Enabling environment development
strengthen legal and policy frameworks, institutions, coordination,
capacity strengthening
Jacqueline Snijders
June 1, 2015
• Context: How can the growth of
small and medium-sized
enterprises (SMEs) be improved?
How can the employment creation
by SMEs be improved? How can
SMEs provide better jobs?
Major constraints SMEs growth
according to SMEs
•
•
•
•
•
Access to finance
Access to electricity
Competition of informal enterprises
Tax rate
Political instability
Supporting job creation means supporting SMEs
in improving productivity and improving the
quality of jobs
How can the constraints be reduced?:
How can constraints be reduced?
1. Improve access to finance
2. Make information, advice and training on
entrepreneurship available
3. Create an enabling environment that is favourable to
SMEs and create a level playing field
4. Stimulate formalization of informal SMEs
Policies should be developed by the government in close
cooperation with employers and employee organisations so
that they focus on the real needs.
Employers and employee organisations can support their
members with information, advice, training, networking etc.
Organisation of entrepreneurs and workers is needed!
3. Create an enabling environment
that is favorable to SMEs and create
a level playing field
• Business environment covers the legal and
regulatory system in a country that governs
the operation of an enterprise
• SMEs and entrepreneurs can not afford
specialists explaining how to deal with this
system.
• How can this system be made more in favour
of SMEs and new entrepreneurs?
Possible actions enabling
environment (1)
1. Business registration and licensing; adapting business
registration and licensing regimes to simplify the
administrative processes of registration (for example, one
stop-shop integrating all procedures necessary for
business registration).
2. Simplification of taxation policy and administration, in
order to ease tax compliance (for example, by introducing
more transparent and simplified tax reporting, and
differentiating tax schemes for micro enterprises, farmers
and currently informal enterprises).
Possible actions enabling
environment (2)
3. Land ownership and titling; reforming incomplete
cadastres and costly land registration systems, and
enabling female ownership of land and assets. In this way
enterprises can work from a permanent location and to
raise capital through land-based collateral.
4. Labour and labour-related issues; guarantee a proper
functioning of the labour market, basic social protection
for workers and skills development. Keep the costs of
complying with these regulations as low as possible.
Possible actions enabling
environment (3)
5. Judicial reform; reducing transaction costs, improving
the quality of governance methods and improving access
to justice in bureaucratic administration.
6. Intellectual property rights; improving the enforcement
of existing laws regarding trademarks and other property
rights, in order to use economic opportunities
7. Improved access to financial services; increase the
access of poor women and men to the full range of
financial services, in order to reduce the costs of getting
and using capital.
Possible actions enabling
environment (4)
8. Access to information about business regulation and
rules; create awareness and provide information on
existing business regulations and rules.
9. Incentives for reform and communicating these to
informal enterprises. Formalisation should introduce the
benefits of compliance with the legal and regulatory
framework. Micro and small enterprises should see
formalisation as an opportunity for greater access to
markets and growth.
4. Stimulate formalization of
informal SMEs
Informal economy’ refers to all economic activities, by
economic units as well as by individual workers, that are –
in law or in practice – not covered or insufficiently covered
by formal arrangements.
As such, it covers both:
• informal enterprises, and
• informal employment
Results presented focus on informal enterprises: study
carried out by Panteia for GIZ and ILO on whether and
how the level of formalization could be improved.
Definition informal enterprises
Informal enterprises are usually defined in
terms of:
• lack of compliance with government
regulations (in particular regarding
registration, payment of taxes and social
contributions, and labour regulations) and/or
• firm size
Positive effects transition from informal to
formal
1. Formal enterprises tend to perform better than informal
enterprises. At macro level, an increase in the number
and/or size of formal enterprises leads to higher GDP
2. Many employees will benefit from transition. Higher
labour productivity makes higher wages and better
working conditions are possible.
3. Increase of the country’s tax revenues, which in turn can
be used for various public support programmes.
4. Improvement of the general attitude towards
government, which would in turn have a positive effect
on the intention to comply with regulations.
These factors have the potential to reinforce each other, e.g.
a larger tax base allows higher government investments in
infrastructure, education and the rule of law.
Choice for formal or informal
entrepreneurship
Depends on:
• Costs of becoming and remaining formal: entry costs
(registration costs); taxes, fees and social
contributions; and compliance costs (e.g. with labour
regulations and property registration)
• Benefits of being formal: reduction in the risk of
closure or having to pay fines or bribes; easier to
establish an enterprise at a permanent location; better
access to (public) business development services,
financial services and insurance services; and getting
access to more and different markets.
