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Promoting business linkages: the role of trade policy, industrial policy and donor agencies

Time (GMT +00) 13:00 14:30

Dirk Willem te Velde
, Overseas Development Institute
Jack Newnham, Manager, Business Linkages Challenge Fund, Deloitte & Touche
Michael Warner, Overseas Development Institute

1. Michael Warner - how can businesses use their supply chains, distribution channels, technology and other competencies to stimulate local business, increase competitiveness and initiate income-earning opportunities for the poor in developing countries?

2. Dirk Willem te Velde - in looking at linkages between affiliates of trans-national corporations (TNCs) and small and medium-sized enterprises (SMEs) in developing countries, we need to ask some key questions: what are the underlying interests of host governments, TNCs and SMEs and how can these be satisfied; how can we promote backward linkages between TNCs and SMEs; and is there a case for a Global Business Linkage Fund?

3. Whether SME performance generates productivity, employment and income generation depends on two sets of factors: macro-economic structures and policies, and the individual characteristics of SMEs (human resources, technological capabilities etc.). With regard to the former, TNC-SME linkages depend in part on host-country industrial policies, which increasingly attempt to address market failures in the market for skills, capital, technology and information. Regulation, tax, subsidies and the provision of public goods can all be used to overcome market failures in these areas.

4. But counter to these SME development policies are FDI incentives, such as low import taxes and duty-drawbacks, which encourage firms to import supplies rather than source locally. Likewise, investment agreements between governments and companies can adversely affect business linkage creation. For example, the Trade-Related Investment Measures (TRIMs) Agreement bans the imposition of performance requirements on TNC affiliates, such as quotas for local sourcing. The argument is that on the one hand imposed local sourcing on TNCs forces them to allocate resources inefficiently, but on the other, evidence shows it can help domestic industrial development, at least in some cases.

5. Donor agency instruments for stimulating TNC-SME linkages include the UK Business Linkage Challenge Fund, the German Public Private Partnerships (PPP) scheme, and schemes run by the EC, UNIDO and UNCTAD. Donor aid in the context of SME development is increasingly aimed at role of the private sector in delivering 'public goods', not least to avoid charges of unfair competition.

6. Is there a case for a Global Business Linkage Fund, ie a fund that supports TNC-SME linkages within countries, and in doing so could pull FDI into a country while also improving the social impact of FDI? One objective for such a Fund might be to increase the public good outcomes of FDI in the form of SME certification, SME training, regional infrastructure development and market information.

7. The Doha ( WTO ) round mandates that negotiations on investment provisionally scheduled should balance the interests of host and home countries. A Global Business Linkage Fund might help align investment closer to the Millennium Development Goals (MDGs). However, much depends on evaluations from existing business linkage schemes.

8. Jack Newnham: Deloitte and Touche are the managers of the DFID Business Linkages Challenges Fund (BLCF) promotes linkages not only between TNCs and SMEs, but also between medium and small companies within a country or between countries. The fund is experimental in nature. It provides a means for DFID to explore new models of engaging with the private sector and yet avoid charges of creating unfair competition. At the moment the fund is learning about the process of 'developing' new forms of business linkages, as it is too early to evaluate the specific 'outcomes' of these partnerships.

9. Funds available through the BLCF are essentially aimed at encouraging the private sector to invest in areas they would not normally consider. There are often commercial opportunities for businesses to move 'down market'. The BLCF stimulates companies to explore these areas.

10. The DFID Tourism Challenge Fund and the BLCF have now joined, and can be considered as global funds. The Ghana Business Linkages Challenge Fund is relatively new, and is a response to the recognition that business linkages can be better organised by DFID at the country level in line country and regional programmes and offices.

11. Some characteristics of the fund are:
i) broad eligibility criteria;
ii) rapid response by the Fund commensurate with the private sector, eg a funding decision within six months of receipt of a Concept Note;
iii) an Assessment Panel separated from the fund managers;
iv) a 'true' business linkage where each party shows commitment by investing its own resources;
v) support for projects that are 'almost bankable';
vi) pool of funds = £14.7 million;
vii) encourage commercially sustainable business linkages that bring benefits to all parties in the arrangement and make particular contributions to poverty reduction;
viii) not suited to the smallest SMEs, but will benefit the poor through job creation;
ix) applicants must be from two or more "enterprises" (at least one from a developing country);
x) all parties must invest and every member must benefit;
xi) applicants must come from one of the 19 BLCF Target Countries;
xii) criteria used to appraise proposals include: impact on poverty reduction; promoters' commitment (mobilised resources); sustainability (commercial viability); strengthening of participating enterprises; replicability; degree of innovation.

12. The BLCF receives approximately 200 Concept Notes per bidding round. The Panel recommends 5-10 per round be allowed to proceed to Full Application, and approves 3-7 of these. To date 27 projects have been funded, and £6.3 million of grant money has levered more than £10 million of additional private sector resources.

