Policies promoting new-generation micro and small enterprises for productive job creation

In Bangladesh, micro and small enterprises (MSEs) and cottage enterprises (CEs) which are mostly managed by own-account workers together provide a vast majority of employment for the country's enterprise sector. Latest available statistics of the Bangladesh Bureau of Statistics (BBS) show that CEs create jobs for more than 13 million or 54 per cent of the total employed labour of 24.50 million in all enterprises. The share of MSEs exceeds 29 per cent.This highlights the significant job-creation potential of smaller enterprises across almost all economic sectors.
Further, these informal enterprises - a major component of the informal economy as well as source of employment - contribute significantly to the total economic output of the country, estimated at around 43 per cent of the gross domestic product (GDP), as of 2010. However, the workers in these enterprises have low productivity and thus have low incomes and are highly vulnerable to economic and social shocks.
With globalisation leading to less formal and more flexible employment arrangements on the labour market, some workers, especially in the urban areas, find participation in these enterprises as a bridge toward higher -productivity jobs in the informal economy. On the other hand,most rural unskilled and poor workers are trapped in low-productivity jobs in these informal enterprises. Despite these limitations, the invaluable contribution of the smaller enterprises to job creation has long been recognised in Bangladesh.
Moreover, these enterprises face many challenges which are size, sector and context-specific and often multiplied due to their existence in the informal economy. As such, these enterprises are highly vulnerable to economic crises-as revealed during the Covid-19 pandemic-as well as natural disasters and other socioeconomic disruptions. With Bangladesh's rapid structural transformation and resultant changing world of work, sustainable expansion and development of smaller enterprises and their scaling up and upgradation through adoption of right policies are critical.
This is needed to ensure their resilience and continued growth for creating employment and livelihoods for the vast majority of the young people who are entering the labour market as a consequence of demographic dividend. Further, such developments will also serve as the trigger for successfully meeting Bangladesh's quest for inclusive development and strengthen the pathway for a just and equitable transition of the economy and society toward shared prosperity.
Structural transformation of Bangladesh economy: Since independence in 1971, structural transformation of the Bangladesh economy has covered a number of dimensions resulting in, among others, technology and productivity differences across sectors and activities along with earnings across activities, skills, gender, and social groups. Probably the most significant transformation so far is the continuously declining trend in the share of value -added agriculture in the economy's GDP-from around 60 per cent in the 1970s to less than 15 per cent in recent years. In contrast, the share of industry rose from only 10 per cent to 30 per cent; while the services sector saw a high growth in relative share-from 30 per cent to 55 per cent during the same period.
However, the share of agriculture in employment still remains dominant. Agriculture holds a share of about 42 per cent, as of 2022, compared to 68 per cent in 1990.The services sector is absorbing about 40 per cent, while the rest is absorbed by the industry sector, especially by the manufacturing and construction activities. Moreover, the services sector is highly informal, and hence the sector entails low-paid, low-productivity jobs.
One important aspect of the country's economic structure is the dominant role of the informal economy in both employment generation and production and distribution of goods and services. The informal-sector activities are mostly small in size and transient in nature. According to the Labour Force Survey 2017, informal employment overwhelmingly dominates the country's labour market: 85.1 per cent of all employed population is engaged in informal activities. For females, the share is 91.8 per cent while, it is 82.1 per cent for males.
Over the years, there has not been much change in the level of informal employment. In 2000, 75.2 per cent of employment was informal. The rising share of informal employment, however, is not due to declining levels of formal employment; rather it is due to more rapid growth in informal employment than in formal jobs. A clear negative correlation exists between higher educational attainment and informal employment, indicating that educated persons are more likely to be in formal rather than in informal employment.The informal sector usually accounts for about 40 per cent of the country's total gross value added, with the highest contributions coming from agriculture, fisheries, trade, and industries (cottage, micro and small enterprises, CMSEs) where capitalization is relatively low).
The above-mentioned features show that, in terms of shift from low -productivity to high-productivity jobs, Bangladesh is lagging behind. Hence,the big question is how can Bangladesh transform itself from low value-added to high value-added activities to create more decent jobs? Two major challenges are identified. First, although economic growth has been relatively high over the years, job creation has been less, so even if one considers the substantial number of jobs created in the export-oriented readymade garment (RMG) industry. Second, the employment challenge is also about the transfer of workers from low- to higher-productivity sectors, not just the number of jobs alone.The gross value added per employed worker in different sectors (as a measure of labour productivity) shows that labour productivity in agriculture is much low relative to industry and services: only 27 per cent of that of industry and 29 per cent of services in 1996, which further declined to 23 per cent and 25 per cent respectively for industry and services in 2017. This shows the low capacity of agriculture to pay decent wages, although it is the most important source of employment in rural areas.
It is true that, over the past 53 years, the key feature of rural transformation in Bangladesh has been the shift of labour from agricultural into higher-productivity jobs in non-farm enterprises. With mostly subsistence-oriented agriculture in Bangladesh, as labour moves out from agriculture, real wages rise to encourage the adoption of new technologies and machinery toward increasing agricultural productivity.
Entrepreneurship and enterprise development: For the future, the important issue is to identify the place of entrepreneurship and enterprises development in the development process of Bangladesh that has already undergone significant movement out of agriculture but is in a relatively low position in the global industrial value chain, has a small manufacturing sector, and is dominated by a services sector that is the largest absorber of relatively low-skilled self-employed workforce. While the self-employment sector is dominated by services activities and these activities attract more skilled individuals than do the self-employed manufacturing and primary sectors, the level of self-employed skills across all three sectors is lower than that of the salaried workers.
In the case of non-farm activities, enterprises in Bangladesh are classified into five categories-large, medium, small, micro and cottage-depending on the number of persons employed and the amount of investment (Table 1).
The 2013 Economic Census by BBS, which is the latest available such survey, shows that there are 7.82 million enterprises in Bangladesh of which 87 per cent are cottage enterprises while 12 per cent MSEs and the rest are medium and large enterprises (Figure 1). Of the service enterprises, 20 per cent belong to tradable services like transport, storage and communications, financial intermediation, and real-estate activities while the rest are non-tradable services.
