Enterprise and jobs: Job generation by micro, small and medium sized enterprises

ILO ENTERPRISE FORUM 96

International Labour Organization

In Mexico, the traditional textile industry has not yet successfully adjusted to trade liberalization. It was built up through a policy of import substitution, but the implementation of the North American Free Trade Association (NAFTA) has changed the market substantially; unfortunately, traditional companies have not been able to meet international standards of quality, quantity and reliability of delivery. New opportunities have been offered mainly by foreign-owned companies; however, these companies design, cut and commercialize the garments themselves, requiring only the sewing to be done by local companies.

Various factors account for the failure to adjust rapidly to the demands of international markets. The Mexican export sector has virtually no incentives to transfer skills to domestic industry. Countries which have adapted successfully have initiated a process of wide-ranging and broad-based public debate, leading to an up-grading in local production capacities. This debate has apparently not taken place in Mexico, and the government does not seem ready to initiate it.

Various consequences of this failure to adapt can be identified. The new structure appears to be less labour-intensive, and opportunities for upward socio-economic mobility for those in employment have been reduced. As the range of skills required has been reduced, so the independence of individual workers has also been reduced; meanwhile, the domestic industry has become less autonomous, as it depends on foreign firms for design, marketing and other key elements in the production process. On the positive side, it may now be easier to police and enforce labour standards, since production is more centralized. However, labour migration is a probable result of the changes indicated.

Job creation

Many theories about globalization and information technology predict a substantial reduction in employment opportunities, while others predict that the same factors will provide an engine for growth and prosperity in all economies. Three basic parameters enable any business to grow and create new jobs:

• the business must create value
• management must be able to execute its business plan consistently over time
• cost advantages must be sustainable over time

As an example, SoftKey International began to develop software in Toronto, Canada, in 1985, employing only three people. In the last ten years, it has become the largest provider of educational software, and the fourth largest producer of consumer software, world-wide. It employs over 1,500 people, and generates sales of over $400 million in 40 countries.

The first product of the company enabled its customers to reduce their own staff by at least 2 people, and so had a 90-day pay-back period; this created value for the customers. The jobs lost in that way were replaced by jobs in SoftKey International. The company went public in 1986; in 1993, it moved to the United States to gain easier access to the US market. This portability of technology holds particular promise for the creation of new enterprises, jobs and wealth world-wide, as it allows many companies to reduce their costs to the minimum. In particular, by hiring software engineers in other countries, SoftKey has reduced its development costs to 11 per cent of sales, compared to 19 per cent for competitors who have not adopted this global strategy. The Israeli government has been particularly encouraging to this way of working, through major tax incentives, thus creating thousands of new jobs.

Soft Co. ltd. is an example of a software company established in Ghana in 1991. There were a variety of obstacles facing entrepreneurs in Ghana; people who had been retrenched by the government tended not to be very productive. Furthermore, the education provided was inappropriate. University places need to be linked to potential jobs, and governments should deregulate more, and provide greater support to small enterprises.

Corporacion Accion por Antioquia (ACTUAR) is an example in Medellin, Colombia. Medellin is the industrial capital of Colombia, with a population of 2.5 million; however, there is a large gap between those in high technology industries and those living in poverty. During the 1980s, the economic crisis led to mass immigration and a rise in drugs and violence. Liberalization and structural adjustment had a high social cost.

Meanwhile, the work of ACTUAR has led to the creation of, or support to, 60,000 jobs, regenerating the social fabric, since its formation in 1983. ACTUAR was created by entrepreneurs as a non-profit enterprise to encourage small businesses based on family units. High ethical standards are applied throughout. To date, over 17,000 family units have been integrated into the national economy, as a result of the following support measures:

an advisor assists the entrepreneur in studying the feasibility of the business, through the preparation of a business planif the plan is feasible, ACTUAR can make a loan available on flexible terms, with support from IADBthe entrepreneur is also assisted in creating a strategic plan for the businessif needed, training in theoretical and practical skills are providedadvisory services are also available, in design, production and packaging, legal issues, marketing, etc., as diagnosed by the advisor

US women-owned businesses

There are nearly 8 million women-owned businesses in the USA, generating nearly $2.3 trillion in sales. These businesses employ 18.5 million people, which represents one quarter of the work force. Growth of women-owned firms continues to outpace overall business growth, and employment in women-owned firms employing 100 or more has expanded six times faster than the average for the whole economy. Within these statistics, the top growth industries for women-owned business have been construction, wholesale trade, transportation and communications, agribusiness and manufacturing.

