African Businesses and Economic Growth 9781906704193

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African Businesses and Economic Growth Institutions, Firms, Practice and Policy

Published by Adonis & Abbey Publishers Ltd P.O. Box 43418 London SE11 4XZ http://www.adonis-abbey.com Email: [email protected]

First Edition, October 2008 Copyright 2008 © Imani Silver Kyaruzi British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 9781906704186 (HB)/ 9781906704193(PB) The moral right of the authors has been asserted All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted at any time or by any means without the prior permission of the publisher

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African Businesses and Economic Growth Institutions, Firms, Practice and Policy

Edited by

Imani Silver Kyaruzi

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Acknowledgement I would like to thank the contributors for their tireless efforts and commitments during the preparation of this volume. Special thanks to Zachariah Mulenga; Professor Patrick Ehi Oribabor of the Obafemi Awolowo University, Nigeria; Dr. Aihie Osarenkhoe of the University of Gävle in Sweden; Dr Ahoefa Chantal Hales of Birmingham University; Dr Honest Prosper Ngowi of Mzumbe University, Lawrence Ogechukwu Obokoh, of the University of Wales; Rafiu Oyesola Salawu, of the Obafemi Awolowo University and Charles Pilli of the University of Herfordshire, UK. I am also grateful to Professor Mike Taylor and Dr Bob Gwynne of the University of Birmingham for their guidance and support.

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List of Contributors Dr. Aihie Osarenkhoe is Director and Examiner for the MBA programme in marketing at the University of Gävle in Sweden. He earned his doctorate degree in Business Administration from Stockholm University, Sweden. His primary areas of research interest and publications in academic journals encompass strategic management issues such as; implementation of performance-enhancing business practices, customer relationship management and the interplay between relationship marketing paradigms and international business practices and behaviour both in the environment of developing, developed and transitional economies. Dr. Ahoefa Chantal Hales is Researcher in the School of Geography and Environmental Sciences at the University of Birmingham, United Kingdom. She has doctorate degree in economic geography and entrepreneurship. She is currently investigating the factors affecting female entrepreneurship in Dakar, Senegal. Her research interests include gender and entrepreneurship, agribusiness and manufacturing firms, management in small firms and local economic growth in West Africa. Charles Bekoni Russel Pilli is a Doctoral Researcher in the Department of Marketing and Tourism, Hertfordshire Business School, University of Hertfordshire, United Kingdom. He is currently researching on the roles of Entrepreneurial Marketing in Tanzania. His research interests include; accounting and management in small businesses, entrepreneurship and marketing. Dr. Honest Prosper Ngowi is Senior Lecturer, Researcher and Consultant in Economics, Department of Economics, Mzumbe University, Morogoro, Tanzania. He has researched, written and published widely in various areas including Foreign Direct Investment (FDI); informal sector; small and medium size enterprises (SMEs); project management; poverty; Research and Development (R&D); participatory approaches; private and public sector economics and social economic aspects of HIV/AIDS.

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Dr Imani Silver Kyaruzi is an Entrepreneurship and Economic Development analyst, who developed his thinking while working as a doctoral researcher at the University of Birmingham, in the United Kingdom. He is currently a lecturer in Economics and Entrepreneurship in the Department of Business, London Graduate School of Management, where he teaches both graduate and undergraduate courses in Entrepreneurship and Economic Analysis. Dr Kyaruzi is currently course leader of Doctor of Business Administration (DBA) program. He is also Visiting Professor of Entrepreneurship at the University of Kragujevac, Serbia. His works on entrepreneurship and local economic growth have been published in English and Swahili. His main research interests include entrepreneurship and SME development – through business incubation and clustering, local economic growth models and development economics. Lawrence Ogechukwu Obokoh is currently a Doctoral Researcher in the school of Management and Business, University of Wales; Aberystwyth United Kingdom. He is also a lecturer in the Department of Management and Accounting, Obafemi Awolowo University, Ile-Ife Nigeria. He is a Chartered Accountant and an Associate member of the Institute of Chartered Accountants of Nigeria. His areas of interest include small and medium sized enterprises development, international trade and finance, and government economic policy. Professor Patrick Ehi Oribabor is Professor of Management Science and Director of Executive MBA Programmes at the Obafemi Awolowo University, Ile Ife, Nigeria. He is a graduate of the Universities of Keele and Salford, United Kingdom. He has published widely in the field of Strategic Management, Human Resource Management and Industrial Relations. He is currently engaged in research work on developing trends in the management of Small and Medium Scale Enterprises in Nigeria. Rafiu Oyesola Salawu is Lecturer in the Department of Management and Accounting, Obafemi Awolowo University, Ile-Ife Nigeria. He is an Associate Chartered Accountant and holds a Master of Philosophy

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degree in Management and Accounting. His areas of research include accounting, finance and taxation. He has many publications to his credit.

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Preface The improved trade relation between Africa and the rest of the world has brought a renewed focus on Africa’s relatively slow economic growth. This book presents different approaches to African business development, local economic growth, entrepreneurship and economic liberalization. The book chapters reflect the concerns of economic and entrepreneurship scholars whose works focus on small business development, institutionalisation and economic liberalisation. Most of the arguments centre around the interplay between entrepreneurship, institutions and local economic growth and, the effects of global forces on African economies. With the new forms of economic arrangements, the book examines how African businesses and institutions can respond to globalization pressures to assume their rightful place in the global economy. The book also examines the role of non-governmental institutions, local and multinational firms, bilateral and multilateral institutions and how their activities and policies influence the structure and strategies of local firms and economic growth. There is strong evidence linking institutions and local economic growth. However, the knowledge of how institutions can stimulate African local economic growth is weak. This volume offers some empirical evidences to address such weaknesses. Most of the contributors conclude that a full scale economic growth, liberalization and institutionalization across the African economies, though inevitable, are unlikely to be achieved overnight. The papers assembled in this volume are drawn from a number of African scholars who have shown great interest in Africa’s local economic growth initiatives. As their brief profiles suggest, contributors to this volume are strongly devoted to African economic growth and development. They were drawn from Africa and European academic institutions.

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The structure of the Volume

Following Chapter one: Introduction: African Business Development – Institutions, Firms and Local Economic Growth by Kyaruzi, introduces the book, which is divided into four parts: Part one: Institutions and Firms This section presents argument on the role of state and institutions in business development. Chapter 2: (The Role of Business Support Institutions on Entrepreneurship and Local Economic Growth: A case of Tanzanian firms by Kyaruzi) provides an assessment of the effectiveness of the institutional support services in Tanzania. The results presented here come from a convergence of empirical evidences and views from 160 firms and 10 business support institutions in Tanzania. In this chapter, Kyaruzi examines the environment within which Tanzanian firms and entrepreneurship are supported. The analysis includes profit and nonprofit organizations, government agencies and financial and nonfinancial institutions. Since it appears that some institutions are not well positioned to offer effective support, their role(s) in SME development and local economic growth are questioned. Chapter 3: (Small and Medium Sized Enterprises Internationalisation Process: Some Critical Factors by Obokoh, Oribabor and Salawu) extend the concept of institutional support by assessing firms` strategies. In their discussions, an internationalisation strategy was seen as an important option open to SMEs to survive the stiff competition in the domestic market. However, they argue that this option is not easy to adopt due to internal and external factors that militate against the strategy. The crux of these factors is finance, which force most SMEs to have domestic focus at inception and delay their internationalisation process for a number of years. The delay though not deliberate enables them to pass through stages that help them accumulate the needed financial resources and experience to internationalise their operation. ix

Part two: Liberalisation and Institutionalisation This section is made up of 3 chapters Chapter Four: (Senegal: The Economic and Social Environment by Hales). The objective of this chapter is to establish whether the institutional framework (the capacity of public agencies both economic and financial, to plan and implement policies, laws and regulations affecting the private sector) is supportive of female entrepreneurship. Hales provides an overview of the situation in West Africa and situates Senegal within the region to highlight the main socio-economic indicators and the different policies and programmes that affect the private sector. She examines both societal and cultural factors that influence the way that women operate entrepreneurial businesses. Bearing in mind that women’s roles have changed since colonisation, she provides an overview of the impact of pre-colonial and postcolonial rule on Senegalese women’s roles in contemporary Senegalese society. Also focusing on the business environment, she introduces a framework that highlights the main reforms and programmes affecting the formation, development and growth of businesses. Chapter Five: (Constraints in Institutionalizing Informal Economic Activities: The Case of Tanzania by Ngowi). In this chapter Ngowi acknowledges the role of the informal sector in the development of many developing countries in Africa, Asia and Latin America. The sector contributes significantly to the economic activities of these countries by creating employment and incomes to a substantial number of people and their families. Its importance in the economic system not withstanding however, the sector is blamed by various institutions and authorities for, inter-alia, not following rules and regulations laid down by their countries. Ngowi argues that actors in the sector are perceived to be missing some potential benefits that could accrue to them if they were to institutionalize their economic activities. The benefits are summarized as unlocking their legally and economically dead assets. This chapter identifies and discusses some constraints that are potentially and/or actually faced mainly by operators of informal x

economic activities when attempting to institutionalize their activities. It also points out some constraints likely to be faced by government institutions and authorities as they struggle to institutionalize informal sector economic operators. Chapter Six: (Small and Medium Sized Enterprises Development in a Liberalised Economy of Nigeria: Problems and Prospects by Obokoh ). His study focuses on the economic reform programme that was aimed at creating level playing ground that will enhance competition and help SMEs development. While it was widely documented that the Nigerian economy was highly controlled by the government prior to the liberalisation exercise, and with the situation now changed, Obokoh`s study of some entrepreneurs found that SMEs still face some institutional problems that need to be addressed before they can benefit and effectively contribute to economic development in Nigeria. Part three: Formalisation of Businesses and Local Economic Growth initiatives This section has 3 chapters Chapter Seven: (A framework for understanding the imperative role of the informal sector as enabler of economic development in developing countries by Osarenkhoe). In this chapter Osarenkhoe argues that extensive attention has been given in recent years to the role of entrepreneurship in facilitating global economic development, with research indicating that much employment growth originates from the “entrepreneurial sector” of the economy. Paradoxically enough, in discussions of economic development, industrial dualism is often ignored. He stresses the y sometimes regarded as an unorganized “nuisance” sector. He suggests that the importance of informal activities is highly correlated with a nation’s level of economic development and the quality of its institutions. Furthermore, the informal sector emphasizes small-scale, unskilled labour intensive, self-financed activities, which are often under-capitalised. In the light of this, he introduces a framework for understanding the role of the informal sector in the process of economic development. The framework developed also aims to accentuate the continuum, interplay and interconnectedness between the informal and the formal sectors and the role entrusted on some xi

change agents such as international NGOs, small community based or local NGOs as well as government authorities in this process. The conclusions and implications drawn for theory development and public policy recognize the role of industrial dualism in economic progress. Chapter Eight: (Local Economic Growth in Tanzania: Institutions and the Service sector-led growth in an agrarian Economy by Kyaruzi). In this chapter, Kyaruzi acknowledges the fact that Africa is still searching for the most viable way of stimulating local economic growth. He initiates a debate on the adoption of service sector-led growth and local economic growth initiatives in Tanzania, a state whose economy is dominated by agriculture. In this review, the service sector has been examined as a potential driver of local economic growth. However, the argument presented by Kyaruzi suggest that the “service sector-led economy” and “service firms” phenomena appear to be problematically treated as prescriptions for fostering economic growth in developing countries. Fewer researches have questioned the recent LDCs’ tendency to over rely on service sector-led economy. Also, owing to a lack of blueprints for transforming an agrarian economy into a full service sector-led economy overnight, countries like Tanzania still have a long way to transform the agrarian economic base. Finally, the paper suggests the most important steps to follow in order to integrate fully and realise the possible benefits of a service sector-led economy. Chapter Nine: (Foreign Direct Investments (FDIs) Factor in Economic Growth and Development: Tanzania’s Efforts to Reform Institutions to Attract More FDIs by Ngowi). Ngowi’s discussions dwell on institutional reforms to attract foreign direct investments (FDIs) as a strategy for economic growth and development. It documents some general institutional reforms that Tanzania has undertaken to attract more FDIs as one of the strategies for its economic growth and development. The author takes the view point of institutions as seen in the new institutional economics. The chapter limits itself to the realms of institutions as formal rules of a society. In this context therefore, the author looks at the changes that have taken place in the management of Tanzania’s economy with the direct or indirect purpose of attracting more FDIs. It is documented that the country has undertaken many xii

and far-reaching institutional reforms. These include reforms in the political system; economic management; and government administration. These institutional reforms have been among the major factors responsible for the increased FDI inflows into the country. The author concludes therefore that institutions and their reform are important for the economic growth and development process in general, and in attracting FDI inflows into a country like Tanzania in particular. Part Four: Female Entrepreneurship, Marketing and Institutional Support This chapter comprises of two chapters. It provides the discussion on gender and entrepreneurship as well as marketing support available to small businesses in Senegal and Tanzania. Chapter Ten: (Female Entrepreneurship: Business Professional Associations in the Agribusiness and Textile Sectors in Dakar, Senegal by Hales). Hales argues that business associations in Africa have been in existence for many years, but only recently have they been identified as important in the development of businesses. In the past, women have channelled their financial and relational concerns through members of their family. The chapter explores the role and impact of women’s business and professional associations in the agribusiness and textile sectors in Dakar (Senegal) with particular reference to their entrepreneurial businesses. This is part of a much larger study into rise and role of female entrepreneurs in the agribusiness and textile sectors and the role of the government and support institutions in promoting an enabling entrepreneurial environment within which female entrepreneurs can operate businesses. The empirical evidence was gathered using 50 semi-structured interviews with female entrepreneurs and support institutions in both agribusiness and textile sectors. The empirical findings have enabled the identification of the characteristics of women’s owned business and professional associations, the reasons for the decreasing number of women’s associations and the roles of support institutions in assisting women’s groups. The conclusions drawn from the study point to the arguments that women’s business and professional associations in Senegal have increased significantly over the years, either for business development xiii

and social development purposes or because of the availability of external funds; they play a crucial role in the provision of information, resources and training to Dakaroise entrepreneurs; and in facilitating access to international markets. The main proposition of the paper is that women’s cooperation through local, regional, international associations and extended support institutions is vital to their ability to upgrade their skills and face new challenges posed in the global business environment. The paper then concludes with some recommendations on the way forward to enabling female entrepreneurialism in Dakar by providing adequate solutions to deal with some of the constraints identified by the female entrepreneurs as inhibiting the development of business associations. Chapter Eleven: (ICT, Institutions and Entrepreneurial Marketing Development: A catalyst for SME growth in Tanzania? by Kyaruzi and Pilli). The authors examine the role and impact of business support institutions and ICT strategies on small businesses’ marketing in Tanzania. While most ICT- business research in Tanzania have mainly focused on management, finance and attitudes towards ICT, this study focuses on the marketing aspect of the businesses. The results have been obtained by surveying 16 small firms from different sectors. 16 case studies were drawn from 3 main business-active regions in Tanzania namely; Dar es Salaam, Arusha and Mwanza. These results show how these enterprises are struggling to adopt and use communication and information technologies to adapt their competitive capacity in the local and global markets. It is proposed here that among other solutions, one way to improve Tanzanian small businesses` competitive position is to use business policies to stimulate participation in the international market through communication and information technologies by offering the following; the infrastructure, training and by introducing the more affordable means of acquiring ICT equipment for small businesses. Entrepreneurial Marketing and local economic development in Tanzania have a potential to benefit from the use of ICT. This paper proposes a number of ICT strategies to be adopted by small firms and necessary government policies that could aid this process. Initial findings suggest that, unlike firms in developed countries, the competitive advantage of local firms and their participation in the international market is limited due to their inability to access and to participate in the global markets. xiv

Conclusions Chapter Twelve: (Conclusions: Theory and Practices by Kyaruzi). In this chapter, Kyaruzi offers a summary of the key issues that were identified in this volume. The conclusions to this volume have been summarised using the following headings; reasons for failure of African institutions, the states’ response to globalisation pressures and the relevance of local economic growth theories. Most of the contributors conclude that a full scale economic growth, liberalization and institutionalization across the African economies, though inevitable, are unlikely to be achieved overnight. The conclusion chapter ends by opening a debate and suggests future research.

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Table of Contents Acknowledgement ............................................................................................iv List of Contributors...........................................................................................v Preface ........................................................................................................... viii The structure of the Volume.............................................................................ix Chapter 1 ......................................................................................................... 1 Introduction: African Business Development – Institutions, Firms and Local Economic Growth Part I: Institutions and Firms Chapter 2 ....................................................................................................... 17 The Role of Business Support Institutions in Entrepreneurship Development and Local Economy: A Case of Tanzanian Firms Chapter 3 ....................................................................................................... 57 Small and Medium Sized Enterprises Internationalisation Process: Some Critical Factors Part II: Liberalisation and Institutionalisation Chapter 4 ....................................................................................................... 71 Senegal: The Economic and Social Environment Chapter 5 ..................................................................................................... 102 Constraints in Institutionalizing Informal Economic Activities: The Case of Tanzania Chapter 6 ..................................................................................................... 123 Small and Medium Sized Enterprises Development in a Liberalised Economy of Nigeria: Problems and Prospects

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Part III: Formalisation of Businesses and Local Economic Growth initiatives Chapter 7 ..................................................................................................... 149 A framework for understanding the imperative role of the informal sector as enabler of economic development in developing countries Chapter 8 ..................................................................................................... 177 Local Economic Growth in Tanzania: Institutions and the Service sector-led growth in an agrarian Economy Chapter 9 ..................................................................................................... 191 Foreign Direct Investments (FDIs) Factor in Economic Growth and Development: Tanzania’s Efforts to Reform Institutions to Attract More FDIs Part IV: Female Entrepreneurship, Marketing and Institutional Support. Chapter 10 ................................................................................................... 217 Female Entrepreneurship: Business and Professional Associations in the Agribusiness and Textiles Sectors in Dakar, Senegal Chapter 11 ................................................................................................... 244 ICT, Institutions and Entrepreneurial Marketing Development: A catalyst for SME growth in Tanzania? Chapter 12 ................................................................................................... 263 Conclusions: Theories and Practices

Index…………………………………………………………………… …269

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Chapter 1 Introduction: African Business Development – Institutions, Firms and Local Economic Growth

Imani Silver Kyaruzi Introduction Despite the forces of globalisation pressure, there is a renewed interest in local economic growth in Africa. Also the increased influence of entrepreneurship and institutional theorists has led to the revitalisation of the field of growth at a local level. In this process, rather than attempting to go against the forces of globalisation, the “local economic spaces” have now regained their significance and influence in economic development. To some extent, some of the exogenous ingredients of regional growth, such as technology and human capital, have been endogenised in the “new growth theories” (Felsentein and Taylor, 2001). In this new form, the assumption that globalisation is likely to solve economic ills of Africa has been replaced by an assumption that localities have a role to play in stimulating and creating growth by promoting their locally-owned resources (human capital, land, cultures) and institutions. The former view, using globalisation as an excuse, has enabled most African states to distract themselves from the actual situations within their economic corridors while the latter implies that local spaces and policies have a significant role to play in economic growth. In this effort, a combination of “growth” and “institutional” theories are scrutinised. Now then, how can institutions aid the processes of creating growth? Africa is still searching for viable ways of promoting local economic growth. So far, this search has involved different approaches including: Structural Adjustment Programmes, entrepreneurship, industrial clusters, incubation, Foreign Direct Investments, corporate governance and institutional capacity building. However, little growth 1

Introduction: African Business Development- Institutions, Firms and Local Growth

has been achieved through some of these programs. There are evidences to suggest that the type of recent growth experienced by most states has failed to bring development gains to Africa. And, now it has been argued that despite strong economic performance for the third consecutive year with an average growth rate of 5.8 percent, this has not been translated into meaningful gains in terms of social development (Economic Report on Africa, 2008). Against the flow of arguments presented by the proponents of globalisation, what is needed, as one of the objectives of this volume, is to have more empirical research to identify the institutional factors that led to Africa’s stunted growth. Our search, might lead us to scratch some of the policy surfaces that were previously treated as unproblematic. In sum, the anticipated factors for slow economic growth could either be exacerbated by the wrong type of growth models, problems associated with poor policy translation or the institutional frameworks which we seek to examine. The justification for combining institutions, firms and economic growth theories and practices in this volume is based on the fact that these are interdependent. None of these theories seem to claim to offer definitive solutions to economic growth. For instance, Gutema (2003:1) has argued that growth theorists are still unable to claim that they can explain “the mysterious driving forces” behind economic growth (see also, Snooks, 1998; Ruttan, 1998; Kenny and Williams, 2001). And the institutional theorists, on the other hand, have been blamed for doing little empirical work on the effect of institutional relations on organizational survival and mortality, despite the tenacity of the theory's basic assumption that institutional relations enhance an organization's survival chances (Baum and Oliver, 1991: 187). As a result, our knowledge of the effects of direct interorganizational linkages between organizations and institutions on organizational failure is weak. Having realized such weaknesses, this volume takes its point of departure from the premises that since entrepreneurship and firm formation is globally regarded as instrumental in local economic growth and development, institutions that support this process are of paramount importance. Although the promotion of institutionally-led growth is not intentional, we are optimistic that the structure and shape of institutions could determine the type of businesses and, even the type of local economic growth we have. Using institutionally-led 2

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growth as a starting point, we can almost be confident to suggest that this type of growth requires an establishment of an adequate legal framework and sound economic growth policies. In this volume, our attention has been specifically drawn to three specific areas; Institutions, Firms and Local Economic Growth initiatives. Institutions Institutions are the rules and regulations that affect economic activities including; business laws, local and foreign economic policies and business support infrastructure (OECD, 2006). Entrepreneurship scholars have recently focused their attention on the connection between institutional factors and entrepreneurial activity (Stephen et al., 2004:3). There are different types of business supporting institutions, which can be described as those directly involved in business, non-profit institutions (or non-market institutions i.e. universities), foreign institutions and the state itself. According to North (1990: 3) “institutions are the rules of the game in a society, or more formally, institutions are the constraints1 that shape human interaction”. Green (2001:3) points out that the term “institution” is synonymous with “social practice.” Thus, in this sense “games and rituals, trials and parliaments, markets and systems of property” are all described as institutions (Rawls, 1971:55). Three categories of institutions have been identified, these include constitutional order (rules, orders), institutional arrangements (formal and informal operational rules governing transactions, contracts, regulations) and normative behavioural codes (values, behaviour and culture) (Feeney: 1988:172-173) North (1990) describes institutions as either formal or informal, as applied in this volume. Whitley (1994; also see Foss 1997:10) expanded North’s description of institutions by suggesting that institutions are not limited to formal/informal categorisation. They could be either; “background institutions” that are made up of trust, norms or “proximate institutions” (particularly the state). This suggests that the

1 As constraints, government policies, laws and regulations can unintentionally constrain employment growth, reduce the quality of SMEs and contribute to poverty through low wages and lack of social protection (SEED, 2003).

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Introduction: African Business Development- Institutions, Firms and Local Growth

conceptualisation of “institutions” differ depending on the school of thought. For example, the view of political economists, political scientists2 and business/enterprise on what makes or shapes institutions may vary depending on the objectives, nature and structures. The distinction is not very clear. It is for these reasons, in this volume some institutions are thought to act as constraints or facilitators of business development. The argument presented here is that institutions have the capacity to either stimulate or hinder business development. To unpack this statement, both enabling and hindering factors within Africa’s institutional support services have been examined. These institutions are both local and global. They are local in the sense that they have a presence in African states, and, somehow, have a direct impact on business policies and activities. They are global in a sense that some institutions, such as the African Development Bank, Southern Africa Development Coordination Conference (SADDC) play an indirect role in business development in Africa. The book will also put into consideration the roles of bilateral and multilateral organizations. The roles of business institutions discussed in this volume include those of banks, private agencies, government agencies and foreign donors/interventionists such as UNIDO and IMF. The roles of business assistance for start-ups and entrepreneurship development support has been the focus of work by many researchers (see Cooper 1982; Vesper 1982; Birley 1986; Westhead 1990; Cromie 1991; Hawkins 1993; Reynolds 1996 in Veciana et al, 2002). In this volume, more focus is directed towards the study of the relationship between business institutions, economic development and entrepreneurship. Also, the analysis is concerned with the intersection between business institutions and other types of institutions, such as legal and social institutions and other forms of non-business related or informal institutions. Why should we study institutions? The reasons why we study institutions and what we can learn from 2

Here it is argued that political scientists often use the term institution as a rough synonym for government while social scientists, distinguish between organizations and institutions.

