46994 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized for SmallBusiness Creating Opportunities IFC, a member of the World Bank Group, fosters sustainable economic growth in developing countries by fi nancing private sector investment, mobilizing private capital in local and international fi nancial markets, and providing advisory and risk mitigation services to businesses and governments. IFC’s vision is that poor people have the opportunity to escape poverty and improve their lives. In FY07, IFC committed $8.2 billion and mobilized an additional $3.9 billion through loan participation and structured fi nance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries. For more information, visit www.ifc.org. Creating Opportunities for Small Business Table of Contents 2 Foreword 3 Approach 5 IFC and SMEs 7 Improving the Business Environment 11 Improving Access to Finance 15 Providing Access to Markets, Business Skills, and Information 19 Creating New Opportunities Through Innovation 21 Measuring Results 22 Frequently Asked Questions 23 Contact Details 24 Donor Partners Creating Opportunities for Small Business 1 Foreword IFC’s vision is for people in emerging markets to have opportunities IFC plays a catalytic and innovative role in developing small to escape poverty and improve their lives. This vision drives all of businesses. We can tap the policy experience of the World Bank our work to develop the private sector. These efforts range from and mobilize the resources of a wide range of partners, including investing directly in businesses, to mobilizing private fi nancing governments, other multilateral and bilateral agencies, academic from other investors, to advising companies, governments, and institutions, foundations, nongovernmental and civil society other stakeholders in private enterprises. organizations, as well as our client companies. In most countries and regions where IFC works, small This report illustrates some of the strategic methods IFC businesses generate the largest share of economic activity and employs to help SMEs. The larger framework includes broad employment. Starting and expanding a small business is one of interventions to strengthen and improve the business environment the most promising and sustainable routes out of poverty for as well as enhancements to the fi nancial system that expand access many millions of people. These entrepreneurs, and the people to credit. We have programs to improve business skills, enhance they hire, stand a better chance of providing for their families, access to markets, and encourage competitiveness. We pursue these sending their children to school, and leading a healthier life. A programs at a wholesale level, working with intermediaries that can vibrant small business sector also creates choices for consumers provide information, training, and services to the broad business and generates tax revenue that in turn improves public services. sector. This approach enables us to achieve a broader reach and When I meet small business clients, I am struck by their drive increase the effi ciency of our engagements. Where needed, however, and the impact that they have on their communities. Because IFC can also provide more targeted assistance to specifi c, strategic the benefi ts of small and medium enterprises (SMEs) are so far- sectors, so we can learn what works before launching a larger effort. reaching and powerful, we are targeting them as one of the most IFC’s work with SMEs has accelerated steadily since 2000, effective channels to help poor people in developing countries. both through our advisory programs and our investments in Our vision is broad, but so are the challenges. Poverty banks, leasing companies, other fi nancial intermediaries that on- remains widespread, and the fi nancing to fuel the growth lend to smaller businesses, and private equity funds with hands- of smaller enterprises is often out of reach. Frequently, the on managers who add value by applying lessons from experience business environment is confusing, with regulations posing and technology, not just capital. We refer continually to our numerous and costly hurdles to start, register, or operate a strategy and work to ensure that the essential building blocks business. Women and other underrepresented groups still face of private sector development are in place, especially a business many barriers that exclude them from participating fully in enabling environment and access to fi nance. their local economy. We have seen some encouraging results. In Lima, Peru, for example, IFC worked with the municipality to reduce the time to register a new business from two months to about six days. As a result, in 2006, 8,500 new businesses were registered in the city, a more than fi vefold increase over 2005. Each year we ask the banks to which we lend about their small business clients. In 2006, 180 of these fi nancial institutions disbursed $96 billion via 8.8 million loans to small businesses. This lending is growing rapidly: overall, for institutions that reported in both 2005 and 2006, the volume of small loans grew 72 percent. IFC’s work — including our efforts to measure results — is about ensuring that private capital is put to work for the benefi t of people. This report not only points out what needs to be done in developing countries, but also shows the many results that have been achieved. Our work in helping SMEs achieve their potential is steadily transforming from a long-term objective to a solid accomplishment. Lars Thunell congratulates the Mayor of Metropolitan Municipality of Lima, Lars H. Thunell Dr. Luis Castañeda Lossio, on the city’s business registration simplifi cation program. Executive Vice President and CEO, IFC 2 Creating Opportunities for Small Business Introduction In market economies, formal The practical consequences of an environment that treats and informal, small and SMEs fairly is that more young people fi nd jobs; women and medium enterprises (SMEs) other underrepresented groups in developing countries can account for more than 90 participate economically; rural and indigenous communities percent of all enterprises. are better integrated into the modern global economy; Typically, well over half the entrepreneurs have access to fi nancing and better business skills working population, especially and tools; and households, including the poorest, have better poorer people, rely on SMEs choices when they shop for goods and services. for employment and income. In addition, SMEs play a major role in serving the $5 trillion market for goods and services to the 4 billion people at the base of the economic pyramid. Michael Klein Firms that start small but do a good job of responding to Vice President, Financial and market demands become larger. With scale comes productivity, Private Sector Development bringing better salaries for workers. Larger fi rms tend to thrive Chief Economist, IFC for a longer period than smaller ones. The challenge, then, is to create an environment in which new entrants with drive and good ideas can get started in business, and good fi rms can grow. Economic progress is associated with increasing average fi rm size — a healthy, vibrant ecology of fi rms is needed, with fi rms of all sizes participating. In many emerging markets, small entrepreneurs face substantial barriers to entering the market and competing. As the World Bank Group’s Doing Business project documents, the time and cost associated with starting a business, registering property, or getting credit are onerous in many developing countries. These barriers drive many would-be entrepreneurs into the informal sector, where their chances of expanding their businesses are more limited, and their employees miss out on the protections and benefi ts of formal employment. In many developing countries, too, well-connected large fi rms dominate, insulated by government patronage. Productivity suffers as a result, and income growth is stunted: in large fi rms, because they are sheltered from competition, and in small fi rms, because they are held back. Effective competition — that is, the ability of fi rms to enter, grow, and challenge incumbents on a reasonably equal playing fi eld — is essential for progress. By the same token, failing incumbents must be able to exit quickly; they should not be subsidized to the detriment of new, better, and more innovative fi rms. The objective of any program of SME support, therefore, should not be to reward fi rms that happen to be small. Rather, the objective is to ensure a functioning ecology of fi rms, in which new ones can emerge, existing ones can grow, and large and small ones can contract and work together. This objective guides IFC in the design and implementation of its advisory and investment programs targeted at SMEs. Creating Opportunities for Small Business 3 INTRODUCTION Supporting small and medium enterprises (SMEs) is a key factor to alleviating poverty. To help countries spark sustainable growth in this vital area, IFC works with other groups to assist entrepreneurs, drawing on both its investment and advisory experience and the World Bank Group’s expertise. In addition, to monitor and gauge the success of its interventions, IFC consistently measures and evaluates its programs. The latest methodology is employed and the evaluation approach is constantly benchmarked against leaders in the fi eld. Our work with SMEs falls into four broad themes: 1. Improving the business 2. Improving access to fi nance environment A signifi cant barrier to the growth of SMEs in IFC works with policy makers and other many developing countries is a lack of access stakeholders to improve the business to affordable credit. IFC provides fi nancing environment, infrastructure, and fi nancial and advice to banks and other lenders that systems to help small businesses grow assist SMEs, and supports programs that and prosper. target underserved markets and populations, such as women in business. 3. Improving access to markets, 4.