Women-owned businesses are as financially sound and credit-worthy as the typical firm in the US economy, regardless of industry or firm size. Also, women-owned firms are more likely to remain in business than the average US firm; nearly 75 per cent of women-owned firms in business in 1991 were still in business 3 years later, compared to 67 per cent for all US firms. Women-owned businesses are more likely than average to offer flex-time, tuition, reimbursement, and (in smaller companies) profit sharing. Women business owners are more likely than men entrepreneurs to volunteer, and to encourage their employees to volunteer, for public service activities.

The experiences of the National Association of Women Business Owners was also presented. The Association was formed about 20 years ago, and has campaigned successfully for legislation to give women easier access to credit. It also organised a conference at the White House on small business, in 1995. As a result of its work, one bank created a $10 billion fund specifically for women business owners. The Association is now networked in 35 countries around the world.

Mauritius

The potential of SME for job creation was appreciated in Mauritius in the early 1980s, when economic recession was leading to high unemployment and it was noted that SMEs can create jobs for 10 per cent of the cost of jobs created by larger enterprises. Furthermore, SMEs can be more widespread, more resilient, and make better use of local resources.

As a result of these insights, a package of policies targeted at larger enterprises was adapted to the needs of SMEs; the Government of Mauritius spearheaded an initiative which was supported by a wide range of institutions. Credit was made available at preferential interest rates, advice was provided to SMEs, and import tariffs were waived for machinery and parts. The Mauritius Employers' Federation played a key role by implementing the Improve Your Business programme in collaboration with the ILO

This approach has paid dividends, in that unemployment has been reduced from its 1983 level of 21 per cent to a 1996 level of 1.6 per cent. During the same period, the SME share of that employment rose from 33 per cent to 43 per cent. In the last five years, large enterprises have generated only 7,000 jobs, while SMEs have generated nine times more opportunities. Job seekers have become job creators; social and economic stability has been achieved. The challenge now is to raise further the contribution of SMEs to GDP, through improved productivity, training and quality enhancement; the assistance of the ILO in these areas can also be of immense help.

The ILO: three challenges

The ILO's Bureau for Employers' Activities has identified three challenges which are facing SMEs:

Globalization and the internationalization of markets: this affects enterprises, both at the policy level and at the operational level; enterprises see the appearance of new investors, new customers and new competitors. Furthermore, countries are now competing for investment, and must therefore be seen to have transparent, stable and restrained policies.

The need for continuous new benchmarking: there is a totally new emphasis on continuous new benchmarking, in financial performance, quality and delivery. Quality is no longer a competitive edge, but is expected on a consistent basis. Delivery performance must be flexible and reliable.

Product life cycles have been shortened: returns on investment must now be faster than before.

Now, the challenge is to up-grade skills of enterprises on a continuous basis, to cope with these changing demands. But it is probably easier to identify appropriate enterprise development programmes than to implement them in ways which ensure sustainability and continuity.

The Bureau for Employers' Activities works through employers' Organizations in many developing countries to provide services which are sustainable in the long term. Two examples were given from Nigeria; in one, six firms were assisted to improve their productivity through training in raised awareness, understanding productivity, and labour management relations. Follow-up surveys found that productivity had indeed improved, and the firms had moved from loss into profit. In the second example, an SME network was established under the auspices of the employers' organization, making it more effective for its members, and more accessible to outsiders. This example related to Professor Piore's comment that SME networks are not always accessible to foreign firms. However, this lack of access is disadvantageous for both the domestic SMEs and for the foreign firms looking to establish themselves.