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them will depend on how well their roles and contributions can be revealed and examined. As Stephen et al (2004:2) suggest, “…much of the entrepreneurship research has focussed on the psychological and social factors, which stimulate entrepreneurial activity, and on public policies to stimulate and support entrepreneurship”. However, there appears to be little research on formal institutions (Massawe and Calcopietro, 1999). Since previous researchers concentrated on finance as the main obstacles to effective entrepreneurship, this book shares the feeling identified by Fogel (2004:4) that entrepreneurs need other assistance in conducting market studies, preparing business plans, acquiring loans, technology, and access to suppliers and customers. Essentially, business support is a combination of different actors, actorfacilitators, governance and other informal arrangements in the business ecosystem. While the focus of most institutions have been accused of being deductive in nature, Bruno and Tyebjee (1982) have offered suggestions that in order to develop entrepreneurship, there is a need to improve other areas of support other than financial assistance. The main areas identified here include; (1) the ability of entrepreneurs to use modern transport and communication facilities, and (2) the development of networks and business information systems (see also Fogel 2004:4-7). The private sector in Africa has a new shape (although businesses have always been there pre- and post-structuralism). However, it is still not known as to how much the local institutions have adjusted their policies to accommodate the new changes. It should be noted that since the move to the private sector-led economy, most African countries have gone through a number of major economic decisions and regulations (privatization and foreign investment). It can, therefore, sympathetically be asserted that the communication of these changes to the businesses communities has not been easy. The newness of the sector, globalisation pressures and the continent’s efforts to adopt modern business support services mechanisms makes the roles of these institutions an important area of research and policy formulation. The Roles and impacts of Institutions While the justifications for the existence of institutions at different levels seem to go beyond the often perceived roles of financing and 5

Introduction: African Business Development- Institutions, Firms and Local Growth

creating economic policies, there is a need to pay attention to the impact they may have on businesses. According to Veciana et al (2002) the use of support mechanisms can have positive effects both on the number of firms created and on the improved survival rate of these firms. Also in Gibb (1993) the role of SME support policy has been emphasized. In some developing countries, i.e. Latin America whose business institutions appear to have preceded those in Africa, institutions have impacted on businesses by: improving the public image of business, modernization of existing business organizations, formalization of the informal sector by removing legal constraints on business; strengthening umbrella business organizations to unite sectoral interests; improving communications among national business groups; and educating the public on the benefits of market economies (Sweeny, 1995). Institutions and their characteristics have recently taken a prominent position in a number of policy agendas. The significance of regulating and shaping institutions can be seen at all levels; local, regional and global. As Maskell (1999:2) asserts, “the role of the organisations and institutions at the regional level is now more than ever to support innovative practices by helping in establishing and maintaining preconditions favourable for inter-firm co-operation and information exchange such as social capital accumulation”. Also, in decentralised systems like the United Kingdom, regional institutions do exist with statutory purposes to encourage economic development and regeneration; promote business efficiency, investment and competitiveness; promote employment and enhance the development of skills relevant to employment; and contribute to sustainable development (DTI, 2004). The importance of institutions in African countries cannot be ignored (Wangwe, 2005). Fogel (2004:2) comments that new venture creations are greater in countries that keep rules and regulations at a minimum, offer tax and other incentives, and provide training and counselling services to start-up entrepreneurs (see also Dana, 1987, 1990). However, the levels at which rules and regulations are set are determined by the countries’ desire to improve their economy through the private sector. Recent research on transitional economies (Ovaska and Sobel, 2004:16) suggests that “…having policies that simply help the rate of new firm creation do not automatically [or necessarily] promote the 6

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high rates of technological innovation necessary for economic growth”. However, despite such views, institutions in Africa have shown to have effects on the internal and external organisation of firms. For instance, in Tanzania, these institutions and business support agencies form a part of economic development (Wangwe, 1997; Wobst, 2001). The removal of states` control over economic activities suggests that institutions should also adjust to fit within the new economic models. The challenging question here is whether institutional development in African can move away from the supply-driven policies that tend to focus on the number of firms created rather than the effectiveness of the businesses created, competitiveness and their survival rates. In the context of institution-firms relationship, it is recognised that for firms to perform properly, both physical and human resources are essential (Penrose, 1959). In this case, the services that are offered by local business support institutions in Africa could serve these purposes. First, the internal factors such as; human resources (management, availability of skilled workers) are examined together with physical resources (for example finance and buildings). The second part will examine policies that govern the support infrastructure. These are external factors that are beyond institutions (economic and political factors). “…Although most academics and policy makers seem to agree on the importance of both government and market in generating economic development, it remains a matter of debate what exactly should be the role of the government, to what extent markets should be liberalized, what are the rules of the game” Hermes and Salverda (1999:3)

But, to fully understand the impact of states on business we need more empirical evidences. Although, some researchers have questioned the role of states in business development (Wangwe, 1997, 2001; Kyaruzi, 2006) the roles played by larger firms are yet to be explored. There are considerable arguments to suggest that unequal power relationships between firms can lead to superior firms to acting as institutions. Batra et al (2003:18) have asserted that some influential firms are business environment “makers”, and thus form and shape policies, laws and regulations favourable to their private interests, sometimes through illicit means. In other words some large businesses are institutions in themselves. Since most African states have now 7

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abandoned their old economic models (African socialism and others) and adapted foreign neoclassical models, there is a change of tune as Ahrens suggests: “…The internal organization of state apparatuses is made up of a complicated nexus of institutions, which provide incentives (and disincentives) for political decision-makers and bureaucrats to carry out public policies. In neoclassical models, however, the state is exogenous to the economic reform process”. - Ahrens (1999:26)

The extent as to how exogenous the African states are when it comes to economic and private sector development remains a debatable issue that needs empirical backup. Some states, for instance Tanzania, while the eras of socialism seem to have waned the public sector is still making key decisions on the private sector development. The transition to a full private sector-led economy is still miles away. We are sceptical as to how neatly the new institutional frameworks could fit within the old systems. Also there are challenges, for instance, neo-classical theories of production are characterized by perfect competition, homogenous products and constant returns to scale. This suggests that comparative advantages of nations and location are determined exogenously, mainly by the spatial distribution of natural endowments and other factors of production (Peterson, 2000:2) and state controls cannot work. One recurrent issue is that of centralised states making all major economic decisions. The bureaucratic states and the decisions they make on the economy are often romanticised and unquestionably treated as unproblematic. As Eifert et al (2005:19) have argued that some aspects of business climates in Africa should aim at improving the delivery of business services and reflect the needs to consider the political economy that underlies state performance and capacity. Firms Can African firms foster local economic growth? After the failure of the Structural Adjustment Programmes in Africa, in the mid 1980s most African countries embarked on entrepreneurship and firm formation. Millions of firms have been created while others have failed to survive and reach maturity. Some of this controversy comes about 8

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because of the difficulty in measuring the economic contributions of these firms. Other than the outputs (especially the amount of taxes generated) of these firms there is no specific measurements. Talking of the economy at a local level, the numbers of firms created do not translate into growth (Kyaruzi, 2006). This makes the conceptualisation of the relationships between African firms and local growth harder than previously thought. There have been a number of approaches to studying firms’ contributions to local economic growth (Nielinger, 2003; Kyaruzi et al, 2006). To some extent, these theories have called for a fresher look into the policy, structure and functions of these firms before appreciating their perceived economic contributions. For example, looking at Tanzania’s experience, Nielinger (2003:9) suggested that; “…If SME development is regarded as a suitable instrument to raise economic growth and issues of SME promotion are to be addressed – either from politics, the donor community, SME development agencies, or from the SMEs and their associations themselves – any approach needs to deal with the challenging mix of business obstacles and the heterogeneous character of different types of enterprises”.

Most African firms are of survivalist nature, with poor technology and are too small to contribute to economic growth (Kyaruzi, 2006). While firms in developed countries enjoy privileges such as good infrastructure, technology etc most of African firms are static and tend to operate in difficult environments. This, and other structural factors, tends to affect their performance in the wealth creation process. It is argued that wealth creation takes place in environments dominated by rapid technological change (Teece, Pisano, and Shuen 1997), and that the firm’s response to such a turbulent environment is to adjust their competitive advantage through new knowledge accumulation and increase in competence of the businesses. With recent developments and technological changes, firms are becoming more complex. It has been argued that apart from being an economic entity, firms are also socio-spatial constructions embedded in broader discourses and practices (Yeung, 1998a; Oinas, 1997; Taylor, 1999, Yeung, 2000; Leonard and Taylor, 2002). The modern firm is more dynamic in nature. It is dynamic in a sense that in the new world economic order and intense competition, firms are constantly readjusting in order to sustain the pressure. Apart from responding to 9

Introduction: African Business Development- Institutions, Firms and Local Growth

the intensifying globalisation pressure, the dynamic view of firms also suggests that firms rely on an emerging new form of reflexive business knowledge encapsulated in the idea of ongoing practices and performance (Yeung, 2001:3). Research on African Firms The issues of SME formation and growth are becoming an agenda for many African economies. However, taking Tanzania as an example, a few problems have been highlighted. To some extent, there has been little research on firm formation (Massawe and Calcopietro, 1999). The following factors have been blamed for this: the low quality of microeconomic data (Bigsten and Danielson, 1999:8) and the recurring confusions on what constitutes small firms (Nchimbi and Olomi, 2001). Could we possibly be researching on something that does not exist? For Calcopietro and Massawe (1999: 36), the volume of research with a practical orientation and/or policy relevance is still limited, compared to the needs of the sector. They argue that most of the existing literature on SMEs has emerged from supply-driven research as opposed to demand-driven research. “Donors have primarily assumed responsibility of determining the research agenda and implementation on behalf of stakeholders” (ibid: 36-37). However, though the authors do not claim to have a solution for this ongoing research problem, this volume has attempted to examine the role of firms by setting our own research agendas. This has not been done with the purpose of distancing ourselves from donor-driven research, but the scale and coverage would have however made this move impossible. Conclusion The main objective of this chapter is to introduce the key themes, to clarify the concept of local growth and provide the justifications for this volume. In sum, much of the introductory arguments presented in this chapter point towards the direction that institutions have a significant role to play in business development, firm formation and business policy formulation. However, going against this flow of views, the scepticisms exist to suggest that institutions exhibit different shapes and structures, and, therefore a lack of empirical evidences to assess their suitability to African local economic growth could be a limiting 10

Imani Silver Kyaruzi

factor to fully understand the practical contributions of institutions to local growth. While a volume of literature acknowledges the existence of the missing pieces, the next step is to embark on the processes of unpacking the mysterious concepts behind the local economic growth. In this particular book, to fully understand the processes of stimulating growth using institutions, a combination of theoretical views and empirical evidences have been presented. The following sections will seek to show how the interplay between institutions, firms and policies affect growth at different levels. While contributors to this volume do not claim to have definitive answers to all the questions posed in this area, they have opened the room for further debates that will possibly lead us to develop an understanding of the working of African local economic growth from a non-presumptuous position. As a result, a number of significant conclusions have been drawn from this volume.

Reference Ahrens, J (1999). Toward A Post-Washington Consensus: The Importance Of Governance Structures In Less Developed Countries And Economic Transition.. In Hermes, N., and Salverda, W. (1999). (eds.). State, Society and Development: Lessons for Africa? CDS Research Report No. 7 July 1999 Batra, G, Daniel Kaufmann and Andrew H. W. Stone (2003). The Firms Speak: What the World Business Environment Survey Tells Us about Constraints on Private Sector Development. World Bank October, 2003 (available at: ftp://econwpa.wustl.edu/econwp/mic/papers/0405/0405004.pdf) Baum, J. A. C., & Oliver, C. (1991). Institutional linkages and organizational mortality. Administrative Science Quarterly, 36(2), 187218. Baum, J.A.C. (1996). Organizational Ecology. In S.R. Clegg, C. Hardy and W.R. Nord (eds.) Handbook of Organizational Studies, London: Sage Publications Bigsten, A. and A. Danielson (1999) ‘Is Tanzania an Emerging Economy?’, a report for the OECD Project Emerging Africa, OECD Development Centre: Paris Bigsten, A., Mutalemwa, D., Tsikata, Y, Wangwe, S (August 1999) “Aid 11

Introduction: African Business Development- Institutions, Firms and Local Growth

and Reform in Tanzania”. World Bank Birley, S. (1986). The role of new firms: births, deaths and job generation. Strategic Management Journal, 7: 61-376. Bruno, A.V. and Tyebjee, T.T. (1982). ‘The environment for entrepreneurship’, in Kent, C.A., Sexton, D.L. and Vesper, K.H. (Eds.): The Encyclopedia for Entrepreneurship, Prentice Hall, Englewood Cliffs, NJ, pp.288–307. Cromie, S. (1991). The problems experienced by young firms. International Small Business Journal, Vol. 9: 43-61. Dana, L.P. (1987). ‘Entrepreneurship and venture creation: an international comparison of five commonwealth nations’, in Churchill, N.C., Hornaday, J.A., Kirchhoff, B.A., Krasner, O.J. and Vesper, K.H. (Eds.): Frontiers of Entrepreneurship Research, Babson College, Wellesley, MA, pp.573–583. Dana, L.P. (1990). ‘Saint Martin/Sint Maarten: a case study of the effects of culture on economic development’, Journal of Small Business Management, Vol. 28, No. 4, pp.91–98. Eifert, B, Gelb, A and Ramachandran, V (2005). Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data.world Bank, February 2005 (available at: http://www1.worldbank.org/rped/documents/rped126.pdf) Felsenstein, D. and Taylor, M. (eds), Promoting Local Growth: Process, Practice and Policy, Ashgate: Aldershot. Fogel, G. (2004) ‘Policies and socio-economic conditions of private enterprise development in transitionary economies’, Int. J. Entrepreneurship and Small Business, Vol. 1, Nos. 1/2, pp.136–152 Gibb, A. (1993). The Enterprise Culture and Education, Entrepreneurship Theory & Practice, vol.11 no.3 1993, pp11-34 Gibb, A.A. (1993): Key factors in the design of policy support for the small and medium enterprise (SME) development process: an overview. Entrepreneurship and Regional Development, Vol. 5, No. 1, 124. Green, M. (2001). Institutional theories of justice and responsibility. University of Chicago, March 2001 Gutema, P (2003). Economic Growth in Subsistence Economy: An Alternative View. Journal of Developing Areas, 38 (Fall 2004):19-36. Kyaruzi, I. S (2006). Business Incubation and Clustering in Tanzania. Unpublished Phd thesis. University of Birmingham, UK. North D.C. (1990) Institutions, Institutional Change and Economic 12

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Performance. Cambridge University Press, pp120-122; pp125-130. Oinas, P. 1997: On the sociospatial embeddedness of business firms. Erdkunde 51, 23–32. Oxford: Blackwell Publishers Olomi, D., and Nchimbi, M.I. (2002). Review of experience from interaction among donor agencies in small enterprise policy reform in the United Republic of Tanzania, prepared for the DAC Private Sector Development Group Tanzania and the International Working Group for SME Development of the OECD Committee of Donor Agencies, Sep. (Dar es Salaam, University of Dar es Salaam). Olomi, D.R. (1999). “Entrepreneur Characteristics and Small Firm Performance: Knowledge Gaps and Priority Research Issues,” In Rutashobya, L. and D.R. Olomi (eds) African Entrepreneurship and mall Business Development. DUP: Dar es Salaam, pp 161-180. Ovaska, T and Sobel, R.S (2004). Entrepreneurship in post-socialist economies. Department of Economics, West Virginia University. Octt. 2004. (http://www.be.wvu.edu/div/econ//work/pdf_files/0406.pdf ) Petersson, L. (2000). The Theory of new Economic Geography and Industrial Location in SADC. Paper presented at the 29th annual conference of economists, the economic society of Australia. May, 2000 Stephen, F, Urbano, D., Hemmen, S (2004). Entrepreneurial Activity and Legal Institutions; Paper presented at 21st Annual Conference European Association of Law & Economics: September, 23-25, 2004.Zagreb Sweeny, J. (1995). New Roles for Business Institutions in Latin America. Economic Reform Today Business Associations: Building Democracy Number 2, 1995 Taylor, M. (1999). The small firm as a temporary coalition. Entrepreneurship and Regional Development 11: 1-19 Teece, D.J., Pisano, G., Shuen, A. (1997), "Dynamic capabilities and strategic management", Strategic Management Journal, Vol. 18 No.7, pp.509-33 Veciana, J.M., Aponte, M. y Urbano, D. (2002): Institutions and support programmes for entrepreneurship: A two countries comparison. Paper presented at ICSB conference (Puerto Rico, June 16-19) Vesper, K.H. (1982): Research on education for entrepreneurship. In Kent, C.A.; Sexton, D.L. and Vesper, K.H. Encyclopedia of Entrepreneurship, 1982, 321-351, Englewood Cliffs, NJ: Prentice-Hall, 13

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Inc. Wangwe, S (2005) Macroeconomic Policy Choices For Growth and Poverty Reduction: A case of Tanzania. Policy Brief (Accessed February, 2006) Wangwe, Samuel M. 1997. The Management of Foreign Aid in Tanzania. Economic and Social Research Foundation. Discussion Paper No 15. Dar es Salaam: ESRF. Westhead, P. and Storey, D. (1997) Training Provision and Development of Small and Medium-sized Enterprises, Research Report No.26, London: HMSO. Whitley, Richard. 1994. “Dominant Forms of Economic Organization in Market Economies,” Organization Studies 15: 153-182. Wobst, P. 2001. Structural Adjustment and Intersectional Shifts in Tanzania: A Computable General Equilibrium Analysis. Research Report 117. International Food Policy Institute, Washington, D.C., 193 pp. Yeung, H.W.C. (2000a): Organizing ‘the firm’ in industrial geography I: networks, institutions and regional development. Progress in Human Geography 24, 301–15. Yeung, W. H. (2001). Regulating ‘the firm’ and sociocultural practices in industrial: Progress in Human Geography 25,2 pp. 293–302

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Part I Institutions and Firms

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Chapter 2 The Role of Business Support Institutions in Entrepreneurship Development and Local Economy: A Case of Tanzanian Firms

Imani Silver Kyaruzi Introduction In recent years, developing countries have renewed their resurgent movements to support SME development and economic growth by emphasising private sector-driven strategies in their economic agendas. This renewed interest is now common in those countries in transition, moving from a centrally planned to a market economy – a shift from a public-led, administratively-controlled economy towards a liberalized economy fostering and encouraging private sector development. Also, some have adopted entrepreneurship and local economic growth models to revive their declining economies (Kyaruzi, 2008). However, while SMEs and entrepreneurship are making headlines in developing countries, less have been said on institutions and policies that support this process. Until recently, “Institutional theory” seems to have started to draw the attention to the institutional or contextual – cultural, social, political and economic – factors as determinants of entrepreneurship” (Veciana et al, 2002:2). The process of studying institutions, in addition, is said to follow different approaches depending on the type and nature of institutions in question. Institutions, on the other hand, have been romanticised and few researches have attempted to question their effectiveness and, the significances of their existence. Some researchers have looked at the enterprises, psychological and social factors, and how public policies can be used to stimulate and support entrepreneurship (Stephen et al, 2004:2). However, there appears to be little on the significance and effectiveness of the business support institutions. Also, their economic 17

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

contributions have been explored using volumetric measures that tend to treat the whole section of the business communities as “support seekers”. It is argued by Fogel (2004:4) that entrepreneurs seem to need other assistances… [in addition to the obvious]… in conducting market studies, preparing business plans, acquiring loans, technology, and access to suppliers and customers. Despite this recent realisation, much of the research on African entrepreneurship and business support services have chosen to focus on finance as the main obstacles to effective entrepreneurship, thus failing to scratch the surfaces of most supply-driven institutions whose policies are likely to answer for the business environment and local growth. To investigate and fill the existing gaps within the Tanzanian business support infrastructure, the study applies different methods. First, a review of literature on institutions is provided. Second, we adopted the 10 factors used by Bruno and Tyebjee (1982) when studying the environment conducive for entrepreneurship development. The 10 factors observed here include; (1) venture capital availability, (2) the presence of experienced entrepreneurs, (3) technically skilled labour force, (4) accessibility of suppliers, (5) accessibility of customers or new markets, (6) favourable government policies, (7) proximity of universities, (8) availability of land or facilities, (9) accessibility of supporting services, and (10) attractive living conditions. Therefore, the main focus of this paper will be to assess the environment within which SMEs are supported with the purpose of forming successful firms leading to economic development in Tanzania. This will include an analysis of profit and non-profit organizations, government agencies, financial and non-financial institutions. Defining institutions There are different conceptualisations for the use of the notion of “institutions”. According to North (1990: 3) “institutions are the rules of the game in a society, or more formally, institutions are the constraints that shape human interaction”. Business institutions described in this chapter includes banks, private agencies, government agencies and foreign donors/interventionists such as UNIDO and IMF. 18

Imani Silver Kyaruzi

The research interests in the roles of business assistances for start-ups and entrepreneurship development support has been the focus of many researchers (see Cooper 1982, Vesper 1982, Birley 1986, Westhead 1990, Cromie 1991, Hawkins 1993, White, Reynolds 1996 in Veciana et al, 2002). In developing countries, terms such as “business institutions” and “business environment” tend to accompany each other. The term Business environment has been defined as “…nexus of policies, institutions, physical infrastructure, human resources, and geographic features, which influence the efficiency within which different firms and industries operate” (Eifert et al, 2005:5). Also Batra et al, (2003:2) have described this notion as “enabling conditions for enterprise growth and operation”. It is the ‘’enabling environment’ that forms the basis of this paper. Institutions and Entrepreneurship Development There are evidences to suggest that entrepreneurship play a role in local economic development (Gibb, 1993; Nchimbi and Olomi, 2001; Rutashobya et al, 2001; Kyaruzi, 2006). Institutions have a significant role to play in entrepreneurship development (Batra et al, 2003; Fogel, 2004; Eifert et al, 2005). The institutions here tend to link the all elements of the business ecosystem together. As Spilling (1996: 91) suggests: “…Economic development is a result of complex entrepreneurial processes. Many things are linked together; many ventures develop in close interaction with each other and with environmental factors... [however]… the development of communities requires more than just the development of a number of businesses; it is also about infrastructure, public institutions, and about firms that can match together in advanced production systems”

The entrepreneurial process is complex and tends to involve both formal and informal institutions. Although not all businesses are believed to seek business support during start up (Kyaruzi, 2006), it is argued that the use of support mechanisms can have positive effects on both the number of firms created and on the improved survival rate of these firms (Veciana et al, 2002). For SMEs to grow, develop and become successful, the role of SME support policy is significant (Gibb, 19

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

1993). However, the explanations for the existence of the policy and institutions are too casual to explain their deserved significance in the business ecosystem. Institutions do not just exist to provide financial support to SMEs. They have many other roles to play. Among these, is a process of ensuring and maintaining the constant availability of resources, controlling the levels of government influences etc. Some of the services from non-financial institutions are not directly linked to firms but their absences have a significant impact on business development. The Tanzanian Business Environment: A brief history The current structure of the business institutions in Tanzanian could be exacerbated by the past economic history. Looking at a volume of literature on business environment in Tanzania (Wangwe, 1997, 2001; Rugumamu, 1992; Wobst, 2001; Ndulu,2003; Muganda,2004) suggests that that from 1961 to 1986 Tanzania had both home-grown policies (through experimentation) followed by foreign/donor driven policies (Muganda,2004). The post 1986 policies such the National Investment Promotion Policy3 of 1990 were due to pressure from foreign donors and multilateral institutions. Wangwe and Charle (2005:3) identified three policy episodes followed by Tanzania. First, poverty reduction through an emphasis on social policy consistent with a basic needs approach (1967-1985), secondly an adoption of orthodox growth policy consistent with the first generation of structural adjustment programs (1986-1995) and thirdly, initiatives directed towards combining social and growth policies. There is a little mention of terms such as “business environment” in Tanzania prior to 1986, in most literature the term “trading environment” is used instead. Tanzania has gone through dramatic swings in policy and economic outcomes. From independence in 1961, Tanzania followed a socialist model of economic development that resulted in the nationalization of businesses and industries and the

3

This was replaced by Tanzania Investment Act in 1997

20

Imani Silver Kyaruzi

collectivization4 of agriculture. By 1967, Tanzania became a centrally planned (state controlled) economy. Rugumamu (1992) suggests that most African entrepreneurs were marginalised: “... [during the colonial times in Tanzania]… African economies during this period were restructured to make them produce those goods that complemented the economic needs of the colonizing powers” (Rugumamu, 1992: 8)

Rugumamu`s (1992) analysis suggests that this marginalisation, and many other factors such as poor enabling environment, low level of education and exposure suppressed people’s entrepreneurship spirits, and activities outside those demanded by the colonialists were regarded as unproductive. A fair question to be asked here, is the colonialist’s institutions to blame for the current economic situation? The current situation Following the prolonged slow economic growth in Tanzania, in recent years, a number of economic programmes have been put in place as an effort to alleviate the situation. Some of these have been indicated in Wangwe (1997, 2001 & 2005) and Wobst, (2001). However, the government’s response to the economic crisis has not been reached voluntarily. A number of reasons have contributed to this, among others, including pressure from donors (Bigsten et al. 1999) and the fall of socialism (Ndulu and Wangwe, 1997; Wangwe, 1999; Cooksey et al, 2001). The fall of the Soviet Union and the collapse of socialism left the followers of these ideologies in a dilemma as capitalist forces emerged strongly and appeared to be the only choice available. The period between 1986 and 2004 has been characterized by trade liberalization, privatization and stimulation of export trade (Ngasongwa, 2003). However, most of these programmes have had little impact and, therefore, faced harsh criticisms from both local and foreign economists. According to Wangwe (1995:14), “…import liberalization has threatened the survival of local industries even 4

This policy aimed at transforming the countries agricultural system from predominantly individual farms into a system of large state collective farms. The “forced collectivization” in Tanzania had a negative impact both socially and economically (Rugumamu, 1992)

21

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

though it improves access to imported inputs and capital goods”. It appears that trade liberalization policies are lacking direction and have cleared the way for foreign investments, and to be more specific, an influx of South African companies. For local firms, the government has been gearing up efforts to promote the private sector-led growth. Also the SME policy formulation in 2003 is one of the moves to recognise the importance of small businesses in economic growth. Some of the current initiatives include the Development Policy-SIDP (1996-2020), which puts some emphasis on the importance of the Small and Medium Enterprises (SMEs) for generation of wealth and employment creation. How have these policies been translated into economic growth? Wobst (2001:2) argues that despite the introduction of macroeconomic reforms, policies and market liberalization, “many countries of SubSaharan Africa (SSA), of which Tanzania is one of the poorest, have experienced, only moderate improvement in their general social and economic condition”. In Tanzania, basic services such as telecommunication, infrastructure, power and water and legal frameworks that support the private sector are not yet fully developed (see also Wangwe 1995:8). The lack of such essential services for businesses will provide a platform for this research to investigate the business support environment. Methodology The research reported here involves the use of qualitative and quantitative methods. The research design necessarily took into account the Tanzanian context in which the private sector of the economy is still embryonic. Research techniques on entrepreneurship in developing and developed countries were reviewed. Since the purpose was to collect information on both businesses and institutions, the first step was to identify the businesses and the targeted sources. Letters of introduction were prepared and checked for language clarity in order to avoid offending people through the use of technical language that was unfamiliar to them.