The total number of employed labourers in all enterprises is 24.5 million, of which the average share of wage employment is 65 per cent while the rest are self-employment. Of the total, 54 per cent are employed in cottage enterprises, 29 per cent in MSEs, while the remaining 17 per cent work in medium and large enterprises. The 2013 Economic Census results highlight several features of the country's enterprise sector:
• Cottage, micro, small and medium enterprises (CMSMEs) constitute 99.8 per cent of total number of enterprises in Bangladesh and account for 83 per cent of total engaged persons. The average number of engaged persons per enterprise is less than 2 in micro (including cottage) enterprises compared with nearly 8 in small enterprises and more than 654 in large enterprises. The disaggregated figures further show that enterprises with up to 9 workers have an average engaged persons of 1.92 while similar number is 5.37 in enterprises having between 10 and 24 workers.
• The number of manufacturing enterprises is about 0.87 million-about 11 per cent of all enterprises while the rest are services enterprises. However, the employment share of manufacturing is about 29 per cent of the total employment in all enterprises.
• The dominance of rural areas in nonfarm enterprises is evident with nearly 72 per cent of all economic enterprises and 76 per cent of manufacturing enterprises located in rural areas.
• Cottage enterprises account for nearly 88 per cent of all economic enterprises while the share of micro, small and medium enterprises (MSMEs) is about 12 per cent while the share of large enterprises is negligible.
• Cottage enterprises feature less prominently in manufacturing accounting for only 28.8 per cent of manufacturing employment compared with 83.8 per cent for all enterprises. On the other hand, manufacturing MSMEs account for 15.9 per cent of all enterprises and 30.6 per cent of manufacturing employment.
• The dominance of cottage enterprises, however, is significantly less in terms of employment. The share of cottage enterprises is 53.7 per cent while that of MSMEs is 32.1 per cent and, for large enterprises, it is 14.1 per cent.
Another important feature is the overwhelming dominance (around 98 per cent) of the size group '<10 workers' in the number of all nonfarm enterprises. Furthermore, the 2013 Census shows that enterprises with less than 10 workers account for nearly 95 per cent of all manufacturing enterprises in Bangladesh.
Overall, the CMSMEs in Bangladesh provide an example of enterprises where entrepreneurship lies at its very core and which are normally built on practical, time-tested and often innovative approaches. As a result, these can survive and even flourish under toughest economic situations. Usually, the models adopted by CMSMEs are market-responsive, require minimum capital, and usually are profitable. They have the capacity to emerge as 'silent transformers' of the Bangladesh economy mainly due to their large numbers and relatively simple forms of operation consistent with the country's labour-force characteristics and resource endowments.
Thus, despite their small sizes, CMSMEs account for a large share of the country's employment and consequently output and income.
The above-mentioned size structure of nonfarm enterprises indicates that a large number of non-agricultural employment in Bangladesh takes place in smaller enterprises which operate with low productivity and generate relatively low incomes for their owners and workers. Two issues are particularly relevant in this context: first, what constrains these enterprises from becoming larger; and, second, how smaller enterprises can become more productive.
Employment in MSEs accounts for the lion's share of employment in retail and wholesale trade, construction of buildings, specialized construction activities, and land-transport sector along with high shares of employment in labour-intensive manufacturing industries, including in the manufacturing of fabricated metal products, furniture, food products, and RMG. In fact, smaller enterprises have been a major contributor to employment growth in industry and services in Bangladesh.
However, it is also true that the high prevalence of informality in these enterprises affects working conditions, limits access to social protection, and therefore dampens their contribution to decent work outcomes. In the above context, several characteristics of MSEs in Bangladesh may be noted:
Owner-operated: The MSEs are mostly owner-operated initiatives having few employees and with limited capital. In most cases, the micro-entrepreneurs find it difficult to find jobs through regular channels with their available human skills and hence prefer to create their own jobs by starting an enterprise. This may be a full-time or a part-time arrangement depending on specific situations. MSEs are greatly participated by the poor and marginalized segments of the poor, including women and 'graduates' of microfinance programs, especially in the rural areas.
Diverse organisational forms: MSEs have different organisational forms with various structures e.g. sole proprietorship, partnership or family enterprise, depending on convenience. These are highly characterized by competency in entrepreneurship, marketing and innovation. The majority of MSEs are involved in sales of products and services, including traders, retailers and street vendors, aiming to generate income and build assets.
High degree of flexibility: Significant flexibility exists in operational and other aspects of MSEs. For example, a large number of MSEs are temporary establishments (e.g. established outside household but organized in a temporary structure) or parts of economic households (e.g. households having non-agricultural economic activities such as cottage industry, shop or workshop in or within its premise). MSEs are operated across diverse sectors, and have low entry requirements in terms of capital and human skills. Further, being small in size, MSEs have the ability to be flexible and can respond easily to changes in market and customer demand.
Capital constraint: In most cases, MSEs face capital, management skills, technology, marketing links and other constraints especially while expanding their scale of operation.
Policy Framework for MSE Development: Available empirical evidence from different countries shows that the size distribution of enterprises in an economy depends, to a certain extent, on the industrial composition of the economy. Since low income countries like Bangladesh tend to have a composition dominated by simpler to produce products like apparel and footwear, metal products, and furniture-the average low income means greater demand for these types of products-such that there is a tendency for a concentration of smaller enterprises in these countries. The larger the proportion of low-income consumers in a country, the greater will be the demand not only for simple items but also for relatively low-quality versions of products purchased by both high-and low-income consumers.
The more stringent the technology-size-quality relationship, the greater will be the economic distance between smaller enterprises producing low-quality products with low technology and the larger enterprises using more advanced technology.
Similarly, poor infrastructure reinforces the effects of product- market segmentation. For example, an inadequate transportation network means that there can exist many pockets of small and localized demand, especially in rural areas, which are satisfied by small-scale local production. Moreover, without reliable electricity and power, the enterprises are unlikely to use modern methods of production. The lack of finance can also prolong the use of outdated technology thereby trapping an entrepreneur in the production of a low-quality product and restricting his/her market to the low-end segment.
