40. There are a number of unique features in small enterprises, including in this term micro-, small and medium-size enterprises (SEs), that can help to explain their key role in a nation's economic success. Although entrepreneurship is important for all types of enterprises, it is especially important for SEs, which typically constitute the bulk of total enterprises by number. In many countries enterprises in these categories account for more than half of industrial employment and as much as a third of the national product and export earnings. They tend to be highly innovative, make excellent use of scarce capital and skills, and provide a range of services and goods to the large corporations. In countries in which economic units are often too large to be economically efficient, many new small units are needed because they are responsible for a great deal of technological progress. The lack of small-scale entrepreneurs, especially the "missing middle" (small and medium-sized entrepreneurs in the modern sector), is a handicap to economic progress.
41. However, SEs face many constraints. Generally, they lack access to capital, appropriate technology and information about national and international markets. In some countries, particularly the former centrally planned economies, government policies and business attitudes do not favour SEs, and even create barriers to their operations.
42. The task of promoting small enterprise development involves essentially two main strategies: they can be loosely characterized as a top-down/indirect approach and a bottom-up/direct approach. The top-down approach seeks to create an enabling or "fostering" environment, which provides the right incentives for small firms, together with enough positive support and protection (e.g. against unfair practices of larger competitors) to allow such firms to make the best of their potential.4 The top-down approach seeks to improve the business environment by operating on macroeconomic variables such as prices, government regulations and policies, by providing legislation and enforcement, and by building up the physical infrastructure. The second strategy, the bottom-up approach, aims at supporting small enterprises directly by mobilizing indigenous resources, creating or reinforcing local institutions and support systems, and with the active participation of beneficiaries. Central and local governments, decentralized government bodies, financial institutions, business and industry associations, chambers of commerce, universities, international organizations and donor agencies have worked, independently and together, in both the creation of an enabling environment and the provision of direct support to small enterprises.
43. In the past, most small enterprise policy has focused consciously on fostering timely access to the factors of production and to markets, with the involvement of state development banks, public sector technical assistance, etc. Rather than complementing and cooperating with private entities in, say, the financial and technical assistance areas, governments have substituted for what was felt to be the inadequate performance of the latter. Part of the challenge at present is to find ways which make private markets work better rather than replacing them. One view gaining widespread acceptance is that governments should concentrate on creating the enabling environment, including macroeconomic policy-making, legislation and enforcement, catalytic promotion and regulation and that direct support to the sector should be provided by private individuals, firms and non-government organizations.
44. There are a number of situations in which partnership between public and private sector institutions is the most efficient and effective mechanism, due to the presence of mutually reinforcing goals - which in the final analysis converge towards an equitable and sustainable economic development of the country - and to the complementarity of capacities and roles. Through partnership, governments and private entities assume co-responsibility and co-ownership for the promotion of small enterprises. Through these novel modalities, the advantages of the private sector - dynamism, access to finance, knowledge of technologies, managerial efficiency, entrepreneurial spirit - are combined with the social responsibility, network of contacts, environmental awareness, local knowledge, and job generation concerns of the public sector. For example:
(a) The government farms out the functions which need to be performed for SE promotion, such as organization of support/regulation systems, to private entities, seeking when possible the joint financing of such initiatives;
(b) The government allocates a specified share of government procurement to SEs;
(c) Public-private partnerships are established for the creation of institutions such as business support centres, business incubators, industrial parks, or centres to disseminate technical and commercial information for small enterprises. These institutions are usually, and optimally, financed and/or operated by both public and private sector entities, such as universities, public development corporations, development banks, industry and entrepreneur associations, venture capital firms, etc.;
(d) More cooperation of local authorities (and less involvement of national governments) with local NGOs, industry and entrepreneur associations and universities. For example, the impressive performance of Italian small enterprise (e.g. in international markets) is due to the effective interface between municipal government (with a long and special involvement in the local economy) and small business;
(e) The establishment of institutional mechanisms for dialogue between the government and interest groups representing small enterprises, viz. industry associations, entrepreneur associations, chambers of commerce, cooperatives (as described in paras. 29-39 above). The development of effective means of consultation with the private sector is essential even for decisions which must remain in the public sector. The importance of involvement by business associations lies in their direct knowledge of the needs of their affiliates and the mobilization of collective action on other fronts.