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Imani Silver Kyaruzi

Dual approach: Combining qualitative and quantitative The research methodology used was a combination of qualitative and quantitative techniques encompassing both data and methodological triangulation enabling the convergence of results. The importance of using the dual approach (Jankowicz, 1995) or mixed methods was chosen based on the fact that we had more than one sources of investigation and quantitative data alone could not have been sufficient (Clark et al, 1986; Lindsay 1997). The study adopted the dual perspective so as to make sure key issues were not missed. To reinforce the reliability of the results drawn from the dual approach used here, triangulation has also been used. Denzin (1984) describes methodological triangulation, (when one approach is followed by another) as a known way of increasing confidence in the interpretation of the collected data. Triangulation methods used refer to “designed use of multiple methods, with offsetting or counteracting biases, in investigation of the same phenomenon in order to strengthen the validity of enquiry results” (Green et al, 1989:256). The results from these methods converge to enhance the results. The triangulation technique or mixed-methods enabled the researcher to have maximum flexibility in data collection, while at the same time minimizing research problems caused by the reliance on a single method. It has been suggested that, qualitative and quantitative research can be effectively combined in the same research project (Strauss and Corbin, Patton, 1990). For example, Russek and Weinberg (1993:131) claim that, “using both quantitative and qualitative data, the study tends to give more insights than either type of analysis could provide alone”. Therefore, the use of dual or combined techniques is most likely to produce reliable results. The research was then divided into three phases. Each phase attempted to answer specific research questions and the convergence of the three phases aimed to provide a richness of information that could lead to well-balanced conclusions. Also, at this stage, it should be noted that the study had to adopt different sampling techniques for each research phase. • Phase one: Questionnaires with 160 SMEs, • Phase two: Interviews with 10 institutions • Phase three: Case studies with 30 local entrepreneurs

23

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

Table 1 below indicates the structure of the surveyed companies in phase one. Table 2.1: Sample Structure Frequency of surveyed companies (f)

Percentage of surveyed companies (f/160)

No of S In the population

% of S in the population

Telecommunication

16

9.9

216

10.8

Consultancy

11

6.8

125

6.25

Computing

17

10.5

129

6.45

Motor Industry

3

1.9

41

2.05

Food

8

4.9

320

16

Manufacturing industries Hotel and Restaurants Retail shops

12

7.4

180

9

7

4.3

411

20.55

61

37.7

419

20.95

Health and beauty

22

13.6

92

4.6

Poultry and Diary Producers TOTAL

3

1.9

67

3.35

n = 160

100%

n = 2000

100

Sector (S)

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Imani Silver Kyaruzi

Results The analysis of business support services is a key element of this research. To explore the effectiveness of the existing support services in Tanzania, the survey attempted to identify businesses that received any type of support ranging from governmental institutions, to private organisations, and to family sources. The aim here is to identify the usefulness of the received support as well as to establish the reasons for not seeking support. With respect to the nature and structure of local businesses, this study recognises at the onset that (a) not all businesses are in need of support, and (b) not all businesses are able to access the available support. This last point is vital to assessing the effectiveness of policy formulation to support businesses. Companies that sought support: To identify those businesses that received support and those that did not, a screening question was asked. Businesses were asked to state whether they sought support (pre-start-up) or not. The purpose was to collect information that will enable the study to establish the effectiveness of the services and reasons for their reluctance. Also this would help to assess the importance and usage of the business support services offered by the existing business support institutions. The results revealed the following: Table 2.2: Percentage of Businesses that sought Support:

Yes No Total

Frequency 50 110 160

Percent 31.3 68.8 100.0

On the basis of this data, at this initial stage it is noted that there were issues to be explored and this screening question could signpost the direction where support providers’ and support users’ expectations could be tested. A large section of businesses (68.8%) did not seek business support. Only 31.3% of the survey businesses sought some 25

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

sort of support. Follow up interviews suggested that, entrepreneurs only approach business agencies if they offer what they are looking for to meet the specific needs of their businesses and they are accessible. As one interviewee explained: “I decided not to approach business agencies...the reason being that, I have had bad experiences with banks. They do not seem to understand my business needs. Anyway, I managed to raise money from friends and here I am” (Case 5)

To almost all local entrepreneurs finance is preferred to other types of services. Further analysis will attempt to establish the alternative sources of support adopted by entrepreneurs as well as reasons for their (the entrepreneurs) reluctance. Nature of support sought In most African countries, where the private sector is well established, business support institutions are still rare (or at an embryonic stage) (see Brautigam et al, 2002) and entrepreneurs tend to use different sources of support. As the empirical findings of this research indicate, the choice of support depends on the nature of businesses, size and accessibility factors (influence if one knows someone in the organisation/agency). Some issues were explained by one interviewee: “…No. I am not receiving any support now [at this moment]. Firstly, for me to receive support it would take a very long time as my businesses is too small to be recognized…also there is a lot of paperwork involved. I have to leave my business to deal with all that [meaning filling in the forms] Secondly, I may not get anything in the end… but some of my sales might be affected in the process…so well… now you know the reasons why we decide to stay away from these organizations”. (Case 25)

This section explores the sources of support used by firms. Table 2.3 shows the nature of support sought by entrepreneurs.

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Table 2.3: Types/Nature of business support sought

Government Support Private Support Agencies Family and other sources Own means (Did not seek support) Total

Frequency 2 14 34 110

Percentage 1.25 8.75 21.25 68.75

160

100

Source: Survey

The survey data suggest that the majority of the surveyed firms (69% of the total population) did not used external business support during the start up phase of their businesses, some out of choice and others not so. For those who received support (N=50), the majority received family support followed by private support agencies. Government support was the least-sought support raising issues of accessibility to government institutions and the availability, provision and accessibility of business support services in Tanzania. To explore these possibilities respondents were asked why they used what support they did (family support over private or government support). One of the respondents claimed that: “..Yes it is true that there are a number of business agencies around and the government is still pushing towards a good direction. But I am afraid the support is not for people like me who have no properties […collateral] or any form of godfathers […knowing someone within the system]. We as a family, we have been supporting each other and in case of loans, the issue of charging interest is never been a priority to the lenders…” (Case 8)

It appears that those who chose to opt for family support did not have access to other forms of support. But also, failure to seek support could also be attributed to ignorance or lack of awareness on the part of business founders. As one respondent remarked: “...you are not serious.[responding to the question about seeking

27

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

government support]. Do you think business agencies exist to support people like us? [...meaning low income and small scale entrepreneurs]. … could you show me where these organizations are located? (Case 29)

When business support agencies were asked to respond to this assertion they claimed to be aware of the magnitude of the problems that kept entrepreneurs away, essentially a lack of awareness and a complaining culture. Should local institutions bear the blames or be responsible for raising awareness? One of the support agencies suggested that: “…We have done a lot to open doors to all businesses but it is difficult to meet the demands of every individual businesses…[and]... if you support a hundred businesses you should at least expect a few dissatisfied clients” (IPM04)

What the survey also showed was that despite such claims (IPM04) there were many dissatisfied clients, most local businesses were not happy with the support provided by these institutions. Dissatisfied entrepreneurs led this research into exploring the usefulness of the support services as one of the key areas for answering research questions posed at the beginning of this thesis. Before embarking on the long process of rating the services mentioned above, the key interest was to establish whether business support seeking process had anything to do with the legal status or ownership structure of firms within the sample.

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Figure 2.1: Ownership Structure (OWNSTR) vs. Support seeking pre-establishment (ESTASP) 100

80

60

40

ESTASP

Count

20

yes No

0 Group

Branch

Sole trader

Others

OWNSTR

Despite the availability of support institutions in Dar es Salaam, the analysis by sector shows that the majority of sole traders did not seek business support prior to setting up their businesses. This indicates that business support absorption somehow depends on the legal structure of the firm. The main reasons could be their sizes (capital requirements too small) and lack of awareness of the available support as suggested above. Other reasons for not seeking support will be discussed later. Issues of the size, status and low level of capital were indicated in Case 17. “We are only small and…we are often treated as unproductive compared to large businesses. It will take me a long time to reach that level…[accessing business support agencies]. I think in spite of all that improvement it is still not the best, they only support in giving you details of exhibitions, guidelines on how to pay on what is required, new procedures etc. [signposting rather than supporting]”. (Case 17).

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The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

Such observations suggest that local businesses in Tanzania know what they need. What appears to cause misunderstandings between them and support agencies is the lack of clear communications. Agencies need to provide guidelines on services to be offered to businesses. Equally, some entrepreneurs are not well educated and processes of filling forms and unnecessary bureaucracy are too much to bear. Reasons for not seeking Support Having analyzed reasons for seeking different types of support, the research takes another turn by focusing on those who did not seek business support. At this stage we are working on 110 firms (n=110). Issues of awareness, accessibility and applicability of the support services were described as follows (see table 9.34). Although support is essential, at this stage the study worked with an assumption that “not all businesses need support”. Table 2.4: Reasons for not seeking support Frequency Business support was not 19 essential Was not aware of Business 43 support services available Available support was 44 difficult to access Not applicable 48 Other reasons 10 n = 110 = those who did not seek support

Percentage of n=110 17.3 39.1 40.0 43.6 9.1

The tendency of some SMEs to reject or ignore support has been blamed on their lack of entrepreneurship spirit and culture. But the figures are suggesting that the majority of the firms (39.1%) were not aware of the existing support. This signals an alarm as to why these 30

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support agencies still fail to make themselves known to the wider business community. Other major failures to gain support have been blamed on difficult/denied access (40%). What policy makers could draw from such findings is the fact that business support does exist, but with poor accessibility, bureaucracy and a lack of openness in their dealings with the entrepreneurs. Fewer agencies admitted to the fact that the clients do not know their services and organisational objectives they are supposed to serve. In response to the above findings, follow up interviews revealed that, business support agencies are blaming the government for these failures. Many believe that unless there is more funding from the government, it will become increasingly difficult for them to provide adequate support. The case of agency “IPM04”: “...We have little funding and sometimes donors’ support is unreliable. You can see the quality of the office and the equipment that we have. We need support in order to serve our clients better.” (IPM04)

For the support agencies it is still the “number game” where agencies are evaluating their success and achievement based on the number of contacts with clients and businesses formed (volumetric measures) rather than the effectiveness or usefulness of support they offer to entrepreneurs. Entrepreneurs also have their expectations and rate the received support in terms of the differences made to their businesses` performance. The comments made by an entrepreneur Case 18 below confirm the feelings entrepreneurs have. “I would expect an agency to have smart, energetic business professionals who can provide modern business solutions and not the same old civil servant that I see in offices all time” (Case 18)

Is the reluctance to seek support linked to the year the businesses were established? This was assessed based on the years the companies were formed (year of establishment) and their response. The figures suggest that the period ranging 1965-85 had almost average responses; the number of businesses that thought support was not essential was equal to the number that was not aware of the availability of business support. For the companies established during 1986-95 the business

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The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

support was difficult to access and the poor support accessibility problem rocketed during 1996-2004. In a way non-support seeking could be linked to the size of the business and entrepreneurs` intentions. These views were supported by Case 7 who decided to avoid business support institutions. “…No I am not receiving any support at the moment. Depends on what you mean by support. If you mean building and finance then the answer is absolutely no… I have been supporting myself all along. Well…this is the only way to run businesses of this nature [meaning Cargo Handling Services]…You need minimum intervention and do your own things. I am sure if I had a loan from the banks they would be chasing me for interests and all sorts of nonsense” (Case 7).

In terms of size and accumulating collateral, others do not seek prestart up support due to the smallness of their business. For instance, Case 11 chose to build up the business before seeking support. “No, I did not seek and still I am not receiving any business support from anyone. I have only just started… I have decided to develop the business on my own first …see how it goes first…and you know the reasons behind this because it is very hard to get any favours from support providers and banks when you have nothing to show” Case 11

For others, support is not something that is readily available when needed, as indicated by Case 30: “…Well apart from the support I received when I was setting up this business… I am not receiving support of any kind. I could mention a catalogue of reasons for this but I am going to limit my answers…may be I should ask you one question…where are these support institutions?” Case 30

The views voiced by Case 30 indicate that not all entrepreneurs are aware of what is available to them. This left this research with a challenging question whether support organisations should approach entrepreneurs or vice-versa. Who should make a first move?

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Usefulness of the Support Received from the Institutions: To assess the usefulness of the support services, local entrepreneurs who used the services were asked to rate the effectiveness of the service-providers based on their experiences. The support received ranged from pre-incubation services, business planning and forming a company, training to develop business skills, accounting, legal and other related services, market, sales, export, ebusiness, bank finance and networking support. Although most of the interviewed support agencies claimed to have the capacity to provide all ranges of services, generally it is the effectiveness and not the efficiency that count in terms of business development and formation of successful ventures (as perceived by local entrepreneurs). Table 2.5 below is shows the ratings of usefulness of each specific services received.

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The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

Table 2.5: Usefulness of the received support

Business Support services

Excellent

Average

Business Planning and company formation Business Skills and training Accounting, legal and other related services Marketing research and sales Export

11 (34.4)

19 (59.4)

4 (26.7)

10 (66.7)

E-Business and Technology Development of new Products and Services Bank finance and Venture capital Recruitment of Staff and Personnel management Networking with Other Entrepreneurs

Poor

2 (6.35)

A/E

1

A

1

A/E

1

A P

(6.7) 5 (38.5)

7 (53.8) (7.7)

5 (38.5)

7 (53.8) (7.7)

3 (27.3)

3 (27.3)

1 (10)

5 (50)

5 (45.5) 4 (40)

7 (39)

8 (44)

3 (17)

A/E

3 (21.4)

7 (50)

4 (29)

A/P

5 (39)

4 (31)

4 (31)

E-P

1 (8)

6 (50)

5 (42)

A/P

45 (28.3)

76 (48.6)

30 (23.3)

A/P

151

Table 2.6 shows the summary of ratings as perceived by support users ranging from Excellent, Average and Poor.

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Table 2.6: Summary of Findings Excellent Recruitment of Staff and personnel management none none

Average Business skills and training

Poor Export help

Marketing research and sales Business Planning

none

Development of new products

E-Business and IT Bank finance and Venture capital Networking with Other Entrepreneurs

none

Accounting and legal

The following is the discussion of these services based on the summary provided in Table 2. 6. Business Planning and Forming a Company Business planning ranked from Average to Excellent indicating that businesses do receive initial planning support. However, follow up interviews suggested that local entrepreneurs do not see this service as an important aspect of business formation process. It is either people plan before setting up businesses or they choose not to for one reason or another. The follow up interviews with entrepreneurs revealed a number of factors, such as high costs for consultancy services and bureaucracy as indicated below: “If you go to the banks they will ask you for a document (business plan) and again if you approach business advisors….they will ask for money…you need money before you can access anything in this country…otherwise you end up going round and round wasting your precious time” (Case 11)

Most of the surveyed businesses believe that the pre-incubation services such as business planning, helped with forming a company and the initial support was excellent. However, 88% of the surveyed businesses did not seek pre-incubation services for one reason or another. For some, the “business planning process” was not an essential service as they appear to have other businesses and 35

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

everything followed the same path by using past experience to form businesses. One of the institutions (IPM10) claimed that “failure of many SMEs is largely contributed to by a lack of proper business objectives and guidance during start up”. However, it appears that many companies in the sample did not receive this important support, which aims at cementing ideas to provide a stable business foundation. Yes, there are problems meaning that local businesses start their ventures “the wrong way” without considering different factors such as competitors and economic trends but there appears to be fewer solutions (from the policy side of view) to this problem. Bureaucrats believe that, planning is essential and an interview with policy maker “IPM10 TNBC” to find out the reasons for lack of business planning revealed the following: “I am afraid most businesses in Tanzania fail due to lack of specific objectives. Others fail to plan before they start their ventures [in this case] if anything goes wrong, they have nowhere to refer to...[and stressing on local businesses failure to succeed]…for local businesses it is just work, work …no plan and no direction...I think to form a successful business people should be ready to invest in initial support [consultation]” (IPM10 TNBC)

The reaction from “IPM10” explains why support for planning and forming businesses (see table 9.36) had few takers. A question was also asked about procedures and information on business planning that are available to entrepreneurs during the start up period. The majority of entrepreneurs thought laws relating to business planning and forming a company were average (and required serious review. Business people who are less skilled found the process of forming a company too tiring and often with too much paperwork (bureaucracy) to deal with. Unnecessary bureaucracy could be one of the reasons for the existence of many businesses with unclear or no legal status. Training to develop business skills Poor business skills and the lack of trained business owners have long been blamed for the failure of businesses in Tanzania (Olomi and Nchimbi, 2001). The skills issue was explored in questions to firms on business skills training, seminars, and conference and skills 36

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development sessions. Findings suggest that few businesses have received business training and among this number, 66.7% thought that the received support was average. Further interviews revealed that local business people did not feel comfortable with the type, delivery and the timing of the business training programmes offered by business agencies. Most of the training sessions took place during weekdays and office hours while some agencies are believed to be charging a premium. To achieve their goals, some of the SMEs have to adopt different strategies as suggested by IPMO5: “A key constraint to the development of the private sector in Tanzania is the lack of sufficient managers with the qualities required to successfully steer for profit as well as non-for profit organisations to success. An often-cited problem is that the managers or potential managers are not sufficiently entrepreneurial. This problem has led many organisations, including medium sized enterprises to import managers from neighbouring countries” (IPM05).

Poor business knowledge and training has also resulted in the failure of most businesses to comply with legal standards and maintenance of their business books. The lack of accounting software and books on small businesses accounting together with other factors are discouraging entrepreneurs to grow into large complex businesses. Fafchamps (2001, with Minten, 2001a) while looking at SSA firms noted that, “given that, most market transaction were beyond the ‘reach of the law’, African traders and manufacturers opt for trading practices that minimizes the potential for breach (2001:pp 8). Accounting, legal and other related services The effectiveness of accounting, legal and other related services were rated fairly average (53.84%) while 38.46% of those who received this type of support thought that it was excellent. Businesses commented that the newly formed legal and private consultancies are giving a helping hand in this line of services. However the questions remain unanswered for those who did not seek this type of support (a) how are they managing? (b) If they are not recording their businesses accounts then how do they survive?

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The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

The documentation and legal status of the firms remains a major problem in the company’s advancement. Many organizations appear to have little market and sales knowledge (see table 9.36).

Market Research and Sales It is obvious that most SMEs in Tanzania are struggling to market their products and services. Many are operating with an attitude that “customers know us and they will always come to us”. Most of the companies within the sample do not have marketing as a part of their production or operating costs, this could have been either contributed by ignorance or inadequate capital. One of the respondents claimed to have had enough of the foreign supermarkets poaching his customers; “I have been in Namanga shopping area for over 7 years and customers have always flocked to my shop to buy products. I am a bit disappointed to see “South African” (large supermarket in the area) poaching my customers. He is even charging less for his products than what we are used to charging here” (Case 29)

Similarly, local entrepreneurs are struggling to export their products and services. One of the contributing factors is lack of effective support in this area; SMEs are forced to rely on the local market that has now been saturated with cheap imports from abroad, mainly from Asian countries and South Africa. Lack of marketing and export support is affecting the whole idea of incubation due to the fact that, companies that are incubated do produce products that have little capacity to diffuse into the market. Help with Export Past research (Wangwe, 1995, 1997, 2002; Massawe and Calcopietro, 1999) has shown that the poor performance of SMEs in Tanzania and Africa in general has been blamed on lack of export support. This study found out that 45.45% of those who receive this type of support though it was poor and below standard. Not surprisingly the figures of those who did not have access to export 38

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assistance was 93.1% suggesting that more efforts need to directed to this area of support. SMEs have failed to grasp the opportunities brought by Internet technology to advertise their products and services. Not surprisingly the research found out that others did not have email addresses and access to a computer. Support with E-Business and Technology Figures suggest that, E-business and technology support had a little uptake compared to other support services. The majority of firms, 93.1%, did not receive this type of support. E-business and technology are the new phenomenon to most SMEs in Tanzania. The issue of affordability and lack of government support was mentioned during the follow up interviews. Business owners believe that, despite the government’s efforts to scrap taxes on ICT imports, still most SMEs cannot afford to own even personal computers. Others (SMEs) have attempted to advertise their services on websites, the services that they cannot even themselves afford to access. Poor access to technology (in most cases inability to afford or acquire technology) and competition from foreign companies with better ICT knowledge is strongly affecting the quality of the products and services provided by SMEs in Tanzania. However, there are still fewer organizations that are capable of supporting SMEs on products and services that reflect the current market situation. . Advice on Development of new Products and Services Constant improvements in innovation and production of high quality products within SMEs are a way forward, if they are to compete with other firms (Matambalya and Wolf 2001). However, despite of this fact, most SMEs in Tanzania are not receiving this essential support. This is evident in some areas in Dar es Salaam where entrepreneurs tend to form businesses by simply copying from one another. Lack of adequate resources and lack of expertise on the business support side have contributed to poor delivery of services to SMEs and entrepreneurs. One of the major reasons for SMEs’ failure to adapt to modern businesses is lack of funds. It appears that there are numerous commercial banks and financial organizations but accessibility of these services remains a problem. 39

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

Raising Bank Finance and Venture Capital Access to finance and raising capital are essential parts of any business. However, the figures indicate that majority of firms (93%) did not use this type of services; even those who received support, 50% thought it was average with little impact on their business development. This is due to the factors that have been mentioned earlier; family sources are easy to access and bureaucracy from banks. Few respondents expressed their feelings about finances and venture capital. “…If you go to the banks you can only access secured loans on properties. If you have no property [collaterals] you have to forget about it, nobody will talk to you” (Case 1)

According to an interviewee (IPM08), one of the conditions for obtaining loans from their institutions was to present an “Article of Association and Memorandum” and business plans before loans are granted. However it appears that fewer clients can afford to prepare these formal documentations. On the other hand, banks and financial organisations appear to be aware of the prevailing situations as indicated below: “…entrepreneurs without business plans, financial statements and securities but we have to turn them away if they do not meet the conditions set by the bank.” (IPMO8)

Some of these issues were reported by entrepreneurs Case 3 who claimed that; “…No… I am not receiving financial support at the moment… [but]… I have been to the banks and other financial agencies but failed to convince them to give me a loan. I am going to raise my company’s profile for two years and then I will approach them again. Hopefully this time they will offer me something based on my efforts”. (Case 3)

From experiences reported by Case 3 above, it appears that the banks and financial services providers are interested in people who are 40

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already in business (those with collaterals) and the support does not exist for start-ups, therefore, affecting the whole idea of business incubation. In simple terms, banks will not bother lending to the poor; they have no collateral and their capital requirements are too small (in this case the interest return on the money borrowed would be insignificant to the institutions). Smaller businesses that form the majority of the enterprises in Tanzania are left to find their own ways i.e. unregulated credit unions. Similarly, venture capitalists (though it is a new phenomenon in Tanzania) are only interested in injecting cash into businesses that are at stages of making profits. From the survey of institutions it is evident that conditions set by the bank could be met but not at a very small cost. Entrepreneurs reported high consultancy fees as one of the reasons for their failure to meet the required conditions as local consultants do charge heavily to formulate business plans for entrepreneurs. In some cases those without securities (e.g. properties) have to obtain loans through their relatives who happen to have them, thus creating more risks. Most SMEs are struggling to locate well-qualified individuals to help them with daily running of their businesses. Advice on recruitment is not on the agenda of business support institutions (as they appear to be internal matters). Support agencies have not taken human resource management contribution to firms’ performance by failing to realize that, qualified workforces determine the productivity and competitiveness of SMEs. Recruitment of Staff and Personnel management The lack of adequate support in this area could be due to the fact that the majority of firms in Tanzania employ fewer people (0-20), the need for support in recruitment and personnel management would therefore not be as high as the rest of the services. However, the small percentage of those who received the support were not very disappointed. Failure of agencies to support entrepreneurs in recruiting staff could be complimented by introducing business groups and networks where individuals have a chance to exchange ideas and overcome their isolation. However, it appears that agencies are struggling to initiate networking events.

