Report of the Secretary-General of UNCTAD to the ninth session of the Conference
June 1996

Chapter III

PROMOTING ENTERPRISE DEVELOPMENT AND COMPETITIVENESS
IN DEVELOPING COUNTRIES AND ECONOMIES IN TRANSITION Introduction

247. The role of enterprises in development is receiving increased attention from policy makers in all countries in the 1990s. Enterprises are the basic building blocks of an economy, the entrepreneurial engine of the dynamic processes of capital accumulation, growth and development. This has been a text book truism for many years, but only recently has it found wide expression in the policy approach to major issues.

248. The reasons for contemporary interest in enterprise development are many, and are as diverse as countries are different:

(a) Poverty. Micro-enterprises are increasingly seen as the means to empower the poor and the disadvantaged.

(b) Employment . Small and medium-sized enterprises are seen as major contributors to job creation, even in the mature industrial economies facing structural unemployment.

(c) Adjustment. The considerable experience now gained from structural adjustment programmes in many developing countries suggests that the supply response of enterprises is essential to the success of structural adjustment measures.

(d) Transition. The nurturing of a whole new class of entrepreneurs and wealth-seekers is fundamental to the reconstruction of the former socialist economies in line with market principles.

(e) Privatization. Fiscal burdens, coupled with the need to promote entrepreneurship and economic efficiency, have prompted the transfer of enterprises from the public to the private sector in developing and developed countries.

(f) Competitiveness. The best industrial exporters among developing countries have relied on enterprise development strategies, including linkages with foreign investors and TNCs.

(g) Competition. The trend towards a borderless world is increasing competition everywhere and bringing enterprise issues within the ambit of international discussion and negotiation. These issues include competition policy, the harmonization of national standards of all kinds and access to global networks.

249. This chapter examines this new policy setting and outlines main considerations for the shaping of more coherent national and international strategies for enterprise development in the current context of liberalization and globalization.

A. The enterprise sector in developing countries and economies in transition

1. Main features

250. Over the past decade, nearly all developing countries and economies in transition have enacted an array of institutional and economic reforms to liberalize the environment for enterprise activity. These efforts are beginning to bear fruit, but not without a degree of restructuring and dislocation.

251. The liberalization of domestic markets is encouraging greater private sector activity generally. In some cases, the response has been impressive: double-digit annual growth rates in private output in several countries in Asia and Latin America for instance. At the same time, greater freedom for entrepreneurial activity has also given rise, in some instances, to extortionate pricing, gangsterism and lawlessness. Liberalization of the trade regime has meant that many enterprises have had to close down, but the sustained growth in exports of developing countries in recent years is due largely to private enterprises, domestic and foreign. Newly privatized or incorporated enterprises have been stimulated to rationalize their production methods, but they have also shed workers and the pool of unemployed has consequently grown in many countries.

252. In many developing countries, market reforms have been implemented in the context of structural adjustment programmes. Although the stabilization objectives of these programmes have met with some success, the persistence of low-growth conditions has discouraged capital outlays on modernization of equipment, capacity expansion and exploration of new business opportunities. The cutback in public expenditures in the many developing countries has also prevented investment in the basic physical, institutional and standard scientific and technological infrastructures that local and foreign-owned enterprises require in order to be able to operate profitably.

253. The supply response has been particularly weak in Africa. A major inhibiting factor is the scarcity of enterprises in general, and their low initial levels of capabilities in particular. Because of low entrepreneurial capabilities, enterprises, even if otherwise efficient producers, lack the know-how to tap emerging market opportunities. The problem is aggravated when infrastructure and institutional support is limited, as is the case in many of the least developed countries.

254. In the economies in transition, market implementation has been slowed by the necessity to overhaul institutions with considerable historical, economic and social-political dominance. The production base is outmoded in many economies, owing to the earlier orientation towards satisfying military rather than consumer needs, and the emphasis on meeting quantitative targets without regard to quality standards.

255. Public enterprises, generally, have faced more difficulty than the private sector in adapting to market reforms. In part, this is because governments in economies in transition have laid greater stress on improving financial performance rather than efficiency. Reduction of the size of the public enterprise sector has received greater attention than the need to improve management. At the same time, success in cutting the relative size of the sector in developing countries has been limited.

256. Overall, enterprises in developing countries and economies in transition will need to continue to restructure and improve their competitiveness if they are to meet successfully the challenge of competing imports or to penetrate foreign markets. Production in many countries has typically consisted of the domestic replication of foreign products for local markets that are not large enough to permit operation in efficiently scaled plants at full capacity. Costs tend to be excessive and quality standards barely sufficient to meet the requirements of local markets. In the context of liberalization and globalization, firms will need to react flexibly and quickly to a dynamic setting with new technologies, changing market demands and the entry of new competitors. World markets have exacting standards as regards packaging, finishing, styling and technical specifications that firms in developing countries and economies in transition must be prepared to meet.

257. Foreign direct investment and other types of foreign collaboration can help improve competitiveness, particularly in the manufacturing sector, and almost all developing countries and economies in transition are able to point to at least a few such projects. However, many countries have been disappointed in the interest so far shown by foreign enterprises - as investors, joint venture partners, technology suppliers, franchisers, trading companies, sales agents and buyers - in potential ventures. Although countries have liberalized their framework for foreign investment, foreign partners are often not enticed because of the high transaction costs and risks inherent in investing in, or in collaborating with, weak and inexperienced local partners in many developing countries. Nevertheless, starting from a small base, there has been a rapid growth in international subcontracting with the small-scale enterprise sector, mainly in East and South Asia, North Africa and parts of Latin America and the Caribbean. FDI and joint ventures have, meanwhile, grown rapidly in a number of more advanced or large developing countries. Where a dynamic, indigenous enterprise sector is not yet entrenched - particularly in sub-Saharan Africa and in the economies in transition - prospects for increased foreign investment will largely depend on the pace and success of enterprise development.