Moreover, this is important in explaining the 'missing middle' size of distribution in a country like Bangladesh. This is because credit constraints are particularly binding for smaller enterprises since they do not have sufficient resources of their own as well as the collateral to access bank credit. In addition, there can be coordination failures and learning-related externalities as well as higher transaction costs of market and business regulations and economic policies that influence enterprise size and its distribution.
It is important, therefore, to recognize that the overall business environment is the most important determinant of competitiveness and growth of MSEs. This is also a necessary condition for the success of targeted assistance programs for these enterprises. Reforms to improve the business environment go beyond macroeconomic and structural features that discriminate against smaller enterprises and reduce their growth and competitiveness. Additionally, the government needs to accelerate the development of markets for financial and nonfinancial services suited to the special characteristics of these enterprises by promoting product innovation and building institutional capacity.
On the financial market, improving the access to credit requires redirecting financial institutions toward lending to smaller enterprises in a way such that these are profitable and, therefore, sustainable. This requires reduction in risks and transaction costs of lending to this segment of the market, strengthening the capacity of financial institutions to serve small-scale clients, and increasing competition in financial markets.
For the purpose, the development approach has to follow several principles. The government can facilitate greater demand and supply of nonfinancial services by directing intervention toward market assessment, product development, building institutional capacity, and monitoring and evaluation of results. The efforts to develop private markets may be complemented with a rationalization of traditional public-sector involvement.
For Bangladesh, the key to taking advantage in the labour market will be to capitalize on the increase in the working-age population by raising the quality of the labour force in both general and technical education with direct relevance to the needs of the labour market to raise the GDP-growth rate progressively in order to absorb the existing surplus labour and create decent job opportunities. Obviously, achieving job-rich growth is a challenge for Bangladesh, especially in view of the recent experience of industry, especially manufacturing and construction, where job creation has substantially slowed down.
In this context, the compulsion is to create a more diversified growth in general, especially through diversifying the base of productive enterprises. The critical challenge is to raise productivity and incomes from labor-in both wage and self-employment. In view of the rising labor force participation of women, diversification of women's employment to include tradable services sector and overseas jobs will be critical along with changing the skill composition of migrant workers toward more skilled jobs.
MSEs as vehicle for inclusive transition:
Through examining the employment characteristics of MSEs at a detailed industry level, specific cluster of enterprises may be identified where targeted policies and initiatives can contribute to inclusive transition and decent-work outcomes. For example, construction, architectural and engineering activities, technical testing and analysis, and similar other skill -intensive MSEs have high potential of decent job creation. Similarly, MSEs related to clean-energy supply and waste management can generate decent jobs. For instance, jobs in electricity, gas, steam and air-conditioning-supply MSEs can increase very rapidly, especially in urban locations. In these and many related MSEs, there is a large scope for support to pursue growth and job creation simultaneously.
The support measures need to cover macro and sectoral policies, as well as skill development and other measures aimed at improving the low levels of productivity commonly associated with MSEs, and by addressing challenges through social interactions. It is also important to establish regulatory and non-regulatory frameworks that support environmental and social sustainability while promoting innovation specifically targeting MSEs and creating awareness toward making their operations more resource-efficient and environmentally responsible.
Another cluster where support for MSEs provides significant opportunities for contributing to a just transition is labour-intensive manufacturing industries. The level of integration of industries in global and regional value chains is highly related with industry and firm structures at the national level. For instance, in garment-exporting countries in Asia and Africa, the share of workers employed in MSEs is far lower than in other countries, and lower than other labour-intensive manufacturing industries in the same country. For instance, in 2017, MSEs accounted for only 7.0 per cent of employment in the garment- manufacturing industry in Bangladesh, compared with 85 per cent of employment in the manufacturing of food products.
This, however, does not necessarily mean that MSEs are less important in these industries, rather the implication is that different policies and interventions would be needed in this context. Indeed, it is often observed that employment growth in large (exporting) enterprises is accompanied by employment growth in MSEs in the same sector. This suggests that there can be a pull-effect in employment creation, and a spill-over effect from value-chain integration and increased productivity, if adequate policies and supportive market conditions can be put in place. For example, these industries can achieve important gains in job creation from policies supporting their transition to formality and helping them access finance and markets.
In Bangladesh, another cluster of industries which has high potential for creating decent work and where the employment inMSEs is already growing rapidly is related to information and communication technologies (ICTs) and business-facilitation services. This cluster includes computer programming, software development, call centers, information-technology-enabled services (ITES) sector, development of digital landscape, consultancy and related activities which have been facilitated by greater digital connectivity.
In recent years, growth has been very rapid in legal and accounting activities, office administration, office support and other business-support activities, activities auxiliary to financial services and insurance, advertising and market research, and other professional, scientific and technical activities. Support for MSEs in these industries, including through improving digital infrastructure and bridging digital divides and digital adoption gaps, and through investment in education and skill -development systems will be the key to raising productivity and unlocking far more decent work opportunities in Bangladesh.
In particular, in view of the significant heterogeneity of economic and industry structures, Bangladesh needs to adopt multiple pathways to support MSEs in generating decent work. The key will be to design country-specific strategies to address the challenges of raising productivity and resilience of MSEs in a comprehensive manner. Within the holistic approaches available globally, Bangladesh will have to identify the right entryways and develop specific strategies depending on its own context, challenges, and priorities.
No doubt, good policies need to support the growth of all enterprises - large, medium and MSEs, but it is important to keep in view that MSEs face specific challenges-difficulty to access finance, greater burden from regulatory frameworks, and cost disadvantages to expand in relation with bigger enterprises. As such, the need is to adopt targeted policies for MSEs, not because they are small but because they are key engines of the real economy and the seedbed for bigger enterprises in Bangladesh.