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The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

Networking with other Entrepreneurs A new wave of entrepreneurship around the world is encouraging networking, business groups and sharing of scarce resource as ways of overcoming isolation amongst SMEs; leading to increased competitiveness (as indicated in chapter seven). From the survey, it appears that fewer SMEs in Tanzania have been encouraged to join their forces together, thereby leaving them vulnerable to competition from foreign firms. However findings (see Table 2.5 and 2.6) suggest that entrepreneurs rated the networking services provided by local institutions as “poor” The role of educational institution Tanzania has little experience of utilising universities and other educational institutions to stimulate local economic growth through incubation (Universities-SMEs links) apart from the University of Dar es Salaam Entrepreneurship Centre that was established in 1999. The problem is evident in both vocational institutions and universities. According to Sekwao (1990) the polytechnic system in Tanzania aims at producing technically qualified graduates for wage employment in the formal sector. Until recently, the state has been the main employer, thus leaving graduates (especially those of business and technical backgrounds) to wait for civil service employment. Loss of employment through privatisation of state owned companies necessitates the improvement of the relationship between the government and educational establishments. Essentially, for the government to achieve knowledge transfer from educational institutions to SMEs more research commercialisation is needed. So far the University of Dar es Salaam is the only educational institution that has an entrepreneurship centre that supports businesses in the community. However, findings suggests that the centre is under funded (heavily relying on foreign donors) and has shortage of expertise in the area of entrepreneurship. It is suggested here that, more emphasis should be directed towards funding university incubators as well as encouraging other institutions such as the College of Business Education and the Institute of Financial Management, to 42

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commercialise their research in an effort to form competitive innovative firms in Tanzania. Like many business support organisations universities are under funded making it difficult for them to meet their objectives (see IPM05`s remarks below). The shortage of business and entrepreneurship skilled lecturers has been stated as one of the major problems. The Entrepreneurship Centre at the University of Dare es Salaam is struggling to make up the number of lecturers, therefore, technology commercialisation and community activities engagement is an unachievable dream without government intervention. Donors alone cannot provide sufficient inputs, more government funds are needed. “…UDEC in 1999 identified a strong need and a significant demand for entrepreneurship as a specialist subject to be embedded in the teaching programmes of the [Faculty of Commerce] FCM as well as a cross-curriculum subject to be introduced to other departments and schools of the university. UDEC adopted a strategy of engaging with senior management in the university, as a result of which entrepreneurship is now incorporated into the university’s policy and development strategies. [However] UDEC has no full-time staff to service the internal market and hence progress depends very much on availability of a specific budget from UDSM or other partners. The director, his assistant and associates can give time, but this will be very limited because they all have to handle a normal teaching and research workload in addition to their responsibilities in UDEC” (IPM05). These suggestions indicate that Tanzania has a desire to develop SMEs-Universities interactions but the execution of such strategies is hampered by lack of human and physical resources. The outcomes of entrepreneurship education provided by the centre to the rest of the faculties across the university is hard to measure as the data of students who have set up their own enterprises upon graduation is not available. Duration of Support Firms need support at all stages (ex-ante, maturity and decline) because a lack of support at any stage could affect the performance of the business (life cycle of the firm, Penna, 2001). This section explores the duration of support offered to businesses.

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The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

Table 2.7: Duration of support (DOS) Frequency

Percentage

started

17

30.9

Still receiving back up support Business does not need back up support

31 6

56.4 10.9

1 55

1.8 100

Ended operating

after

business

Other reasons Total

For those who received support, the majority (56.4%) are still receiving support, while 30.9% had their business support terminated for one reason or another. Follow up interviews discovered that some of the business support agencies only act as resource locators and others have no referral systems in place. Some of the business owners’ feelings include; “...Others [support agencies] are aware of their limitations in terms of capacity and knowledge but they will hang on trying to do almost everything. We end up frustrated and when you complain they will stop your support.” (Case 24)

The survey revealed that, the majority of the business support organisations do not offer support beyond the start-up phase making the rest of the SMEs` lives difficult. As indicated earlier, in Tanzania the numbers of businesses formed tend to fill the policy makers books and the records are used to attract more funds from international donors. Since the trade liberalisation of 1986, there has been tremendous growth in numbers of small enterprises in Tanzania. However, the view of having a million tiny “survival enterprises” is not a great asset for the country’s economy since their contributions have long been exaggerated by the policy makers. The majority of these firms have been set up by individual as a means of survival, rather than in pursuit of new market opportunities and employment creation. The poor support infrastructure has also led to the creation of unstable firms that tend to lack competitiveness in both local and international markets. As indicated in the SEED report (2003:1), “small enterprises can be 44

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difficult, dangerous and insecure places of employment with low financial rewards”. This calls for more effective support and consistency, which is not only directed towards the start up phase but also to the growth and consolidation phases for the country to realise the potential contribution of the private sector. To establish links between the ownership structure and the duration of post start-up the research elicited the following: The ownership structure had less to do with the duration of support than the poor support infrastructure and ineffective business policies. However, “groups” appear to have received support for longer periods than other types of legal organisation. Also, none of the branches had their support terminated although there is an indication that most groups did not need support post start-up. Companies, which were formed between 1996-2004, had shortlived business support for more but less readily identified reasons. Entrepreneurs did not state specific reasons for the discontinuation of the support. Therefore, follow up interviews were essential at this stage. There is also a section of businesses that were formed in the period 1965 and 1985 when business support agencies were few and those businesses did not need any back up support. The findings suggest that, due to resources limitations (scarcity) it is difficult for agencies to provide support for longer periods. As claimed by respondent “IPM01”, who is in charge of small industries` incubation. “…We have limited resources here. Fewer qualified staff and premises. We cannot afford to keep companies all year round” (IPM01 SIDO)

Business Support Policies and the Tanzanian Policy Environment To improve the SME support infrastructure in Tanzania, a number of policies have been drawn up (Wangwe, 1997; Bigsten et al, 1999; Wobst, 2001). These include: The National Sustainable Industry Policy (NSIP, 1996 – 2020), National Micro-Finance Policy, 2000; Business Environment Strengthening in Tanzania Programme (BEST) 2001; SME Development Policy 2002- 2003; Trade Policy, 2002; and the recent establishment of a number of business associations. From these policies, it is clear that support for SME development is relatively new and, in consequence, officials often have limited 45

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

experience in dealing with SMEs. They also depend heavily on the transfer of know-how and knowledge from donor governments and international agencies (SEED, July 2004). As indicated above, some SME policies that are directly involved in SME development are less than five years old with the result that their impact or effectiveness is hard to measure. Also, these policy initiatives have not escaped criticism (see Wangwe and Rweyemamu 2002; Wangwe, 1997; Bigsten et al, 1999). The nature of this criticism is exemplified by that levelled at the Tanzanian Chamber of Commerce, Industries and Agriculture (TCCIA, 2005): “By the mid-1980s, the government had realised that the past development policies and strategies were not adequately responding to changing market and technological conditions in the regional and world economy and were also not adapting to changes in the domestic socio-economic conditions….In response, beginning mid1986, the Government adopted socio-economic reforms which continue to be implemented to date. However, it has increasingly become apparent to the Government and its people that these socioeconomic reforms are not adequately informed by a national longterm development philosophy and direction”. (IPM03)

There are a number of reasons why business policies have been ineffective. First, the government has been slow to react to the new economic challenges brought by globalisation. Second, there has been an introduction of many business and economic policies within a short period of time. Tanzania has been bombarded with all sorts of policies (especially neoliberal policies) which are aimed at picking winners in terms of GDP rather than paying attention to the organisation of economic activities in Tanzania and the policies, which were still favoring socialism to drive local economic development. In this sense, there has been a clash of expectations in which multilateral institutions exaggerate the contribution of the private sector and attempt to turn an agrarian economy into a private sector-led economy overnight. For instance Ayodele et al (2005:2) believe; “Tanzania’s ill-conceived socialist experiment, Ujaama…, received much Western support. Western aid donors, particularly in

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Scandinavia, gave their enthusiastic backing to Ujaama, pouring an estimated $10 billion into Tanzania over a period of 20 years. Yet, between 1973 and 1988, Tanzania’s economy contracted at an average rate of 0.5 percent a year, and average personal consumption declined by 43 percent”

This suggests that, not all multilateral policies have been effective in promoting local economic growth. In similar vein, Ayittey (2004)5 suggests that despite many years of policy reform, barely any country in Africa has successfully completed its adjustment programme with a return to sustained growth. He believes that the path from adjustment to improved performance is, at best, a rough one and, at worst, a disappointing dead-end (UNCTAD, 1998). In pursuit of growth firms generally face many contradictions, but in the Tanzanian business context confusion is exacerbated by the fast pace of change in the business environment, and also because of the impact of micro- and macro-economic policies. In Tanzania, many local entrepreneurs see policies of trade liberalisation as commercial suicide and a policy that favours multinational co-corporations. As the ILO (2003:13) has suggested: “…It is important that governments are clear about the role that small enterprises can play in development. Clarification in this regard provides a basis upon which policy and legislation can be designed and assessed”.

In Tanzania, SME policies are also plagued by bureaucracy, poor administration and embezzlement. A number of policies do not marry with each other. The confusion has arisen from a large number of policy initiatives introduced in a short period of time, thereby, making an assessment of these policies a difficult task. The dissatisfaction has been voiced in Case 1 in the following terms: “[Talking of business support for SMEs]…I think they are very poor and unreliable. The ones that are available concentrate on bigger businesses that bring big incomes and benefits. However very few 5

Ayittey, G (2004). “Corruption, the African Development Bank and Africa’s Development,” Testimony before the Senate Foreign Relations Committee, September 28, 2004, p. 7. 47

The Role of Business Support Institutions in Entrepreneurship Development and Local Economic

[institutions] provide for smaller local businesses, e.g. commercial banks, but only on very restricted conditions that are very hard to come about, thus creating harder conditions for the type of businesses like this one”. (Case 1)

This statement points to the range and complexity of issues and institutions involved with business support. Discussions Institutional Support Services and Local Economic Growth: Based on the empirical findings reported here, it can be argued that, the introduction of the Tanzania Private Sector Foundation and many other business support institutions will only function if there is a stable base of entrepreneurs, on which to build Tanzanian economy. The lack of enterprise education at secondary and university level will only lead to more unemployment problems in the country6. In the Tanzanian business environment, the main criticisms facing business support institutions are the lack of “accessibility”, bureaucracy and lack of well-trained staff. Generally, the institutions are mainly there to lower the costs of transactions amongst businesses. At a government level, the lack of transparency and corruption are obstacles that are making it impossible for the state to translate economic policies into actions. In the past, the government has been known to introduce forceful measures for example the “nguvu-kazi”7 policy of 1983, where being unemployed was considered to be a crime. A few people managed to set up businesses to avoid being arrested. The dent caused by such policies on the local entrepreneurship spirit has never been

6

In the conclusions, the model of entrepreneurship education will be proposed based on the view that, incubation should begin at a local entrepreneurship awareness level (pre-conception and ex-ante stages) in order to channel enterprise ideas through the right directions. 7 “Nguvu kazi” was the Government initiative to force people into employment regardless of their skills and capability. The policy could be simply translated as “being unemployed in urban areas is a crime” (also see Tibandebage et al, 2003:7).

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empirically tested. Also, no one ever talks about “nguvu-kazi”; failure is always inconceivable in African political economy. Local businesses are still facing high transaction costs. These are similar to those observed by Kuchta-Helbling (2000:2), as costs of doing businesses in emerging economies: obtaining a business license, acquiring land titles or leases, hiring employees, knowing and complying with applicable government laws and regulations, obtaining information about the price, quality and quantity of particular goods and services, about sources of goods and services, potential customers, obtaining a loan, buying supplies, hooking up and maintaining electricity and telephone services, paying taxes, enforcing contracts, and so forth. The proponents of businesses associations and linkages (Porter, 1998) suggest that business associations can enhance competitiveness and promote collective linkages by providing a neutral ground for identifying common needs, constraints and opportunities (Porter, 1998:258). Institutions and businesses associations in Tanzania are fragmented and therefore raising rather than lowering transaction costs. The main mechanisms through which the business support institutions in Tanzania can support businesses by lowering the costs of transactions (costs of doing business) are not known. The empirical findings suggest that the majority of local institutions have failed to provide effective support due to a number of internal and external limitations. This study has examined both internal and external institutional capabilities. The interpretation of internal factors include the organization’s internal capacity or their ability to provide support (such as; trained staff, resources etc) whereas external factors are described as the capacity to utilize other resource as well as relationships with other institutions (networking, outsourcing). Internal capability of business institutions: As indicated above, business support institutions in Tanzania lack effective support from the state and the main problems are internal constraints (poor resources and low skilled staff). Previous research by SEED (2002:33) suggests that business associations in Tanzania generally face a number of organizational and managerial problems. These include: “human resource capacity; lack of funds and poor management information systems, which put their effectiveness and 49

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sustainability in question”. The majority of business agencies are operating under very tight budgets and as indicated earlier, they are all depending on subsidies from the government (which is not a lot) and foreign donors (eg. FINIDA, NORAD, SIDA). This affects the quality of the services offered to the end users (entrepreneurs). It was surprising to find out that, one of the oldest “business support institution” in Dar es Salaam did not have a basic facilities such as computers and their working environment) were poor compared to other respondents. One possibility of supporting these institutions to cope with the shortage of staff would be to introduce internet incubators. However, the issue of having technology and Internet incubators is not feasible, as most support institutions have to rely on contacts with clients. The main contributing factors here are higher costs of maintaining the technology and since clients (entrepreneurs) are still not keen ICT users (see also Matambalya and Wolf, 2001) and introduction of Internet incubators at this stage will be wastage of time and resources External capability of business institutions Our interpretation of external capability of business institutions refers to the services that are offered through facilitation, networking and delegation. Most of the surveyed agencies/ organizations do not have referral systems; they lack networking ability with both local and foreign organizations. In summary, they have little or no capacity in dealing with other organizations that are dealing with similar activities. Most of the agencies are there to lobby with the government rather than searching for network partners locally or abroad as one of the ways of supporting clients. The business associations’ tasks mentioned by Nadvi (1999:2) include that of “lobbying government in the interests of their members, providing a range of producer, technical and advisory services to clustered firms” are non-achievable. The government sets policies and, in most cases, appoints leaders of these business institutions making it difficult for these “civil servant appointees” to have impacts on economic matters. In a nutshell the negotiations are predetermined as one government body cannot go against the other.

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Conclusions In this chapter, the effects of business support institutions on business incubation and local economic growth have been outlined. Tanzanian businesses operate in difficult environments, exacerbated to by a lack of effective business policies coupled with misuse of resources through service replication. In some areas, policies have been introduced (SME policy 2003) but the implementation of these policies is still a cause for concern. Also, indicated in DED`s report (2005), “the most important factor inhibiting the micro and small enterprises sector growth is believed to be a non-conducive, non-transparent and complicated legal and regulatory framework coupled with inefficient bureaucracy”. Business agencies have people who have no adequate business skills and, therefore, fail to offer effective support. In some areas, staff have been appointed by the central government regardless of whether they have business skills or not, and in this sense, the public sector is made to inform the private sector. As for coordination amongst business agencies in Tanzania, the relationship is poor since majorities are competing for the same business clients. Similar issues have been voiced by Fafchamps et al (2001:3) on poor institutional policies in Africa, they suggested that “successful macroeconomic policy can be regarded as a pre-condition for growth [but effective] public policy is also needed to reduce coordination failure, favour institutional innovation, and minimize commitment failure in all areas where the private market is likely to prove lacking”. The impact of Business Support Institutions Generally, the impact of local business institutions is yet to be realised. Laws and regulations show little understanding of the dynamics and needs of local SMEs. Also as stated in DEED`S report (2004) there are a number of constraints hindering the private sector development in Tanzania and these include a non-conducive, nontransparent and complicated legal and regulatory framework coupled with inefficient bureaucracy. It is also believed that, in developing countries, under-developed institutions constrain firms from growing to their efficient sizes (Beck, et al., 2003; and Kumar, et al., 2001). Other 51

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authors (Acemoglu et al., 2003) argue that colonial origins and the nature of colonisation are the key determinants of development because they heavily influence current institutions. In a way, the economic path followed by the country largely influences most of the current institutions. The institutional policy blunders after gaining independence (such as the Arusha declaration) are still in most people’s and policy makers’ memories. However, despite the colonial past (and not using it as an excuse), it should be noted that the country gained independence in 1961. This implies that, for over 44 years, the government has had full control over micro- and macro-economic policies. In these 44 years, the private sector and institutions have only been in place for less than 12 years and within this period the government has been struggling to change the people’s mindset (from colonial and socialism to entrepreneurial mindset) as well as correcting, if not covering, past mistakes. While developed countries (e.g. UK universities) have introduced entrepreneurship education in all levels of their education set-ups, in Tanzania, the University of Dar es Salaam Entrepreneurship Centre was introduced in 1999 as the soles university-SMEs linked institution, but its impact to the business communities is yet to be fully realised. As Hendry et al (2000:1) suggest, an understanding of the nature of relationships between universities and SMEs is, therefore, important, particularly in view of the fact that, “current theories on regional development suggest that concentrations of SMEs in certain regions, clustered around one or more university centres, can be effective locations for accelerating this process” (ibid:2). However, the majority of educational institutions (such as business colleges in the country) have been too slow to introduce entrepreneurship education due to the rigidity of their curriculum and lack of directives from the government. Tanzanian businesses lack protection from governmental institutions leaving them prone to external forces and exploitation from rogue dealers. Similar problems face developing countries and have been mentioned in Lalkaka`s findings (2003:3) to be: poor protection of patents and the prevalence of ‘copycat entrepreneurism’; the lack of business and trade information; and inadequate business and financial management experience among the entrepreneurs. On the other hand, entrepreneurs are reluctant to approach business institutions due to the

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perceived bureaucracy and lack of transparency of these institutions (the system is not open to ordinary entrepreneurs). The bureaucracy is strongly embedded in the local support system and those who are ineffective are still hanging on. For instance, looking at business support institutions at a local or national level one can see overlapping of responsibilities and services replication. Such views were also pointed out in Moore and Hamalai (1993)8 who believe that business associations could generate political conflict and lead to a waste of resources as associations compete with each other, rather than stimulate private enterprise and firm cooperation. The local business institutions` approach, especially those under the government, is a “top-down” approach. In this way, they are lacking a clear understanding of the business needs. The lack of double coincidence of needs appear to be a malignant problem that has been voiced in previous research on institutions. According to Bruno and Tyebjee (2002) in addition to providing financial assistance, government policies and institutions, the availability of resources, government influences, accessibility of customers, suppliers and transportation need to be predictive of entrepreneurial intentions. The majority of business institutions think that financial assistance is what entrepreneurs need most, therefore, ignoring other services that affect the businesses throughout their life span. The copycat or duplication of services is also evident in most support institutions. Local Business support agencies appear to have overlapping responsibilities (same services under a different name). A good example is Dar es Salaam Chamber of Commerce and Dar es Salaam Merchant Chamber. The organisations are serving almost the same clients and the differences in the services they provide are hard to see. Poor accessibility of services The majority of the business population do not use the agencies` support and think that they are not easily accessible. The type of support received has a very short lifespan making it difficult for entrepreneurs to achieve their long-term objectives. On the other hand, the agencies have not done enough to market themselves as well as

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improving the accessibility. Multilateral and bilateral organisations have tried their best to improve the business situation in Tanzania; however, they lack a clear understanding of the local business needs, as they appear to have multiple objectives that cannot be achieved simultaneously. The objectives include solving social problems (poverty), diseases and economic problems. In doing so, they have been a good vehicle for introduction of neoliberal policies, thus overstating the role of the private sector in a country whose economy (about 85%) rely on agriculture. In some cases bureaucracy in business support environment still exist and the only way of overcoming this constraint is to have an open system or a decentralised system that will allow institutions to operate with minimum government interventions. It is also suggested by Kuchta-Helbling (2000:13) that, transparency is the key determinant in business development in emerging economies and that, “the best way of overcoming the key to facilitating the informal sector’s participation in the formal economy and in the policymaking and lawmaking processes is to institute democratic governance in the public and private sectors”. Lastly, in summary, the key suggestions drawn from this chapter is that Tanzania should create an effective or right environment for business by removing obstacles in private sector activity such as those resulting from inappropriate legislation, bureaucracy, institutional deficiencies and market failures in order to allow markets to work with the minimum of interference. The policies and laws (institutions) that were discussed in this chapter should attempt to reflect the relationship between the state and small enterprises to avoid misinterpretations of policies, which has always been the case. Reference Birley, S. (1986): The role of new firms: births, deaths and job generation. Strategic Management Journal, 7: 61-376. Bruno, A.V. and Tyebjee, T.T. (1982) ‘The environment for entrepreneurship’, in Kent, C.A., Sexton, D.L. and Vesper, K.H. (Eds.): The Encyclopedia for Entrepreneurship, Prentice Hall, Englewood Cliffs, NJ, pp.288–307 Cooper, C.C. and Gimeno, F.J. (1992): Entrepreneurs, Processes of 54

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Founding, and New-Firm Performance. In Sexton, D.L. and Kasarda, J.D. The State of the Art of Entrepreneurship, Chapter 12, 301-340, Boston: PWS-KENT Pub. Company. Cromie, S. (1991): The problems experienced by young firms. International Small Business Journal, Vol. 9: 43-61. Denzin, N. (1984). The research act. Englewood Cliffs, NJ: Prentice Hall. Fafchamps, M. (2000). 'Ethnicity and Credit in African Manufacturing.' Journal of Development Economics 61: 205-235. Fafchamps, M; Teal, F and Toye, J (2001). Towards a Growth Strategy for Africa. Center For the Study Of African Economies. Oxford University. REP/2001-06 (http://www.csae.ox.ac.uk/reports/Rep0106/rep2001-06.pdf) Fogel, G. (2004) ‘Policies and socio-economic conditions of private enterprise development in transitionary economies’, Int. J. Entrepreneurship and Small Business, Vol. 1, Nos. 1/2, pp.136–152 Gibb, A.A. (1993): Key factors in the design of policy support for the small and medium enterprise (SME) development process: an overview. Entrepreneurship and Regional Development, Vol. 5, No. 1, 124. Hawkins, D.I. (1993): New business entrepreneurship in the Japanese economy. Journal of Business Venturing, Vol. 8, No. 2, 137-150. Hendry C, Brown, J. & DeFillippi, R. J. (2000) Understanding the Relationships Between Universities and High Technology-Based SMEs: Lessons from Government Policy International Journal of Innovation Management 4 (1), 54-75. Kuchta-Helbling, C. (2000). Background Paper – Barriers to participation: The Informal sector in emerging democracies. The World Movement for Democracy Second Global Assembly: Confronting Challenges to Democracy in the 21st Century São Paulo, Brazil November 13, 2000 Kyaruzi, Imani Silver (2008, forthcoming). African Entrepreneurship and Local Economic Growth in Kyaruzi, I.S (eds) African Entrepreneurship and Local Economic Growth: A case of Tanzanian Firms. Mkuki na Nyota Publishers, Dar es Salaam, Tanzania. Moore, M.; Hamalai, L. 1993. "Economic liberalization, political pluralism and business associations in developing countries", in World Development, Vol. 21, No. 12, pp. 1895-1912. Nadvi, K., & H. Schmitz., 1994, “Industrial clusters in less developed 55

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countries: Review of experiences and research agenda”, IDS Discussion Paper 339 Institute of Development Studies, Brighton. North, D. (1990): Institutions, Institutional Change and Economic Performance. Cambridge University Press. Peña, I (2002) “Intellectual Capital and Business Start-up Success” Journal of Intellectual Capital 3(2), 180-198. Russek, B. E., & Weinberg, S. L. (1993). Mixed methods in a study of implementation of technology-based materials in the elementary classroom. Evaluation and Program Planning, 16(2), 131-142. Stephen, F, Urbano, D., Hemmen, S (2004). Entrepreneurial Activity and Legal Institutions; Paper presented at 21st Annual Conference European Association of Law & Economics: September, 23-25, 2004.Zagreb Stephen., F, Urbano,D.,Hemmen, S (2004). Entrepreneurial Activity and Legal Institutions; Paper presented at 21st Annual Conference European Association of Law & Economics: September, 23-25, 2004.Zagreb Veciana, J.M., Aponte, M. y Urbano, D. (2002): Institutions and support programmes for entrepreneurship: A two countries comparison Vesper, K.H. (1982): Research on education for entrepreneurship. In Kent, C.A.; Sexton, D.L. and Vesper, K.H. Encyclopaedia of Entrepreneurship, 1982, 321-351, Englewood Cliffs, NJ: PrenticeHall, Inc. Wangwe, S (2005) Macroeconomic Policy Choices For Growth and Poverty Reduction: A case of Tanzania. Policy Brief (Accessed February, 2006) Wangwe, Samuel M. 1997. The Management of Foreign Aid in Tanzania. Economic and Social Research Foundation. Discussion Paper No 15. Dar es Salaam: ESRF.