258. National policies can also help foster the emergence of a dynamic enterprise sector, since market forces alone may not provide sufficient incentive to private enterprises to invest or innovate in a developing or transitional economic environment. Factors which markets tend to ignore include: the presence of economies of scale; risky and unpredictable learning sequences whose costs differ according to the technologies and which cannot be financed by firms themselves or by capital markets; and various spill-overs (such as inter-linked cost reductions to other firms which are not reflected in current market prices). Under these conditions, market-friendly policies can help improve the allocative potential of markets while generating new skills and capabilities, and can increase private profitability while lowering the risk of investing. That is by no means a simple or straightforward task but, as the successful East Asian experience attests, it is possible to influence the market-place while taking account of price signals in setting priorities and mapping out strategies and, in so doing, serve the long-term interests of the enterprise sector and the economy as a whole.

2. The East Asian experiences

259. There can be no across-the-board extrapolation of the East Asian experiences to the rest of the world, but they do contain several features that seem relevant to enterprise development anywhere. To begin with, the governments of the region pursued sound macro-economic and exchange rate policies that ensured the stability necessary for profitable investment, high saving and rapid economic growth. Savings were channelled through the banking system to the enterprise sector, which relied extensively on debt-financing. State-subsidized credit was made conditional on competitive performance criteria. The availability of credit allowed those with management experience, often acquired from employment in TNC affiliates, to set up their own SMEs.

260. Many East Asian countries relied on protectionist trade policies in order to provide scope for technological learning in their infant industries. However, protection was selective, staggered and (starting in the 1980s) time-bound. Also, emphasis was placed on the establishment of local suppliers, many of which were SMEs linked to the larger firms through sub-contracting arrangements. The supply of technical know-how associated with these inter-firm relationships contributed to technological learning. Moreover, in some countries the existence of a dense network of relationships with local suppliers, which emerged in the 1980s, gave exporters of more modern products an advantage in being able to respond quickly and flexibly to shifting demand patterns.

261. The pattern of importing technology and capital varied between economies. Whereas the Republic of Korea, following Japan, was selective in permitting foreign investment, Taiwan Province of China did not discriminate between foreign and domestic investment except in a few individual sectors. Singapore relied on FDI as a means of importing technology, as did several other ASEAN countries. In all instances, however, government policies were designed to enhance the learning potential of domestic producers. There was a continuing emphasis on education at all levels, and on training. Public and private investment was made in the creation of technical institutes and vocational training schools, which helped train and supply middle-level technicians and foremen. Owing to the high rate of growth in real wages, families had incentives and the means to invest in the education of their children. Through a system of tax incentives and levies, governments also promoted in-house training in domestic firms which supplemented the training provided by affiliates of TNCs. In some countries, such as Singapore, governments prevailed upon and cooperated with TNCs to establish training facilities in selected industries.

262. Ample resources were also poured into the funding of R & D which was encouraged by the granting of tax advantages and other incentives. Promotional policies favoured competitiveness by distinguishing between infant, mature and declining industries. Sectors with the potential for high productivity growth were encouraged to export, inter alia, through exemptions from tariffs, preferential interest rates and tax write-offs. Governments invested heavily in creating the necessary infrastructure in the form of modern telecommunications systems, cheap and reliable electrical power, roads and transportation facilities and ready-to-use factory sites. This investment in modern infrastructure has helped offset the declining importance of labour-cost advantages in the face of new competition from other low-cost producers since the 1980s.

263. Firms responded to the opportunities created by this favourable environment in a number of ways. Initial emphasis was on learning-by-doing and applying imported technologies for production in the domestic market. Gradually, this led to the acquisition of the capacity to make minor changes and improvements in productive facilities, and to realize minor innovations through reverse engineering. All this strengthened their ability to respond to growing competition in world markets, producing for specialized product niches and increasingly more sophisticated knowledge-intensive products. Experience in servicing export markets provided the necessary technical and marketing expertise even to invest abroad, both in less developed and in industrialized countries.

264. The conditions leading to these favourable outcomes do not prevail in all countries, nor do all of them have the option for an orderly sequencing of liberalization in today's globalizing world economy. Furthermore, the legal framework has been changed by the Uruguay Round. Nevertheless, the East Asian experience does suggest the main elements of a national strategy for enterprise development: the creation of an enabling environment; provision of market-friendly incentives for national enterprise development and business support services; and the fostering of backward and forward linkages between firms, and horizontal linkages between firms and other institutions, particularly science and technology institutes.

B. National and regional policies for enterprise development and competitiveness

1. The enabling environment

265. The creation of an enabling environment for entrepreneurship and enterprise activity is one of the most important roles of public policy intervention, including government measures and international financial support of such measures. A favourable or enabling environment is not by itself sufficient to ensure the emergence of a dynamic enterprise sector, but it is a highly desirable and often necessary condition for enterprise activity. It requires, primarily, sound and consistent economic policies to foster business confidence and investment, mobilize savings and facilitate structural adjustment. Also essential are the institutional, legal and commercial frameworks that define the market conditions for transacting business.

266. An important aspect of the enabling environment is the quality of the working relationship between government and the private sector. All governments regulate and promote enterprises in one way or another, and how this is done often matters more than why. Quite often, well-intentioned policies to correct market failures have the opposite effect; on the other hand, interventionist policies can be market-friendly when formulated in a transparent and non-discretionary manner, in cooperation with the constituency most affected - the private sector.

(a) Fostering business confidence and investment

267. Most developing countries and economies in transition have already put in place policies to liberalize and improve their national environment for enterprise activity. Such efforts include, among others, macro-economic stabilization programmes which seek to maintain and/or restore price stability and economic growth. They also include significant liberalization of FDI frameworks and the implementation of trade-policy reforms. These involve the reduction or elimination of licensing and quantitative restrictions, high and extremely differentiated tariff rates, export taxes and burdensome bureaucratic requirements and paperwork.

