Leveraging business enabling environment

Defining the business enabling environment (BEE)
MSMEs can leverage the BEE to elevate their competitiveness. The BEE is a set of policy, institutional, regulatory, infrastructure and cultural conditions that govern formal and informal business activities. It also covers government-influenced macro-level factors that affect enterprises throughout the value chain.193 It includes the administration and enforcement of government policy and national and local institutional arrangements that affect the behaviour of relevant actors who comprise many of the critical players in the BEE.194 Ultimately, BEE is an essential factor in the competitiveness and development of a value chain. Thus, at the macro level, improving the overarching institutional frameworks for private investment and innovation with elements of both liberalization and new regulation related to competition policy frameworks, opening sectors to foreign investment, and supportive regulation are all aspects of a functioning BEE.195 Here, budding MSMEs could be encouraged to enter specific sectors with inclusive growth potential such as renewable energy or organic agriculture via deregulation of government-controlled systems or removal of other overly rigid regulations stifling market entry. Improving the BEE can, therefore, benefit many organizations within it.

Improving BEE for MSMEs
The International Labour Organization (ILO) reckons that getting the BEE right is critical for MSMEs to access new services, leading to performance improvement and business sustainability. The Donor Committee for Enterprise Development (DCED) notes that the BEE aims to reduce the costs and risks of business activity by improving poor government policies, laws, and regulations and stimulating competition by promoting new market entrants.196 It is essential to distinguish two fundamentally different sets of measures to structure reform options. The first set relates to the functional areas of business environment reform aiming to reduce costs and risks for all businesses caused by poor or changing policies, laws and regulations. The second set is firm-specific government measures 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. However, poorly reformed interventions have caused a significant barrier to inclusive growth.

Business enabling environment reform denotes regulatory, legal, policy and institutional reforms intended to improve the business environment. It aims to reduce the costs and risks of business activity by improving poor government policies, laws and regulations, and by stimulating competition through new market entrants.197 BEE reforms have evolved from large-scale, top-down programmes targeting national-level laws and regulations to second-generation programmes. Hence, increasingly combining bottom-up with top-down approaches, linking BEE reforms with specific sectors, sub-sectors and value chains, and integrating cross-cutting issues. Originally structured around doing business, today, BEE reforms increase companies' investment and innovation and create more and better jobs. BEE reform does this in the following ways:198

  • Reducing business costs, resulting in increased profits (possibly leading to increased investment) or increasing market share (and thereby output and employment); 
  • Reducing risks and improving predictability. Poor or frequently changing government policies, laws and regulations pose a risk for businesses, thus reducing the value of capital and the number of attractive investments in that market;
  • Promoting new business entry and increasing competition. Laws and regulations to support capacities and means of entrepreneurs (training, financial) enabling access to production factors and infrastructure (such as human capital, energy or transport);
  • Promoting positive social and environmental externalities, thus contributing to long-term sustainable growth and Sustainable Development Goals (SDGs).

In achieving effective reforms, champions are needed within the government and among businesses within the value chain for reforms and policies to be enforced and monitored over time. The role of donors is not to advocate but rather to support the advocacy process, ensuring transparency and the flow of information. A critical part of government ownership is ensuring that the government receives public recognition and credit for its role in successful reforms. Box 2 illustrates how Vietnam has successfully advanced BEE via provincial competition.

Box 18. Vietnam’s provinces strive to become more attractive with BEE

Ecofarm has been a profitable venture in Vietnam’s Dong Thap province, resulted from the company’s sound investments and strong business enabling environment. It sells substantial volume of farm produce from 85 hectares of land harvested on a three-month planting cycle using high-tech practices. Until recently, business registration in this area was a time-consuming affair, making the opening of new businesses a chore. Ecofarm’s decision to open a branch in Dong Thap was encouraged by its ease of operating and investing in business. The province scored the second highest in the Provincial Competitiveness Index (PCI), produced through a partnership with the Vietnam Chamber of Commerce and Industry and USAID. In general, Vietnamese businesses face many challenges due to the lack of local government support. The primary difficulties include significant delays in business registration, accessing to land matters, and paying taxes.

In an effort to promote Dong Thap as a destination for agricultural investment, local government leaders made many trips to Phu Quoc, where Ecofarm is headquartered. When Ecofarm first opened its business operations in 2015, local government continued to offer support and actively find out about obstacles to new businesses. Despite being located remotely with few geographic advantages, and relatively poor infrastructure compared to other provinces, Dong Thap witnessed a response to its efforts with much new business development, increasing by 28 percent in 2016 over 2015, higher than the national average of 16 percent. Dong Thap’s leaders set a policy goal to create a strong enabling government that serves people and businesses.

Source: USAID’s Provincial Competitiveness Index project, 2013 to June 2019

The above boxed example establishes that local or regional implementation of the existing legal framework can be more critical than the reform of national policies. In Vietnam, the various steps, requirements, days and visits needed to register a business vary enormously among different provinces, despite a national legal framework. This example highlights two critical issues: (a) implementation of the law matters, and (b) what happens at the municipal level is more relevant to how businesses operate than decisions and actions taken at the national level. An exclusive focus on the national government misses an enormous opportunity to address BEE constraints directly. Local governments determine transaction costs and the incentives for businesses to formalize. Their support of or hostility to business affects business relationships, and upgrading decisions are critical factors in the competitiveness of a value chain. More so, USAID and the IFC offer the following observations:

  • Changing incentives can have a powerful effect on business behaviour
    Reforming laws is often insufficient to improve the BEE since it does not change the incentives for poor government behaviour. Businesses often encounter corruption at the registration stage, and resistance to reform can seem to be prohibitive. Therefore, the registration process needs to be transparent and stipulate that if the business registry completed the process within the target number of days, the registry employees would receive 50 per cent of the registration fee. Such would provide employees with an incentive to keep the process moving and identify new transparent systems to clear any process bottlenecks. In instances such as this, changing the incentives within an institution can be more effective than changing the law
  • A successful reform strategy between the private sector and local government
    Effective engagement between the government and the private sector (including small and informal enterprises) requires training and support for both sides. Private-sector advocacy capacity can be built through studies on specific BEE issues, funding for advocacy initiatives, and the establishment of links between value chain businesses and institutions that can support reform. Similarly, local government skills can be strengthened through training and dialogue between local government agencies and private-sector associations or representatives. With this, consultation on a particular issue can provide the forum for the organic development of the public-private exchange.
  • BEE support structures are crucial to the success
    For the reform process to be sustainable, support structures must be developed. Value chain stakeholders should link up with specialist service providers such as think tanks and universities. The media should be encouraged to report on BEE issues and assist in understanding policy constraints and the positive impact of reform.
  • Quick successes generate opportunities for more success
    The critical lesson in implementing a BEE strategy is to start with reforms that can be rapidly implemented and will quickly demonstrate impact. Successful reform in one area generally opens up opportunities for interventions in other parts of the enabling environment. Conversely, stagnation and lack of success will restrict possibilities.