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Chapter 3 Small and Medium Sized Enterprises Internationalisation Process: Some Critical Factors Lawrence Ogechukwu Obokoh, Patrick Ehi Oribabor & Rafiu Oyesola Salawu Introduction Small and Medium Sized Enterprises (SMEs) play a critical part in sustainable development of any nation because they contribute to gross domestic product (GDP) and value-added by creating jobs for the unemployed and providing goods and services within and across national boundaries. SMEs are vital for the industrialisation strategy of developing countries due to their presence in all areas of manufacturing (Mojmir, 2000; Udechukwu, 2003; Saleh and Ndubisi 2006). Mazzarol (2000) argues that small businesses have been identified as the engine of economic growth and could be the solution to decades of persistent unemployment because of their innovativeness. The identification of the enormous potential of the SMEs’ sector has been a consistent theme since the commencement of the industrial revolution. Most Governments, especially in Less Developed Countries (LDCs), have now recognised the need to formulate policies that creates enabling environments for the establishment and operation of SMEs. The current emphasis can be linked to the current global trend of free market and the need to bridge the development gap that exists between the LDCs and the Industrialised Countries (ICs) SMEs have various definitions. For instance, the United Nations Economic Commission for Europe (2003) defines SMEs as enterprises with employees less than 250, and have either an annual turnover not exceeding ECU 40 million, or an annual balance-sheet total not exceeding ECU 27 million. But, within the context of this study, SMEs are firms with less than 300 employees and have small financial base compared to Multinational Companies (MNCs) and which in most cases do not enjoy the advantage of large-scale production like the

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MNCs. These SMEs come in various sizes and with different business objectives. At the initial stage of their operation, most SMEs focus their business activities in the domestic market and later spread their business tentacles abroad in order to seek better opportunities. It is the process of spreading their businesses abroad that make them international in focus. Dunning (1988) asserts that firms are international if they are able to transfer some moveable resources such as raw material, knowledge, intermediate products across a national border to combine these resources with less mobile resource in the international market. There are a number of strategic reasons for SMEs` decisions to go international. (Some of the reasons given ) among which are to exploit economic potentials abroad that once existed domestically and has now been eroded due to competition from other firms in the local market, the need to find new source of raw materials and cheap labour and market for new products as a result of product innovation within the firm. Cavusgil and Zou (1994) assert that international expansion provides new and profitable markets for SMEs by increasing their competitiveness, facilitating access to new product ideas, manufacturing innovations, and access to new technological advancement.) Local companies get involved in internationalisation of their business by selling their products abroad (Knight, 2000). Initially, firms gather information on foreign markets which help them transform their products to meet the needs of the foreign market. The compatibility of their products to the international market gives them that competitive edge over other firms. Nationalisation process Most SMEs are set up primarily with domestic business objectives and later in their operation prompted by economic and environmental factors to broaden their activities internationally in order to survive. Karagozoglou and Lindell (1996) opine that internationally competitive SMEs are those that are able to secure long-term growth and survival. SMEs attainment of international status requires them to pass through some critical stages of development before they can be fully established for international competition. This staged development of a firm’s internationalisation is described by thinkers of internationalisation as an incremental, risk-averse and reluctant adjustment to changes in a 58

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firm or its environment. This explains why firms would initiate their internationalisation process at a later period of their development which, when started, is often done gradually (Johanson and Vahlne 1977; 1990; 2003). Vesper (1990) attests that the organization of a new venture spreads over time in which the business operation becomes progressively established over the years. This distinguishes SMEs formed with a domestic focus at the onset from ventures formed with international objectives from inception. In their research, Oviatt and McDougall (1994) defined an international new venture as a business organisation that seeks to derive significant competitive advantage from the use of resources and the sale of its products in different countries right from its initial operation. SMEs whether domestic or international in focus, have some factors that impact on their internationalisation process. For the purpose of this study, these factors will be broken down into motivating and de-motivating factors. The motivating factors are those factors that give SMEs the drive to internationalise while de-motivating factors hinder the ability and delay internationalisation process of SMEs. De-motivating factors make some SMEs take longer time before internationalising. Lu and Beamish (2002) in their study of SMEs’ performance and growth posit that age has a negative moderating effect on the internationalisation and growth of a firm. They believe that the earlier a firm internationalise the greater their chances of a faster growth. But this study believes that the number of years SME take to internationalise is relative and dependent on the prevailing economic environment and also on the resources available to the firm. Robert (2001) opines that small businesses undergo extensive preparation and research to succeed in their international endeavour. This translate to the fact that time gives SMEs opportunity to pass through stages that will make them well established to face the challenges of internationalisation. Eminent scholars on the internationalisation process of SMEs have put forward a number of theories and concepts. Notable among them is Cavusgil who postulated the stage theory for SMEs. The theory posits that SMEs internationalisation process pass through stages. This theory has received a lot of support and criticism. Critics of this theory argue that the theory is irrelevant with the emergence of international new ventures. They went further to suggest that these new ventures skip some stages as a result of the creation of global niches, transportation 59

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and communication cost that have greatly decreased in recent times (McDougall ,Shane and Oviatt 1994; Oviatt and McDougall 1994). While Reuber and Fischer (1997) stress that firms with internationally experienced management team have been known to skip the first two stages of the Cavusgil stage of development prior to internationalisation. Welch and Loustarienen (1988) reports that some small English firms, Australian start-ups, and well established Swedish firms skipped some stages and experience unexpected growth rate in direct foreign investments. The success and the ability of these firms to skip some of these stages cannot be divorced from economic environment and condition that exits before and during their internationalisation process. It is important to note that all firms have different capital base and resources available to them at the formation stage and diverse business objectives, which makes their growth rate and internationalisation process different. The aim of this study is to strengthen the argument that the stage theory holds true for most SMEs with domestic focus from inception, which later internationalise their business operations. It attempts to draw from extant empirical research to demonstrate that the age of SMEs at internationalisation does not have negative moderating effect on their growth rate but the growth rate is affected by factors such as economic and political environment, which are out side the control of SMEs. In other words it will draw a line of difference between the brilliant work of Lu and Beamish (2002) that links age at the time of internationalisation and growth rate with organisational inertia. They supported their argument from the logic posited by Hannan and Freeman (1984) that the older a firm, the more established the routines and practises and the higher the degree of organisational inertia. They assume that organisational inertia makes it difficult for firms to adjust to changes in their environment, which in turn makes them less efficient in their use and management of resources and hence less profitable. The argument of this study is that SMEs delay in internationalising their operation is due to factors that transcend the control of SMEs and that age does not impact negatively on its performance and growth given favourable international environment.

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Background Internationalisation is the most complex strategy that any firm can undertake in order to realise corporate objectives and survive the current global competition. Melin (1992) describes internationalisation as a gradual development that takes place in distinct stages. Bell, Crick and Young (2004) stress that the number of stages differs, a common underlying assumption of extant “stage” models is that firms are well established in the domestic market prior to developing international strategies. Two major models can be identified in this process. First, there is the Innovation-Related models (I-models) conceptualised by Cavusgil (1980). The second, is the Uppsala model (U-models) initially developed by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977). Both models have a common congruence of firms’ involvement in foreign markets. In the I-model, export involvement is operationalised by the extent of a firm’s dependence on foreign market as a result of innovation within the firm. The U-model on the other hand, depicts the process as that of organisational learning and focuses on experience (Nordstrom 1991). Harold, Henoch and Per (2000) posits(Suggests) that the operationalisation of the U-model is organised around strategic choices and organisational forms, which are influenced by many other factors as well. These factors include forces facilitating or inhibiting exporting, information needs and the acquisition of information, foreign market selection and entry (including the effects of cultural distance), expansion and marketing strategies (Leonidou and Katsikeas 1996). In this study, these factors will be discussed under motivating and de-motivating factors that impact on the time SMEs internationalise. This study hopes to elucidate that the age at which SMEs internationalise does not hinder their growth given favourable economic environment both locally and internationally. The U-model and I-model will be used as the basis to show that the resources available to SMEs have greater moderating effect than the age at internationalisation. Motivating Factors for SMEs Internationalisation Process Motivating factors are those factors that give SMEs the drive to seek business opportunity internationally. These factors range from innovation within the firm leading to the discovery of new products 61

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that are a unique asset to the firm. Knight (2000) describes innovativeness as a corporate environment that promotes and supports novel ideas, experimentation and creative process that leads to new products, techniques or technologies. These new discoveries often secure the firm the patent right to enjoy monopoly profit for some specified number of years before other firms are allowed to take part in the manufacture and sale of the newly discovered product. During the period of protection for the use of their patent right, firms are reluctant to seek market opportunity abroad. At the end of the period of protection, or after new firms have discovered similar products that are perfect substitutes to the existing product, the old firm then faces stiff competition that erodes the monopoly profit previously enjoyed by it. The erosion of the monopoly profit drives the old firm to seek market internationally. The ability of SMEs to innovate is either hindered or brightened by the availability of capital to finance Research and development (R&D). Rowden (2001) stresses that small businesses are risk averse and do not have the financial and human resources available to MNCs. Small businesses react to the business environment rather than predict or control it. This makes them hesitate to actively seek out foreign market for customers or supplier for raw material (Baird, Lykes, & Orris, 1994). Due to the fact that SMEs lack enough financial resources to expand, there is need for them to operate domestically for some years to enable them accumulate profit that would be ploughed back into the business to meet up with the appropriate financial base for international expansion. This makes them different from international new ventures that are able to attract funding from multiple sources. LASA Industries Inc is a good representation of these new international ventures with multiple source of funding. Jolly, Alahuhta and Jeannet (1992) sited in Oviatt and McDougall (1994) argue that LASA’s strategy was international in all respect. This is because its founders were Americans, Swiss and French. Its funding was from Europe. The operational headquarters and R & D were located in the United States, while marketing was managed from France and finance from Switzerland. Manufacturing was centred in Scotland to take advantage of attractive regional grants and initial sales were in France and the United State. LASA was able to skip the traditional stage of internationalisation because of its promoters unlike the SME / ventures that started their operation in the local market. 62

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SME’s product life circle also determines the strategy to either pursue early or late internationalisation strategy. If an SME is facing declining sales in its domestic market, it may be facing a rising sales in another country. Kotler (1997) asserts that product adoption occurs throughout the world at different rates. Often a late-adopting country may end up providing a more lucrative market for a firm’s product that have experienced downward drift in sales and eroded profits. A good example is the Internet communication facility that has been in use for many years in industrialised countries and which is just gaining grounds in the LDCs like African. In fact there is currently a boom in the sale and installation of Internet equipment and operation of cyber cafes in Africa when this type of business has reached its saturation point in most industrialised countries of Europe and America. Changes in consumer preference and taste as a result of exposures to new product, or improvement in economic status may make domestic firms face declining demand for their product and then compel them to seek market abroad. According to Bell et al (2004) some factors such as changing consumer preferences, developments in manufacturing, communication and information technologies and changing competitive conditions provide a favourable environment for small firm’s internationalisation. These mentioned factors transcend the control or influence of SMEs either in their early or later stage of their operation. The performance, growth rate and profit generating ability revolve around how well SMEs manage these factors given the human and financial resources available to them. De-motivating Factors to SMEs Internationalisation Process The de-motivating factors are factors - external or internal that inhibits SMEs’ ability to internationalise especially at their early stage of operation and which need to be properly addressed if internationalisation option will succeed. Suarez-Ortega (2003) stresses that the knowledge of export barriers is a vital issue to be addressed by export promoting organisations if they want to effectively target their goods and services to specific markets that need them. Ramaswami and Yang (1990) argues that export knowledge, internal resource constraints, procedural barriers and exogenous variables contribute to factors that affects firm’s export performance. This section attempts to point out some of these de-motivating factors which would then help 63

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us appreciate why most SMEs delayed internationalisation process can either be deliberate to enable them prepare adequately for the internationalisation process or not deliberate but are hindered by factors beyond their control. Some SMEs lack the financial resources to employ skilled managerial staffs that are vast in international operation at the commencement of their operations. This lack of competent personnel compels most SMEs to operate within their resource capability at the initial stage. It is when SMEs attain a reasonable level of financial stability that they employ experienced managerial staff that would help them achieve their internationalisation objectives. Reuber and Fischer (1997) asserts that internationally experienced management teams have a greater propensity to develop foreign strategic partners and delay less in obtaining foreign sales after start-up, which lead to higher probability of success in their endeavour to internationalise. The capacity of SMEs to achieve large-scale production at the commencement of their operation is another barrier to internationalisation. SMEs initially face the problem of market penetration and product acceptance by consumers when they enter the market as well as having capacity problems. If they even have the installed capacity to produce in large scale, they still have to produce in small quantities throughout the period they are trying to gain consumer loyalty. The problem is further compounded by the fact that at this stage of the SMEs life cycle, capacity under utilisation tends to be rampant. The initial productions at a small scale are often not cost effective for SMEs. Breaking into the market and achieving product acceptance requires conscientious and deliberate planning which takes time depending on the type of product and quality of the marketing personnel of the firm. It is only when these SMEs are able to gain their own market share that large-scale production is possible provided they have the financial resources to install the needed machinery for expansion. SMEs also face exogenous barriers in their quest for internationalisation which are basically institutional and regulatory constraints. According to Suarez-Ortega (2003) exogenous barriers are the uncertainties of international markets which can be attributed to the activities of stakeholders in the international market such as competitors, foreign government entry regulations, supply of inputs and demand for products. All these variables transcend the control of 64

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the exporting company. Other factors such as political instability in foreign markets and war, sudden and unexpected depreciation of currencies can act as de-motivating factors that will put off SMEs from internationalising their activities. Conclusion Internationalisation strategy is the strategic option most SMEs have adopted to cope with the current global competition. The strategy opens up more opportunities for potential and profitable markets in addition to providing new product ideas, manufacturing innovations and latest technological development. The internationalisation strategy, good as it may be, is influenced by internal and external factors which transcend the control of SMEs. This then provides the need for SMEs to properly plan and take conscious step towards internationalisation. According to Knight (2000) internationalisation will not achieve its desired objective unless the firm prepares and makes all the necessary provisions in advance before going into the foreign market. Internationalisation preparation describes a firm’s efforts made in advance as it seeks to expand into foreign markets. Such preparation involves conducting international market survey to find out product specification, which will involve human and financial commitment in order to adapt their products to suit the needs of the target foreign markets. The main underlying factor is financial resources to back up the preparation plans. African SMEs have to take deliberate and careful steps that will help them plan within their limited resources. Rowden (2001) stresses the need for SMEs to start slow by using indirect forms of international commerce such as passive exporting and not actively seeking international market share. Adopting “stage model” allows small firms to minimise their risk exposure and help them gradually develop international market expertise. In contrast, other companies have products that often require them to go international immediately or to move rapidly through the internationalisation stage. The rapid movement through the internationalisation stage is enhanced by firms’ innovativeness in developing a unique product or service. This study appreciates the brilliant work of Lu and Beamish (2002) which posits that the age at the time of internationalisation has a negative moderating effect on firm’s growth and performance. 65

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Considering the primary motive of business, which is profit maximisation, no SME will like to remain static given favourable economic environment to expand both locally and internationally. The bedrock of internationalisation is adequate financial base, international market experience which time/age gives SMEs that started “small” the opportunity to build up before venturing into the international market. This study suggests the need for further research on the postulate of Lu and Beamish (2002) on the grounds that new firms with stronger capital base and competent management staff which are international from inception can achieve better growth rate than old firms with weak capital base and which lack the resources to employ competent staff. But a new firm that has international focus at inception will achieve stunted growth if it does not have the needed resources to internationalise. The age at the time of internationalisation of SME should not be considered in isolation from its capital base. If the financial base is considered in isolation, the result can be misleading. Hence the Cavusgil stage theory for SMEs still holds for those SMEs with small capital base and which has domestic business objectives from inception. Such SMEs need to pass through stages before they can attain a proper footing for internationalisation. This study concludes that SMEs’ delay in internationalising is due to factors that transcend the control of SMEs and that age do not impact negatively on its performance and growth given favourable international environment. References Baird, I.S., Lyles, A.M. and Orris, J.B. (1994). "The Choice of International Strategies by Small Business,”. Journal of Small Business Management,32(1), 48-59. Bell, J., Crick, D. and Young, S. (2004). " Small Firm Internationalisation and Business Strategy: An Exploratory Study of 'Knowledgeintensive' and 'Traditional' Manufacturing Firms in the UK”. International Small Business Journal Vol.22 (1): 23-56. Cavusgill, S.T. (1980). "On the Internationalisation process of Firms". European Research (6), 273-281. Cavusgil, S.T. and Zou, S. (1994). "Marketing Strategy-Performance Relationship: An Investigation of the Empirical Link in Export Market Ventures, "Journal of Marketing, 58: 1-21. Dunning, J. H. (1998). “The Eclectic Paradigm of International Production: A restatemant and some possible extensions”. Journal of 66

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International Business Studies, 19: 1-31. Knight, G. (2000). "Entrepreneurship and Marketing Strategy: The SME under Globalisation". Journal of International Marketing.8 (2): 12-32. Hannan, M.T. and Freeman, J.H. (1984). "Structural Inertia and Organisational Change”. American Sociological Review, 49:149-164. Harold G.J.G; Henoch R.S. and Per S Z. (2000). “The Internationalisation Process of Small and Medium-sized Enterprises: An Evaluation of Stage Theory”. Journal of Small Business management; 38(4). Johanson, J. and Weidersheim-Paul, F. (1975). “The Internationalisation of the Firm: Four Swedish Cases”. Journal of Management Studies 12(3): 305-22. Johanson, J. and Vahine, J. (1977). “The Internationalisation Process of the Firm-A model of Knowledge development and increasing foreign market commitment”. Journal of International Business Studies, 8(1): 2332. Johanson, J. and Vahine, J. (1990). “The Mechanism of Internationalisation”, International Marketing Review, 7(4): 11-2 Johanson, J. and Vahine, J. (2003). “Business Relationship Learning and Commitment in the Internationalisation Process”, Journal of International Entrepreneurship, 1:83-101. Jolly, V. K., Alahuhta, M. & Jeannet, J. (1992). “Challenging the incumbents: How high technology start-ups compete globally”. Journal of strategic change, 1:71-82. Karagozoglou, N. and Lindell, M. (1996), "Internationalisation and Small and Medium Sized Technology-Based Firms: An Explaratory Study", Journal of Small Business Management. Kotler P. (1997). Marketing Management, Analysis, Planning, Implementation, and Control. 9th Edition, Prentice Hall, Inc., Upper Saddle River, New Jersey 07458. Leonidou, L.C. and Katsikeas, C.S. (1996). “The Export Development Process: An Integrative Review of Empirical Models”. Journal of International Business Studies 28(3): 517-51. Lu, W. Jane and Beamish, Paul W. (2002). "The Internationalisation and Growth of SMEs". Paper presented at the ASAC conference 2002, Hotel Fort Gary, Winnipeg, Manitoba, Canada: 86-96. Mazzarol, T. (2000). "Do Formal Business Plan Really Matter? A Survey of Small Business Owners in Australia," Paper presented at the ICSB World conference 2000, Brisbane, Australia, June. McDougall, P.P., Shane, S. and Oviatt, B.M.(1994). "Explaining the 67

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Formation of International New Ventures: The Limits of Theories from International Business Research", Journal of Business Venturing 9(6): 469-87. Melin, L. (1992). "Internationalisation as a Strategic Process", Strategic Management Journal 13: 99-118. Mojmir M. (2000), “Globalization: Trends, Challenges and Opportunities for Countries in Transition”. United Nations Industrial Development Organisation, Vienna. Nordstrom, K.A. (1991). "The Internationalisation Process of the Firm: Searching for New Patterns and Explanations," Dissertation (Unpublished), Stockholm School of Economics, Stockholm, Sweden. Oviatt, B.M and McDougall P.P. (1994). "Towards a Theory of International New Ventures," Journal of International Business Studies 25(1) 45-64. Ramaswami, S. N. and Yang, Y. (1990). “Perceived Barriers to Exporting and Export Assistance Requirements”, in S.T. Cavusgil and M.R. Czinkota (eds) International Perspectives on Trade Promotion and Assistance. Westport, CT: Quorum Books. Reuber, R. and Fisher, E. (1997). "The Influence of the Management Team's International Experience on the Internationalisation Behaviours of SMEs', Journal of International Business Studies 28(4): 80726. Rowden, R. W. (2001). “Research Note: How a Small Business Enters the International Market”. Thunderbird International Business Review, Vol. 43(2) 257-268. Saleh, A. S., and Ndubisi, N.O., (2006), “SME Development in Malaysia: Domestic and Global Challenges”, University of Wollongong, Economics Working Paper Series, WP 06-03. Suarez-Ortega S. (2003). Export Barriers: Insights from Small and Medium-sized Firms. International Small Business Journal. 21(4): 403419. Udechukwu, F.N. (2003). “Survey of Small and Medium Scale Industries and their Potentials in Nigeria”, in Small and Medium Industries Equity Investments Scheme (SMIEIS), (Eds) Central Bank of Nigeria. Lagos: CBN training Centre, pp 6-18. UNECE (2003) “Small and Medium-Sized Enterprises in Countries in Transition”, United Nations Economic Commission for Europe Series: Entrepreneurship and SMEs, United Nations, New York and Geneva. Vesper K. H.(1990). (Revised edition) New Venture strategies. Englewood 68

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cliffs, NJ: Prentice Hall. Welsh, L.S. and Luostarinen, R.K (1988). "Internationalisation: Evolution of a Concept", Journal of General Management 14(2): 34-55.

