Chartered Bank (SCB) have launched a pilot project that will
improve the operations of Small and Medium Enterprises (SMEs). Under the project, 60 SME
owners in Kenya’s capital will undergo training in a pilot phase of the program which is to be
rolled out countrywide. The project’s aim is to boost business growth and competitiveness
of SMEs through capacity building to improve entrepreneurial skills. The project is expected
to have a knock-on effect for improved access to financing, and access to greater markets
which will subsequently boost company sales and facilitate employment opportunities. The
project has been brought to Kenya following the successful implementation of a similar
initiative in Pakistan where 80 SMEs were trained. After the implementation of the same
project in Pakistan, 69 per cent of participants in the training workshops incorporated the
acquired knowledge into their businesses. The entrepreneurs reported that their business
operations had improved. They also managed to clear their debts and keep records of their
cash flow in their businesses.xxiii
The Value add of capacity building in supply chains
The globalization of value chains constitutes a major challenge for small scale enterprises
accustomed to serving local and national markets. Meeting the strict product standards and
quality required for participation in global value chains is difficult and costly. xxiv An UNCTAD
study conducted in five countries indicates that transnational corporations (TNCs), with a
few exceptions, are reluctant to cooperate with the SME sector because of shortcomings
such as lack of quality and poor reliabilityxxv.
The availability and quality of domestic suppliers is a key determinant to participation in
TNCs global value chains.xxvi Therefore, TNCs can, and do, take SME development and linkage
programs beyond their own value chainsxxvii. Specifically Business Edge and the SME Toolkit
are used by firms and financial institutions to build the capacity and improve the
performance of SMEs in their value chainsxxviii. Dialog Telekom PLC, Sri Lanka’s leading
mobile telecommunications service provider, for example, decided to strengthen its retail
network by delivering SME Toolkit-based training to its local retailers in order to improve
their skills and business performance. In collaboration with Dialog, IFC has been able to tailor
SME Toolkit materials to the Sri Lankan context, reaching 1,835 retailers so far.xxix
Even when SMEs do not enter into the global value chain of TNCs with which they have
linkages, they still feel compelled to conform to those international standards for
technology, quality, delivery and after sales service in their particular industry. SMEs also
have to adapt routines and practices developed at the cluster level to administrative and
managerial practices set by international buyers.xxx
Formalized training programs enhancing managerial skills and resulting in potential
compliance to international industry standards can lead to increased attractiveness and
higher credibility of SMEs within global and local supply chains of TNCs. Supply chain
integration and participation further enhances growth prospects for SMEs and strengthens
SMEs ability to grow. An example of an individual company’s linkages contributing to SME
development is MTN, a telecommunications corporation active in 15 African countries. MTN
has extensive backward and forward linkages with small support companies that provide a
wide platform of services to it. MTN Ghana, for instance, reaches the market through a
distribution infrastructure that has 35 distributor offices, 575 sub-distributors, over 91 000
retailers and some 40 000 electronic voucher resale points. MTN Nigeria has extensive
wholesale and retail distribution channels, with 161 appointed distributors and 19 451
second and third tier points. xxxi
Impacts on consumers
Prahalad and Hammond (2002) argue that consumers at the bottom of the pyramid pay
much higher prices for most things than middle class consumers do mostly due to a lack of
access to cheaper channels and better products. The business opportunity to capture bigger
market share by offering high quality products at lower prices arouses for innovative and
multi-national companies exploiting economies of scale and leveraging local supply chains.
As shown, capacity building enables farmers and SMEs to participate in the supply chains of
multi-national companies and to become local market innovators themselves. In this
context, Prahalad and Hammond conclude that especially multi-national companies provide
basic goods and services that reduce costs to the poor and help improve their standards of
living – while generating an acceptable rate of return on investment – the results benefit
everyone.xxxii
IFC’s impact and contribution to the achievement in IFC’s poverty focus
The 4 billion people at the base of the economic pyramid (BOP) – all those with incomes
below $3000 in local purchasing power – live in relative poverty. BOP markets are often rural
and very poorly served, dominated by the informal economy, and, as a result, relatively
inefficient and uncompetitive.xxxiii Addressing the needs of the BOP is essential to raising
welfare, productivity, and income – to enabling BOP households to find their own route out
of poverty. SMEs, especially when expanding rapidly, tend to generate new employment
opportunities - often for those at the BOPxxxiv.
IFC is contributing substantially to bridge existing knowledge gaps of farmers and SMEs in
low-income countries and conflict affected regions through a market-based approach by
building capacity through enabling access to knowledge (SME Toolkit) and training (Business
Edge). The growing number of classroom participants (Business Edge) and visitors (SME
Toolkit) indicate that there is a strong demand for IFC’s services. Yet, there is more work to
be done and as IFC accumulates more knowledge and experience working with the relative
poor and developing commercially viable business models adapted to their environment, it
will become more effective at helping the absolute poor find the right models too. xxxv
Further, business formalization in low-income economies prospectively results in formal
employment relations, higher government revenues and improved access to health services.
