Deutsches Institut f

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What determines MSE upgrading?Evidence from
India, Egypt and the Philippines
Dr. Aimée Hampel-Milagrosa Dr. Markus
Loewe Caroline Reeg
Paper presented at the FMC Conference Changing
Paradigm of Cluster Development Delhi, 20
February 2014
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Outline

• 1. Research question
• 2. Definitions conceptual framework
• 3. Research methodology
• Results
• Conclusion and Policy Recommendations

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Research question

• What are the most important factors of upgrading?
• What are the main constraints for MSE upgrading?
• Why do some firms succeed to upgrade while others
  do not?(What are the critical success factors?)
• How does the process of MSE upgrading unfold?
  (What kind of growth trajectories are
  suggested?)

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Definition Upgrading
What are the determinants?Extensive literature
is offering manifold explanations
Upgrading
New to the market gt innovation rent

• Innovation(qualitative improvement)
• Process innovation
• Product innovation
• Functional innovation
• Marketing innovation
• Sectoral innovation

• MSE growth
• (quantitative improvement)
• in terms of
• employment
• sales
• return of investment
• assets
• turnover

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Factors of upgrading the onion model
Business Environment
Business Networks
Social Networks
The Enterprise
The Entrepreneur
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Factors of upgrading the onion model

• Membership in business organisations
• Relations with buyers and suppliers (value
  chains)
• Relations with competitors(clusters)

Business Environment

• Infrastructure (access to electricity,
  transportation, telecommunication)
• Financial and political stability
• Access to finance (credit, leasing, insurance)
• Corruption and politics
• Laws and regulation

Business Networks
Social Networks

• Personal relations with core family, relatives,
  friends, neighbours etc.

The Enterprise

• Location
• Size
• Degree of formalisation
• Workforce characteristics(e.g. training)
• Product portfolio
• Strategy
• Market orientation
• Portfolio diversification

The Entrepreneur

• Human capital
• Family background
• Work experience
• Personal qualities
• Gender
• Social capital
• Social class

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Definition of MSME based on employment

• Employment figures are
• easy to observe and easier to remember
• do not change over time due to inflation or
  productivity increases
• Employment numbers reflect the sustainability of
  enterpise growth (maturity of the enterprise).

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Methodology

• Primary objective is to learn from successful
  cases
• Therefore, PURPOSIVE and EXPLORATIVE!
• Gather rich stories that show the longitudinal
  dynamics of upgrading
• Capture whole picture of evolution and growth of
  entrepreneur and enterprise
• Capture qualities of entrepreneurs environment
  (networks and business environment) that MATTER
• Gathered additional quantitative information
  for confirmation

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Method Tracing Back Success Stories
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Country selection
Egypt India Philippines
Population (million inhabitants) 81 1224 93
GDP per capita (in constant PPP 2005) 5544 3039 3560
MSMEs ( of all companies) 99 80-95 99
Informal MSMEs ( of all) 50-60 94 94
Informal employment outside agriculture ( of total workforce outside agriculture) 45 83 50
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Sampling

• Identification of upgraders by
• quantitative criteria (i) grown fast in
  relative terms (at least 10 annually over a
  period of 5/10 years)
• (ii) passed threshold
• qualitative criteria (i) any kind of
  innovation (product, process, functional,
  marketing, inter-sectoral)
• (ii) grown faster than competitors (new to
  the market innovation rent)

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Identification of SMEs for interviews
Egypt India Philippines
102 93 150
Company registries and other representative lists Near-to representative lists Recommendation by experts, business associations or lead firms in sector Walking the street (especially in geographic clusters) 23 30 29 19 - 10 34 49 7 - 19 124
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Composition of core sample (descriptives)
Egypt India Philippines
Total 80 93 112
Upgraders Non-upgraders 40 40 42 51 21 91
Garment textile Leather footwear Food processing ICT 42 - 26 14 29 37 - 27 31 32 49 -
Formal at start Informal at start 59 21 28 65 30 82
Female entrepreneur Male entrepreneur 15 65 4 89 58 54
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Methodological tools