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Chapter 4 Senegal: The Economic and Social Environment Ahoefa Chantal Hales Introduction The chapter provides an overview of Senegal, highlighting the different aspects of the country’s environment and focusing on past and present policies affecting the formation of SMEs, particularly female owned enterprises. The underlying motive behind this analysis is to establish whether the institutional framework (the capacity of public agencies both economic and financial, to plan and implement policies, laws and regulations affecting the private sector) is supportive of female entrepreneurship. For this purpose, the chapter is structured into four sections. The first section provides an overview of West Africa and situates Senegal within the region, while highlighting the focus of some studies. The second section centres on Senegal, highlighting the main socio-economic indicators and the different policies and programmes that affect the private sector. Here, societal and cultural factors that influence the way that women operate entrepreneurial businesses are also explored. Because women’s roles have been changed since colonisation, the third section provides an overview of the impact of pre-colonial and postcolonial rule on Senegalese women’s roles in contemporary Senegalese society. In the fourth section, the focus is the business environment and a framework is introduced highlighting the main reforms and programmes affecting the formation, development and growth of businesses. Section five concludes the chapter, by drawing together all the discussions in the chapter. Towards a stable economy? “The key constraints to sustainable growth and poverty reduction in the context of Senegal are of a structural and institutional nature. They are associated with the insufficiency of economic infrastructure, 71

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inadequate control of water supply, poor diversification of the economy, limited accumulation of human and financial capital and persistent rigidities in the institutional environment, as well as fiduciary risks in the management of public finance and the award of contracts” (Zejly and Galibaka, 2005:28). The economic environment of a country is influenced by the conditions of the country, policy biases, reforms and economic performance. The economic institutions of a country, however, influence the activities that men and women carry out, the type of resources they can access as well as the ways that they can participate in the national economy. Understanding the Senegalese economic environment and its impact on women’s entrepreneurial activities today, requires taking a step into the past to establish the impact of preindependence and post-independence policies and reforms. The economy pre- and post independence Senegal passed from a slave trade economy in colonial times to an economy based on groundnut as a cash crop (Walter, 2006). Before independence the economy was in the hands of the private sector, and solely dependent on the peanut trade which was controlled by French companies. Independence did not greatly change Senegal’s economic situation, as it continued to suffer from agricultural dependency and variable commodity prices (Dembele, 2003). Following independence, Senegal made some social and economic progress: between 1970 and 1980, GDP growth was lower than population growth by 25%, and agricultural production declined because of environmental factors and the rural exodus caused by declining farmers’ income. The creation of public sector enterprises led to new infrastructure facilities such as roads, GDP averaged 3.5% a year between 1971 and 1999 and income per capita rose steadily. While agri-industries, textiles and other light processing industries dominated the industrial sector and mostly served domestic and regional markets before independence, post independence performance was problematic, with the sector losing many African markets and hence had to focus on the domestic market. Import substitution policy was adopted (Bruton, 1998), but later proved disappointing and led to de-industrialisation (reduced production or closure of local firms, retrenchment of labour) (Africa 72

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Recovery, 2000). By the mid 1970s, following a series of external shocks and droughts, combined with the fluctuating prices of primary materials, an economic crisis occurred resulting in unsustainable external debt levels (Sarr, 2000). The high level of debts, increased interest rates and poor export performance meant that the country was unable to service its debts. The post independence economy was shaped by numerous reforms (for example, the Structural Adjustment Programme (SAP) and the Poverty Reduction Strategy (PRS), some of which were initiated by the international donor community, and are still underway. Structural Adjustment programmes and their impact on women Following the poor performance in the last decade of the 1980s to the early 1990s, the Senegalese government devised new programmes to deal with the socio-economic phenomenon that the country was experiencing. An ambitious reform programme initiated by the World Bank and the International Monetary Fund (IMF)9, began with a 50% devaluation of the CFA franc10 to improve the competitiveness of Senegalese products on the international market, and re-set the economy (ADB/ADF, 2001). However, GDP growth rate dropped in 1993 (-2.2%) but managed to become stable between 1995 and 2001 (Fig. 4.1).

9

The IMF had been involved with Senegal since 1979, when it signed loan agreements each year until 1982. It has been involved in the SAP in sénégal since 1986 (Fall, 1999). 10 Currency : 1000 Communauté Financière Africaine franc (CFAF) = £1.027792 (Septembre 2006 est.)

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Figure 4.1 Growth in GDP (at 2000 constant price) from1980 to 2002

Source: World Bank (2005 in Walter, 2006, p.5). World Development Indicators

The primary objectives of the policies of structural adjustment and notably the post-devaluation programme (1994-2000) was to improve the competitiveness of the economy in the context of sustainable economic growth, by setting up reforms to liberalise the economy, reduce the public sector, promote the private sector, and maintain inflation. Since 1999, the main programme was replaced by the new PRSPs (Intrac, 2005). Senegal’s SAPs covered broad areas from fiscal and monetary systems, pricing and trade policies, to the public sector, and its core policies included cuts in public spending; tight monetary and fiscal policies; export-led growth; trade and investment liberalisation; deregulation of internal prices; dismantling of the public sector and privatisation of State-owned enterprises and of essential services (IMF, 1998). The fiscal policies that were implemented involved administration and broadening the tax system; financial improvement of public sector enterprises, improved efficiency of

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government planning and debt management system; and UMOA11 monetary reforms (Fig. 4.1). In a push towards liberalisation, a common tariff was introduced, interest rates were rationalised, more controls were set on borrowing, and a bank supervisory board was created. However, this profound liberalisation of the economy had severe consequences on employment, poverty and public spending. At the domestic level, the economy was liberalised by reducing agricultural subsidies, putting less control on consumer prices, and introducing a labour code, to allow more flexibility in hiring and firing12. Despite the new labour code, labour freedom in Senegal still remains in the twenty lowest in the world (Bertelsmann, 2004). During the programme some public enterprises were privatised while others were restructured, and a financial reform took place following the financial deadlock, especially with the immense difficulties in paying salaries to 68,000 public servants (Tshibaka, 2002). Here, significant restructuring of the financial system took place with the re-orientation of public investment towards productive sectors, setting of interest and exchange rates, and privatisation of state banks and other financial institutions. While the initiation of the reforms was successful, the implementation was extensive but not sustainable (Parker et al., 1995; Bertelsmann Transformation Index, 2003). Problems included delays in implementing a number of measures of the privatisation programme and issues with the promotion of private sector activity; their

11

UEMOA, formally known as the West African Monetary Union (WAMU) was created by a treaty signed in Dakar in 1994 by the head of states of the then seven countries (Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo), in response to the devaluation of the currency CFA Franc to work with the central bank, BCEAO (Michel, 2004). UEMOA, which is also a custom and monetary union among some of the members of the Economic Community of West African States (ECOWAS), has a commission whose role is to “establish a customs union, harmonize investment incentives, public financial management procedures and taxation, and monitor key macroeconomic convergence criteria, including fiscal deficits, inflation, public sector wages, and government arrears” (World Bank, 2006). 12 The new labour code revokes article 35 of the labour code, which restricted the use of temporary staff. The new labour code hence gives more flexibility when establishing contract and bargaining wages. It also weakens the position of unions as well as workers’ right (Dembele, 2003).

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consequences were observed in the country’s macro economic indicators: the agricultural sector suffered severely from the dissolution of several states enterprises, and farmers and peasants’ livelihoods were reduced because of the invasion of cheap international imports (Dembele, 2003). The consequences of this were also felt by women, as shown in the following statement: "The soils are getting poorer and poorer; the government no longer provides seeds on credit, and fertilizer has gotten very expensive. The few seeds that are available are given to the men's farms as a matter of priority. When the men migrate from the village, they leave us alone to till the fields. To transport what little we produce to the market costs twice as much since the devaluation" (Renshaw, 1995).

Overall, the SAP was labelled “unsuccessful and undemocratic”, as poverty exploded (Mutasa, 2006) and reflected more the views and priorities expressed by the two institutions than the priorities identified by the poor and other vulnerable groups” (Dembele, 2003, p.8). Fall (1997, p.3) argued that the IMF never took into account the impact that its views and its “suggestions” had on Senegalese citizens, especially women who make up the majority of the poor and feel the impact of changes in social services. What this implies is that a vast majority of the Senegalese population is still not covered by the formal social security system, and in some extent, has to fall back on the extended family network for healthcare (Bertelsmann Transformation Index, 2006). As a result of the impacts of the SAPs, the IMF and the World Bank introduced the Poverty Reduction Strategy Papers (PRSPs). Highly Indebted Poor Country (HIPC) Initiative While Senegal’s economic reform programme was back on track, poverty alleviation could not be achieved and as a result, external debt worsened. For instance, multilateral debts averaged 64% of total debts between 1995 and 2003, with 86% accounting for debts owned to the World Bank and the IMF (Republic of Senegal, 2005c, p.75). In 2002, external debt accounted for 70% of GDP and more than 200% of export revenues, resulting in the collapse of the industrial and agricultural sector. Small-scale rural businesses and farms saw their operations plummet by cheap and subsidised imports from the developed world, 76

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and all these caused a major strain on the country’s economic and social growth (Mutasa, 2006). Despite the high level of debt, Senegal was unable to be considered for the first phase of the HIPC programme because its debts were deemed “sustainable” by the International Financial Institutions (IFIs). After the adoption of the second phase of the HIPC initiative, which relaxed the eligibility criteria, Senegal was admitted in June 2000 (Dembele, 2003). The initiative would allow the country to benefit from a debt relief of $800 millions over a ten-year period, starting from the year 2000. However the contribution of the World Bank and the IMF only accounted for less than 25% of the total debt relief (Mutasa, 2006). Following the G8 summit in Scotland, a decision was made to cancel all the debts. Poverty Reduction Strategy (PRS) The PRS, a framework for growth and poverty alleviation, examines policies to be implemented to correct distortions in the ways that benefits of growth were distributed within the country. In 2001 Senegal submitted its PRSPs to the World Bank and IMF, and after evaluation, a new version was issued in 2002, with the main objective of a 50% reduction in poverty by 2015 (Republic of Senegal, 2002). For this purpose, the government planned to focus on the acceleration of growth and income generation, to build and strengthen capacities, and to improve the standards of living of the most oppressed (Republic of Senegal, 2000). With respect to agriculture, the main objective was to achieve food security, increase agricultural production and establish synergetic links between industry and the service sector. Some of the macroeconomic and structural reforms, which resulted from the adoption of the PRS include the privatisation of the state-run pension fund (Fond National de Retraite), of the groundnut processing industry and of some hospitals. Since the adoption of the PRS, some progress was made. The tertiary sector (commerce, transport, telecommunications and BTP) contributed 63.3% to national GDP in 2004 in comparison to 19.7% contribution in the secondary sector (industries) and 17% contribution in the primary sector (agriculture) (AfDB/OECD, 2006). Despite this progress, the PRS was heavily criticised for its recommendations being “against the interest of the poor” (Afrodad, 2006, p.8).

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In 2002, Senegal was one of the few countries to be selected by the UN to benefit from the Millennium Project (MP), which involved estimating the resources necessary to achieve the MDGs13. Within this context, Senegal submitted a series of reports, based on consultations with various actors including trade unions, the private sector, local communities and society organisations. A report was drafted in 2003, revealing that Senegal was lagging in terms of meeting the MDGs. As a result an Accelerated Growth Strategy (AGS) paper was formulated, with the objectives of increasing annual growth rate to 7-8%, doubling of GDP over a ten-year period and achieving a per capital income of $1,400 in 15 years (Republic of Senegal, 2005a). Senegal then chose to plan its development strategy on competitive sectors chosen on the ground of employment generation and export. The chosen sectors included agro-industries, sea products, tourism, cultural industries, art/craft, textiles (clothing), and information and communication technologies (ICT) (OECD/AfDB, 2006). Despite all the various development plans, equitable and sustainable development which focuses on the eradication of poverty was still a problem (Mshana, 2002), and consequently, African leaders (Algeria, Egypt, Nigeria, Senegal and South Africa) were given a mandate by the Organisation of African Unity (OAU) to develop an integrated socio-economic framework for Africa. The South African president proposed the New Millennium for Africa Recovery Programme (MAP) while the president of Senegal proposed the Omega Plan. These two initiatives were combined into the New African Initiative (NAI), which was later changed to the New Partnership for Africa Development (NEPAD) to combine effort with other African leaders to address critical issues such as poverty, peace, security and underdevelopment through open interaction with the developed world. .

The Millenium Development Goals (MDGs) were introduced following a number of summits organized by the United Nations to deal with some of the most important problems of development. In a UN millennium summit in 2000 the world leaders adopted the declarations of the MDGs. Developing countries were encouraged to incorporate the MDGs in their development agenda.

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New Partnership for Africa Development (NEPAD) “This New Partnership for Africa's Development is a pledge by African Leaders based on a Common vision and a firm and shared conviction, that they have a pressing duty to eradicate poverty and to place their countries, both individually and collectively, on a path of sustainable growth and sustainable development and at the same time to participate actively in the world economy and body politic.” (World Council of Churches, 2002, p.8 in Mshana, 2002). NEPAD’s objectives stress poverty eradication, sustainable growth and development, integration into the global economy and empowerment of women (nepad.org, 2007), and its sectoral policy reforms were in agriculture, human development (with emphasis on health, education and skills development), infrastructure especially ICT, products diversification, and preservation of the eco-system (Aluko-Olokum, 2001). While NEPAD was praised by the G8 countries, it faced several criticisms from the people (women, academics, unionists, farmers, NGOs, etc.) who argued they had been excluded from its contents. In particular, it appears that there is a limited recognition of the barriers and discrimination faced by women in every sector addressed by the programme (Wanyeki, 2002), hence the argument that NEPAD is simply another form of SAP. Mshana (2002, p.2) also claims that: “As a charter or manifesto for designing the political-economic future of a continent whose ailments have been the subject of countless mis-diagnoses, mis-constructions, mis-prescriptions, and a diversionary speculation, NEPAD has been a heads-of-state project, almost exclusively owned by the New African Leadership Group. Efforts of the New Leadership group to popularise it have ended up reinforcing the perception that it is little more than a marketing exercise, targeted at the multilateral donor community and the western bureaucratic elite”. Recent economic development In 2003 and 2004, real GDP increased by 6.5% and 6% respectively but declined in 2005 because of the rise in oil prices and the impact on the world economy (AfDB/OECD, 2006). The increase in GDP was 79

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attributed to an improved regulatory and microeconomic framework, and the private sector development strategy implemented by the Senegalese authorities. Forecasts still predict a positive outlook as GDP is expected to reach 7% in 2007. The primary sector still continues to be an important source of income for many Senegalese and contributed 4.3% to GDP in 2004, despite a significant decline from the previous year (19.8%). Cereal production also dropped significantly by 21% in 2004 due to the locust invasion, and cotton production, by 9%. The secondary sector characterized by weak investment and a limited domestic market, contributed 20% to GDP in 2004 (AfDB/OECD, 2006), while the tertiary sector, which suffered less from the oil crisis, has been the leading sector, heading the country’s growth with a 9.5% contribution to GDP. Inflation, however, remained within the norms, and public revenues increased by 1% (20.7% of GDP) for the period 2000-2004. This is partly due to the efficiency of the Senegalese fiscal administration and an improvement in government expenditure in relation to the priorities of the PRSPs. In other words, the reduction of corporate tax from 35 to 33% (and to 25% from 2006) (Mbengue, 2006) and the more effective tax collection system enables tax collection in the informal sector using an adapted tax system, known as the single tax (CGU). The single global contribution (CGU) was introduced to replace six types of taxes (including VAT), and aimed at simplifying the tax procedure for small enterprises to make it fairer, to combat evasion and to improve competition (OECD, AfDB, 2006). Under the new system, the taxpayer pays the entire fiscal obligation once on an annual basis. This reduces tax administration costs as well as improving the administrative process (Boston University, 2004). Nevertheless, the Senegalese fiscal freedom was 73.9% and below the world average, suggesting that tax rates are still too high (Index of Economic freedom, 2007). Given the progress made within the macroeconomic environment with increasing per capita GDP growth rate and the ongoing reform of the social sectors, the government of Senegal believes that the millennium objective goals are well within its reach (Republic of Senegal, ADF, 2005).

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Country demographics and social indicators Senegal is the 25th most populated country in Africa with an estimated 11,987,121 (July 2006 est.) inhabitants, and ranks 157th out of 177 countries in terms of poverty (United Nations Human Development report, 2004, in AfricaFocus, 2005). The population is quite young with over 40% aged 14 years or younger; the majority is Muslim and 5%, Christian, but there is clear tolerance and respect between the groups. Senegal’s urban population share increased from 25% in 1960 to 41% in 2002 (Senegal Development, 2006) largely because of rural migration14. Estimates show that one in two Senegalese dwell in the city and one city dweller out of five lives in Dakar, with the consequence that many Senegalese are unable to provide for themselves and their families (Duffy-Tumasz, 2005), and informal neighbourhoods (poor housing, crowding, unemployment and increased urban poverty) are formed. Because 45% of informal neighbourhoods in urban areas are located in Dakar (The National Habitat Committee, 2001, p.1), the Senegalese Government has set up a restructuring and urban alleviation, and land regulation programmes, with the support of institutions such as World Bank, the USAID, the French Cooperation and the German Cooperation Agencies, with the aim of restructuring squatter housing and creating of new habitat for the most deprived of the urban population. Overall, social indicators are showing some improvement as a result of the Senegalese Government’s investment in education, health and social services, with the support of donor institutions such as the United Nations, World Bank and USAID. The adoption of a national Health Development Strategy, for the period 1998-2007, which works in line with the Poverty Reduction Strategy Papers (PRSP), is believed to have improved the well-being of the population and to have reduced Rural exodus is defined as the migratory patterns that normally occur in a region following the mechanisation of agriculture. In such a situation, there tends to be a movement of peoples from rural areas into urban areas. This is related to the fact that with mechanization (or any other change in the method of production, which increases productivity) fewer people are needed to bring the same amount of agricultural output to market [Accessed 12/06].

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illness and mortality. However, significant constraints on the social security system still exist (ILO, 2002), and the legal system is not accessible to the majority of the population because of financial, cultural and language barriers, resulting in an increase in public impatience with the government (Bertelsmann Transformation Index 2006). Education In line with the Millennium Development Goals, there is an increased commitment to improve access to education for both girls and boys as investment in education can improve lives in terms of health and income. The Senegalese education system, which is similar to the French, consists of an elementary level (7-12 years of age); a middle level (13-16 years of age); secondary level (17-19 years of age) and university level. Post independence, primary school enrolment rose from 27% in 1960 to 53% in 1983, following an increase in the middle and secondary level. In the 1980s, however, following SAP, population growth and fiscal factors, enrolment decreased, and increased again in the 1990s (Sarr, 2000). Between 1990 and 1998, primary school enrolment rose by just 4.7% (DPRE, 1998 in Sarr, 2000), the slow growth rate attributable to the low increase in boys’ enrolment, in comparison to girls, and to the difficulty in recruiting school teachers (Harsch, 2000). Evidence from UNESCO (2006) suggests that between 1991 and 2004, 64% of girls and 68% of boys were enrolled in primary school, suggesting that not only are girls catching up with boys, but also Senegal’s educational system has improved significantly (Fig. 4.2). At the 2005 education conference in Dakar, it was suggested that girls were more disadvantaged than boys because of their higher dropout rates (Mbaye, 2005).

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Figure 4.2 Net enrolments in primary education between 1991 and 2004

Note: Percentages of children in school are represented by Gross Enrolment Ratios (GER) and Net Enrolment Rates (NER). GER is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. NER is the number of pupils in the theoretical age group who are enrolled expressed as a percentage of the same population. Source: (UNESCO, 2006) Recent efforts to improve literacy resulted in the establishment of community schools and the provision of basic tuition in local languages such as Wolof, Pular, Mandinga and Joola. This Non-Formal Education (NFE15) training, provided through the government’s Decennial Education and Training Programme (DETP)16 by various 15

The NFE is administered in communities, and participants are encouraged to actively participate in the training. This method of administration has been chosen to generate solidarity and a sense of “we-ness” among the participants. In other words, the culture of solidarity is still maintained in the environment. 16 The DETP was set up in collaboration with institutions and agencies in the educational sector, the civil society and technical and financial partners, to accelerate the Senegalese educational system. Among the many objectives, the programme aims to bridge the gap on educational map and provide higher quality training.

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institutions across the country, as a recent study on NFE showed, has increased women’s self esteem (Kuenzi, 2005, p.212). By the end of the first phase of the DETP programme (1998-2003), some progress was evident with middle and secondary school enrolments, although implementation problems were experienced due to a lack of resources. Still, the government remains optimistic about the second phase of the programme (2005-2010). Unemployment Unemployment was a critical issue for university graduates in the 1960s, as they were automatically employed in the civil service, state enterprise or public institutes. In the 1970s however, following the oil crisis of 1973, university graduates were unable to obtain employment. This worsened with increased urbanisation and the rural exodus, and by the mid 1990s, the unemployment rate was at its highest; it was worse for women and young people (Randle, Africa Renewal, 2004), and resulted in enhanced social tensions. For Zejly and Galibaka (2005) Senegal was experiencing underemployment rather than unemployment. Their study on unemployment revealed that 72% of the labour force was underemployed despite the fact that the majority of commercial and industrial businesses are located in Dakar. Amongst the workforce in active employment, only 7.5% were in the public sector compared to 16% in the formal private sector, and 76.5% of the workforce was in the informal sector, confirming the importance of the private sector and the role of the underground economy (Sarr, 2000). Foreign funds transferred by Senegalese living outside the country (Europe and America) were paramount for the financial security of some families (both direct and extended) and for setting up informal sector activities. The high level of unemployment amongst young people led to the development of an employment policy based on a national employment plan and an employment observatory, alongside which a national employment fund for integrating the young people, supporting the technical and vocational training of job seekers, financing job creation and monitoring trends in the job market was created (Zejly and Galibaka, 2005).