Policies for MSE Development: In 2007, the SME Foundation was established as the core authority to guide both policies and actions designed to support the SMEs. At present, the support structure for SME development is multi-institutional in which the major players are the Ministry of Industries, Bangladesh Small and Cottage Industries Corporation (BSCIC), SME Foundation, and the Bangladesh Bank. Although each of them works in specific areas, there are significant overlaps. For example, the SME Foundation was conceived as the 'one-stop service' provider, but it does not have the legal authority over relevant organisations. For credit wholesaling, although the Foundation has gathered information on SME clusters, their composition and credit needs, it is not involved in the credit programmes of Bangladesh Bank , the central bank.
The Bangladesh Bank has several programmes for advancing institutional financial services to the SMEs, such as credit wholesaling, creating dedicated desks and SME service centres in the banks and for women entrepreneurs. The SME and Special Programmes Department (SMESPD) has been created in the Bangladesh Bank to devise policies, facilitate credits, and monitor SME entrepreneurship development. The credit wholesaling programme of the central bank involves refinancing small enterprises through 46 banks and non-bank financial institutions and refinancing schemes for agro-based product-processing industries, women entrepreneurs, and new entrepreneurs under cottage, micro and small categories.
However, available evidence indicates that these institutional mechanisms have not made notable improvements in the support mechanism for the SMEs. Although the current institutional arrangements of Bangladesh Bank have created incentives for the banks and non-bank financial institutions to provide more credits to the SMEs, ensuring appropriate targeting still remains a major challenge. Since the SME Foundation has a better knowledge about the sector, more effective collaboration between Bangladesh Bank and the Foundation would probably ensure accurate cluster and sectoral targeting of the credits for the SMEs.
The National Industrial Policy (NIP) 2016 identifies the development of CMSMEs as a critical component of the overall development strategy of the government. The policy guidelines emphasize the facilitator role of the government with the purpose of removing policy obstacles and neutralizing market barriers. The roles of different institutions in achieving the targets of SME development are also spelled out, including the SME Foundation, Bangladesh Bank and the BSCIC. The Small and Medium Enterprise (SME) Cell has also been set up in the Ministry of Industries (MOI) to coordinate the activities of relevant institutions and act as the focal point for providing necessary promotional support to the CMSMEs. In addition, the SME Policy 2019 provides the detailed guidelines for SME development in the country.
Suggested policy interventions: With the overwhelming importance of MSEs, improved competitiveness of these enterprises can obviously contribute to economic and social development as well as poverty reduction in Bangladesh since poverty-reducing growth depends on the quality of growth-its composition, distribution, inclusiveness and sustainability. And, in Bangladesh, smaller enterprises are the perfect vehicles for achieving quality growth. As globalization proceeds, the quality of
Bangladesh's future growth of smaller enterprises will substantially be determined by three factors (i) its ability to integrate with the global economy through trade and investment regimes (ii) its capacity to maintain sustainable government finances and sound monetary balances (iii) its ability to put in place an institutional environment in which good governance prevails, contracts can be enforced and property rights can be established.
Although the government makes the policies, the enterprise sector is predominantly private and, within the private sector, there are different types of market players-enterprises of various sizes and multinational companies. Improved competitiveness can tap the potential of MSEs for which Bangladesh needs to address the following challenges:
• MSEs will have to expand and develop through (i) adopting new and innovative initiatives and (ii) graduating as many informal enterprises as possible into the formal sector.
• Will have to become more competitive and productive.
• An increasing share of the competitive MSEs will have to achieve a level of competitiveness that will enable them to integrate into the global value chains (GVCs) through trade (exports and internationalization) and investment, including linkages with FDI.
In the aforesaid context, multiple challenges exist in Bangladesh. As trade barriers are dismantled and transport and communication costs decline, MSEs are required to add more value to their products to stay ahead and compete with lower cost rivals. Further, consumer demand is changing rapidly as incomes rise and choices increase when imported products become easily available in domestic markets. Technological advances create new products and transform almost every stage of business from production to marketing, sourcing and logistics.
In addition, new rules introduced through the multilateral trade system and foreign buyers would require the MSEs to comply with higher technical (e.g. technical barriers to trade), environmental (e.g. ISO14000) and labour standards in domestic and export markets. Multinational enterprises seeking out new markets and investments offer capable MSEs the opportunity to involve in the GVCs through subcontracting linkages, while those that are unable to do so increasingly face the danger of losing their existing markets.
Competition within the developing world for export markets, foreign investment and resources is also intensifying. Against the backdrop of increased global competition, the government and MSEs in Bangladesh will have to adjust to and adopt new approaches and invent new ways of working together to foster MSE competitiveness.
Access to finance: The MSEs identify financing, especially medium-to long-term finance, as their topmost constraint to growth and investment. These obstacles originate at two levels in Bangladesh. Deficiencies in both macroeconomic and microeconomic environments pose challenges: fiscal constraints and legal, regulatory and administrative environment poses major obstacles to access of MSEs to financing. The second level of obstacles emanate due to organizational capacity weaknesses. For an example, business -services markets in accounting, auditing, financial management and legal counsel are underdeveloped such that the MSEs are not able to access or afford these services.
Similarly, they lack access to essential services they would need when they approach banks and other types of lenders. The MSEs face challenges in accessing formal finance in the form of bank loans, guarantees, venture capital, leasing and so on. Moreover, due to high-perceived risks in MSE loans, access to competitive interest rates is also very limited.
Finally, banks prefer to lend to the formal sector and the government, which offers less risk and higher returns. However, innovations can be introduced by the commercial banks which can provide good results in servicing the MSEs.
In addition to loan financing, MSEs can also avail the option to cooperate with venture-capital investors. Venture capital involves the provision of investment finance to MSEs in the form of equity or quasi-equity instruments not traded on recognized stock exchanges. It is long-term risk finance where the primary returns to the investor are derived from capital-gains rather than dividend income. Venture-capital investors may be actively involved in the management of MSEs they invest in, to assure the success of the venture. With mutual efforts, such investors may actively seek the MSEs especially in the high-growth sectors.
