RECOMMENDATION 3: WBG Management should institute a tailored research agenda to support and assist the clarification and refinement of its SME support approach.
Utilizing the best qualified researchers (for example, a great deal of qualified expertise focused on this agenda resides in DEC), this should produce more policy- and contextually-relevant distinctions of the definition of SME a better understanding of the dynamic contributions of SMEs to economic growth, employment and poverty alleviation deeper knowledge about how the design of interventions should vary contingent upon country conditions a project-relevant definition of the "frontier" a clearer view of the correct sequencing and combinations of systemic and targeted and more rigorous analysis of the actual performance and impact of key types, combinations and sequences of WBG and other donor interventions. Enterprise surveys should be refined to better identify market failures and unmet demand for financial and other services and to generate more panel data that better account for firm dynamics and allows more confident relating of explanatory factors to firm growth and employment.
Targeted support for SMEs needs to be firmly rooted in a clear, evidence-based understanding of what distinguishes an SME and how the proposed support will sustainably remove the problems that constrain SME growth. An appropriate and correct definition of SME is important to guide selectivity in projects. The definition of SMEs (both the "ceiling" and the "floor") establishes projects' relevance to development objectives and differentiates some firms from others based on criteria of employment, sales and assets. Selectivity affects both efficacy and efficiency of targeting - directing benefits to those who need it and controlling costs.
There is surprisingly little guidance from research on the actual efficacy of the most common forms of targeted SME (TSME) support either for direct beneficiaries or, more broadly, for markets and economies, much less the appropriate sequencing and complementarities of interventions.
WBG: Agree. Overall, Management agrees with this recommendation with some caveats described below.
We agree that underpinning WBG support to SMEs with sound research and evidence-based knowledge is imperative. Decisions on how to further improve this area going forward including availability of resources will have to be made under the new governance structure of the Global Practices. A research agenda would need to bring different WBG units to work together on deepening the understanding of inter alia SMEs' role on growth, job creation, and poverty alleviation, sequencing of interventions, and more rigorous analysis of the actual impact of interventions.
Further analysis of the Enterprise Survey's panel research will be conducted to gain more insights into the link between SMEs and jobs. IFC will also continue to conduct and strengthen its micro-case analysis of the link between IFC financial institution financing and SME reach and impact.
Management acknowledges the suggestion to rethink the approach to defining SMEs within the WBG. The existing definitions were developed to meet the specific operational needs of each institution, having important benefits. As the report suggests, there is no consensus on what the best way to approach relative definitions is, and external researchers have not been able to achieve consensus on common definitions. This complex issue would benefit from further research and should be considered in the research agenda if funds are available for that activity.
There are many attributes that could be relevant in designing a TSME project that a size-specific definition will not address (for example, gender of owner, sector or type of activity, level of formality, etc.). These can vary from country to country and project to project and can therefore be considered as part of the framework for country diagnostics and in project design.
It should be noted that if changes to the definition are to be considered, implementation may be a multi-year process as there are significant operational ramifications for both IFC staff and clients.
Action 3A: Implement a research agenda to better understand the links between SMEs, job creation and productivity and factors affecting SME performance.
Indicator: A coordinated research agenda
Baseline: Lack of comprehensive research agenda.
Target: 5-6 research papers developed.
Timeline: FY19
IEG agrees that the WBG has realized and/or launched a substantial amount of research on SMEs, as documented by reports and articles listed. However, some of the documents provided are reviews rather than original research, and there remain
significant gaps between, on the one hand, the questions the agenda is intended to answer ("the links between SMEs, job creation and productivity and factors affecting SME performance") and, on the other hand, the evidence generated. For example, the review cited, conducted by Ruchira Kumar on "Targeted SME Financing and Employment Effects : What Do We Know and What Can We Do Differently" reviews the literature and finds "Evidence is usually collected for identifying impact on SME growth but there is a lack of rigorous data from program level evaluations on the creation of more and better jobs." This accurately identifies a knowledge gap but does not fill it.
