Design and implementation

Design and implementation

Policies that seek to change the situation of SMEs have achieved limited results.9 This has been blamed on problems in the design and implementation stages. Other aspects that have hindered results are the theoretical framework behind the policies, co-ordination among institutions and programmes, and the capacity of agencies responsible for public policies to produce correct diagnoses.

The theoretical framework

In relation to the theoretical framework, it is important to take into account that SMEs are a highly diverse set of economic agents. This affects which policies are chosen and should be reflected in their objectives, instruments and forms of implementation. Studies on SMEs in Latin America acknowledge their diversity, and policy makers largely do so too. However, this has not resulted in a coherent model to justify the selectiveness of these interventions.

Some countries, though, have made progress in this area. Brazil, for instance, includes various stages of the business life cycle: entrepreneurs who want to start a business; firms that are less than two years old; and firms that are more than two years old. In Mexico, however, beginning with the process initiated when the SPYME was set up in 2001, the 2002 legislation was passed and the SME Fund was set up in 2004, a model has been drawn up that covers five types of firms (reflecting the possible stages of development of SMEs): new enterprises, microenterprises, SMEs, gazelle companies and market-driving companies.10 The Mexican business development strategy is built around five stages, beginning with training “new individual entrepreneurs”, who turn their businesses into microenterprises and then into SMEs. The SMEs that mature and achieve sustained high growth (20% a year or higher) turn into gazelle companies, which qualifies them to receive support from non-governmental bodies called business accelerators. This support allows them to move into the next phase, associated with market-driving companies (large firms), by integrating into supply chains or becoming exporting SMEs. Each stage is associated with a specific set of instruments according to the particular characteristics of each business segment. The role of the SME Fund is essentially to provide demand-side subsidies, which can generate constraints, particularly for smaller and less dynamic firms. However, an important new characteristic of this policy is that it plans, designs and implements support actions as part of an integrated model.

Despite these examples, in most Latin American countries implicit or explicit acknowledgement of how diverse beneficiaries are has not translated into a coherent model that is able to direct all the interventions. This is reflected in the “horizontal”,11 excessive use of instruments based on the philosophy of demand-side subsidies. Although programmes such as these have had interesting results, they involve assumptions that could prove to be exaggerated. For example, these programmes assume firms are in a position to properly express their demand, and that doing so is enough to create markets. But this seems unlikely for smaller firms. Consequently, demand created by subsidies will not necessarily be for services that respond to the real constraints these firms face.

The assumption that subsidies create new markets for services for SMEs does not always hold true. Stable, efficient policies do not necessarily cause relevant markets to emerge. Particularly in the areas of technological innovation and training the results have been quite poor. A major problem seems to be that it is hard to create a services market for SMEs in areas that require heavy investment by the firms that should be offering the services. Subsidies do seem to successfully generate services in areas that do not need heavy investment by consultancy firms, such as administration, management, computing and marketing. But more sophisticated activities, such as training in industrial processes and the activities of technology centres, represent a hurdle that is too large for private companies whose market consists of SMEs.

Strict application of a policy of demand-side subsidies has strong negative consequences for SMEs: markets that need large-scale investment are not generated and instruments to develop production are designed for the most efficient SMEs, which most are not.

Strict application of a policy of demand-side subsidies has strong negative consequences for SMEs. Certain markets are not generated, such as those that need large-scale investment from companies that want to participate and provide services to SMEs. Moreover, it is difficult to spread the use of instruments to develop production that have proved to be efficient, because they were designed specifically for the most dynamic companies, which are in a position to clearly define their market demand. Most SMEs do not fall under this category.

So, if intervention is built solely around demand-side subsidies it probably will only amplify the differences among firms. Though a small group of highly dynamic firms is able to use the available instruments efficiently, a much larger number of firms cannot. Consequently, only the dynamic companies will reap the rewards of the development programmes, thus widening the performance and efficiency gaps between them and less dynamic firms (Ferraro and Stumpo, 2010).

Co-ordination among institutions and programmes

The vast range of public institutions involved in designing and implementing policies creates problems in co-ordinating intervention measures. These problems are even more complex when the main agency in charge lacks the capacities, rank and resources to exercise the necessary leadership, which unfortunately happens more often than not in the region.

The situation becomes even more complex when the programmes are implemented through second-tier and third-tier systems. In these cases, a set of intermediary agents – sometimes created by the programmes themselves – must be used that require a high control and certification capacity from public agencies. In particular, they need co-ordination to ensure there is coherence among the overall policy objectives, the results achieved and the beneficiaries that are reached effectively. The problems are caused because the policies do not have an integrated vision (or they have a poorly defined perspective) or a guiding theoretical model12 in which the programmes and instruments are effectively co-ordinated in such a way as to complement each other. SMEs have problems related to innovation, human resources, capital, and specialist technical assistance, but there are few initiatives to co-ordinate the tools available and maximise their impact on the beneficiary firms.13

The lack of an integrated vision and institutional co-ordination is also reflected in the duplication of instruments. For example, in several countries in the region, multiple ministries in the same country (finance, foreign affairs, home affairs, etc.) have their own unrelated programmes encouraging SMEs to work together in partnerships, and these projects have different objectives and methodologies, and have little to no contact with one another.

Diagnostic capacity