Challenges of Microenterprise Development By Prof. Ronald T. Chua Asian Institute of Management

Challenges of Microenterprise Development Microenterprises: Growth and Contribution to the Economy Microenterprises: Growth and Contribution to the Economy Microenterprises: Growth and Contribution to the Economy Microenterprises: Growth and Contribution to the Economy Profile and Characteristics of Microenterprises Profile and Characteristics of Microenterprises Profile and Characteristics of Microenterprises Profile and Characteristics of Microenterprises Challenges to Microenterprise Development Institutions Challenges to Microenterprise Development Institutions Challenges to Microenterprise Development Institutions Challenges to Microenterprise Development Institutions Strategic Choices Strategic Choices Strategic Choices Strategic Choices

Microenterprises: Growth and Contribution to the Economy Share of Total Employment Share of Total Employment Share of Total Employment Share of Total Employment Numbers and Value Added Numbers and Value Added Numbers and Value Added Numbers and Value Added Contribution to Household Incomes Contribution to Household Incomes Contribution to Household Incomes Contribution to Household Incomes Role During Crisis Role During Crisis Role During Crisis Role During Crisis Response to Positive Economic Developments Response to Positive Economic Developments Response to Positive Economic Developments Response to Positive Economic Developments Employment in Microenterprises Employment in Microenterprises Employment in Microenterprises Employment in Microenterprises

Share of Total Employment Non-agri Microenterprises employed a significant number of people (1993) Non-agri Microenterprises employed a significant number of people (1993) –8.757 Million Workers –36% of total Employed Workforce –66% of Non-agricultural Employment –80% of Total Private Sector Employment Sources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households, Census of Small Establishments ; Survey of Household Operated Activities

Numbers and Value Added Microenterprises accounted for over 98% of Philippine enterprises in 1988 Microenterprises accounted for over 98% of Philippine enterprises in 1988 Microenterprises had low gross value- added Microenterprises had low gross value- added –Household Operated Activities Accounted for 12.7% of 1988 Gross value Added –Household Operated Activities Value Added per Enterprise: Ps 33,000 to Ps 7,120 (1988)

Contribution to Household Incomes Microstudies showed that microenterprise income accounted for significant share of client and household income Microstudies showed that microenterprise income accounted for significant share of client and household income –48% of client income in rural area –52% to 58% of household income Many of the Poor relied on microenterprises as important source of income Many of the Poor relied on microenterprises as important source of income

Role During Crisis Microenterprises served as Safety Net during hard times Microenterprises served as Safety Net during hard times –1991 to 1993 GDP Growth rate: negative 1.3% –Net non-agri employment increased by 2% but was result of: »3% decrease in enterprises w/ 10 or more workers »4% increase in microenterprises (9 or less workers)

Response to Positive Economic Developments Microentrepreneurs responded positively to conducive economic climate Microentrepreneurs responded positively to conducive economic climate –1993 to 1995 GDP growth rate 1.1% –No. of Employers grew by 11% –No. of Self-Employed people grew by 4%

Employment in Microenterprises Non-wage and salary employment accounted for 52% of microenterprise employment Non-wage and salary employment accounted for 52% of microenterprise employment Urban microenterprises accounted for 67% microenterprise employment Urban microenterprises accounted for 67% microenterprise employment More males (55%) than females (45%) employed in microenterprises More males (55%) than females (45%) employed in microenterprises

Employment in Microenterprises Higher share of females (over 60% vs. over42% for males) in non-wage microenterprise employment, mostly self- employed Higher share of females (over 60% vs. over42% for males) in non-wage microenterprise employment, mostly self- employed Trade sector dominated by self-employed microentrepreneurs (over 60%) followed by transport, mining and manufacturing Trade sector dominated by self-employed microentrepreneurs (over 60%) followed by transport, mining and manufacturing

Microenterprise Employment by Class of Worker (Non-Agricultural, 1993) Sources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households

Microenterprise Employment by Sex by Area Sources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households

Microenterprise Employment by Sex by Class of Worker Sources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households

Employment in Microenterprises by Industry Sector (Non-Agricultural, 1993) Sources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households