Other significant forms of MSE financing may include leasing, trade credit, and fiscal incentives in the form of tax breaks. In Bangladesh, leasing-and trade -credit systems require the existence of appropriate legal and regulatory frameworks, while a legal basis for leasing needs to be present, enforcement of contracts has to be ensured for both leasing-and trade-credit mechanisms to work well. The government has also set up fiscal incentive schemes for the MSEs. However, cumbersome procedures often render incentive schemes inaccessible or too costly.
In Bangladesh, the microfinance sector is emerging as a major financier targeting the self-employed and microenterprises. The microfinance institutions (MFIs) usually provide small amounts of working capital and a majority caters to the traders and small entrepreneurs. Micro-scale, rural-based, women entrepreneurs are among the primary target groups. Women's lack of access to land renders them as non-customers of formal financial institutions in most cases.
Furthermore, gender-biased attitudes prevailing among the bank staffs that are mainly male, low level of education and training among women entrepreneurs and lack of access to information about sources of financing are also major barriers for women entrepreneurs.
Access to finance is essential for improving MSE competitiveness, as MSEs have to invest in new technologies, skills and innovation. Access- to-finance issues cannot be resolved by implementing financing schemes or programmes in a vacuum. There are institutional issues covering a spectrum from the macro to the micro level, which are accompanied by capacity deficiencies. This wide spectrum can only be tackled by mainstreaming MSE development in the national framework.
Furthermore, efforts to resolve access-to-finance issues are not solely the responsibility of the government. The MSEs also need to take more active initiatives such as through mobilizing joint advocacy and recommendations, based on sound analyses, through their membership organisations.
Most significantly, MSEs must implement sound business practices and continuously invest in good internal -management systems: in accounting, planning, financial, operations and human-resource management.
Institutional support structures: The MSE development strategy has to be inclusive and build on a consensus on MSE challenges, goal and broad policy direction among the key stakeholders. The strategy has to concert and coordinate efforts of institutional structures that make or affect policy (policymakers, local government institutions, private sector, entrepreneurs and others), administrators of policy such as line ministries, local government authorities and regulatory structures, and support organisations (MSE organizations, government agencies, technical education and training institutions, banks and financial institutions, MFIs etc). The private sector's roles and responsibilities will be to integrate into the strategy through business membership organizations, organizations of business-development services (BDS) and financial- service providers, trade bodies and unions and civil-society organisations.
Clearly, the multidimensional and multi-stakeholder nature of MSE-competitiveness strategies requires on-going consultations between the public and private sectors. Hence, institutionalized public-private dialogue mechanisms are required. The structure will have to specifically focus on MSEs such that the interests of large domestic and foreign enterprises may not dominate the agenda prominently.
Policy coordination and monitoring structure: The impact of institutionalized public-private dialogue institutions as well as resulting policies and programmes can be strong if an independent or semi-autonomous central -level MSE policy coordination and monitoring institution is given the backstopping responsibility.
What will be important is introduce a paradigm shift on how the MSEs should be supported through the institutional structures. The present approach perceives the MSE sector largely through paternalistic lenses under a protectionist view. With the ongoing technological revolution under a globalised world, the paradigm shift has to be toward MSE promotion with an enhanced focus on specific sub-sectors and activities, with considerably larger amounts of assistance and subsidies going to high technology-oriented manufacturing and service enterprises and entrepreneurship development.
With the advent of trade liberalization, the focus needs to be on facilitation, where a holistic approach to competitiveness should take the priority.
One important function of the structure is to compile statistics on the state and health of the MSE sector in collaboration with the national statistical organisation-Bangladesh Bureau of Statistics, BBS--, to conduct/commission applied research on priority MSE issues, coordinate and monitor regulatory reforms affecting MSE competitiveness and the implementation of 'good regulation' principles, develop guidelines on MSE -promotion-programme design, implementation and monitoring for national stakeholders, including those at the local level, facilitate MSE-support programmes by providing financial and technical assistance to local stakeholders, including business -membership organisations, coordinate MSE-related interventions of the line ministries and regulatory agencies, implement/coordinate programmes at national and local levels to act as an information-clearing house for MSE programmes and policy progress in the country and coordinate development -partner assistance.
Evidently, these functions are those of an 'MSE advocate' in the public sector for an enabling environment and one of a 'facilitator' for MSE promotion e.g. technology-upgrading programme, membership-organisation capacity -building programme etc.
Business development services: The MSEs have to be able to respond quickly and efficiently to market signals to take the advantages of trade and investment opportunities and reap the benefits of the global trading system. Among others, business-development services (BDS) help them implement competitive business practices and strategies. The BDS include a wide variety including training, consultancy and advisory services, marketing assistance, information, technology development and transfer, and business-linkage promotion. With the limitations of the public provision of BDS, the strategy needs to adopt the market-based approach-traditional programmes have been supply-driven, they have crowded out potential private-sector BDS suppliers with free or subsidised services, they have been limited in outreach, and have been of low quality due to limited institutional capabilities.
The ultimate vision for BDS will be to install a well-functioning market with a diverse array of high-quality services that meet the needs of the MSEs in a cost-effective manner. The approach does not totally absolve the public sector of its responsibilities, rather it aims to limit their interventions to developing private -sector BDS market as 'financiers' of BDS facilitators (both private and public) and BDS providers (may be private or public).
The BDS market-development approach would focus on sub-sectors and market analyses, through which MSE needs, potential demand for particular BDS and the state of the BDS market would be assessed.
Accordingly, the approach would have to develop efficient and effective commercial BDS services that are more relevant and of required quality. The approach would have to adopt both supply-and demand-side interventions, as required.
Development of human resources: Since human capital is a significant determinant of growth and BDS largely involves short-term professional (e.g. for entrepreneurs and professional staff of MSEs) and vocational (for the workforce) training, BDS are not likely to be substitutes for deficiencies in the education and training system. The ability of the MSEs to adjust to the competitive pressures that emanate from trade liberalisation and globalisation depends on the level of skills that are available in the economy.