268. Industrial reforms include measures to reduce the number of inefficient and loss-making public enterprises through privatization and other public enterprise reforms, reduction of entry and exit requirements on private enterprises, easing of price controls and removal of soft budget constraints. Such measures make it easier for investment to take place, eliminate obstacles to doing business and put management of enterprises in the hands of professionals whose performance is made subject to the test of the market. Combined with stabilization measures and trade-policy concerns, they increase the rewards to productive entrepreneurial activity - or activity "subject to verification by the market" - as distinct from speculation and rent-seeking.

269. Liberalization inevitably involves a process of restructuring and dislocation. When inherently inefficient activities are wound up, resources are released for more productive purposes; however, when potentially competitive activities fail, resources are simply left unemployed. As it is difficult to choose winners, it is important that all enterprises be allowed an opportunity to restructure and upgrade their physical and human capital. As already noted, many countries undergoing structural adjustment programmes have experienced a generally weak supplier response. In such instances, governments may need to go beyond market liberalizing reforms and consider more proactive, supply-side policies to facilitate enterprise restructuring, particularly in industries that appear to have medium-term technological and competitive potential. Such policies would need to be market-friendly, and avoid the pitfalls frequently associated with industrial policy. They should also receive the support of international institutions, by ensuring that structural adjustment programmes include strong measures in favour of enterprise development.

270. Competition policies can help strike a balance between, and create a level playing-field for, small and large enterprises, fostering enterprises that are capable of standing up to international competition, and permitting enterprises to take advantage of large size and opportunities to cooperate with other firms in R & D and other technical (cooperation) activities. The enforcement of competition laws takes on increased relevance in economies in transition and more generally wherever the public interest needs to be protected from restrictive business practices and other potential abuses of monopoly power arising from privatization of large enterprises.

271. Enterprise development also requires a transparent, predictable and supportive commercial and legal framework. Although such a framework exists in many developing countries, it still needs to be put in place in most economies in transition, in which there are no traditional legal institutions for enforcing contracts, incorporating enterprises, protecting creditors against defaults, preventing business fraud, etc., and where it is sometimes necessary to reinforce the public's perception of the legitimacy of private economic activity. Adequate protection of intangible assets such as patents and copyrights is an inherent element in the creation of a hospitable environment for investment and for the encouragement of technical progress.

(b) Strengthening government-business relationships

272. The involvement of governments in enterprise development varies greatly from country to country. In all instances, it is the vocation of governments and donors to act as catalytic agents, doing only what enterprises and markets cannot do themselves. In practice, however, cumbersome policies, rigid measures and overly bureaucratic rules often tend to crowd out the private sector and de facto circumscribe, or even supplant, the responsibility of enterprises to manage their own establishment, operation and technological advance. It is therefore essential that all strategies for enterprise development be formulated in close consultation with the private sector. Whenever possible, enterprises should pay for the services that they receive from the government, to ensure that these are demand-oriented and self-terminating when no longer needed.

273. The quality of the working relationship between government and the private sector is particularly important for building skills, technological and infrastructure development and the promotion of inter-firm linkages.

274. Various mechanisms have been established by governments for the promotion of policy dialogues between different economic actors - workers, entrepreneurs, investors, bankers, consumers, large and small enterprises, and elements of the civil society - and between them and the government in order to balance their different "claims" and to reconcile them with the objectives of government policy. The deliberative or consultative councils established in Japan and the Republic of Korea have served as useful forums to exchange information and to obtain inputs for policy-making from the private sector on such matters as market trends, technological developments, regulations and potential business plans - the latter on both a functional (e.g. pollution, finance or taxation issues) and an industry-specific or sectoral (e.g. automobiles or chemicals) basis. Government-business consultative committees have also been established in Malaysia, Thailand and other countries. An essential condition for the success of such bodies is an efficient and reputable bureaucracy that commands the confidence of all the parties concerned.

275. Consultative mechanisms help to strengthen the quality of government-business cooperation. They establish the broad parameters for business cooperation, allowing firms to concentrate on market competition and not worry about trying to curry favour with the government. They also serve as proto-democratic institutions, providing direct channels to governmental authorities for businesses, labour, consumers and academia.

2. Formulating national strategies for enterprise development

276. A favourable enabling environment provides the necessary backdrop for policies directed more specifically at fostering enterprise development. In many countries that have succeeded in fostering a strong enterprise sector these policies were brought together in a coherent enterprise development strategy. At UNCTAD IX, developing countries that so wish might declare their intention to formulate or update national enterprise development strategies, with help from the international community as required. The following paragraphs discuss some of the more important elements that would need to be included in such strategies, focusing in particular on micro-enterprises and small and medium-sized enterprises, which are of central importance in most developing countries.

(a) Elements of an enterprise development strategy

277. The enterprise sector is highly diverse, with different growth potentials, structures and problems, depending on the particular industrial sector and economy. Typically, it consists of a network of micro-, small and medium-sized enterprises (SMEs), big locally-owned companies, affiliates or partners of transnational corporations (TNCs) and State-owned or parastatal companies operating in a market system with freedom for private entrepreneurship.

278. The focus of an enterprise development strategy should be primarily on SMEs, as these constitute the vast majority of enterprises in most countries, developed or developing. Of course, particular country situations and national objectives may warrant additional foci (e.g., privatization of large parastatals in some economies in transition).

(i) Mobilizing entrepreneurial resources

279. Entrepreneurs are economic risk-takers - individuals who can perceive a profitable opportunity and are willing to take risks in pursuit of it. They also need business acumen, but the ability to organize a business can be learnt, and it can of course improve with experience, for few entrepreneurs succeed in their first venture. All societies have men and women who are inherently entrepreneurial, although these capabilities may not always be put to productive use if economic conditions and the business environment are not favourable, as can be the case in developing countries and economies in transition.