Microenterprise Employment by Sector by Worker Class (Non-Agricultural, 1993) Sources: 1993 Yearbook of Labor Force Statistics; Integrated Survey of Households

Profile and Characteristics of Microenterprises Classification of Microenterprises by Growth Potential Classification of Microenterprises by Growth Potential Classification of Microenterprises by Growth Potential Classification of Microenterprises by Growth Potential Microenterprises: A 2nd Look at Risks: Not Really Risky! Microenterprises: A 2nd Look at Risks: Not Really Risky! Microenterprises: A 2nd Look at Risks: Not Really Risky! Microenterprises: A 2nd Look at Risks: Not Really Risky! Microenterprise Characteristics Microenterprise Characteristics Microenterprise Characteristics Microenterprise Characteristics Context in Broader Economic System Context in Broader Economic System

Classification of Microenterprises by Growth Potential

Microenterprises: A Classification by Growth Potential Microenterprises: A Classification by Growth Potential

Microenterprises: A 2nd Look at Risks: Not Really Risky! Risk Factors Risk Factors –Market –Technology –Skill –Capital Investment –Individual : »Character »Decision –Household Vulnerability –External Factors »Government Policy/Regulatio n »Force Majeure

Microenterprise Characteristics Ease of entry and exit Ease of entry and exit Very little or no asset requirement Very little or no asset requirement Low skill requirements Low skill requirements Low capital requirements, mostly working capital Low capital requirements, mostly working capital Mostly into trading/buy and sell Short cash cycle Short planning cycles: daily, weekly Can be seasonal High return on capital invested (in % but not in peso terms)

Challenges to Microenterprise Development Institutions How to reach more microenterprises How to reach more microenterprises How to increase incomes of microenterprises How to increase incomes of microenterprises How to generate more employment through microenterprises How to generate more employment through microenterprises How to ensure provision of effective, relevant, and responsive services How to ensure provision of effective, relevant, and responsive services How to do it in a sustainable manner How to do it in a sustainable manner

Strategic Choices Who is Target Client? Who is Target Client? What level of intervention? What level of intervention? Develop Microenterprises or Improve Access to Microfinancial Services? Develop Microenterprises or Improve Access to Microfinancial Services? Promote or Provide Services? Promote or Provide Services?

Strategic Choices What is Range of Services? What is Range of Services? How Design Services – Standardized vs. customized How Design Services – Standardized vs. customized How structure? How structure? How Expand Outreach? How Expand Outreach?

Who is Target Client? Poverty Groups or Microentrepreneurs? Poverty Groups or Microentrepreneurs? Start-ups or Established Microenterprises? Start-ups or Established Microenterprises? –Formation vs. Expansion vs. Transformation Urban or Rural Clients? Urban or Rural Clients?

Who is Target Client? Factor to Consider: –Differing microenterprise types mean differing needs – Risks involved, capacity to absorb risk, capacity to minimize risk –Add’l inputs needed/ not needed

What Level of Intervention? Direct Service Provision – Enterprise Level Direct Service Provision – Enterprise Level Industry/Subsector Level Industry/Subsector Level Policy, Regulatory, or Institutional Policy, Regulatory, or Institutional Support Services for Service Providers Support Services for Service Providers

Microenterprise Development or Microfinance? Microenterprise Development Microenterprise Development –Access to Markets, Skills, Information, Finance, etc. Microfinance Promotion: Microfinance Promotion: –Improved Access to Financial Services

Promoter or Provider? Promoter: Promoter: –Roles include Building User/Client Managed Structures and Institutions Provider: Provider: –Role is Responsive, Efficient and Sustainable provider of Services Vision for Client System - Cost and risk reduction structure or grassroots organization? Vision for Client System - Cost and risk reduction structure or grassroots organization?

Range of Services Range of Services Range of Services –Single dominant service –Integrated package of services? How Expand Outreach? How Expand Outreach? –Setting up Branches –Setting up Independent Organizations

DELINEATION OF SERVICE DELIVERY TASKS Service Provider Clients RANGE OF SERVICES SingleMoney Lender Pawnshops ROSCAs Simple STRUC- TURE Lending InvestorNGOCooperatives High Client Skill Level Required Com- plex Service Delivery Institution Low Service Provider Role Institution Builder Multi- ple