Although Bangladesh is investing significantly in education (mostly basic) and training systems, the linkages between education and training strategies and MSEs/enterprise -development strategies are weak, resulting in weak market signals for the policymakers and implementers. One major factor behind such weak linkages is the low level of priority and recognition that MSE development has traditionally received in national development efforts. Hence, the first step is to mainstream MSE development into national development framework and ensure effective public-private dialogue mechanisms with MSEs/private sector regarding their needs while developing education and training strategies and curricula. This is especially needed in the technical and vocational training systems to ensure effective demand on the market.
Vocational and technical institutes in Bangladesh usually produce graduates with vocational and technical skills that would enable them to take either one of two career paths-as an employee in an enterprise or as an entrepreneur. However, no provisions are made to enable these graduates to learn the basic entrepreneurship skills while at school. Entrepreneurship-skills trainings are mostly available as BDS for the adults. A primary reason for this is the lack of appropriate linkages between the MSE policies and those of the education and training sector.
While human-resource-development issues are fundamental to developing the MSEs, the MSE-development strategy also needs to address issues such as sustainable use of natural resources. Agriculture and agro-processing, including use of forest and marine resources and tourism, are prominent among MSEs where Bangladesh has comparative advantages. The MSE -development strategy, while emphasizing environmental sustainability in general, may also prioritize the promotion of good management practices in small businesses, resulting in improved productivity without the need for major investments and utilisation of cleaner production techniques to reduce production costs, thereby contributing to improved efficiency and competitiveness.
Supporting infrastructure: Infrastructure investments, such as those in transport, telecommunications, energy, water and sanitation, can enhance MSEs/private -sector activity and ability to access local, regional and global markets. Furthermore, the quality of available infrastructure has a significant influence on MSE competitiveness. It is important that infrastructure services reach all segments of society - such as the poorest areas and rural areas - in order to enable the MSEs of different sizes and from all areas to participate in various economic activities.
Although infrastructure deficiencies affect the MSEs as well as large-scale enterprises, the adverse effects on MSEs are relatively large since many of these are involved in agriculture, agro-processing including fisheries, and low -quality infrastructure prevents the commercialization of production based on rural resources. Additionally, poor infrastructure results in low levels of entrepreneurial activity in the rural areas, and large-scale rural-to-urban migration, thereby putting pressure on urban infrastructure and employment in the urban areas. Bangladesh has embarked on industrial-estate development for MSEs over the last few decades. Geographical agglomeration, although by itself not sufficient, can potentially help enterprises, especially the MSEs, overcome constraints associated with size, and promote technological development and productivity enhancement as well as enhance their ability to compete in local and global markets.
Building trade and investment capacity:
Globalisation has created new opportunities for MSEs through creating a new international environment for MSE exports from Bangladesh. The process of world economic integration has involved a broadening and deepening of interrelationships between international trade and foreign-investment flows. Several influences - falling trade barriers, increasing technological progress, migration of technical and professional and highly mobile multinational corporations (MNCs) seeking out new investments - have combined to drive globalisation in its present form.
Globalization has brought new challenges, too, for Bangladesh. The new international environment provides opportunities for MSE exports from Bangladesh along with access to the global pool of new technologies, skills, capital and markets. At the same time, it brings about multiple trade challenges and a sudden increase in competition from imports and the entry of foreign investors for MSEs on the domestic market. The MSEs need to adjust to the competitive strategies of MNCs in different countries, to public and privately set standards (e.g. sanitary and phytosanitary), to changes in international tastes, prices and competitive conditions.
For accessing the export opportunities, potential and dynamic MSEs will have to design well-adapted marketing strategies and invest in their manufacturing capabilities to bring them up to world standards of price, quality and delivery (hence complying with new technical, environmental and labour standards in export markets). These may also form networks or industrial clusters with other MSEs or MNCs to stimulate the emergence of production networks among enterprises and increase value addition.
Such MSEs can expand their existing domestic-market shares, broken into new export markets and continuously upgrade their products and processes. The key is to pro-actively upgrade their operations through own efforts to avail the opportunities (Box 1). For success, these require, among others, easy and cost-effective access to information on demand patterns and new technologies, training and advisory services to upgrade management practices, skilled pool of labour to employ, testing, quality assurance and certification institutions and, most importantly, access to finance to upgrade the technologies. For exporting MSEs, the availability of ICT is not enough, but more important is reliability and cost of ICT services - an issue that hampers the access to information by the MSEs.
Cluster development strategies: Cluster development strategies are important to facilitate MSEs to link with global value chains through targeted initiatives. The cluster -development policy emphasizes the importance of creating enabling environments at macro, meso and micro levels through sound macroeconomic policy, capacity building of support structures, and business strategies based on differentiation, niche markets to achieve competitiveness based on quality, consumer preferences rather than low costs. In this respect, cluster -development strategies serve to improve both competitiveness and ability of local MSEs to involve themselves in global supply chains through linkages with FDI.
FDI-MSE linkages and spillover effects: The potential benefits of FDI to the Bangladesh economy specific to the MSEs may be summarized in five major linkages and spillover effects as follows:
Backward linkages with suppliers: This refers to the extent to which components, materials and services are sourced from MSEs in Bangladesh since this creates new market opportunities for these enterprises. Such linkages may range from arm's -length market transactions to deep, long-term inter-firm relationships. The productivity and efficiency of local suppliers (MSEs) will benefit from this type of spillover as a result of direct knowledge transfer, higher quality requirements and increased demand levels. Backward linkages with suppliers are traditionally seen as the main vehicle to promote technological and other spillovers from MNCs to the MSEs.
Forward linkages with customers: These include marketing outlets, which may be outsourced. Examples include petrol stations and restaurant chains, and linkages with industrial buyers through, for example, value-added after-sales services.
Linkages with competitors: Foreign investors may set new standards which local MSEs may seek to compete with. Although MNCs usually hold a strong market position in relation to local MSEs, linkages with competitors refer to second and third tier suppliers to leading inward investors, and not just first-tier suppliers to the MNCs.
Linkages with technology partners: Some MNCs may initiate common project/programme with MSE partners, including joint ventures, licensing agreements and strategic alliances, which are important potential sources of technology and know-how for local MSEs. While such cooperation is quite common in matured economies, such technology agreements with MSEs in developing countries are also rising fast and Bangladesh can take advantage of this development.