280. Experience suggests that programmes to identify and develop the entrepreneurial skills of particular individuals and groups can play an important role in mobilizing entrepreneurial resources. When carefully designed and implemented, these programmes can bring economic and social benefits that greatly exceed their cost. Typically, the programmes are targeted, with candidates undergoing self-selection procedures or behavioural testing before qualifying for training. The programmes then focus on building business skills and aptitude, by providing instruction and counselling related to activities ranging from the original screening of the project to the actual operation of an enterprise. Successful entrepreneurship development programmes ensure that the demand for training and advisory services is a genuine response to the opportunities of a competitive economy. They also avoid creating new windows for privileged access to subsidized credit and other forms of special treatment.

281. Entrepreneurship training can be an important component of an enterprise development strategy, particularly when adapted to target a wide variety of groups such as high school and university graduates, middle-level employees of large enterprises (including parastatals), redeployed workers from the public and private sectors, school leavers, women and the poor.

(ii) Supporting micro-enterprises in the informal sector

282. Micro-enterprises that function outside the official regulatory framework contribute substantially to employment and productivity. It is estimated that the informal sector accounts for over 50 per cent of the labour force and some 20 per cent of GDP in many African, and a few Latin American, countries. The informal sector thrives because of its responsiveness to market forces; ease of entry and exit makes it a magnet for entrepreneurs from all sections of society, including women, the poor and minority groups.

283. The competitive environment of the informal sector is a good breeding ground for entrepreneurs, but it cannot provide the infrastructure and support services that enterprises need to expand and grow. The informal sector offers little recourse when business deals are not honoured; moneylenders are often the only ready source of credit. Micro-enterprises that limit business contacts to close acquaintances and relatives stay small. An accessible and predictable legal framework could help entrepreneurs escape the constraints imposed by informality, while also helping to eliminate some of the barriers that prevent graduation to a larger scale of production. Successful government policies to facilitate the development of enterprises that originate in the informal sector include measures to lower the costs of compliance with regulations and provision of support services to micro-enterprises, which encourage them to strengthen their linkages with formal markets and institutions and eventually to formalize their participation therein.

284. Experience suggests that programmes to help develop micro-enterprises in the informal sector - typically owned by women, rural residents and the urban poor - increase employment and incomes. By raising the incomes of the poor above marginal subsistence, they also boost the demand for products and services of all domestic enterprises. By legalizing the ownership of assets and bringing them into the production system, the formalization of the informal sector is also wealth-creating. The most effective micro-enterprise development programmes are locally run and focused on specific objectives. The beneficiaries are many, as the individual assistance offered is often modest (e.g. small loans of US$ 1,000 or less are often all that is required).

(iii) Assisting small and medium-size enterprises

285. Small and medium-size enterprises play a crucial role in industrial, technological and trade development, and are an essential part of the "supply response" to the pressures and opportunities of globalization. SMEs are, by definition, relatively more adaptable, flexible and innovative than large enterprises. By working together in cooperative arrangements with other SMEs and/or with larger firms, they can become specialized suppliers of goods and services and achieve scale economies associated with such specialization. By investing in multi-purpose equipment together with other cooperating firms, they can also achieve the benefits of flexible specialization. However, being small has its drawbacks, particularly in terms of access to essential inputs, such as support services, credit and finance, and business information.

(iv) Access to support services

286. There is need for a framework of proactive policies designed to expand the demand for a broad range of "producer" or support services that enterprises use insufficiently, either because the market, such as it is, does not supply them or because they are unaware of their importance in improving performance. Support services cover such areas as project execution, pre-investment studies, management consulting, production control, product development, marketing, engineering design, quality control, laboratory testing, packaging, accounting, insurance, banking, legal services, repair, maintenance and hire of equipment, data management, computer and software, transport, etc.

287. Programme coverage is always likely to be limited in comparison with the number of potential users. Additionally, to be cost-effective, programmes need to target firms with a likelihood of success. In order to ensure that it is genuinely needed and in line with market demand the cost of a service should be, at least partly, borne by the recipient firms. The success of any one programme depends on the functioning of many: since SMEs typically need multiple support services, programmes need to be integrated and organized so as to fill a wide gamut of needs (e.g., human resources management, advice on organizational improvements, design, quality assurance and marketing, etc.). Even the most successful programmes show results in terms of contributions to growth and exports only in the medium to longer-term but, when they do appear, the dividends can be quite sizeable.

288. The role of Government is not necessarily to provide the advisory, consultancy or technical assistance services, but rather to stimulate the private sector and provide some financial support, leaving intermediaries to actually deliver the services. Entities most commonly providing such services might be business associations established by groups of enterprises; professional societies in fields such as accounting or engineering; ad hoc organizations established jointly by government agencies and business groups; and international organizations. One advantage in relying on third parties, rather than civil servants, for the supply of services to the enterprise sector is that they are more likely to be in tune with market demand and the needs of industry users, and are generally able to deliver higher-quality services with less delay, greater flexibility and lower cost. Universities have also fulfilled a useful role in assisting industry, primarily when specialized bodies have been created that are organizationally and financially independent of the university.

289. In order to stimulate the supply of domestic services, Governments have used various instruments. These include direct financial support (e.g. financial assistance to overcome a shortage of venture capital); fiscal and credit incentives (e.g. exemption from import duties on equipment, tax exemptions on royalties, accelerated depreciation schemes or subsidized loans); and deregulation (e.g. modification of the regulatory system to reduce or remove the boundaries between different services). Other components of the strategy to promote the supply of such services include incentives for the "externalization" of locked-in service activities, and the establishment of service centres or training centres aimed at teaching national staff to render producer services.