Three main views on causes many informal
enterprises (1):
Assumption: High entry costs and high levels of
taxes/ fees/social contributions of formal
enterprises.
Action needed is reducing these costs
> more enterprises formalized > these
enterprises get more access to markets and
services > positive effect on performance of
enterprises and economic growth (romantic
view)
Three main views on causes many informal
enterprises (2):
Assumption: Costs formalization are higher than
benefits and informal enterprises have a
competitive advantage compared to formal
enterprises
> negative effect on economic growth due to
lower productivity and take away market shares
by informal enterprises from more productive
formal enterprises > action needed: informal
enterprises should be forced to close (McKinsey
view)
Three main views on causes many informal
enterprises (3):
Assumption: People running an informal
enterprise might prefer to have a formal wage
job. Large number of informal enterprises is not
due to choice of entrepreneur between formality
and informality, but result of person searching
for income (subsistence enterprises).
> Benefits of formalization are low since
necessity entrepreneurs lack drive and skills for
growth > Action needed: stimulating the
creation of new, formal firms and improving the
conditions for the incumbent formal enterprises
to grow and provide formal jobs (the dual view)
Difference subsistence and unofficial
enterprises is important
• Unofficial enterprises are usually owned by entrepreneurs
with higher educational and skill levels, can benefit from
some kind of product differentiation, and operate more
efficient than subsistence enterprises.
• Unofficial enterprises are more similar to formal
enterprises (of similar size) than subsistence enterprises
are.
• Romantic and McKinsey view: more relevant for the
subpopulation of unofficial enterprises. Such enterprises
are likely to have more potential, and are therefore more
likely to compete with formal firms and also to transform
into a formal enterprise.
• Dual view: More relevant for subsistence enterprises
The effect of formalization policies
• Literature research
• 10 programmes studied on the basis of available
information
• The programmes/policies were mainly aimed at
reducing the costs of formalisation by reforming
business entry
Example of policies studied
1. Monotax (Argentina), this concerns the simplified
regime for small taxpayers that consists of a single tax
with a flat monthly fee, which replaces income tax, VAT
and social security contributions.
2. SIMPLES (Brazil), introduced by the Brazilian
government in 1996, is a program with reduced tax rates
and tax regulations for Brazilian micro firms with no more
than 5 paid employees.
3. The Individual Micro-entrepreneur (MEI) is an
innovation of the Brazilian tax system approved in 2008
allowing the formalisation of self-employed workers at low
costs, with pension coverage for the micro-entrepreneur
and his/her family.
Measures studied
• Minas Fácil Expresso /Brazil); expansion of a business
start-up simplification program to more remote
municipalities through set up of local registration
offices
• Law 1429 (Colombia) package of measures on
formalization of employment and enterprises a.o.: (1)
business development; (2) reduction of costs during
first years of existence; (3) employment generation for
specific target groups; (4) reducing red tape.
• Experiment in Sri Lanka: Offering informal firms after
formalization a financial compensation.
Conclusions Formalization policies
(1)
• Comparing practices has to be done with care, since local
circumstances differ considerable. Effect can differ per
country
• More monitoring and measuring impact is needed in each
programme and not only on the number of entries but
also longer term impact on performance and employment
created
• Effects of changing business entry forms is low. Decision
of becoming formal is not so much determined by the cost
of becoming formal, but the costs and benefits of being
formal
• Strengthening enforcement law showed to have good
results
Conclusions Formalization policies
(2)
• Decision to formalise is often taken in start-up phase.
More effective to focus on new start ups.
• Focus on growth oriented (unofficial) enterprises since
they may benefit more from formalization then
subsistence enterprises.
• Subsistence enterprises might have less skills and less
motivation to become formal (preferring a paid job)
• Large reforms combining more reforms at one moment
are preferred. Studies show that number of entries
increase significantly if costs are reduced with 50% and
time involved with procedures with 15%
Conclusions Formalization policies
(3)
• Existing initiatives did not show that being formal,
means easier access to bank loans or public contracts.
So effects should nog be overestimated in campaign to
stimulate entrepreneurs to formalise.
THANK YOU!
More information:
Panteia (Netherlands)
Jacqueline Snijders ([email protected])
Bredewater 26
2715 CA Zoetermeer
www.panteia.eu
Tel: + 31 79 322 22 00