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What determines MSE upgrading? Evidence from India, Egypt and the Philippines

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. Outline. 1. Research question

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What determines MSE upgrading? Evidence from India, Egypt and the Philippines

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  1. 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

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

  3. 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?) medium small micro

  4. Definition: Upgrading What are the determinants?Extensive literature is offering manifold explanations: Upgrading New tothemarket=> innovationrent • 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 Entrepreneur characteristics Enterprise characteristics Social networks Business networks(inter-firm linkages) Business environment

  5. 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

  6. Definition of MSME based on employment Micro Small Medium • Employment figures are • easy to observeand 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). Egypt: 10-49 empl. India: 10-19 empl. Philippines: 6-10 empl. Egypt: 50-99 empl. India: 20-99 empl. Philippines: 11-99 empl. Egypt: 1-9 empl. India: 1-9 empl. Philippines: 1-5 empl.

  7. 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 entrepreneur’s environment (networks and business environment) that MATTER • + Gathered additional quantitative information for confirmation

  8. Method: Tracing Back Success Stories Number of employees 69 41 26 17 15 15 10 6 7 3 Time Start-up 2012 9

  9. 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)

  10. Identification of SMEs for interviews

  11. Composition of core sample (descriptives)

  12. 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

  13. Common constraints (of upgraders and non-upgraders in the three case studies) 15

  14. What makes an upgrader? (Success factors: explaining differences in the likelihood to upgrade)

  15. What makes an upgrader? (Success factors: explaining differences in the likelihood to upgrade) 17

  16. Takeaways • MSEs in India, Egypt and Philippines face very similar constraints to upgrading • Deficit in owner’s 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 R&D • Have personal or family wealth, integrated in GVCs (many through clusters)

  17. 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

  18. Combination of Factors The Enterprise The Entrepreneur The Social Network The Business Networks The Business Environment Challenges ENTREPRENEUR personal savings family savings / Friends cash-advance bank loan Finance employees as shareholders SECTOR -SPECIFITY personal labour family labour pooling outsourcing availability of (skilled) workers Labour incentives for workers to stay readiness to accept risk mutual support insurance economic stability, rule of law Portfolio diversification Security Markets inter-national exposure personal outreach (global) value chains published market information own market research Technology and creativity quality education exchange of ideas value chains Availability of external training R&D

  19. Policy Recommendations • Education • Work experience • Human resource development • Access to markets • Access to finance • Rule ofLaw

  20. Thank you for your attention! German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Tulpenfeld 6 D-53113 Bonn Telephone: +49 (0)228-949 27-0 E-Mail: DIE@die-gdi.de www.die-gdi.de www.facebook.com/DIE.Bonn

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