(v) Access to finance

290. Access to credit and equity capital is important for all enterprises, but particularly for SMEs. Financial institutions tend to favour large enterprises at the expense of SMEs owing, for example, to difficulties in assessing SME risks or the relatively higher administrative costs of lending to them. These policies are not helped by poorly documented loan requests from SMEs caused, for example, by internal difficulties of SMEs such as lack of skills in assessment of input costs, marketing and the preparation of proper accounts and a business plan. Often compounding the problem is the lack of adequate information and understanding of borrowing procedures in the formal financial sector.

291. One approach which has proved highly successful in Asia is the establishment of specialized credit institutions for SMEs, including loan guarantee programmes for commercial banks lending to SMEs. Community-based banks have also been effective, tapping informal networks of personal contacts that help to reduce the risk and cost of lending to SMEs. Likewise, linking the information network of the informal sector, such as thrift societies, with the lending network of the formal sector can help to improve information flows. The experience of specialized small-scale lending to low-income groups, for example of Grameen Bank, shows that group solidarity can serve effectively as a form of lending collateral.

292. Organized stock markets are lacking in much of Africa and the economies in transition. While international development agencies have established venture capital facilities in a few countries, these initiatives are by no means adequate. The feasibility of regional venture capital facilities deserves consideration by international and regional financial institutions.

293. The international community provides financial support for SME development, particularly for low-income countries, in several ways. One is through loans and equity financing, as in the case of IFC. Various developed-country bilateral agencies also provide such financing in partnership arrangements linked to the internationalization of their own enterprises. However, it is not clear to what extent SMEs in developing countries and countries in transition have benefited from such support. The World Bank provided loans through the formal banking sector for SME development projects in developing countries from 1973 until 1991, when the traditional SME lending programme was discontinued for a variety of reasons, including the mixed performance of the projects.

294. However, a small number of "disguised" SME loans, i.e. loans incorporated in other projects, remain. Recently, a micro-lending programme has been created to channel micro-loans to the "poorest of the poor" through grass-roots organizations. So far $200 million have been pledged by the World Bank, regional development banks and bilateral agencies for the Consultative Group to Assist the Poorest, which will mobilize resources and coordinate lending. Another form of support or "the next frontier in SME lending", as the World Bank puts it, is to help Governments establish well-designed, market-based technical assistance or support services for the development of SME capabilities, including in the area of finance. These efforts need to be strengthened through technical cooperation support from organizations such as UNCTAD, UNIDO and the World Bank.

(vi) Access to information networks

295. SMEs can broaden their markets through cooperative arrangements that disseminate information on local or regional products and services. Privately managed programmes with public support are better at sustaining up-to-date information flows to local SMEs. The success of these efforts depends on the ability of locally-based trade and professional associations, NGOs, and grass-roots organizations - sometimes working with Governments and international organizations - to develop demand-driven mechanisms for delivering these services.

296. Private schemes that bring together SMEs for joint leasing, purchase, or time-sharing of equipment can increase efficiency and economies of scale. Such cooperative arrangements can help smaller firms to find inputs from local and regional large-scale manufacturers. These efforts can be supported through data banks that help entrepreneurs locate equipment or make licensing arrangements for imported technologies.

(vii) Building technological capabilities at the enterprise level

297. The ability of a country to sustain rapid economic growth in the long run is highly dependent on the effectiveness with which its institutions and policies support the technological transformation and innovativeness of its enterprises. While most developing countries and economies in transition have science and technology policies and institutions, these are, for the most part, poorly adapted to meeting the needs of industry. They need to focus not only on scientific research but, more importantly, on the diffusion of technology, and they also need to create horizontal linkages between the various actors involved in the diffusion process.

298. In formulating science and technology policies it is essential to have a clear picture of the network of agents that interact to generate, produce and disseminate technological innovations. This is because technological innovation does not always occur through scientific research. Many innovations involve incremental improvements in technical performance, product quality or product design, or simply learning how to manufacture an existing product. The design for a new variant of a particular product may come from the R & D department of a firm which is the buyer of that product rather than from the manufacturing firm itself. Improvements in quality control procedures could be worked out entirely by the firm's engineering department; alternatively, the firm could receive technical assistance from its machinery supplier, from a State-run industrial technology centre or an engineering consultancy centre, or a combination of the above. In other words, there is a larger network of agents, together with science and technology institutions and policies, that influence enterprises' innovative behaviour and competitive performance. Technology-based incubators, working closely with universities and research institutions, are an important instrument for commercializing R & D and for exploiting knowledge spillover arising from location and proximity.

299. Innovation at the enterprise level involves the introduction of a product or a process that is new to the firm, irrespective of whether it is new to the country or to the world as a whole. This means that the orientation of science and technology policies should not be limited to activities or institutions associated with the most advanced scientific research at the frontier of knowledge but must be more broadly focused on factors and policies that influence the formation of technological capabilities. Policies should facilitate interaction among and between both users and producers of knowledge, including with enterprises and other agents from outside the country.

300. The aim of policy intervention in the R & D systems of economies in transition differs somewhat from that facing developing countries. The economies in transition have inherited a critical mass of scientists and engineers able to carry out R & D even if it is not all relevant to contemporary civilian needs. Nevertheless, in both groups of countries, policies have centred on steps to commercialize a significant part of the activities of publicly funded R & D institutes. This serves to increase the amount of resources available to them for R & D and to improve their effectiveness and relevance to the needs of industry by subjecting a greater part of their activity to the market test. More generally, there is a tendency to move away from pure academic research, without totally abandoning it, and towards the provision of trouble-shooting, engineering, product development and similar services to enterprises. These services, together with the establishment of industrial standards, quality controls and certification and testing, all contribute to the development and greater internationalization of their industrial sectors.