• Qualitative
• Stories of interviewees growth trajectories
• Quantitative
• Main constraints for upgrading structural
  factors
• Main success factors in upgrading differences
  between upgraders and non-upgraders
• Comparison between characteristics of upgraders
  and non-upgraders differences between them
• Egypt econometric analysis of representative
  panel data from two rounds of MSME surveys
  differences between upgraders and non-upgraders

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Common constraints (of upgraders and
non-upgraders in the three case studies)
Egypt India Philippines
Entrepreneur characteristics Low education and training of entrepreneurs Limited readiness to take risks Low education and training of entrepreneurs
Enterprise characteristics Lack and high turn-over of workers Lack of market information Lack and high turn-over of workers Lack of worker motivation Lack of market information
Social networks
Business networks Delay in Payments by clients/ buyers Unstable relationship with suppliers
Business environment Difficulties in access to finance Deficits in law enforcement Difficulties in access to finance Difficulties in under-standing/ predicting laws and regulations Corruption Difficulties in access to finance Difficulties in accessing markets
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What makes an upgrader? (Success factors
explaining differences in the likelihood to
upgrade)
Considerable impact in all three countries No major impact in any of the three countries Divergent results
Entrepreneur characteristics Human capital(quality education and training, international exposureand work experience) Availability of own finance Motivation Gender Readiness to take risks Social origin
Enterprise characteristics Employee welfare(training, benefits, care, treatment, participation) Systematic RDand market research Degree of formalisation Market orientation Portfolio diversification Location
Social networks Social networks
Business networks Value chains(esp. power structures) Clusters Business organisation
Business environment Registration, licensing Taxation, customs Corruption Access to land Political stability BDSs
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What makes an upgrader? (Success factors
explaining differences in the likelihood to
upgrade)
Egypt India Philippines
Entrepreneur characteristics Readiness to take risks Social origin (socio-economic stratification) Readiness to take risks Social origin
Enterprise characteristics Portfolio diversification Market orientation Location Portfolio diversification
Social networks Social networks Social networks
Business networks Clusters Membership in (quality) business organisations Membership in (quality) business organisations
Business environment Access to land Access to land Political stability
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Takeaways

• MSEs in India, Egypt and Philippines face very
  similar constraints to upgrading
• Deficit in owners education and experience
• Lack of and high turnover of trained workers
• Difficulties in accessing finance/Lack of market
  information
• Deficits in rule of law
• Upgrading is possible for some MSEs despite
  constraints!
• Found more upgraders than expected
• Some upgraders contracted in size
• Upgrading depends critically on few specific
  individual factors
• Upgraders better endowed with human capital, more
  motivated
• Willing to take risks, invest more in HRD and RD
• Have personal or family wealth, integrated in
  GVCs (many through clusters)

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Takeaways

• Upgrading requires a combination of factors
• Upgraders combine factors to create strategies to
  overcome constraints
• Combination of factors/strategies are
  sector-specific
• Most combination of factors are corner-stoned on
  entrepreneur
• The entrepreneur matters
• Other success factors are contingent on
  entrepreneur
• Glaring inequality of opportunity for MSEs to
  upgrade

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Combination of Factors
The Enterprise
The Entrepreneur
The Business Environment
The Business Networks
The Social Network
ENTREPRENEUR
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Policy Recommendations

1. Education
2. Work experience
3. Human resource development
4. Access to markets
5. Access to finance
6. Rule ofLaw

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Thank you for your attention! German Development
Institute / Deutsches Institut für
Entwicklungspolitik (DIE) Tulpenfeld 6 D-53113
Bonn Telephone [phone] E-Mail
DIE_at_die-gdi.de www.die-gdi.de www.facebook.com/DIE
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