SBA: FAST - IFC

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 redu
ction
.


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 mate
rials 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
s
mall b
usiness owners
–

especially in rural and underdeveloped regions
–

need affordable
access to information and advice on regulation, accessing markets, and how to start and
operate the
ir busine
sses
.
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 fr
anchised pr
oviders and certified trainers.
v

Importantly, Business Edge does not aim to displace local training capacity, rather it
aims to add valu
e 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 w
orks 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 compl
ementary 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 t
eams
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 1
6
0
,000 participants in
2
7

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, 3
4

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
5
15.000 business
1

are
listed
ix
.


O
ut 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 contribu
tions 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 hig
h 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 transformat
ion 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 ac
tivities, 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 Indi
a

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,
201
1)
.

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
busin
ess.
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 lin
e of $3,000 for working capital
en
abling 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 an
d enhancing managerial capacity as well as overall
entrepreneurial spirit

lead to grow
th of

formalized business operations.
This in turn has

positive effects
on the companies’ performance
-

especially on
sales, profit and
productivity
xix

-

and

thus

arguably
on
job creation and job security.

A
n

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 th
an $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

Mod
ern outsourcing strategies, like
business process
outsourcing (BPO)

for example
, create
sustainable jobs that can generate step
-
function
income improvem
ent 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 area
s where it is otherwise scarce.
C
ase
-
study 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 c
lear their debts and keep records of their
cash flow in their businesses.
xxiii


The
Value add

of capacity building
in supply chain
s

The globalization of value chains constitutes a major challenge for small scale enterprises
accustomed to serving local and na
tional 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
t
ransnational corporations (TNCs)
, with a
few ex
ception
s, are reluctant to cooperate with the SME sector because of shortcomings
such as lack of quality and poor reliability
xxv
.

The availability and quality of domestic suppliers is a key determinant to participation in
TNC
s

global value chains.
xxvi

Therefore
, TNCs
can, and do, take SME development and linkage
pro
grams beyond their own value chains
xxvii
.

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
chains
xxviii
.

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,
reach
ing

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 s
till 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
mana
gerial practices set by interna
tional 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 gl
obal 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 pro
vide a
wide platfo
rm 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

Pra
halad and Ha
mmond (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 qu
ality 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 serve
d
, 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 BOP
xxxiv
.

IFC is contrib
uting substantially to bridge existing knowledge gaps of farmers and SMEs in
low
-
income countries and conflict affected regions through a market
-
based approach b
y
building capacity through enabling access to knowledge (SME Toolkit) and training (Business
E
dge).
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 th
e 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
improv
ed access to health services
.


Description of IFC’s addionality and value
-
add

IFC contributes to poverty reduction indirectly by stimulating fast and sustainable g
rowth,
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 l
earnware 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
solut
ions.
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 stake
holders provide/sell content a
nd 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 skill
s.

In 200
5
,
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 ongoin
g SME management training in
Yemen
.

Overall, t
he project facilitated training for 21,930 participants, of which 14% were women.
Training activities covered the four major cit
ies in Yemen:
Sana’a, Aden, Taiz, and Hodeidah.
Trainees consumed over 35,000 work
books and reported average training satisfaction
ratings of over 89%.
I
mpact assessment
s
showed that 80% of post training survey
respondents asserted that
the
training had contributed to impro
ving their performance at
work. IFC contributed towards advancin
g the Yemeni SME management training market by
localizing international best practi
ce 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 prio
rity 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 de
velop the market for SME training

together with local partners. Intermediaries delivered Business Edge training in area
s 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
expansi
on, as well as skill development. Direct results would be reporte
dly increased
productivity and enhanced managerial capacity and thus, expected positive income effects.




Annex


Portfolio Composition: Regional Product Shares
xliii
:

REGION

Region

FAST

% of
regional
total

% of FAST
total

% of
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

Region

FAST

% of
regional
total

% of FAST
total

%

of

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 Projects
xliv
:



Map of different transmission links presented:




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ix

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x

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xviii

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xxi

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xxiii

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xxv

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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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–

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Foreign Direct

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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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xliv

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