(viii) Encouraging inter-firm linkages

301. Owing to changes in market demand associated with new systems of globalized production, inter-firm relationships have changed dramatically in recent decades. Industrial firms all over the world are finding it necessary to cooperate both vertically with suppliers and customers and horizontally with erstwhile competitors, i.e. to fortify and rely increasingly on relationships with other firms, both domestically and abroad.

302. In today's market place, both speed and flexibility in production have become imperative. The availability of forward, backward and horizontal linkages allows firms to make more cost-effective decisions in terms of choosing whether to produce a particular input within the firm or to source it externally. These firms are finding that such cooperation may be necessary in order to lower their costs and to become more innovative. However, trust is an important factor in establishing effective inter-firm networks and cooperation.

303. As traditional determinants of competitiveness are being eroded, technical change and innovation have emerged as dominant factors contributing to competitiveness of firms in today's market place. Experience from industrialized countries has shown that inter-firm relationships play a critical role in the innovation process. Inter-firm linkages make possible the learning needed for cooperation. Product innovation is highly dependent on feedback of user-experiences, as the involvement of suppliers in manufacturing processes gives them an insight into the use of the equipment they produce, which in turn facilitates process innovation.

304. There are many different types of inter-firm linkages, including formal networks for knowledge exchange (such as relations with universities, centres of higher learning, R & D institutes, government laboratories), informal relations among firms (both domestic firms and TNCs) and with suppliers, and other social relations that affect learning. Communication and interaction between firms with different capabilities and complementarities are a very important source of creativity and innovation. Interaction with foreign affiliates operating in an economy and with foreign firms through outward FDI can be a particularly important source of learning.

305. In addition to the kinds of policies and institutions for promoting enterprise capabilities already discussed, Governments can promote inter-firm collaboration in R & D and other areas by facilitating the transfer of technology between firms and assisting in the formation of national and international strategic alliances, collaboration agreements, sub-contracting or OEM (original equipment manufacturing) arrangements and/or technological partnerships, including the participation of universities and local governments. They can also help to promote collaboration in R & D among firms and research institutes and to commercialize R & D by the establishment of technology-based incubators.

(ix) Regional cooperation

306. A useful complement to national efforts is regional cooperation, which can enhance the access of SMEs to information, technology, finance, technical know-how and skills. Regional efforts have been successful in Asia and should be drawn on in framing similar approaches in Africa.

307. A recent example is the ASEAN Programme of Action on SME Development, which provides for the networking of national support agencies to exchange information and to pool resources and expertise for SME development in the region. Areas for cooperation include the possibility of establishing new financing mechanisms for SME development; joint training programmes to upgrade the capabilities of entrepreneurs, managers and technical workers; joint technological development in particular industries; and cooperation in marketing and in collective promotion efforts in the form of joint trade exhibitions for particular products.

308. Proposals are also under consideration in APEC for cooperation on access to information (private/business sector networking and electronic commerce) and finance (APEC venture capital investment scheme to facilitate the globalization of SMEs in the region). In the area of human resources development and technology, an APEC Centre for Technology and Training for SMEs has been established.

309. TECHNONET Asia, set up in the early 1970s, is an outgrowth of various donor-supported projects for SME development. It groups together 14 participating organizations - principally SME support agencies -from 12 countries in Asia and the Pacific. Its programmes are primarily supported by international and bilateral donors and focus on four main areas: dissemination of industrial information; provision of industrial extension services; facilitation of technology transfer or sharing; and development of indigenous entrepreneurs and enterprises. The establishment of similar schemes in other regions deserves consideration.

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310. The elements of a strategy for enterprise development outlined above will have practical application only to the extent that they can be adapted to a variety of different country contexts and, also, integrated with other overriding national policy imperatives, such as poverty alleviation and structural change. Moreover, successful implementation will require that the orientation of enterprise development is towards tapping the potential opportunities presented by the larger globalizing and liberalizing trends in the world economy. Furthermore, international support, ranging from technical assistance to financing, will be required, particularly for the least developed countries. Finally, any strategy needs to take account of larger systemic issues, which may need to be addressed through multilateral action, aimed at creating an appropriate international framework that provides opportunities for firms from all countries.

C. Facilitating enterprise operations in a global economy: the need for international action

311. National strategies for enterprise development need to be supported by actions at the international level. These actions can take two forms, as part of a global strategy for enterprise development.

1. Global supporting activities

(a) Fielding of enterprise development missions, especially in LDCs

312. While the vast majority of enterprises in any country are small, they can develop into dynamic and technologically sophisticated companies, and a significant and increasing number also internationalize. The process is not automatic, nor should it be. Entrepreneurship involves a high degree of risk and many start-up enterprises fail within the initial three years of operation, in all economies. This is in part a matter of market selection, and is necessary for the preservation of a nation's long-term industrial strength. At the same time, enterprise survival rates during incubation and in later years are not insensitive to the overall business climate. It is also true that the life-span of enterprises is longer - and their growth in size and activities over the life-cycle is greater - in countries where infrastructure, market institutions and the regulatory environment (e.g. property, liability, bankruptcy and monopoly laws) are more highly developed. In developing countries, especially LDCs, where these conditions vary considerably and are generally less hospitable, policies and technical cooperation programmes must address a very wide set of country-specific issues for effectively tackling enterprise development.

313. There is no shortage of policy approaches and technical cooperation programmes for enterprise development. At the macro level, the World Bank, IFC and other institutions provide advice on implementing an enabling environment for enterprise development, usually focusing on policy and institutional reforms, and the removal of obstacles to the conduct of business. At the micro level, the focus is on providing support and training to enterprises of all kinds, ranging from traditional cottage industry, rural and urban micro-enterprises and SMEs, agro-business and, of course, large-scale industry, including firms with overseas facilities. Not all these elements are in place in all countries, and when global support is forthcoming it is not always country-specific.