Other spillover effects: Other spillover effects may include demonstration effects, as FDI investors demonstrate new and better ways of doing things to local MSEs, which are sources of, and stimuli to, innovation. These also include human-capital spillovers when, for example, trained personnel of FDI-linked MSEs decide to work for local MSEs and/or set up own MSEs.
Understanding the rationale (e.g. productivity gains, factor-cost advantages such as lower wage cost, etc.) of MNCs outsourcing products and services to suppliers (MSEs with capability to meet stringent quality, cost and delivery standards of MNCs) can clarify the implications for MSEs and their development for enhanced FDI linkages. As such, the FDI-MSEs linkage -support programmes need to have two distinct components (i) a number of linkage promotion services (ii) technical and management- upgrading services, including training and consultancies to internalize the requirements of the MNC, complemented by access to finance to integrate any new technologies into the existing production process.
Job creation through: In Bangladesh, the private sector is the key player to create decent and high-quality job opportunities. In this context, several features of the MSEs may be noted. First, the MSEs are typically concentrated on low-skilled and labour-intensive sectors such as in light manufacturing and the services sectors. Compared with the larger enterprises, MSEs generally bring their products directly to the market, selling to individual customers, or are alternatively contracted as suppliers to the lower-value-added upstream segments of value chains dominated by larger enterprises. Second, there is less cooperation and collaboration among the MSEs, often due to lack of trust and market information. Many MSEs are family-owned businesses with a strong tendency to employ family members without careful consideration of the suitability of their skill sets. This often impacts on operational efficiency, quality and consistency in both products and processes and competitiveness of the MSEs, which usually turn the jobs created by MSEs to lower-paid and insecure compared with those provided by larger enterprises. Third, informality is another important feature of the MSEs. The vast majority of the MSEs are informal in Bangladesh without registration. Despite their informality, these MSEs are the most important job providers in the country. In view of the above characteristics of MSEs in Bangladesh, employment in these enterprises is not likely to fulfill the decent-job requirements from the dimensions of earnings and working conditions
Hence, while emphasizing the crucial role of MSEs in creating jobs, it is useful to highlight their potential as decent job providers. This means not only formulating policies at the enterprise level for improving human capital, efficiency and productivity of MSEs, but also launching structural transformations that provide a regulatory framework conducive to their upscaling and growth into formal enterprises.
The close relationship between entrepreneurship and innovation has led to the distinction of a new class of entrepreneurs-known as the 'innopreneurs'-who manages and bears the risks of the business model and is interested in R&D and works as 'innovation hunter' who aggressively seeks for opportunities, transforms the opportunities into concrete marketable ideas, maximizes value addition, assesses/undertakes relevant risks to apply the ideas and optimizes returns of their enterprises.
In Bangladesh, MSEs require innopreneurs, who would be flexible in the adaptation process of their business models to the country's dynamic socioeconomic environment, form partnerships with relevant local value -chain stakeholders and customers for deriving mutual benefits, use ICT and modern technologies to exploit dynamic advantages, and undertake continuous innovation in order not to remain excluded from the country's rapid socioeconomic and structural transformation processes.
For the MSEs, sustainable development goals (SDGs) can act as catalysts for creating shared value through innovation, growth, creating good jobs, and better competitive performance in the local market and the national economy. These enterprises may also develop the tradition of reporting and communicating on local issues of importance to the SDGs, such as job-market situation, climate change, women's employment and empowerment, health and education, food security and nutrition, diversity and empowerment in the workplace and other issues. Aligning the local stakeholders with the expectations and requirements of the SDGs can provide valuable tools to share the SDG pathways in an effective manner and pursue business opportunities in sustainable ways by the MSEs, especially in creating better jobs.
Development pathways: Within the existing institutional structure, MSEs in Bangladesh are highly vulnerable to bad governance, poor policies and weak institutions, and suffer from high transactions costs. In addition, their existence in the informal economy creates limitations on growth of these enterprises through several channels, such as inadequate access to financial and other inputs, limited availability of support services and the informality of their contractual arrangements which narrows down their investment options. In practice, although the definition of MSEs in Bangladesh focuses on quantitative criteria, these characteristics influence their organizational behaviour as well. Their individual ownership creates a limited internal resource base (e.g. finance and management); and the MSEs have lower ability to shape the relationships with external stakeholders , such as the suppliers and sources of finance, and merging of ownership and management as an integral strategy to improve organisational behaviour. While these behavioral similarities may be widespread, the heterogeneity of the MSEs is also important especially in the context of the Bangladesh economy.
For efficient development of MSEs, the need is to support the scaling up and technological upgradation of these enterprises and mobilize social capital for training and education of the involved labour force. Moreover, skill- development efforts and trainings need to cover product -quality development and diversification, bookkeeping, accounting and business- management, adoption of innovative technology and ICT, and value-chain development and marketing. These job-oriented trainings are also needed to be integrated into the formal school curricula such that the interested students may have access to viable future entrepreneurship and job opportunities.
For the MSEs, job-creation policies are required to possess three essential features (i) labourers must have access to training and skill development. The skills should be demand-driven along with policies to ensure adequate availability of labor for skill upgradation (ii) the enterprises must have access to the markets where they can sell their products for which support services such as access to information, business development, transportation facilities and ICT/telecommunications services should be ensured (iii) financial services , including microenterprise loans, need to be made widely available with adequate resources and appropriate risk-sharing programmes for the MSEs. The process will also facilitate the development of an entrepreneurial class from the grassroots.
While promoting entrepreneurial transformation in the MSEs, it may be useful to distinguish between 'entrepreneurship' (an individual's urge to asset and business growth) and 'proprietorship' (ownership to realize profits but not for business development). In reality, 'proprietors' are more likely to utilize the 'surplus' for consumption rather than re-investment in businesses. It is more likely that the proprietors rather than the entrepreneurs dominate the MSEs in Bangladesh, and they mostly use the cash flows for raising general living standards, rather than for business expansion.
