TRADE AND DEVELOPMENT BOARD COMMISSION ON ENTERPRISE, BUSINESS FACILITATION AND DEVELOPMENT EXPERT MEETING ON BEST PRACTICES AND POLICY OPTIONS IN THE PROMOTION OF SME-TNC LINKAGES GENEVA, 6-8 NOVEMBER 2006

PAPER SUBMITTED TO THE EXPERT MEETING*

The Role of GTZ in promoting business linkages Targets and impact

by:

Mr. Rainer Engels, GTZ

________________ * This paper is reproduced by the UNCTAD secretariat in the form and language in which it has been received.

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The Role of GTZ in promotingbusiness linkages

Targets and impact

Expert Meeting on „Best practices and policy options fo Small and Medium Enterprisesand transnational corporations linkages“6-8 November 2006, UNCTAD, Geneva

Dr. Rainer Engels, GTZ

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Contents

Short presentation of GTZ

Best practices and their impact

Business linkages: overview and tools

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GTZ department on economy and imployment

24 experts in the 3 competency areas (Technical Education and Vocational Training TEVT, Financial Systems FS, Economic Policy and Private Sector Development EP&PSD)

30 % of our experts are female, 70 % are male

Age on average: 44 years

Our experts have at least 6 years international job experience.

A quarter of our experts has worked for other international organisations (i.e. ILO, FAO)

183 project managers belong to our department, 35 % on long-term contracts

435 projects belong to the department

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What do we stand for?

Our Aim: Poverty reduction through sustainable growth with wide spread and productive employment (+ standards, + formal sector)

Our Guiding Principle: A social and ecological market economy

Our Fields of Intervention:

Global trade regimes and regional economic integration

Framework conditions for development on the national level

Competitiveness of the private sector

Participation of poor people in the production process

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Modules of business linkage promotion by GTZ:

Module Vertical Business Linkages

Module Horizontal Business Linkages

Module Cluster Development

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Horizontal linkages

• are cooperative-type of activities between firms on the same step in the value chain. The underlying economic imperative is that

• The individual firms are too small to implement economies of scale in purchasing

• The individual firms are too small to have the scope to serve certain customers

• By cooperation, the marketing costs can be reduced through joint trade fair attendance or by producing a joint catalogue or

• It allows for joint development of products and advent of an umbrella brand name

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Vertical linkages

• are cooperations between firms along the value chain. The underlying economic rationale is that by cooperating, success in the destination market can be enhanced. This arises through the reduction of costs in the value chain and/or quality improvement, e.g. by

• The definition and meeting of certain quality, environmental and social standards

• The creation of communication channels e.g. interfaces, and the resulting increase in information flow

• Joint action for product improvement in the value chain

• Joint action for the development of new products

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Clusters

Firms in mature clusters can be highly competitive in national and global markets, promoting clusters is an important economic development approach characterised by

• Identifying the competitive advantages of a given region and the resident enterprises for certain products and services

• Developing a joint strategy with participation of the local stakeholders

• Linking the local measures for private sector development to the strategy

• Fostering busyness linkages between the enterprises of this sub-sector and related sub-sectors and

• Developing capacity of public and private business service providers

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Type of business linkages between enterprises of different size

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The franchiser (large enterprise) supports its franchisees by

• Association with the brand name and its advantages

• Elaborated business models

• Training in basic skills such as pricing, stocking, forecasting, legal requirements, sales, customer relations and marketing

• Preferential access to working capital and equipment

• Innovative solutions such as transport bicycles or mobile coolers for vending

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The typical contents of embedded services are:

• product training with respect to effective use and safety considerations

• financial arrangements to meet liquidity shortages arising from long drawn out production processes, and

• additional training in basic management issues e.g. financial planning.

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Advantages for SME to be involved in the core business:

Studies from India and Brazil indicate that firms specializing in national markets are more likely to develop their own designs, brands and marketing channels.

Arguments in favour of this strategy are the intimate knowledge of the local demand patterns and the resulting potential competitive advantage in the branding and invention of customized products for the local market.

Necessary preconditions are sufficient local market size and adequate purchasing power.