314. There is thus a need to field enterprise development missions, especially in LDCs, with a view to formulating country-specific strategies and implementing integrated technical cooperation programmes for enterprise development. In countries where structural adjustment programmes are under way, the enterprise development missions could consider ways to facilitate efforts by enterprises to respond to adjustment measures (see next section).

315. These integrated programmes should ensure continuity of global supporting activities across the enterprise development continuum, as firms grow from micro- to medium-sized enterprises. As previously noted, enterprise development has an important global dimension. New technologies have encouraged transnational corporations to globalize their production and disperse activities geographically, to take advantage of local conditions. With appropriate support, small businesses in developing countries can be players in the world market-place by linking with foreign companies as suppliers, service firms and joint venture partners. An example of such support is EMPRETEC 21, a new programme developed by UNCTAD to provide SMEs with an integrated package of services to enhance their entrepreneurial drive, their technological capability, their eco-efficiency and their ability to export. The programme builds on the highly successful EMPRETEC programme (jointly implemented by UNCTAD and DDSMS), which has benefited over 2,500 entrepreneurs in Africa and Latin America over a six-year period.

316. The relevant international institutions should come together to formulate a more systematic approach to the multiple needs of low-income countries in a number of areas, including inter alia: provision of policy advice or technical expertise in the creation of favourable framework and market conditions, especially a sound policy and commercial framework for the development of well-functioning institutions and markets; enterprise development, particularly SMEs; strengthening of institutions for providing market-based support services to SMEs, and the networking of support agencies at both regional and interregional levels; development of the institutional requirements of an effective policy dialogue between the Government and private-sector organizations, including SME associations; and networking of firms of developed countries with those of developing countries and countries in transition in order to promote mutually beneficial forms of enterprise, technological and trade development.

(b) Ensuring that structural adjustment programmes include strong measures in favour of enterprise development

317. Programmes of structural adjustment in low-income countries were initially introduced in response to severe external shocks and in order to correct policy distortions which were deemed to impede the development process. They were designed as a finite process of policy reform, supported by external financial assistance. The overall expectation was that macroeconomic stability would provide an environment in which privatization and the freeing up of markets would unleash the forces of growth.

318. Experience to date has not borne out these expectations. While the precise pathology varies considerably among countries, it would appear that, owing to structural features and the embryonic stage of the development of markets, managers and entrepreneurs, as well as the lack of a reasonable period for adjustment by enterprises, the expected response of producers to liberalization and deregulation has often failed to materialize. Indeed, the African experience suggests that too rapid exposure to import competition may have deterred some firms from making the kind of restructuring investments that take time to yield results.

319. Failure of liberalization to bring forth adequate responses by producers, difficulties in reforming public sector revenue systems and the lack of sufficient external support have meant that budget deficits have had to be dealt with primarily through cut-backs in expenditure. A major new effort needs to be set in motion to strengthen structural adjustment by addressing, in consultation with the private sector, the need to include strong supply-side developmental measures for enterprise development. These measures should enhance the supply response to other adjustment measures and promote employment. Adequate attention should be given to the link between producer services and adjustment in manufacturing and agricultural sectors.

(c) Activities aimed at enhancing enterprise competitiveness

(i) Capacity-building for producer services

320. The support of the international community is required to assist developing countries and countries in transition in formulating development strategies encompassing the aspects described above. Sectoral and country-specific studies examining these issues should provide these countries with useful inputs and guidelines in considering policy options for capacity building for producer services. The technical assistance being carried out in the field of services has concentrated on developing an awareness of the importance of the producer service sector, including as a means for promoting SMEs. In a number of countries - for example, China - questionnaires submitted to manufacturing firms were used as a basis for measuring the quality of service inputs and assessing service needs. Such an approach, originally tested in Latin America, has been used in several developing countries and would be of particular relevance to countries in transition.

321. The Coordinated African Programme of Assistance on Services (CAPAS) aims to provide the participating countries with the tools to assess their national economic policies in the area of services. In the process, the programme has also stressed the development of an endogenous analytical capacity not limited to the government machinery but involving also the national academic and consulting communities and representative organizations from the private sector. Where requested, technical assistance should be provided with respect to the reform and liberalization of international transactions in services and the strengthening of the domestic capacity of developing countries in the area of services, so that their enterprises may benefit from the increasing participation of foreign service providers in the domestic economy through investment, cross-border trade, and other modes of service delivery.

(ii) Capacity-building in trade efficiency

322. Most advanced technologies can successfully contribute to the trade competitiveness of developing countries' enterprises if an appropriate strategy for the mobilization of local and international resources is adopted. Examples of successful programmes in the area of trade facilitation include Customs automation (ASYCUDA) and the Global Trade Point Network (GTPNet), a worldwide system providing trade- and investment-related information and transactional tools, especially targeted at SMEs.

323. The application of information technologies has made a significant contribution to the improvement of customs revenues in a context of tariffs reduction. It is helping to reduce corruption and to simplify trade, particularly for SMEs. Similarly, the main users and beneficiaries of a Trade Point are small and medium-sized enterprises. Such programmes are practical tools which can contribute to reducing the cost of integration in global trade. International support will now be particularly important for the provision and improvement of local infrastructure such as national and subregional Internet servers, which will allow an even greater degree of interactivity and flexibility in exchanges among Trade Points and their business users.

324. One proposal which could usefully receive attention from the Conference would be to enhance the capacity of Trade Points to function as information and training centres for SMEs with regard to new trading opportunities and requirements. Thanks to the links between Trade Points and local business communities, such an effort could assist the private sector in adapting to, and benefiting from, Uruguay Round commitments.

