Synthesis documents

Looking at Microenterprises through the Competitiveness Lens, DAI, AMAP 2004

    How does the performance of microenterprises, establishments with up to ten employees, affect the competitiveness and growth of a regional or national economy? Under what conditions does economic activity in the microenterprise sector become a drag on competitiveness drives? Under what conditions can competititve performance in the sector advance overall productivity gains? How are microenterprises affected by changes in the enabling environment that determine a country's competitiveness ranking?

    This paper reviews and summarizes theoretical arguments and empirical evidence on these issues, looking at the micro and small enterprise sector through the competitiveness lens, focusing on innovative capacity. Gains in (total factor) productivity drive economic growth, and the essence of competitiveness is the ability to sustain productivity increases through continuous innovation.

    A synthesis of current thinking on innovative capacity in microenterprises is complicated by the diversity of the sector in terms of activities pursued and organizational structures. Different concepts of productivity and innovation apply to a self-employed streek hawker versus an 8-person upholstery shop. Much of the empirical work on innovative capacity and, by implication, competitiveness has focused on the manufacturing sector, making generalizations to other sector problematic.

    Summary of results
    The review of available evidence suggests four main points:

    - There is not a convincing case for either small or large enterprises being consistently more innovative, owning a competitive edge. Under the right conditions, small manufacturing firms can successfully pursue innovation and position themselves competitively. The main exception are the one worker establishments. The performance of the microenterprise sector helps shape aggregate productivity growth.

    - Innovation is increasingly a product of network or relational learning, through interaction with suppliers, customers and competitors.

    - New technologies are affecting transaction costs in value chains, changing criteria for the "make or buy" decision, combining increased centralization for commoditized production with easier access to niche markets for differentiated products. These trends offer new opportunities to innovate for micro and small enterprises, but also imply threats to longer-term growth prospects if innovation is stifled.

    - Micro and small enterprises suffer disproportionately from a flawed enabling environrment. Continuing structural reform to lower transaction costs is therefore critical to boosting innovative capacity and productivity growth in the microenterprise sector.