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1. Can be promoted in LDCs as well as MICs

2. But: There are some influencing factors for success:

- transport infrastructure / physical Market access- regional proximity of SME/MSME- Quality and Quantity of potential lead firms- Quality and spatial distribution of BDS- Population density/income level

3. Competitive Advantage of the sub-sector needed

4. Integration in the private sector development strategy of the respective country needed

Success factors for business linkages

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Principle of pro-poor impact:

• The implementation of the business linkages approach should be monitored with a pro-poor perspective.

• Upgrading of cluster and value chains can have winners and losers.

• Particularly vulnerable groups e.g. unskilled workers, woman or ethnic minorities, can be left behind in this process.

Therefore the effects on the poor should be monitored by

• mapping the bottlenecks and

• designing customized approaches to integrate them, i.e. through interventions from other development fields like

- education,

- health or

- infrastructure.

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Preconditions for enterprises to get involved in building up linkages: • awareness of the opportunity on the part of the enterprises • coverage of the transaction costs incurred in building up business linkages • experience of, and therefore faith in, the advantages of collaborative actions

Arguments for government involvement in promotion of pro-poor business linkages: • business linkages do not develop simply as a result of market forces• business linkages support the process of innovation • the evolution of collaborative business linkages strengthens the process of division of labour.

This contributes to the overall competitiveness of the enterprises involved and a country’s or region’s private enterprise sector as a whole

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Arguments in favour of linking SMEs to the global value chains:

Growth dynamics: • Direct and indirect job creation by TNCs (about 24 million employees

in the foreign affiliates in 1990, 54 million employees in 2001). • Opportunity to participate in the growth rates of the global market.

Opening up of development paths:• adequate qualification on the part of local suppliers • upgrading strategy, mainly product and process upgrading

Tapping into the full potential of local content: • Considerably more potential for business to be done between local

SMEs and the TNCs• TNCs are still reluctant to develop linkages with local suppliers

fearing that they could fail meeting quality requirements.• public private partnerships between the TNCs and donor activities can

combine their efforts

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GTZ experience with PPP

• The role of the donor tends to be that of a facilitator

• GTZ can match the relevant partners (enterprise, public entity, other stakeholders) and is respected because of its neutral position

• GTZ, besides its neutral position, should be the advocate of the development goals e.g. poverty reduction, and gender and environmental issues

• GTZ personnel is highly regarded by the private partners, as far as the facilitator role and communication abilities are concerned. The trust of the local stakeholders and the intimate knowledge of local conditions are also important assets

• Successful public private partnerships regularly have a long preparation phase.

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GTZ experience with PPP (2)

• Upon the start of the implementation phase, the role of GTZ should be, and is, very restricted. The private partner has the leading role and the responsibility, and the role of GTZ is limited to overall co-ordination, conflict management, and monitoring and evaluation.

• Enterprises anticipate economic advantages. Otherwise they do not get involved in the public private partnerships.

• PPPs support sustainability because the private partner will only be willing to bear part of the costs if he expects returns beyond the project phase. This has a positive effect on the detailed design of projects and increases overall impact.

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Internet-based databanks

• Open up a search path either for potential buyers or sellers

• In the simple version, they basically function like the yellow pages.

• An additional feature is the establishment of a market place. Within the market place, enterprises fill in a concrete search request for products or services they are looking for or that they have to offer.

• Such an Internet platform has been developed by German Chambers of Commerce Abroad (AHKs) and GTZ in cooperation with several further partners

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Nucleus Approach

• Supply of services by business associations and chambers did not meet therequirements of the SMEs

• Communication process between SMEs and the support institutions must beimproved through the development of communication mechanisms,

• SMEs need a forum where they can not only express their demands but also benefit from immediate action. These fora are the nuclei.

• The nucleus is facilitated by a counsellor. As the counsellors are employees of either a business association or the chamber, the nucleus approach also makes a contribution to the organisational development of these institutions. This isbecause of the intensive communication processes initiated between the nuclei-members, the counsellor and his institution.

• The extensive experience with the nucleus approach (start of development 1991) led to the elaboration of a manual of the current project in Sri Lanka.