Description of IFC’s addionality and value-add
IFC contributes to poverty reduction indirectly by stimulating fast and sustainable growth,
and directly by promoting open and competitive markets to improve poor people’s access to
essential goods, services, jobs and other income generation opportunities.xxxvi
IFC is uniquely positioned to provide global best practice approaches and best-of-breed
content to farmers and SMEs under the FAST program, drawing on its brand and reputation,
global presence, strong expertise in private sector development, and based on the trust and
confidence of its partner network.xxxvii
In providing localized learnware and requiring beneficiaries at each level to demonstrate
financial commitments, IFC is helping to build and sustain an SME management training
market mechanism.xxxviii In underdeveloped markets, the FAST offering represents the largest
body of business management information in local languages. By doing so, IFC facilitates
access to leading training methodology's, a comprehensive set of global and local content,
effective technology-based solutions, and it builds local capacity for implementing the
solutions.xxxix Thus, IFC taps into its global expertise to ensure that best practice approaches
and lessons learned are shared in local markets.xl
While globally or locally stakeholders provide/sell content and information that strengthen
the skills of local distributors, IFC is the only institution that provides a comprehensive
solution combining content development, with the development of local capacities, and
market development. This not only addresses the needs of farmers and SMEs, but also
reinforces the long-term sustainability of the solutions.xli In addition, several program
partners draw great value from the association with the IFC brand, and vice versa.xlii
Case Study Business Edge: Yemen Education for Employment Foundation (YEFE)
Yemen is a conflict-affected country and one of the poorest in the MENA region. The
majority of Yemeni private businesses are SMEs facing substantial challenges due to human
capital limitations, primarily managerial competencies and appropriate labor skills. In 2005,
IFC introduced Business Edge to the Yemeni Market to improve the business performance of
SMEs and their capacity to contribute to job creation. The project involved 6 local training
service providers and developed their capacity to offer ongoing SME management training in
Yemen.
Overall, the project facilitated training for 21,930 participants, of which 14% were women.
Training activities covered the four major cities in Yemen: Sana’a, Aden, Taiz, and Hodeidah.
Trainees consumed over 35,000 workbooks and reported average training satisfaction
ratings of over 89%. Impact assessments showed that 80% of post training survey
respondents asserted that the training had contributed to improving their performance at
work. IFC contributed towards advancing the Yemeni SME management training market by
localizing international best practice SME learn ware and solutions otherwise not available in
Yemen. Similarly, project efforts to build the capacity of Yemeni training providers and
trainers serve IFC’s priority of supporting private sector growth in education, and have
ultimately benefited the Yemeni SME training market.
In 2009, as a result of the successful initial Business Edge project in Yemen, IFC and the
Yemen Education for Employment Foundation (YEFE) partnered to train unemployed youth
in Yemen. Through this partnership, YEFE further benefited from offering IFC’s Business Edge
management training program to its clients, trained more than 760 young Yemenis and is on
track to place more than 75 percent of these youths in jobs.
In summary, IFC’s engagement in Yemen helped to develop the market for SME training
together with local partners. Intermediaries delivered Business Edge training in areas where
no training was available beforehand and to parts of the population without proper access
to training offers. Capacity building in this example supports business formation and
expansion, as well as skill development. Direct results would be reportedly increased
productivity and enhanced managerial capacity and thus, expected positive income effects.
Annex
Portfolio Composition: Regional Product Sharesxliii:
Region
%
of
% of FAST
REGION
FAST
regional
% of total
total
Total:
total
#
#
#
#
#
EAP
24
6
25%
10%
3%
ECA
35
3
9%
5%
1%
LAC
32
11
34%
19%
5%
MENA
23
6
26%
10%
3%
SA
34
11
32%
19%
5%
SSA
40
18
45%
31%
8%
WORLD
40
4
10%
7%
2%
SBA-Mapped Total: 228
59
26%
100%
26%
Region
%
of
% of FAST
REGION
FAST
regional
% of total
total
Total:
total
$
$
$
$
$
EAP
17.888.734 3.707.307
21%
6%
2%
ECA
52.284.987 5.945.218
11%
10%
3%
LAC
25.853.875 3.869.521
15%
7%
2%
MENA
14.047.147 4.789.891
34%
8%
2%
SA
15.784.652 7.253.378
46%
12%
3%
SSA
49.060.056 27.263.874 56%
46%
12%
WORLD
57.891.493 6.424.376
11%
11%
3%
SBA-Mapped Total: 232.810.945 59.253.565 25%
100%
25%
Regional Portfolio Active Projectsxliv:
Map of different transmission links presented:
List of References
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viii
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x
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xi
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xiii
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xv
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xvi
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xvii
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xviii
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xix
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xxi
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xxii
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xxiv
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xxv
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xxvi
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xxvii
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xxviii
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xxix
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xxx
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xxxi
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xxxii
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xxxiii
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xxxiv
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xxxv
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xxxvi
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xxxvii
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xl
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xli
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xlii
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xliii
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xliv
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