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Socio-cultural environment and women’s changing roles The socio-historical context of Senegalese women has demonstrated that women’s power and weight might not be evident in terms of public representation. Rather, it is rooted in the social process in which households, neighbourhoods, and local decisions are made (Venema, 2004, p.21). This section focuses on the changing roles of Senegalese women since colonisation and the impact of these on business activities. Senegal’s colonial history and traditional values have helped forge a culture of hierarchical structure where socio-political position and status are clearly defined and respected, Islamic tradition and adherence to Muslim brotherhood (Dembele, 2003). However, the spread of education and the increasing effort of the government to promote education and training, and increased economic opportunity, may have modified the traditional social structure based on kinship. Nevertheless, the majority of the population still adheres to traditional values of Terranga (hospitality), Kersa (respect for others), and Tegin (good manners). In pre-colonial societies, women had access to resources such as land, tradable goods and markets (Waylen, 1996). They owned capital and were part of the labour force; their opinions were sought and they held special social status as essential figures in the communal sphere, and hence played an important political role (Sudarkasa, 1996; LeQueret, Le Monde Diplomatique, 2000). For instance, positions such as first wives, or mother of the leader were the most prestigious positions in the Wolof society (Diop, 1981) and, even though some women were subordinate to men in traditional societies, there was a clear balance of sex roles, and they had some power due to child bearing and their role with production and distribution of food responsibilities. In other words, sexual division was along parallel lines rather than hierarchical and structured lines, and women were viewed as important for the continuity of the group (Steady, 1981, p.32). The economy was based on subsistence and each family produced the necessary food for consumption and clothing, and wealth depended on the number of children. Agricultural activities included the production of vegetables, animals, seafood and plants (Sokona et al., 2003), and men cleared the land for agriculture while women plan 85

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and harvested the crops. Any surplus food left from consumption was swapped for other food products such as milk, dried fish and salt, hence an economy of barter (Baumann, 1928). The women’s role under colonisation Colonisation brought with it some changes in women’s status (Waynen, 1996) and the disappearance of the traditional system of trade, which was based on bartering. Different values were placed on labour under the new colonial system as male labour was favoured and money became the basis of all activities. Even customary practices such as the dowry, which previously had symbolic value suddenly, became monetary. As Steady (1981, p.13) argued, under the new capitalist system, “…an equal dual economic system inevitably develops, which favours the modern urban sector at the expense of the traditional rural sector”. The new system encouraged inequality, as women were no longer included in cash cropping or in political decision-making. Instead, women remained responsible for caring for children, feeding the family and dealing with all agricultural work, especially when male labour migration began. Peanut cultivation was encouraged to obtain profit from its export back to France, and farmers and peasants found themselves forced to participate in the new monetary system, to pay for levies and fiscal taxes. The best lands were taken and traditional cereal staples were forced to make way for peanut production, and as a result, the population was forced to purchase imported rice (Sokona et al., 2003). The new colonial capitalist system had other detrimental effects on women. For instance, while ownership of land was previously in the hands of the group (family), the new system insisted on ownership being given to of the individual men in the group. The role of women post colonisation In postcolonial societies, patriarchal values and hierarchies remain. The notion of solidarity and family, referred to as extended production and reproduction of people, their protection and security, rooted from colonial times, still bound people together (Tshikuku, 2001). While this culture has somehow slipped into modern times, the capitalist system 86

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has not completely eradicated it, and as a result, the two systems (old traditional and new capitalist) are still existent but not fully integrated (Tshikuku, 2001). The unemployed and recently arrived immigrants into the cities became absorbed into the new system and made a living in the informal sector as hawkers, domestics and prostitutes (Steady, 1981). Family still remained at the centre of the Senegalese society and was strongly marked by religion, which was sometimes at the centre of discrimination against women (IRD, 2002). In addition, family was the structure that allowed some individuals to survive in times of crises, as jobs are offered to individuals within the family unit. While this type of operation has been working for generations, it appears that it is also at the centre of break ups and some of the problems that the society encounters (Sokona et al, 2003). For instance, employment is often provided to members of the immediate family even though they may not have the appropriate skills for the job, and that such solidarity often means that these family members deliberately avoid becoming educated, as they believe that whatever happens, they will receive support from the family. To conclude this section, many women in Senegal are still confined to traditional roles: they marry at a young age, half of them live in polygamous unions and despite constitutional protection, are still discriminated against when attempting to access vital resources such as finance and land. The last twenty years have seen a significant improvement in the social and economic condition of women because of advocacy work around the world, and the contribution of bilateral and multilateral partners. In Dakar, these changes are evidenced by the government’s new laws and regulations and their impacts on the business environment within which women operate their businesses. The Senegalese business environment This section focuses on the Senegalese business environment (Fig. 1.5) and the changing role of women within that environment, with the goal of establishing whether the climate is enabling for female entrepreneurship. The section will begin with an exploration of the business environment, and will highlight the main female policies and programmes shaping the environment. The business environment defined by Agboli and Ukaegbu (2006) as a country’s bureaucratic practices, institutions, physical 87

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infrastructure, and regulatory polices, appears to have a significant impact on individuals’ ability to undertake entrepreneurial activities (Gnyawali and Fogel, 1994). In a country, while the business environment does not have to be perfect, it must be good enough on a number of dimensions to stimulate enough investment and competition, and be efficient to allow different enterprises and industries to operate (Eifert et al., 2005). The Senegalese business environment is the product of substantial reforms such as the SAPs, the PRS, the AGS and other changes in the private sector, which make the business climate enabling or disabling. Some of these reforms have already been discussed in the first section of this chapter and have been combined with other institutional changes to construct a framework summarising the main policies and practices influencing the business environment within which women operate their businesses in Dakar (Fig. 4.3). Figure 4.3 Senegal’s economic freedoms

Source: Index of Economic Freedom, 2007 [Accessed 17/17/07]

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The economic freedom of a country is that country’s freedom to engage in economic transactions without fear or governance interference, and it measures a country’s policies’ consistency using various dimensions of economic freedom (e.g. business, trade and fiscal freedoms). The world’s average economic freedom is 60.6% and SSA’s is 54.7%. Senegal ranks 86th most free economy out of 157 countries worldwide; the 9th most free economy out of 40 countries in the SSA, and ahead of Ghana (which ranks 91st), Ivory Coast (which ranks 105th) and Nigeria (which ranks 131st). In other words, whilst Senegal is still one of the “most unfree countries in the world” (Index of Economic Freedom, 2007), it has shown some improvements and has scored 1.4% point in economic freedom compared to last year. As shown in the figure, Senegal’s business freedom rate is 56.4%, suggesting that the freedom to start, operate and close a business is to some extent still restricted by government rules and regulations. Monetary freedom however, is higher than average (82.9%) because of relatively stable prices. Policy environment: SMEs policies In a market economy, while wealth is created by the private businesses, these businesses still have to operate within a country and have to adhere with the institutions created and maintained by the government, including the legal system and the state of corruption. SMEs development policies can enhance entrepreneurship, competition and job creation; will spur economic efficiency and improve economic growth and poverty alleviation. In Senegal, the management of SMEs is assumed by the ministry of SMEs, female entrepreneurship and micro finance and its sub-departments which include the SME headquarters (Direction des PME), and the SME support institution ADEPME). The main role of the SME headquarters is to promote SMEs and to provide a strategy for the development of this economic segment. It also aims to generate a favourable environment for SMEs through better control of the judicial, financial, and regulatory aspects of the segment. In 2003, an SME charter, which provides a classification of SMEs in Senegal, was drafted by the Direction des PME. The charter also provides a list of programmes and advantages (access to finance, to public market, export support and exemption from tax), which enterprises recognised by the charter 89

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benefit from. In line with the charter, ADEPME has been “following up” enterprises through training, credit repayment and compliance with SMEs laws and regulations. Many of the entrepreneurs used in the research have used the services of ADEPME. Legal environment Understanding the various laws affecting Senegalese women entrepreneurs requires examining the country’s legal system, which determines the manner in which laws and policies are enabled, interpreted, modified and challenged. International laws recognise and promote specific rights, and are legally binding on governments. In Senegal, as soon as international laws are ratified and treaties endorsed, national laws are automatically overridden. Concerning women’s rights, Senegal is party to the African Charter on Human and People’s Rights17, the international covenant on Economic, Social and Cultural Rights, and the Convention on the Elimination of All Forms of Discrimination Against Women (CEDAW) (Centre for Reproductive Rights, 2003). Domestic laws however, originate from the 1960 constitution18, which guarantees, amongst many things, equality between men and women, self determination, and the right to life and physical integrity (article 6 of constitution); protects institutions of family and marriages, and guarantees freedom of religion, the right to work and the right to public education. Some of these laws, which are derived from French laws, include the Code of Civil Commercial and Administrative Obligation, property laws, and the family code. For instance, the 1972 family code was followed by the creation of a department of female promotion in 1978, and the adoption of an action 17

After signing the Charter of African Unity in 1981, African leaders adopted the Charter on Human and Peoples’ Rights to give full effect to the UN charter and the Universal Declaration of Human Rights. The Charter on Human and Peoples’ Rights covers social, economic and cultural rights as well as third generation rights. Available at: http://www.diplomacy.edu/africancharter/acharter_intro.asp[Accessed 18/03/08] 18 Senegal’s first constitution originates from the 1960s, but several revisions have been carried out since: 1963, 1970, 1973, 1992, and 1998.

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in favour of women in 1982. A national health policy declaration was introduced with the aim of decentralising health care delivery systems. While this amendment led to some success in health care, the quality of health throughout the country remained problematic. As a result, a new declaration was introduced in 1995, which sets as a priority health and social welfare. In 1997, a National Reproductive Programme was introduced (1997-2001) with the aim of promoting reproductive health through the improvement of welfare. This initiative, which was aimed at the most deprived members of the population including women and the young people, also stressed women’s contribution and their importance in sustainable development; it was updated in 2004 with the aim of providing a better life for poor women, and women who are heads of households or in difficulties, through access to goods and services and enhancement of decision-making capabilities (Zejly and Galibaka, 2005). The development of the action plan has also led to the ratification of all treaties and conventions relative to discrimination against women19. Recent mobilisation of women into groups such as the Groupement de Promotion Feminine and associations to provide mutual aid and credit to members has often resulted in women’s determination to challenge local traditions such as polygamy and Female Genital Mutilations. In Dakar, women face less discrimination and even take part in political life, legal professions and business (NetCent Communication, 2006)20.

19

For instance Article 25 of the Senegalese constitution posits that everyone has the right to work and seek employment (US Department of State, 2004), and discrimination of all types (gender, opinion, employment) is forbidden (ILO, 2003). Research carried out by the Canadian Centre for International Research and Development in Dakar and Kaolack on 515 Senegalese women revealed that 14% of women in urban areas were lawyers and that urban women usually received equal pay for equal work. The research concluded that women in urban areas face less discrimination. Available at: http://www.ncbuy.com/reference/country/humanrights.html?code=sg&sec=5 [Accessed 10/06]

20

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Financial environment: the banking system A major re-structuring of the private and public sector and notably of the banking sector took place in the 1980s, which resulted in unemployment and the development of the informal sector and subsistence economy (The World Bank, 2001). Entrepreneurs in the subsistence economy were excluded from the traditional banking sector due to a lack of education and an inability to provide collateral to access credit. The regional solution to the crisis, which caused an overhaul of the banking sector by the central bank of francophone West African, BCEAO21, was the creation of the Economic Promotion Fund (Fond de Promotion Economique) by the African Development Bank (AfDB) and the BCEAO, to fund the refinancing of loans. At the domestic level, the liberalisation of the financial sector brought with it some re-structuring such as the availability of commercial and development banks, and cooperative financial institutions, both regulated by the monetary body WAEMU22. Both groups of organisation, made up of savings and credit associations, savings and loan groups and signatories of the convention framework, initially benefited from financial support from some ministries (for instance the Ministry of Agriculture and Rural Development), as well as from social funds available through anti-poverty programs. Still, the system was undergoing sustainability problems (Africap, 2003) including an absence of qualified personnel, a lack of professionalism, a predominance of short-term loans, and problems in refinancing. As a

21

This is one of two banks (the other banks being the Central bank of Africa and Cameroon) created in 1962 in Africa after decolonization in 1958 as an opportunity for the former colonies to join the French community (Michel, 2004). 22 The West African Monetary Union was set up in 1962 and groups 12 countries in West Africa, which constitute the monetary region, with a population of about 75 millions people. WAMU, which in 1994 after being coupled with an economic union became the West African Economic Monetary Union (WAEMU), has a central bank (BCEAO) which emits a common currency, the CFA franc. The zone shares an economic policies and performances as well as common development policies.

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result, a decentralisation framework was introduced to ensure that micro-finance became an instrument available to micro-entrepreneurs. While the decentralised mechanism did work, it did not support entrepreneurs when they began to expand their business, as micro institutions only provide short-term loans. The government then set up a National Development Strategy for the Microfinance sector, involving the development of sectoral policies that would allow the development of a microfinance sector that could contribute to growth and to poverty reduction. To meet such objectives a Ministry of SMEs and Microfinance was created with the ultimate goal of making “microfinance, an effective tool for mobilising internal resources and to contribute services and products that are appropriate for the financing of the economy” (Africap, 2003, p47). Over the last ten years micro credit activity in Senegal has grown significantly, and in 2002 microfinance reached twice as many households as were served in the formal banking sector (World Bank, 2002; Jenkins, 2006). The year 2005 was declared “the year of microfinance”, and services were offered as key development tools for those targeted by the microfinance programme, particularly women (Guerin, 2006). The main MFIs in Senegal include the saving and credit cooperatives, saving and credit associations, and semi-formal institutions such as financial NGOs. They are available in some parts of the country, although the majority are still located in Dakar. Credit Mutual of Senegal (CMS), Partnership of Mutuals for Mobilization of Credit in Senegal (PAMECAS), Union of Partnership of Mutuals Credit of UNACOIS (UMECU), Alliance of Credit and Savings for Production (ACEP)23, and The Development of Women Entrepreneurs in Africa (Femme Development Enterprise en Afrique, FDEA), remain the five biggest MFIs in Senegal (Africap, 2005). Despite all these efforts, Senegal’s financial system is still seen as undeveloped and its freedom estimated at 50%, which is below the world’s average (Economic Freedom Index, 2007). Trade Trade negotiations are important in allowing mutual benefits in accessing markets and this is usually carried out through agreements 23

ACEP stands for Alliance de Credit et d’Epargne pour la Production and FDEA stands for Femmes Developpement Entreprise en Afrique.

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or trade policies. Since the end of the Yaounde and Lome I-IV conventions in 2000, the EU has been offering preferential market access to African exporters through the Cotonou Partnership Agreements (CPA). This new agreement was set up under the Economic Partnership Agreements (EPA) between the EU and the ACP countries, allowing free trade with relevance to the WTO principles (Alaba, 2006, in Alaba and Alaba, 2007). However, the EPA with the European Union is often difficult due to threats form European imports. Senegal’s trade freedom rate is 61.6%, just below the world’s average because of some inconsistencies in customer implementation and corruption, which add to the costs of trade. In other words, improvements still need to be made. Investment environment Senegal enjoys an investment environment, which is free of discrimination, as foreign ownership of businesses is allowed in most sectors, except electricity, telecommunications, mining and water. While investment freedom remains average (ranked 50%), it seems that unofficial barriers such as corruption and judicial weaknesses are still affecting capital transfers. The Senegalese government hopes to improve the investment environment through the foreign investment agency known as APIX (Agence de Promotion de l’Investissement et des Grands Travaux). The goals of APIX are to facilitate partnership and other forms of business venture, assisting both investors and local entrepreneurs to access information and appropriate documentation. The agency also offers incentives for investors wishing to invest in sectors with growth potential (agribusiness, textiles, fishing, aquaculture, mines and ecology). However, the investors have to invest a minimum of 15,000,000 FCFA (equivalent to £16000.31) in order to benefit from incentives in agribusiness. To promote the development of industrial land and new sites where enterprises could locate their business, the agency for the development and promotion of industrial sites (APROSI - Agence d’Amenagement et de Promotion des Sites Industriels) was created with the support of the African Development Fund. Recent assistance from the Taiwanese government has resulted in APROSI’s plans to create an industrial park in the town

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of Diamniadio (located 35km form Dakar), allowing enterprises to operate from an appropriate business location. Infrastructure While Senegal’s geographical position and the location of Dakar provides an economic hub for the rest of the African continent, the transport system remains problematic and as a result, some regions are poorly linked to the rest of the country. This is an impediment for the entrepreneur, when accessing raw materials and attempting to trade and market products around the country. Furthermore, the great traffic problems in Dakar make it difficult for entrepreneurs to manage their activities. However, programmes are under way with the support of development agencies to improve the transport system, through the implementation of urban renewal programmes (AfDB/OECD, 2006). For instance, the Urban Mobility Improvement Programme was established to improve the safety, efficiency and environmental quality of urban mobility in the Dakar area, through road safety and traffic management measures. Furthermore, there are plans to develop an urban air quality management strategy, to construct interchanges and to modernise rails services. Corruption Corruption is a significant factor in the development and competitiveness of a country. In Senegal, the government has initiated new reforms to cut down corruption. For instance, a National Presidential Commission of inquiry against non-transparency, misappropriation, and corruption was set up in collaboration with both the private and the public sector (Zejly and Galibaka, 2005), and there is enhanced training for magistrates and commercial law practitioners. Despite the new procurement code 2004, the monitoring council for good governance and anti-corruption has yet to prosecute any case, and Senegal was ranked 78th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005. Freedom of corruption is 32% (Index of economic freedom, 2007) and below the world’s average, suggesting that more effort is still required to fight corruption.

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Figure 4.4 Dakar business environment

SME Environment SME Charter (+) Ministry of Female Entrepreneurship (+)

Market environment Trade and labour code (+) EPA and CPA agreements (+) High import taxes (-) Corruption (-) Financial environment BCEAO (+) MFIs (+) (-) CMS, PAMECAS and UMECUS (+) FPE (ADB) (+)

Business registration (+)

Investment environment Investment code (+) Sectoral benefits (+) APIX (+) APROSI (-) Judicial weakness (-) Corruption (-)

Dakar Senegal

Fiscal/Monetary environment Tax reform CGU (+) (-) Corporation tax reduced (+)

Social policy environment Property rights (+) (-) Public/private sector dialogue (+) Social protection (IPRES, IPM, FRN) (+) Family code (+)

Infrastructure Transport (-) PAMU (+)

Source: Author. Note: The (+) and (-) signs represent positive and negative aspects of the policies and programmes available to support female entrepreneurs respectively. Both signs (+ -) together mean that, while some efforts have been made within the policy area, improvements are still required.

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Conclusion This chapter provides an overview of Senegal, highlighting the factors that shape government policies and underpin the formation of female entrepreneurial businesses, and shedding light on the main factors affecting the business environment. Over the years, various government-led policies and programmes, together with the assistance of international institutions have paved the way for an increased acknowledgement of the role and potential of women in economic growth. In economic terms, while GDP has been on the rise, it appears that poverty reduction remains a critical issue, especially since women seem to be suffering the most from it. Consequently, various programmes and policies have been put into place to promote and empower women. However, it is clear that not enough is being done and women are still trying hard to cope with barriers of all kinds, including cultural barriers. Nevertheless, Senegal’s long lasting of democratic government makes it one of the most stable countries in Africa, and has led to favourable international relations with other powers such as Europe and the USA. References ADB/ADF (2001). Evaluation of the Structural Adjustment Programme II Project Performance Evaluation Report. Africa Development Bank (ADB) and African Development Fund (ADF). AfDB/OECD (2006). African Economic Outlook 2005-2006: Senegal. AfDB/OECD (2006). African Economic Outlook 2005-2006: Senegal. Africap Seminar report (2003). Financing MFI growth in Africa through commercial capital Dakar, Senegal, Africap. Afrodad (2006). Accountability in Aid Effectiveness. C. Mutasa. African Forum and Network on Debt and Development (Afrodad). Available at : http://www.afrodad.org/index.php?option=com_content&task=vie w&id=253&Itemid=109 [Accessed 10/07] Agboli, M. and Ukaegbu, C. C. (2006). "Business environment and entrepreneurial activity in Nigeria: implications for industrial development." Journal of Modern African Studies 44(1): 1-30

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Alaba, O. B. and Alaba, O. A. (2007). Post-Conflict Economies in the EU-ACP Economic Partnership Agreements: A case of Sierra Leone. Opportunities and Challenges of Development for African in the Global Arena, Bowen University and Flourish Consult Limited. Aluko-Olokun, I. (2001). NEPAD. www.nepad.org. Baumann, H. (1928). "The division of work according to sex in African hoe culture. Africa." Journal of the International Institute of African Languages and Cultures 1(3) Bertelsmann Transformation Index (2003). Shaping Change. Berlin. 2007 Boston University (2004). African Leaders State of Africa Report 2004 Political and Civil Society Highlights. Boston, Boston University. 2006 Bruton, H. J. (1998). "A Reconsideration of Import Substitution." Journal of Economic Literature 36: 903–936 Bulletin, A. (2005). Human Development Report 2005: United Nations Development Programme [email protected]. 2006 Dembele, D. M., (2003). Debt and destruction in Senegal: A study of twenty years of IMF and World Bank policies. London, World Development Movement. Diop, A. B. (1981). La Societe Wolof: les systemes d’inegalite et de domination. Paris, Karthala. Duffy-Tumasz, A. (2005). Credit and Co-Wives: exploring empowerment in Senegal. University of Pennsylvania, CUREJ: College Undergraduate Research Electronic Journal. Eifert, B., Gelb, A., Ramachandran and R, V. (2005). Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data. Centre for Global Development. Fall, B. (1997). The informal sector in the national accounts: the case of Senegal. The Informal Sector and Economic Policy in Sub-Saharan Africa, Bamako, Mali. Gnyawali, D. R. and Fogel, D. S. (1994). "Environments for Entrepreneurship Development: Key Dimensions and Research Implications." Entrepreneurship Theory and Practice 18 (4): 43-62 Gwartney, J. and Lawson, R. (2007). Economic Freedom of the World 2007 Annual Report. L. T. Martin. Florida, Florida State University and Capital University.

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Harsch, E. (2000). World Education Forum sets Africa as a priority: Dakar summit urges renewed global drive to achieve basic education for all. Africa Recovery. 14: 1 International Labour Organisation (2002). Social security / Informal sector: The case of Senegal. ILO. Intrac (2005). Poverty Reduction Strategy Papers: Some Reflections. INTRAC. IRD (2002). Divorce as a mean of climbing the social ladder. Scientific Bulletin no. 151. International Research and Development. Kuenzi, M. (2005). "Non-formal education and community development in Senegal." Community Development Journal 41(2): 210222 Lequeret, E. (2000). Femmes Oubliees Du Continent Noir: Les mille et une (petites) mains de l’Afrique. Le Monde Diplomatique. Mbaye, A. (2005). Constraints and Opportunities. Regional Conference on Education in West Africa, Dakar. Mbengue, J. (2006). Baisse de l’impôt sur les sociétés en 2006. L’Etat renonce à plus de 15 milliards de francs de recettes. Walfadjri. Mshana, R. (2002). The New Partnership For Africa's Development (NEPAD): Its success depends on participation of African people. Echoes. Mutasa, C. (2006). Campaigning on Illegitimate Debts Lessons, Prospects and Proposals. Afrodad Occasional Papers. Parker, R. L., Riopelle, R. and Steel, W. F. (1995). Small Enterprises Adjusting to Liberalization in Five African Countries. Technical Department, Africa Region. Washington, D.C, World Bank. Renshaw, L. (1995). The Impact of Structural Adjustment on Community Life: Undoing Development. Oxfam America. Republic of Senegal (2000). Interim Strategy Paper. Dakar, Republic of Senegal, Ministry of Economy, Finance and Planning. Republic Of Senegal (2002). Poverty Reduction Strategy Paper (PRSP). Republic Of Senegal. Dakar. Republic of Senegal (2005). Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding. Dakar. Republic of Senegal (2005a). Letter of Intent and Memorandum of Economic and Financial Policies. Dakar.

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Sarr, M. D. (2000). Youth Employment in Africa: The Senegalese experience. New York, United Nations - International Labour Organization. Sokona, Y., Thomas, J.-P. and Touré, O. (2003). Country Study: Senegal. Dakar, Environnement et Développement du Tiers Monde (ENDA-TM). Sudarkasa, N., 1996. The “status” of women in indigenous African societies. In: R. Terborg-Penn, Benton Rushing (Eds.) Women in Africa and the African Diaspora - A Reader. Howard University Press, Washington DC, pp. pp.73-87. The National Habitat Committee (2001). Improvement and restructuring of spontaneous settlements in Dakar, Senegal. Istanbul, The National Habitat Committee. The World Bank (2001). Restructuring Senegal's Ailing Banks. The World Bank and The IMF (2002). Senegal: Financial Sector Assessment. The World Bank and The International Monetary Fund (IMF). Tshibaka, T. B. (2002). Chapter 8 - Economic Policy Reforms, External Factors, and Domestic Agricultural Terms of Trade in Selected West African Countries. Dakar, International Development Research Centre (IDRC). Tshikuku, K. (2001). Cultures, Entrepreneruship and Development in Africa. International conference on the Cultural Approach to Deveopment in Africa. Dakar, Senegal, Universite de Kinshasa Venema, B. (2004). "Livelihood Strategies Compared: Private Iniatives and Collective Efforts of Wolf Women in Senegal." African Studies Quarterly 63(1): 51-71 Walter, R. (2006). La formation professionnelle en secteur informel – Senegal. Paris, Agence Francaise de Developpement (AFD). Direction de strategie. Wanyeki, L. M. (2002). Up in the Air: The State of Broadcasting in Eastern Africa. London, PANOS. Waylen, G. (1996). Gender in Third World Politics: Milton Keynes, Open University Press. World Bank (2005). Starting a Business in Senegal: Société à Responsabilité Limitée (SARL) - Limited Liability Company City: Dakar. Available at:

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http://www.doingbusiness.org/ExploreTopics/StartingBusiness/Det ails.aspx?economyid=164. [Accessed 03/05]: Zejly, A. and Galibaka, G. (2005). Country Strategy Paper. Dakar, African Development Fund: Republic Of Senegal. 55

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Chapter 5 Constraints in Institutionalizing Informal Economic Activities: The Case of Tanzania Honest Prosper Ngowi24 Introduction Several institutions and authorities are undertaking different efforts to bring about and/or facilitate the process of development and poverty reduction in different parts of the world. This is especially so in most developing countries, including Tanzania. Such efforts include various forms of institutionalization of various economic activities, given the noble role of institutions in economic undertakings. These roles, are partly discussed in Shaffer (1969, 1995), Hodgson (1988), Coase (1998), North (1990) and Samuels (1992). They include provision of laws, rules and regulation within which economic activities should take place more meaningfully. For the institutionalization efforts to be successful, however, there is a need to properly and adequately understand the dynamics involved in general and the constraints faced by various actors in particular. The actors include but are not limited to firms operating both in the formal and informal sectors. This chapter focuses on the potential and actual constraints that various economic agents face in the bid to institutionalize their economic activities in the Tanzanian context. A number of lessons can be drawn from the constraints and provide vital inputs in various relevant policy and decision-making processes in Tanzania and beyond. The lessons may alter the current 24 The author acknowledges rich ideas from a conversation in New Delhi in 2004, with Professor Grzegorz W. Kolodko, former Deputy Premier and Minister of Finance, Director, Transformation, Integration and Globalization Economic Research (TIGER), Poland. He also acknowledges comments on the earlier version of this chapter from Professor Josephat Itika of Mzumbe University, Tanzania. Any shortcomings in the paper however, are the author’s own responsibility.