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Business Bridge in South Africa

• Another example of comprehensive group counselling is a format called Business Bridge developed by SBP in South Africa.

• SBP is active within the arena of business linkages between large enterprises and MSMEs.

• The key mechanism used here is a series of peer group sessions, where entrepreneurs are exposed to new and different ways of doing things, can help each other to solve problems, share experiences, develop their inter-firm networks and improve their management capacity.

• An interesting tool within this format is the market place: Each peer group session starts with an exchange of information about business opportunities the members have heart about.

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Indo-German Economic Project (IGEP)

• The project ended 2004 after 16 years. • More than 300,000 jobs were created or secured, leading to a better livelihood for 1,6 Mill. people• Business linkages with several German enterprises could be established: Karstadt-Quelle-Hertie-Neckermann, Redcats, Otto-Versand, Heine, OBI, Deichmann, Daimler-Chrysler, and Siemens Procurement Office. Small and Medium sized German enterprises not includedOther impacts:- Adaptation of the leather sector to produce without Penta-Chlorphenol (PCP) (300 Mio. EUR exports)- Adaptation to European packaging regulations-Adaptation of the leather, textile, and clothing sector to produce without AZO colours - Introduction of social and ecological standards (e.g. Rugmark label for carpets without child labor)

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Pangasius Value chain in Vietnam

Organic: strict prohibition of chemicals and antibiotics

Improved conventional: controlled use of chemicals and antibiotics

• Hygienic aspects through improved management

• Product quality through improved processing and mgt.

• Modern package design

• Branding for niche and conventional markets

Feed supply, hatchery and farm level

Branding and marketing

Pro

cessing

level

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•Also observed within other PPP projects in similar niche markets: Starting out with a relatively small scale pilot that involves small international buyers and small local producers in a niche market, impacts can rapidly expand by involving more partners at a later stage.

• If the private sector partners are the leading players, a relatively small public investment from a development organization can thus cause broad positive impact.

• In the case of the organic catfish, some European supermarkets have already shown interest in the product.

• Additionally, experiences gained in the organic niche market can be used to help improve the competitiveness of local SME as well as environmental and social standards in the main stream market as well.

• Strategic alliances between GTZ and the private sector show that structural deficits of whole commodity markets can be addressed by involving all relevant stake holders within the value chain, private sector, governments and civil society.

Organic Catfish in Vietnam within a Public Private Partnership

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Background: Vietnam is accessing WTO membership soon

•Public private partnership with Metro AG within the PSD programme in Vietnam •Metro was granted the license to open up wholesale markets, •in turn committed to source as many products locally as possible• investing heavily in upgrading its local suppliers of their freshproduct range to be able to

• fulfil quality and hygiene standards• improve the overall efficiency of the supply chainThe competitiveness of the suppliers will increase sufficiently

to withstand any future competitive pressure created bymembership of the WTO.

Metro in Vietnam

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The project approach (I)

I. Training and advice to stakeholders of selected fruit and vegetable value chains

Participatory analysis of strengths and weaknesses of the selected value chains

Training and consulting program for farmers, collectors, traders, retailers and wholesalers

Support focusing on Eurepgap (Good Agricultural Practice) certification

Support to upgrade facilities for processing and sorting stations

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The project approach (II)

II. Advice to Ministry of Trade to improve legislative and regulatory framework conditions

Consultation process with the stakeholders to discuss the planned legislative and regulatory changes

Training for staff of Ministry/Departments of Trade

Study tour to Europe and neighboring countries to learn from the experiences when it comes to developing distribution networks and building up legislative framework conditions

Technical advice to the MoT on laws and regulations to be submitted to the national assembly for approval

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PPP with Metro in Vietnam

PPPGoals of Private Sector Businesses

Goals of partner countries and developmentcooperation

Increase the competitiveness of the agricultural sector

Improve quality of product, reduce losses and thus increase income

Create better framework conditions to attract further investment

Improve quality and hygiene standards of products sourced in Vietnam

Increase the efficiency and reliability of the supply chain

Contribute to the development of the economy

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Thank you very muchfor your attention !