13. With regard to lessons learned, the key to success for the Fund is to find 'marginal' projects that are nearly commercially viable but need a temporary subsidy to overcome a market failure. It is also important for projects to be in line with the applicant's core business, rather than those thought up purely to secure grants. Less developed private sectors find it difficult to compete and the quality of applications from some countries has been low , for example, Malawi and Rwanda.

14. Looking to the future, country or regional challenge funds offer way forward. For example the Ghana BLCF, Windward Islands CF and FDCF Bangladesh. These ideas are set out in a DFID paper: 'Challenge Funds 2004'.

15. Michael Warner: There may be a link here with the first meeting we held on the Commonwealth Development Corporation ( CDC ). Here the discussion centred on whether CDC should be a 'demonstrator' organisation, or provide 'subsidies'. Perhaps the BLCF is grappling with the same type of issue?

16. Points from the floor:

a) Can you give us some examples of BLCF activities? Jack Newnham: The 27 projects that have been funded so far are on the website. To give some example: (i) in South Africa a sports management company is linking with a UK sports management company, as well as a number of other actors including the government. The project aims to build the capacity of South Africa to host large-scale sporting events. The project has recently won the contract to provide staff for the cricket World Cup in 2003; (ii) In Tanzania there are 12 major corporations looking for ways to source locally and build up local suppliers; (iii) a UK company that owns the patent for a female condom is working with a condom producer in India to develop local manufacturing. BLCF is supporting with money to build the capacity of the Indian firm and conduct market research; (iv) A UK chocolate manufacturer is now linked with a supplier in Belize; (v) In Dominican Republic a cocoa-growers co-operative is linked to a Swiss chocolate manufacturer.

b) There seems to be a marked difference between the two presentations. Dirk was saying that we need industrial development and the need for government to provide public goods. Jack focused on foreign governments providing private-sector grants. Why does not the BLCF focus on public goods too? Jack Newnham: One of the objectives of the BLCF is to work both at an individual company level and on the enabling environment (ie generating public goods in the form of non-discriminary incentives for business linkages). The joint review of the Fund last year showed that we weren't achieving this second aim. It has proven difficult to secure enabling-environment benefits from private sector projects. We are therefore creating a separate window within the fund to concentrate on the enabling-environment. Dirk Willem te Velde: it is not only governments that can deliver public goods. TNCs can deliver public goods through SME linkage creation in the form of, for example, certification. Certifying SMEs is advantageous to the specific TNCs, but it also helps SMEs gain access to other markets.

c) To make a success of business linkages on the ground, who is going to find the companies in the developing countries in the first place, and who will bear these transaction costs? The EC programmes on SME development have been disastrous, with the processes extremely laborious and expensive.

d) When you evaluate BLCF projects, do you only look at employment generation rates or do you look at the types of jobs created and other qualitative measures relating to poverty reduction? Jack Newnham: The independent assessment panel is a great advantage, and has to follow the 'rules' of assessment. The panel takes a holistic view of what makes a good project. The considerations you raise are taken into account.

e) You seem to be looking for business linkage opportunities and taking the longer-term view. Is this not what happens in a multinational company as a matter course?

f) Have you taken into consideration the array of existing research on business linkages. For example, in 1982 in Zambia a Swedish Technical Assistant was promoting the 'sister industries' idea, where a Swedish 'big sister' company would help the Zambian 'little sister'. Jack Newnham: I am sure that when the BLCF was set up they looked at past experiences. To try to build on such experience we have someone from GTZ's PPP programme on our panel. The Challenge Fund approach is based more on the inner-city re-generation model used in the UK where public money is used to catalyse the private sector to do something in both its interest and the publics.

17. Dirk Willem te Velde: There are two new areas where more research is needed. One is on the role of investment agreements. The other the role of the TNC vis-à-vis the government in working together to create business linkages with SMEs.

18. Jack Newnham: Are we a demonstrator or a subsidiser? We are looking for projects that will demonstrate the greatest levered impact or demonstrate the greatest effect. We do not provide funds to companies who require the same resourcing to repeat the project in another country. We want projects to be replicable on their own merits. If it can be done in country 'A' then the company should be able to do it in country B without money from us.

19. Michael Warner - This meeting series has been part of a wider programme at ODI on Optimising the Development Performance of Corporate Investment. The programme is essentially about the collision of two agendas. With regard to corporate social responsibility (CSR), it is about broadening out beyond environmental management, labour standards and human rights (ie from a 'do no harm' ethos) towards corporations enhancing their developmental and poverty reduction impact (ie to 'do some good'). With regard to the public sector, it is about policy incentives to address market failure and realise public goods from private sector development. In the words of Gerry Matthews of Shell at at last week's meeting: in the next 20 years $10, $20 or $30 trillion will be invested in hydrocarbons, much of this in developing countries. This investment is going to take place. The development around this investment, 'may', or 'may not' take place."


This event talked about how businesses can use their supply chains, distribution channels, technology and other competencies to stimulate local business, increase competitiveness and initiate income-earning opportunities for the poor in developing countries.