Drawing on commonalities in the types of SME support that clients request, WBG interventions are delivered through a more comprehensive and holistic framework to overcome the fragmentation evident among current interventions, as they often focus on a particular stage in the life cycle of a firm without exploiting opportunities for achieving synergies across complementary projects. For example, incubation services may support the creation of start-ups, but they address neither the post-entry growth barriers nor the market impediments facing established SMEs, such as family businesses. The firm life-cycle approach aims to understand more holistically the different constraints to SME growth over their life cycle, while keeping in mind sectoral differences and specificities. The specific instruments to support firms will largely depend on the life cycle stage of the firm and the market conditions of the sector in which the firm operates. There is substantial progress made to support the SME research agenda at the WBG:
- The High-growth SME flagship is under preparation. The objective is to increase the evidence base on high-growth SMEs in the developing country context and provide guidance on policy options to enable the start-up and scale-up of firms. The SME-level analysis from 10 countries, including South Africa, Brazil, Mexico, Hungary, Turkey, Cote d'Ivoire, India, Indonesia, Thailand, and Tunisia has been already completed, and the literature review on growth entrepreneurship is available. The inventory of policies to promote growth SMEs has been developed and disseminated internally (July 2017), an the flagship scheduled for publishing in April 2018.
- Additional research has been published by the T&C GP (e.g. Marcio Cruz, Maurizio Bussolo, Leonardo Iacovone. 2016. Organizing Knowledge to Compete. Impacts of Capacity Building Programs on Firm Organization. WBG Policy Research Working Paper # 7640), and Jobs CCSA (for example, Kumar, Ruchira. 2017. Targeted SME Financing and Employment Effects : What Do We Know and What Can We Do Differently?. Jobs Working Paper No. 3. World Bank, Washington, DC. © World Bank).
The target of 5-6 research papers has been met with 8 papers produced since FY15.
IEG notes that the SME working group approach paper laid out a research agenda and the T&C action plan aims to enhance the knowledge agenda. It is not clear that a research agenda is under implementation and the response indicates a lack of funding for this work. The pilots are seen as a positive opportunity for learning.
Responding to this recommendation, T&C developed the SME Growth and Productivity Action Plan (FY16&ndash 19)which provides the rationale for a revitalized approach to supporting World Bank Group programs for small and medium enterprises (SMEs) in client countries. The Action Plan consists of three main parts: I. The rationale for a new WBG approach to support productivity-led SME growth II. A revitalized SME agenda to reposition the current portfolio and III. A multiyear program of activities to strengthen the SME portfolio, sharpen diagnostics and research tools, and enhance the knowledge agenda through more effective internal and external partnerships. The Action Plan will chart the way for any future research agenda that will be undertaken by the WBG in the future years. It should be further noted that, that due to the current budget environment, dedicated budget resources would need to be identified to carry out a properly comprehensive research agenda. A funding proposal is currently being finalized by F&M to fund SME Finance activities in the World Bank -- a part of which will be designated to this important research agenda. Securing donor funding will be the next step in this process.
Under the SME pilots it is planned that a final report, distilling the lessons learned from each pilot and the process, will be developed in FY17. In addition a series of knowledge management activities around the SME pilots are envisaged later in 2016.
IEG notes a limited literature review reflected in the Summary Report of the WBG Working Group on Small and Medium Enterprises, conducted by the SME Working Group and an identification of gaps, suggestive of a research agenda. IEG welcomes evidence as this draft propoed research agenda attains formal status and commitment and is implemented. IEG notes two absences in the research agenda, although the literature review does not shed light on them: a) As indicated in the evaluation, there are no impact evaluations of the WBG's own major instruments for providing financial services to SMEs. b) As indicated in the evaluation, research could shed light on what criteria might meaningfully distinguish SMEs from micro- and large enterprises in particular country contexts, given the continued commitment of WBG to single out SMEs for targeted assistance..
The WBG SME Working Group conducted a comprehensive literature review of all relevant existing research on the link between SMEs and job creation, SMEs and poverty reduction, and other research on related topics. The SME Working Group identified knowledge gaps and research priorities and is discussions with DEC over taking this research program forward. A well developed and coordinated research agenda is almost finalized, with some of the research activities already underway by DEC. Other new ideas will need champions and secured funding to pursue further.
Additional Information: See attachments