(iii) Science, technology and innovation policy reviews

325. Developing countries and countries in transition require considerable assistance from the international community in framing technology strategies to meet their particular needs. Building on experience in developed countries, UNCTAD, in liaison with the Commission on Science and Technology for Development, has been called upon to work on science, technology and innovation policy reviews adapted to the needs of developing countries and countries in transition (pursuant to Economic and Social Council resolution E/1995/4 of 19 July 1995). The purpose of science, technology and innovation policy reviews is to help participating developing countries and economies in transition evaluate the contribution of science and technology policies and institutions to the development of their enterprises - including their international competitiveness - in order to strengthen the relevance of such policies and institutions to the needs of the industrial sector. By enriching knowledge of how these policies are designed and applied, the reviews will help other developing countries and economies in transition to improve their own policies, while at the same time opening opportunities for greater international cooperation.

(d) Diffusing "best support practices" for enterprise development

326. Identification of "best practices" regarding market-based governmental support for enterprise development may be facilitated through exchanges of lessons learned from countryexperiences. The UNCTAD Ad Hoc Working Group on the Role of Enterprises in Development highlighted a number of "best practices" gleaned from country studies and exchanges. Among them were measures to:

(a) Facilitate business start-ups or the "formalization" of small businesses, by providing incentives (for example, in the form of access to finance and other benefits) for small business registration, as in Ecuador, and simplified tax payment procedures for small businesses in the form of a small lump-sum tax without the need for the filing of tax returns or the preparation of accounts, as in India;

(b) Produce skills to meet the needs of the job market through a system which combines apprenticeship, theoretical education at specialized institutions and on-the-job training on the shop floor, as in Germany, or through demand-driven, market-related job training programmes, as in several Latin American countries;

(c) Promote export development by helping first-time exporters to set up an export business, as in Canada and Norway, by providing an integrated package of services in one-stop shops, as in the United Kingdom, as well as by supporting mutually beneficial enterprise, technological and trade development through the twinning of firms of cooperating countries, such as Germany and India;

(d) Reduce the risk and cost of lending to SMEs or to enhance such lending by building up networks of personal contacts (which can also help to mobilize savings) through community-based banks, as in Bangladesh and Nigeria; by providing specialized or policy-based lending, as in Japan and the Republic of Korea; by using mutual credit guarantee societies or insurance schemes funded by banks and small enterprises, as in France; and by creating an export credit facility which provides credit to SMEs which are subcontractors of larger exporting firms, as in Mexico.

327. The identification and exchanges of "best practices" regarding policy and institutional support for enterprise development can benefit from cooperation among developing countries and cooperation between them and developed countries, including through the networking of support agencies and the establishment of procedures for exchanges based on particular areas and on agreed standards for information exchange. There is considerable scope for further work to build on the results achieved so far by the Ad Hoc Working Group on the Role of Enterprises in Development in order to identify policy elements for national action and international cooperation.

2. Issues for intergovernmental action

328. By its very nature, the process of liberalization and globalization of the world economy brings with it the internationalization of enterprises - large and small, from all groups of countries - through trade, investment, licensing and a range of other modalities. This means, in turn, that an increasing number of issues related to enterprises take on an international dimension as well, including, for example, questions related to product liability, consumer protection, competition policy, restrictive business practices, access to R & D funds, illicit payments, accounting standards, environmental regulations, professional qualifications, access to closed user-group networks, the operation of stock markets, taxation, transfer pricing, bankruptcy, protection of intellectual property rights and responsibilities of banks for their branches abroad. What all of these issues share is recognition that the nature of the liberalization and globalization process increasingly reduces the ability of individual countries to tackle them effectively unilaterally.

329. As globalization proceeds, the need for multilateral approaches to issues connected with the internationalization of enterprises will become more pressing. Action will not necessarily take the form of comprehensive multilateral negotiation on enterprise internationalization - a microeconomic Uruguay Round, so to speak. Rather, it may well be a piecemeal process in which issues that are particularly pressing will be dealt with, one at a time, by various competent international organizations.

330. Be that as it may, the nature of the globalization process necessarily puts the implications for national regulatory frameworks of enterprise internationalization on the agenda. UNCTAD can play a central role in helping to understand better this aspect of the globalization process, its implications for development, the role of enterprises in it, the range of issues this brings to the international agenda and the policy options that Governments may need to consider in this respect. In particular, UNCTAD can play a role in identifying and building consensus on the most urgent enterprise internationalization issues that require multilateral attention. In so doing, UNCTAD would, of course, pay special attention to the requirements of enterprises from developing countries, especially the LDCs. When UNCTAD was called upon to do just this in the area of trade some 25 years ago, it developed the GSP. In today's world economy, the challenge is much broader and, if anything, more important.

3. Establishment of a Global Advisory Committee

331. The policy dialogue process operating within UNCTAD should be inclusive and open-ended, seeking to involve not only all Governments but also a representative range of those non-governmental actors playing an increasingly important role worldwide in many aspects of public life, nationally and internationally. NGOs are today active in many areas of interest to UNCTAD: for instance, development per se, the environment, human rights (including labour and gender issues), technology issues, and disarmament. Profit-orientated business groups, representing national and regional sectors, are likewise also actors of growing significance for an international institution such as UNCTAD. How to harness the energies, fresh ideas, and grass-roots links of NGOs and companies, individually or collectively, so as to inject elements of the civil society into the work of UNCTAD and provide a "quick response",two-way channel of information on developmental questions is an issue for the Conference to consider.

332. NGOs, too, are being affected by the globalization process, and their reaction to it will increasingly influence the public policy responses. In addition, they are important sources of inter-disciplinary experience and expertise which can help policy makers see the broader implications of their decisions. In turn, NGOs can play a valuable role in helping translate and interpret to the people concerned those actions and decisions that further the cause of development. To provide a forum for this interchange between the civil society worldwide and international organizations, a Global Advisory Committee consisting of representatives of business, trade unions, academia and other relevant parties might be established to advise UNCTAD and other international organizations concerned on all matters related to enterprise development.

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