45. Some of the policy areas relevant for the success of SEs where public-private cooperation appears to be the most suitable mechanism for support include: entrepreneurship, managerial assistance, access to financing and to technology. It is generally accepted that technology provides growth in output and tangible improvements in efficiency and productivity. For this reason, access to appropriate technology, together with an effective technical and managerial assistance programme, is vital for the development of small enterprises. But, as with financial resources, it has proven difficult to develop such programmes. When they are lodged in the public sector they must often overcome weak staffing and lack of incentives to have a good chance of success. When they are lodged in the private sector they are typically too expensive to be of much relevance to small enterprises. The inability of SEs themselves to access adequate technological and managerial resources, together with the modest efforts of governments, indicate the need for a synergistic partnership.
46. The United Nations EMPRETEC programme, now operating successfully in 10 countries in Latin America and Africa, promotes entrepreneurship on two levels -the national policy level by creation of legal and institutional infrastructures conducive to SE development, and by capacity-building of both national institutions and individual entrepreneurs. By working closely with governments, business organizations and SEs themselves, EMPRETEC influences national policies in the areas of taxation, insurance and labour law, and is midwife to the creation of business support centres, entrepreneurs' associations, cooperatives and international networks. Typically, the EMPRETEC business support centres established in each country are active coalitions of public institutions, private business associations, national and foreign companies, and multilateral organizations, led by National Executive Committees comprising high-level public officials, entrepreneurs' representatives and prominent business leaders from local and multinational companies operating in the country. These have proven essential in setting the institutional base of the programme and in securing its capacity for self-financing after initial donor funding.
47. For an optimal environment, entrepreneurs and SEs need to be recognized and valued by policy makers and society. In many transition economies, SEs have only recently emerged from the black market and gained legitimacy. New entrepreneurial ventures in particular require confidence-building measures from governments and society. One of the first adjustments that governments and societies must make is to overcome a cultural constraint and accept the idea that profit-seeking is healthy, that entrepreneurship and free enterprise can be in the best interests of the greatest number of people. For effective public-private partnership in economies in transition, the greatest need is for an entrepreneurship-friendly environment, including institutional, legal and cultural infrastructures. This will ensure a political and economic system where business risks will be rewarded and returns protected, contracts can be enforced and the social order upheld. Mechanisms of public-private cooperation in fostering the entrepreneurial culture include the introduction of entrepreneurship education and training at public schools and management institutions, where the training is carried out by private sector institutions. Other mechanisms include joint advertising campaigns, establishment of public honours and recognition of merit of successful entrepreneurs.
48. Lack of financial accommodation is reported as the principal problem of small entrepreneurs. One of the reasons for the limited access of SEs to capital from the formal financial sector is the higher administrative cost and higher default risk as perceived by the financial institutions. Such cost differentials go a long way towards explaining why credit goes disproportionately to the large-scale sector. Lack of collateral and security and an undefined legal framework contribute to this bias. Commercial financial institutions cannot easily provide a large flow of credit in small loans to firms with no track record, no guarantee and no security. Another important reason, however, is that some private and public banks have special relationships with their large clients; they may, for example, be part of the same conglomerate. Thus, favouritism towards the "related" companies is natural and inevitable in these cases, but at the same time its presence calls for a corrective action to "level the playing field" among potential borrowers. It is in this direction that public-private cooperation and other innovative and alternative financial support projects are moving. Public-private cooperation directed at the financial support of small enterprises provides a "carrot" to encourage existing financial institutions to be more sensitive and responsive to the financial requirements of SEs.
49. References to innovative financial programmes usually include new institutional arrangements such as the Grameen Bank and its counterparts in other countries, rotating savings and loan associations, microlending and venture capital. The main purpose of establishing these programmes is to create favourable conditions for SE entrepreneurs to obtain financial resources on reasonable terms. In this area, public-private interaction shows particular promise, as shown by the Bolivian Banco Solidario ("BancoSol"). Founded in 1992 as a microbank, today it is a fully fledged bank offering a wide range of savings schemes, with particular attention to small enterprises. With over 70,000 clients and a portfolio of US $40 million, it now serves one third of the country's banking customers.
50. An initial public subsidy permits a microbank to be set up to lend small amounts of money, with or without collateral, to pioneering and potential entrepreneurs. Once the initial financial resources are provided, the microbank can gain credibility as a sustainable and profit-oriented financial institution, and can attract deposits and borrow from commercial banks. It seems that some public subsidy to the fledgling financial institution is necessary for it to evolve to a self-sustainable commercial activity. The result is a "virtuous circle" in which public money catalyses private dollars. The experience of the BancoSol in Bolivia has demonstrated the potential roles of the government and private sector in building a specialized financial institution for small businesses. At the same time, this experience has confirmed the widespread idea that excessive subsidization of SEs would prove counterproductive in the long term, and that to have a concrete effect on the national economy, the financial institutions which supply credit and other financial services to small enterprises must first cover their costs and be profit-oriented themselves.