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How can we create an enabling environment for IB? Lessons from private sector development

How can we create an enabling environment for inclusive business? When I started to work on this question on behalf of the DCED’s Business Environment Working Group, I expected a relatively straightforward scan of the literature – after all, quite a bit has now been written about what governments can do to help inclusive business start-up and grow. It soon became clear however that providing practical advice required a much broader review of evidence and lessons learnt:

ib-blog-post-graphicWhile the IB literature includes many recommendations on this topic, actual experience or evidence is still relatively limited. This may be because many IB programmes have focused on direct assistance to individual business, rather than the wider environment in which they operate. At the same time, I realised that a lot could be learned from other private sector development programmes that have for many years promoted reforms and policies to alleviate poverty, without an explicit mention of IB.  Indeed, many recommendations in the IB literature are either strikingly similar, or surprisingly different, to practices in areas such as business environment reform, market development, small enterprise development or industrial policy. So, why not learn from their experiences as well to inform inclusive business programming?

This is precisely what the DCED’s report is trying to achieve. The paper summarises more than 100 documents with empirical experiences and emerging evidence from different communities, to explore lessons on what to do (and not do). Here are some of the main findings:

  1. Functional areas of business environment reform

ber-for-ib-blogA first set of reform options can be described as ‘functional areas of business environment reform’: These are designed to reduce costs and risks for all business caused by poor or changing policies, laws and regulations. Examples include simplifying business registration and licensing; improving tax policies; enabling better access to finance; improving land titles; enhancing public-private dialogue; and developing appropriate quality standards. Are constraints – and solutions – in these areas different for inclusive business, compared to any other business?

Practical experiences reveal that most reforms as currently implemented can be expected to make it easier to ‘do business’ in general, and therefore also benefit IB. Two examples of particularly relevant reform areas include

  • tackling inappropriate or missing quality standards, which can represent a binding constraint to introducing or scaling inclusive technologies or services; and
  • public-private dialogue to advocate for reform, especially if an IB model depends on substantial reform of government-controlled sectors or there is a need to raise government awareness of specific IB constraints.

Existing advice and lessons on quality infrastructure development, the design of public-private dialogue platforms and political economy analysis can therefore offer valuable resources for IB practitioners.

Yet, inclusive businesses may not always benefit sufficiently from ‘standard’ reform initiatives but require additional measures – often based on sector assessments or tailored to the needs of individual businesses. Examples include

  • licensing regimes for highly innovative inclusive business models, e.g. in sectors that feature only limited private sector participation to begin with (such as energy or health); and
  • specific legislation that allows IB to access relevant forms of finance (e.g. impact investment), or to act as providers of finance to the poor (e.g. mobile and agent banking regulations).
  1. Targeted interventions to support specific businesses, activities or sectors

The inclusive business literature is rich in references to a second set of measures: industry- or firm-specific support such as subsidies, tax waivers, mandatory inclusion, or preferential public procurement. Indeed, all governments that have achieved growth in economic opportunities for the poor at scale have complemented business environment reform with targeted interventions, such as industrial policies. Yet, interventions that are badly designed and managed have also acted as a major barrier to inclusive growth. What could IB practitioners learn from past successes and failures?

Briefly, the most effective targeted government interventions share some common principles and have a strong potential for synergies with functional areas of business environment reform. They…

  • use public-private dialogue as a feedback mechanism to learn about business constraints;
  • establish a clear economic rationale for intervening (in addition to social objectives);
  • make support time-bound and conditional on performance; and
  • favour support to sub-sectors, activities or technologies over individual firms. Empirically, the best poverty reduction results have been achieved through a focus on labour-intensive industries or productivity-enhancing practices in agriculture.

Evidence also suggests that mandatory inclusion rules, for example local sourcing requirements for supermarkets, should be avoided as they tend to work against private incentives, raise the cost of doing business and don’t yield the desired effects. Market-based solutions (e.g. capacity-building and information about local small suppliers) may be more effective. While the role of preferential public procurement for inclusive business is unclear, emerging evidence from small and medium enterprise (SMEs) support hints that, under the right conditions, preferential procurement has allowed SMEs to grow and hire new staff from the informal sector or unemployment.

We will be joining the G20 Global Platforms’ and IBAN’s Policy Dialogue on Creating and Enabling Environment for IB on 5 May in Berlin to share these and other findings –  and, in particular, to continue the exchange of lessons learnt. For example, practitioners from different backgrounds are interested in learning more about emerging policy tools with little or inconclusive evidence, such as special legal forms for IB in corporate law, or effective regulatory frameworks for impact investing.

 We look forward to lively discussions!

 

Full report: How to create an enabling environment for inclusive business? Learning from experience and debates in private sector development: http://www.enterprise-development.org/wp-content/uploads/DCED_Creating_An_Enabling_Environment_For_Inclusive_Business.pdf

DCED Inclusive Business Knowledge page: http://www.enterprise-development.org/implementing-psd/inclusive-business/

Melina Heinrich-Fernandes
Melina Heinrich-Fernandes
Melina Heinrich Fernandes is a Senior PSD Specialist at The Donor Committee for Enterprise Development (DCED). The DCED is a forum for learning about the most effective ways to create economic opportunities for the poor, in line with the SDGs...

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