Job Creation through Business Focus
When considering job creation, one might instinctively think of "workers." This leads to policies primarily aimed at enhancing workers’ skills through training and apprenticeship programs. While these initiatives are vital—particularly for labor market intermediation and additional support services—research indicates that focusing exclusively on the labor supply side yields limited effects on employment rates and earnings, often lacking cost-effectiveness . Instead of primarily emphasizing worker needs, a shift towards job creation is necessary. The more pertinent association should be with "firms," particularly MSMEs, which are responsible for over 70% of global employment .
Challenges Encountered by MSMEs in Developing Countries
MSMEs encounter numerous challenges that range from internal factors, such as management practices and access to technology and financing, to external issues like market access, regulatory environments, and infrastructure deficits. Generally, MSMEs tend to operate at a lower productivity level than larger companies. It's important to recognize that the term "MSME" describes a diverse group of enterprises . This category includes a multitude of firm types, from micro enterprises, often established in the absence of alternative job options, to high-growth companies which significantly drive employment growth.
From an economic development standpoint, these businesses are increasingly relevant. The disparity in development levels between the United States and emerging markets like Colombia can be linked to a shortage of high-growth entrepreneurship and the prevalence of small, inefficient firms. In light of this, industrial policy tools should be directed towards MSMEs, not offering generic subsidies but rather implementing productivity-boosting measures tailored to target firms that show promise for growth. Recent research has detailed a taxonomy and examples of such targeted programs .
Identifying Potentially High-Productivity Firms
One method to strategically support MSMEs is through competitions for business plans, enabling firms to self-identify based on their applications. An example of this is the Youth Enterprise With Innovation in Nigeria Programme (YouWIN!), which utilized a multi-tiered selection process involving initial applications, mentoring, training, business plan development, and evaluation. Successful candidates had the opportunity to receive grants of up to 10 million naira (approximately $64,000 at the exchange rate at the time), contingent on specific activities linked to their business plans. Moreover, winners benefited from personalized mentoring and intensive training sessions covering business strategy, operation, finance, and communication. Evaluations of YouWIN! indicated its effectiveness in attracting entrepreneurs focused on innovation, as well as positively influencing business creation, job opportunities, profitability, and the survival rates of existing enterprises .
Another avenue is to foster collaborations between MSMEs and larger established companies within their supply chains. For instance, the World Class Suppliers Programme in Chile, initiated by the major mining company BHP-Billiton and later by the state-owned Codelco, aims to enhance the innovative capabilities of local suppliers in the mining industry. These larger firms outline specific technological and operational challenges, choosing interested suppliers who can address them, and then assist those suppliers with managerial, technical, and financial guidance. As of now, the program has selected about 100 participants out of over 6,000 suppliers, with those chosen typically being more skilled and export-driven than average firms .
Supporting Small Business Growth through Policy
While initiatives like the World Class Suppliers Programme have successfully facilitated technological advancements, their scalability and international growth face systemic barriers and coordination issues, highlighting the crucial role of government in policy implementation. A large-scale strategy that integrates various competitive elements is embodied in China's industrial policy framework, which categorizes high-tech SMEs as Innovative, Specialized, Little Giants, and Manufacturing Champions, allowing for firms to progress through these classifications over time. The aim is to create a cohort of internationally competitive SMEs. This framework functions as an ongoing competitive process, where firms must continuously demonstrate their merit to maintain their designations, involving comprehensive evaluation and support at both national and local levels . Once identified, these firms receive extensive support, including subsidies, R&D assistance, financing, and mentoring, while also connecting with a network of banks, large corporations, and research institutions.
This ambitious policy initiative relies on a high level of state capacity, characterized by strong state governance, local autonomy, and a culture of experimentation and adaptation. Although such capabilities are not universally available, state capacity can develop through experience and exercise. The principles of this comprehensive MSME support approach can be adapted to various scales and timelines, with significant roles also for non-government stakeholders.
Government as a Catalyst for Growth
Common to these diverse strategies is the necessity to view MSME support policies through the lens of addressing productivity challenges. They importantly suggest that governments should adopt the role of accelerators or venture capitalists—identifying promising enterprises and equipping them with the necessary resources for growth. This accelerator model also serves as a reminder to evaluate the effectiveness of industrial policies based on collective outcomes rather than isolated investments.
References
https://thomaspalley.com/?cat=1
https://voxdev.org/topic/firms/industrial-policy-micro-small-and-medium-sized-enterprises
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