For developing the MSEs, it is important to recognize the differences, including their relative significance, in policies designed to (i) promote new business start-ups and ensure survival of the younger ones (ii) encourage and support growth in existing enterprises which are likely to differ depending on goals to be pursued (e.g. creating jobs or improving competitiveness) and differences in the strengths and weaknesses of the local economies. Despite these differences, a targeted approach is needed at the national level in Bangladesh for providing policy support to growth and efficient performance of the MSEs since sales growth and jobs growth are closely linked.
Moreover, a strong case can be made for giving priority to growth-oriented MSEs in Bangladesh, especially for those which seek either to enter the foreign markets or increase their exports.
The structural characteristics of the country's overall CMSME sector suggest that Bangladesh needs to pursue a development pathway within a complementary framework for developing the smaller-enterprise sector
One strategic component is the competitive and dynamic pathway, in which the larger-sized MSEs and medium enterprises would increase their competitiveness through participation in production networks with large enterprises and/or the MNCs. For moving toward greater involvement in production networks and exports by these enterprises, one of the key prerequisites is technological capabilities as there exist positive mutual effects between firm-level technological capabilities and production-network development. For the enterprises in Bangladesh, a relatively low level of institutional development and low degree of awareness on the significance of technological upgrading exist among most of these entrepreneurs.
Thus, in the competitive and dynamic pathway, a key to developing the smaller enterprises is their greater involvement in production networks and enhanced capability of upgrading. Enterprises with higher capabilities participate more in production networks which helps in further upgradation of capabilities. It is seen that well-linked enterprises outperform non-linked enterprises in product and process innovation by reducing the innovation costs and use of diverse information sources tends to engender varied types of innovation. For the purpose, policy support is needed in several areas for these enterprises e.g. development of institutions to expand financing to enable the enterprises to make necessary investments for technological upgrading, institutions to access various business-support services, technological and managerial human resources needed to upgrade, improved physical connectivity, transportation and communications infrastructure, and logistics services to reduce costs and to fulfill required delivery (as strict observance of delivery is essential in the export business), and reduced bureaucratic costs in investment, taxes, customs, licensing, and other business activities.
Within the framework, these enterprises need also to adopt inclusive business models (IBMs) and utilize the mechanisms of collective action emerging from rural/local development and local market integration. In this context, the government's policy support can broadly be categorized into (i) direct support to facilitate their capability upgrading (ii) indirect support through creating institutional environments and market-based expansion of business development, finance, technology and other services conducive to their development (iii) establishment of regulatory and institutional framework to support more effective relevant policymaking and implementation.
On the other hand, the inclusive pathway component will enable the smaller-sized MSEs and cottage enterprises to upgrade their capabilities through adopting the inclusive business models (IBMs) in tandem with rural/local development. It must, however, be emphasized that these two component pathways are not mutually exclusive, and enterprises in the inclusive pathway need also to participate, directly or indirectly, in international production networks for scaling-up and ensuring profitability and sustainability.
The IBM-based development path consists of developing direct or indirect linkages with relevant agents who play a significant role in expanding markets and choosing design and technology. Typically, these enterprises are small in scale and use relatively low levels of technology. The inefficiencies resulting from their small size can be mitigated by coordinating the functions at the local level while linkages to exports can provide them with the opportunity to upgrade their capabilities through meeting the requirements in export markets. In addition to export linkages, development of clusters provides a mechanism for collective action among these smaller enterprises (e.g. joint purchasing and order sharing) which can help to reduce costs.
However, effective functioning of the mechanisms for collective action requires mutual trust among the enterprises. Trust which is a basic ingredient for developing positive collective behaviour can be strengthened through joint participation in community -development activities which makes local community development as important for effective collective action. Thus, in the inclusive pathway, export linkages and collective action are among the desirable strategies for mitigating the low productivity that is inherent in the size structure of MSEs in Bangladesh. Further, measures to reduce costs or barriers of entry may be necessary to promote new entries, such as start-up support services in aspects of management and financing for the MSEs.
The critical role of government policy support in the inclusive pathway would be to level the playing field for these enterprises. Compared with the competitive pathway, policy support needed in the inclusive pathway is likely to be more direct in nature, such as (i) promotion of collective action among the enterprises with regard to local community development (ii) development of institutions to promote access of enterprises to wider markets, including exports (iii) provision of business development and managerial skill support to enhance their capacity to access finance and credit (iv) development of institutions to reduce risks and lower barriers to financing (v) promotion of entrepreneurial and human resources for MSEs, including new start-ups.
In fine, it goes without saying that the importance of MSEs in contributing to job creation and output growth is now widely accepted in Bangladesh. For these enterprises, the key dynamism is the process of expansion of these enterprises into medium enterprises, when these growth-oriented ventures can make the most tangible contribution to economic growth and job creation. Such dynamic enterprises provide a competitive edge in two ways - as leading subcontractors and as venture firms in their own right. They also tend to survive longer than most MSEs and create decent jobs that yield higher returns, thus multiplying their impact on economic growth and development of the country.
The present analysis indicates the evidence of a 'missing middle' in Bangladesh, a shortage of growth-oriented MSEs that could make an important contribution to the country's development. One important factor for creating such imbalances is the inherent biases in economic policies that inhibit gradual and organic growth of these enterprises. The lack of coherent MSE-development strategies, which take into account the three dimensions of enterprise evolution-- start-up, survival and growth-and the varying needs of enterprises in these different stages of evolution, is another important constraint that the country needs to overcome.
As Bangladesh is rapidly embracing globalisation, the including opening of domestic markets as part of its liberalization policies, adverse impacts on the country's enterprise structure may further deepen in the absence of a coherent policy framework for enterprise development. In particular, MSEs are more likely to lose ground in terms of their competitiveness.
Moreover, the process of globalisation along with rapid advances in ICT would create new dynamics of production, enterprise development and international competition. Bangladesh, therefore, needs to carefully examine the effectiveness of its existing policies and programmes for enterprise development in the light of changes in national and global environment and redesign its MSE strategies to focus on addressing the issues related to dynamism and job creation.
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The writer is Executive Director, Institute for Inclusive Finance and Development (InM)
[email protected]