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conceptualization and understanding of institutionalization processes. Conceptual Framework This section provides some conceptual framework within which this chapter is based. The framework helps in inter alia, clarifying some terminologies thereby making the intended meanings clearer among readers. Institutionalization The term “institutionalization” (of economic activities) in this work is used by the author to mean making economic activities known and acceptable by various relevant authorities and institutions in a country. The authorities and institutions in the Tanzanian context include but are not limited to financial and semi-financial institutions including banks, micro-financial institutions (MFIs) and insurances companies. Other authorities and institutions include administrative authorities like central and local governments institutions and authorities including city and town councils; fiscal authorities like the Tanzania Revenue Authority (TRA) and legal institutions like courts and other authorities that give legal recognition to economic activities operators like the Business Registration and Licensing Authority (BRELA). Making the operators of economic activities known to these and other authorities and institutions means giving them relevant recognitions. The recognitions will differ from one authority and institution to another and will have different implications for their operations. Recognition by financial institutions and authorities may take the form of being accepted as credit-worthy economic actors, thereby facilitating access to formal financing of their activities. Recognition by the fiscal authorities is by having Tax Identification Number (TIN) that facilitates various functions including tax payment while recognition by legal authorities and institution is by having a legally accepted status, this in turn is likely to be a result of being registered and licensed by BRELA. Legal recognition gives various benefits including general legal protection and support. The concept of institutionalization of economic activities therefore will be used in this work to mean making the economic activities undertaken by various actors, especially those in the informal sector, 103

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recognized and accepted by various institutions and authorities. It is to be understood that institutionalization efforts may be taken by the informal sector economic operators as well as by various government authorities and institutions. Strictly speaking therefore, some of the institutionalization constraints are faced by the government and others are faced by the informal sector economic activities operators. The focus in this work is on the latter although constraints faced by the former may be implied in the discussion. The concept of “formalization” is sometimes used in the literature to denote institutionalization (see, for example Bangasser (2000), Charmes (1999), Kaare (1999), Kashuliza (1993), Nkya (2003) and Schneider and Enste (2000). Conceptualisation of Formal and Informal Sectors There seems to be a controversy in the literature on the meaning and definition of both the formal and informal sectors. The existing definitions do not seem to sufficiently explain what is observed in practice on the ground. In practice it is difficulty to draw a clear line of demarcation between the two sectors. This is mainly because actors may be frequently crossing from one sector to another on temporal basis. Some may be operating in both sectors simultaneously in various degrees. In what follows however, the two terms are explained as currently conceptualised in the literature. The Formal Sector The formal sector includes all economic activity operators that abide by the legal requirements that include having a license, physical address and filing a tax return as required by relevant rules and regulations. In the context of this work therefore, the formal sector is considered to be the one that fulfils the requirements provided by appropriate institutions and authorities. It embraces all economic activities that are recognized and accepted (that are institutionalized) by the country’s appropriate institutions and authorities as partly explained in earlier in this work.

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The Informal Sector The informal sector is a topic which elicits diverging views about how to define it, how to measure and to classify it, and especially about how to respond to it. There is even debate on what to call it. It is a fact however that, the informal sector exists in most economies in varying degrees, especially in the developing countries. The concept of the informal sector has itself evolved over the past thirty years or so. It is a very broad concept and an economic reality of our time. The informal sector, conceptually, is a mirror image of the formal one. It includes all the economic activity operators that do not abide by the requirements of institutionalization as do the formal sector25. According to Bangasser (2000) the informal sector is regarded as a group of production units which, according to the definitions and classifications provided in the United Nations System of National Accounts, form part of the household sector as household enterprises or, equivalently, unincorporated enterprises owned by households. The informal sector is defined irrespective of the kind of workplace where the productive activities are carried out, the extent of fixed capital assets used, the duration of the operation of the enterprise (perennial, seasonal or casual), and its operation as a main or secondary activity of the owner. Activities performed by production units of the informal sector are not necessarily performed with the deliberate intention of evading the payment of taxes or social security contributions, or infringing labour or other legislations or administrative provisions. Accordingly, the concept of informal sector activities should be distinguished from the concept of activities of the hidden, illegal and underground economy. Informal sector in Tanzania “Even at its quietest, downtown Dar Es Salaam bustles. At traffic lights, the day’s newspapers, freshly roasted cashew nuts and an assortment of mechanical tools are thrust through car windows to potential customers. Fruit vendors wheel their produce the wrong

It acknowledged in this work that a great part of this subsection borrows much from an extensive and impressive work of Bangasser (2000).

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direction along one-way streets and second-hand shoe salesmen block the pavements. The machingas, as these street hawkers are known, are everywhere, and keen to do business” (IRIN26, 19 September 2003). The above quotation depicts some typical key characteristics of informal sector in Tanzania. The size of the sector is substantial. According to Claussen et al (2005), “The Diagnostic study has estimated a total of 1.482.000 businesses in Tanzania, of which 98 % operate “extra legally”. Furthermore, it estimated and presents in the report that there are 1.447.000 urban properties of which 89 % are held “extra legally”. The value of these extralegal assets has been estimated to be 29.3 million USD”27. By all standards and to the extent that the figures are correct and representative of the real situation in Tanzania, the size of the economic actors in the informal sector of the Tanzanian economy is very big indeed. The informal sector in Tanzania seems to be somewhat different from the text book informal sector. In many cases there is likely to be an overlap between formal and informal sector. It is difficult therefore to draw a sharp demarcation line. It is normal for those owning businesses formally, especially Indian shop owners in Dar es Salaam, to make use of the informal sector as distribution channels. Street hawkers are normally “given” merchandize to sell in the informal way by the formal shop owners on conditions that they give back a certain threshold of profit to the shop owners. It is also normal for people employed in the formal sector, both public and private, to own and/or operate informal economic activities on part time-, permanent- or both - bases. This is mainly done in as a strategy to make ends meet due to generally meagre incomes especially in the public sector. One can also observe a number of semi-formal and semi-informal sectors in Tanzania. Unregistered businesses like food vending have at times been obliged to pay some forms of taxes; fines and fees by some authorities, including health and other administrative authorities. The IRIN is a United Nations’ humanitarian information unit. This is a review report for the first phase of MKURABITA which was on identifying the magnitude and characteristics of the informal sector in Tanzania. It was undertaken in 2004/05 by the Institute of Liberty and Democracy (ILD) of Lima Peru under its president, Professor Hernando De Soto. The author of this chapter participated as the national consultancy in the review in October 2005.

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informal sector economic activity actors tend to set up their businesses almost anywhere there is space. Alongside farmers in the countryside, who account for 80 percent of the population and 50 percent of the overall gross domestic product (GDP), hawkers form the backbone of Tanzania’s informal economy. According to IRIN (2003), the World Bank estimates show that the informal sector accounts for 60 percent of the national GDP. This is one of the highest percentages in the world. This parallel economy is the country’s massive employer and source of livelihoods. Despite its size and potentials, the sector has been for a long time seen as a problem by various institutions and authorities especially those in the local and central government. Actors in the sector and especially in such urban areas like Dar es Salaam, Mwanza, Arusha and other cities and towns are seen as violating rules, regulations and order established by institutions and authorities of the government, both local and central. The actors in the Tanzania’s informal sector on the other hand have been seeing some government institutions and authorities as a problem and barrier to their development. for a long time. They have been victims of frequent and brutal police harassments in their (police’s) crackdown operations. They also seem to be victims of the tax authorities who are perceived as harassing them, and of the financial institutions that are seen as setting too tough requirements for them to access finance. Among The requirements include the one of institutionalization of their economic activities. It has been argued, for example in The Guardian (October 11, 2003) that people entering this sector in Tanzania do so because they could not attend or complete school for reasons associated with poverty. It is further observed that the entry into this sector is relatively easy in Tanzania. From its essence, it is clear that entry into the sector does not require registration or even official premises. It is usually a one-man show that requires relatively very little start-up capital. No wonder then that as many as 205,000 school drop-outs are periodically absorbed by the informal sector, 100,000 of them in Dar es Salaam alone (TOMRIC, 2000)28.

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Efforts to help informal sector economic activities’ actors The informal sector in Tanzania has been marginalised, neglected and cracked-down by both central and local authorities for sometimes. In the recent past however we have witnessed some efforts and initiatives to address and help the problems faced by the informal sector. The efforts include extension of social security schemes so as to cover the informal sector too, (TOMRIC, 2000). The most current efforts and initiatives include the government efforts to recognise, support and facilitate the informal sector. This takes the form of Business and Property Formalization Programme for Tanzania, known in its Kiswahili acronym as MKURABITA29. Under MURABITA, among other things, the government has expressed its intension to develop a proper legal framework, which recognises the assets of the informal sector and creates a system of protecting and giving value to the property of the poor so they can access capital from formal financial institutions. This will involve a complete reexamination of the existing regulatory framework, further understanding of the notion of dead capital and public awareness programme. Instutionalisation of informal economic activities What is involved in institutionalization of economic activities? Institutionalization of informal economic activities means that the activities in this sector are formally and legally registered according to the rules and laws of the country in question. Generally it will imply that these activities should obtain the appropriate licenses, have a physical address and file appropriate tax returns. They will also have to adhere to such established standards as health, wages, opening and closing hours and days. As a result of institutionalization, one’s economic activities become officially “known and accepted” by the appropriate institutions and authorities.

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Mpango wa Kurasimisha Mali na Biashara Tanzania

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Reasons for institutionalization of economic activities in the informal sector There are different arguments in support of institutionalization of economic activities that are in the informal sector. Some of them are presented here with some examples in the Tanzanian context. Although they may give other reasons, most government institutions and authorities are likely to be in favour of institutionalization of economic activities due to pecuniary reasons of widening the tax bases. Economic activities taking place within the realm of the formal sector are legally legible for taxation. This is essential as a source of public finance in most poor countries like Tanzania that tend to overly depend on external donor financing in their budgets. Governments may also want the economic activities in the informal sector to be institutionalized for statistical purposes of having a more realistic picture of their economy, including its size. This is essential in various policy and decision making processes in general and in planning in particular. Actors in the informal sector may be interested in institutionalizing their activities due to, inter-alia, the legal status they acquire and the potential benefits therein attached. The benefits include increased possibility of accessing finances from credit and financial markets and being legally protected. It also means operating within the realms of the law and avoiding the many and normally costly nuisances attached to operating in the informal sector. These include frequent and brutal harassments by local and/or central authorities like police30, taxation (fiscal) and business-related authorities. Institutionalization enables the actors in the informal sector to make most out of the potentials they possess. These include possibilities of using their assets, both actual and potential, for accessing capital in the formal lending institutions and authorities. Under the increasingly liberalised and private-sector-led and 30

In the city of Dar Es Salaam, the largest in Tanzania, it is a normal scene to observe police/militia ambushing and arresting hawkers (famous by the name machingas), destroying their business premises and confiscating their properties. They have been forcefully evicted in several instances (including January 2008) from the very busy Kongo Street in Kariakoo market area. The evictions have resulted into violent actions by the machingas which in turn has resulted into some deaths.

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competitive market economy in Tanzania, it may not be desirable for the government to intervene in the market forces of supply and demand and force the private sector lending institutions to extend loans to the informal sector, whose wealth and assets are legally and economically dead. Adequate access to this facility therefore may only be possible, as it has been for long time, to institutionalized economic activities. Institutionalization may also mean having to conduct business in designated location(s). This implies that institutionalized economic activities have to be undertaken in given physical addresses. Among other things, this is a civilized way of conducting business in a modern world. It facilitates easier deliveries and picking up of goods and services by business partners including customers, contractors, consultants, subcontractors and even government and government institutions and agencies. Institutionalization makes it relatively easy for various authorities dealing with installation of proper business infrastructure. The infrastructure includes communication, power, water, toilets and other sanitary and marketing facilities. Constraints in institutionalization of economic activities The informal sector has been meeting a number of obstacles including harsh working environment due to lack of proper working premises. Some informal sector activities in Tanzania are being undertaken in slums or near-slums and hazardous environments. They typically lack fundamental business and business related infrastructure like conducive business premises, roads, water, security, electricity and toilets. It is a fact that the economic actors in the informal sector in Tanzania are faced with a myriad of problems. The problems are likely to reduce their profitability and competitiveness immensely. Rational as they are supposed to be, one would expect these economic actors to institutionalize their activities in the earliest possible opportunity. Pass et al (2000: 148) describes rationality in the context of the economic man. This is an assumption in economic theory that individuals act rationally in specifying their objectives and then take decisions that are consistent with those objectives. The main explanation beyond this non institutionalization is the constraints that 110

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are potentially and/or actually faced by those attempting to institutionalize their informal economic activities. Some of the potential constraints are presented and discussed here followed by specific cases that document actual institutionalization constraints. Potential constraints to institutionalization of economic activities Institutionalization of economic activities may be undesirable to those in the informal sector because of various constraints that are associated with institutionalization. Constraints in this work are taken to mean and include all the barriers and hurdles that actors in the informal sector are likely to face in the institutionalization process. They also include the perceived and actual disadvantages that actors in this sector face after institutionalization. Some of these constraints include those discussed in this subsection. These are not exhaustive however. One of the constraints is the requirement of having a physical address for economic activities that are to be institutionalized. The requirement may entail conducting business in designated areas. In some instances, rents to be paid in designated business areas are higher than in many alternative places for the informal sector. This is partly explained by the fact that the business operators have to pay for some common and individual costs of utilities associated with establishment and operation of the designated areas. It sounds logical and rational to have designated business premise in a modern economy and pay for costs of the same. Some informal businesses in Tanzania however, are likely to be paying a zero rent for premises as they are quite mobile and typically operate in ”a no-man’s land” like along the roads, bus stands, pavements, institution’s compounds like in schools play grounds, inside buses and trains etc. The nature of these business premises is such that there is no immediately identifiable, responsible and concerned landlord or owner to charge a rent. When and if one emerges, those occupying the premise quickly and easily relocate. This has been highly observed by the author in several occasions. Among the occasions include when taxation authorities and institutions hold their crack-down operations to capture pirate taxis and pick-up operators. The operators would normally relocate to other corners of the city/town in question where the authorities’ crack-down activities are not taking place. 111

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The greatest constraint in the institutionalization process lies most probably in the processes involved and the pecuniary costs and consequences of institutionalization. There are some actual and/or perceived costs and obstacles that make the process and the results thereafter more costly to the economic actors than before institutionalizing. The obstacles include but are not limited to the institutionalization process itself. As part of the procedure there will be a number of forms to be filled. At times it may be relatively difficult to fill them given the generally low education level of most of those in the informal sector. The forms are normally to be submitted along with a number of legally recognized supporting documents like certified copies of different documents and photographs. Some of the forms and supporting documents may have to be collected from and/or submitted to several and usually different offices located far away from each other. One stop-shop office that can take care of the whole institutionalization process is not known to exist in Tanzania. All these add to the transaction costs both in cash and time. It becomes one of the major constraints in institutionalization. Other constraints are associated with corruption and unnecessary bureaucracy from rent-seeking officials. Rent-seeking is due to interalia, asymmetric information. Inadequate information and knowledge of the requirements for institutionalization are likely to lead to compel actors to pay bribe to unscrupulous officials. Possibility of paying penalties for late institutionalization is yet another possible constraint. Deadlines for institutionalization may be set and failure to meet it may be punishable. For Economic actors that are not able and/or willing to meet the deadline and/or pay the penalties may not take the trouble of institutionalizing. The penalty as a stick therefore, becomes a constraint. After institutionalization, the informal sector economic activities actors become exposed to various institutions and authorities. Tax authorities are likely to be among the most “feared” institutions by informal sector operators institutionalizing their activities. Institutionalization implies inter-alia, registration with the tax authorities and subsequently the requirement to pay relevant taxes. Tax is a cost to its payer. With multiple and high tax rates, the costs become escalating. Tax therefore reduces a business’s profit. If able to 112

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avoid this cost by not institutionalizing their activities therefore, informal sector operators will avoid the cost. Some of the informal sector characteristics may be seen as a constraint to institutionalization. The sector is characterised by among other things, easy entry; reliance on indigenous and in most cases personal resources. It is also characterized by family or at times personal ownership in a one-man show. Most of the activities are small scale, labour intensive and adapted technologies operations. Such activities are relatively more economically, financially and managerially easy to undertake. The activities normally require informal school skills with no requirement for school certificates for entrants. They are mostly in unregulated activities. The operators are characterized by innovativeness, creativity, freedom and resilience. The characteristics of the formal sector are more or less different from those outlined above. Rational as they are, informal sector operators would not like to quit these attractive characteristics in favour of the relatively more difficulty entry, operating and exit environment of the formal sector. All these are among the potential constraints to institutionalize in that they are incentives and driving forces of staying informal. Some actual constraints faced in institutionalization of economic activities in Tanzania are presented and discussed in the subsection below. Actual constraints in institutionalization of economic activities in Tanzania This sub-section presents some empirical findings on the constraints that operators of institutionalized economic activities face. These are constraints faced once the institutionalization process is finalized. The cases are borrowed, with a very great acknowledgement, from Nkya (2003) who made a study on institutional barriers faced by some fifteen (15) enterprises in Dar Es Salaam, Mbeya, Moshi and Arusha regions in Tanzania. The constraints identified from the work of Nkya (ibid) include the following. The taxation system Relatively multiple and high tax rates are among the constraints. These include Value Added Tax (VAT) at 20 percent of the sales price; pay roll levy at 2.5 percent of total wage bill; withholding tax at 2 113

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percent of total income; property tax; Pay As You Earn (PAYE) for individual enterprises; development levy; income tax at 25 percent of profit; road license fee; plying fees; vocational education and training levy; stamp duty; land fees; industrial cess;(?) service tax; import tax; sales tax and some arbitrary compulsory contributions (tied up with legal payments) for special events such as clean-up operations; political events and social activities. Some of these taxes were however abolished in the 2003/2004 national budget. The taxation system in Tanzania was reported in Nkya (2003) to be typically characterised by complex taxation policies; several tax collection organs hence possibilities of multiple taxation; and cumbersome tax administration procedures, including complex return forms. Eleven out of the fifteen (73.3%) cases cited the taxation system in Tanzania as a barrier to their operations. This therefore becomes a constraint and disincentive for those in the informal sector to institutionalize their activities. Unlevelled competition ground Nine out of fifteen (60%) of enterprises reported that there was uneven competition ground for institutionalized economic activities. This was by way of, among other things, existence of cheaper imported untaxed goods in the Tanzanian market. It was reported that a knife made locally could cost around 1USD. A similar one imported from Taiwan would cost approximately 0.5USD. This makes institutionalized economic activities uncompetitive due to the taxation burden compared to the informal (uninstitutionalized) economic activities operator. This therefore becomes a constraint to institutionalize economic activities. Business would have more incentive to be uninstitutionalized if they can, to avoid this constraint. Regulations, laws and administrative practices Eight out of fifteen (53.3%) enterprises reported that institutionalized economic activities were obliged to abide with laws and regulations that are incompatible with free market economy. Some regulations, laws and administrative practices by various institutions and authorities were said to be outdated, anti-competitiveness and 114

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sometimes contradictory. Among the outdated laws are the 1952 colonial law which promulgated that all furniture should be made of hard wood! The author’s observation in the furniture industry in Tanzania however, indicates that this law is not followed and not an actual constraint. Contrary to the said outdated law, furniture is being made by various kinds of wood including soft wood. Stringent credit terms and conditions Five out of fifteen (30%) enterprises reported that the procedure and terms for formal credit from lending institutions in Tanzania is extremely difficulty. There are relatively high interest rates, sometimes over 20 percent; prohibitive requirements of collateral; requirement of technical and sophisticated project write-ups and feasibility studies; short or zero grace periods and short repayment periods. The latter is mostly common in micro-financial institutions (MFIs) like FINCA and PRIDE. The findings imply that urging the informal sector to institutionalize their activities so as to get access to formal credit may not always be appealing. The informal sector therefore is not likely to bear the costs of institutionalizing their activities only to find that they cannot meet and comply with the terms and conditions of accessing finance from formal financial institutions. It is clear and well understood that financial institutions cannot risk their money by not requiring collateral. What becomes a constraint in the institutionalization efforts is when the requirements are unrealistic given the real economic and financial positions of most of the informal sector economic activities operators. The other constraint related to this is the fact that there exists various forms of informal money lending institutions. They lend substantial amount of money to both formal and informal sector economic activities operators. This is mainly done through networks of friends, relatives and business associates. The procedures are relatively simple and non-bureaucratic, sometimes taking a couple of hours to be accomplished. At times repayment may be cash with or without interest rate. When interest rates are paid, they may be either lower or higher than charged by the formal lending institutions, all depending on the relationship and agreement between parties to such transactions. Payment of borrowed money in-kind is almost common in the informal money lending institutions in Tanzania. 115

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With a possibility of accessing finance even when operating in the informal sector therefore, economic operators may not feel pressed to institutionalize their activities. In the context of this work, this is a constraint in the institutionalization efforts. It is to be remembered that institutionalization efforts may be undertaken by both the government authorities and institutions on one hand and the economic activity operators on the other. Hustling health and safety inspection regulations with corruptive enforcement In eight out of the fifteen (53.3%) cases, it was reported that there is a bad practice of frequent and impromptu call by administrative institutions and authorities (in this case municipal health and industrial inspectors) to check on health and safety standards. The visits are often with ulterior motive linked to corruptive enforcement that raise transaction costs on these formal businesses, hence a constraint to institutionalize. Bureaucratic administrative formalities and practices The businesses that were studied by Nkya (2003) reported that they experienced unnecessary delays in establishing and operating their activities. The delays were caused by, among other things, the requirements to pass through different offices to get endorsement for various applications and annual renewals of their business operations. Arusha Galvanizing Company (AGC) for example, had to follow the following formalities: Industrial license was obtained from the Ministry of Trade and Industries; Export license from the Bank of Tanzania; Business license from Arusha Municipal council; Registration in the Labour Office; Inspection of premises and machines by the Labour Office and Registration of employees with the National Provident Fund (NPF). All these processes do take place more or less serially, not in parallel. One step has to be accomplished before the other starts. This is therefore among the major constraints to institutionalize economic activities. Operators in the informal sector would rather stay informal than going through all these multiple, cumbersome and sometimes corruptive processes.

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Long litigation process and stringent labour laws It was reported by the enterprises studied by Nkya (ibid) that there is normally a long delay of civil cases in Tanzania. Arusha Cutlery Company faced a litigation case in which retrenchees demanded their annual benefits. The case took about six months in the court of law. The company had to sell some machines to meet the legal fees and to pay the workers. Another company, Tanzania Eyelets Company of Moshi, had a case on withholding tax of about 20million Tanzanian shillings (about 20,000USD) with the Tanzania Revenue Authority (TRA) since 1993. Up to 2004 the case was not resolved. Such delays lead to high costs of doing businesses for institutionalized economic activities operators. This is a constraint in the institutionalization efforts. It is to be noted that with the establishment of the commercial court in Tanzania, among other things, such cases are likely to take much shorter time. Concluding Remarks As predicted in the economic theories outlined above, institutionalization of informal economic activities is essential and good both for the government and the economic agents that are involved. In the current modern and civilized economy and business, it is essential for economic activities undertaken in a country like Tanzania to be formerly known, accepted, supported and recognized by the appropriate institutions. This is due to the many benefits that are likely to accrue from institutionalization. Institutionalization of informal economic activities is desired by various stakeholders for various reasons. This is especially so for the government institutions and authorities. It is also arguably desired by some economic agents in the informal sector. Yet, the level and speed of institutionalization of informal economic activities in Tanzania is rather low. This is mainly due to various constraints, some of which we have been identified and discussed in this work. These constraints both potentially and actually hinder the institutionalization efforts of both the government institutions and authorities and informal businesses. Some of the constraints seem to be necessary while others are not. The necessary constraints partly include the procedures and processes 117

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that have to be followed in order to institutionalize the informal economic activities. In order to institutionalize, there are procedures and processes that must necessarily be followed. The most important thing is to put the procedures and processes at the minimum possible threshold, including creation of one stop shop where the whole institutionalization process could be handled. Other necessary constraints include the seemingly negative consequences of institutionalization. These include the exposure to such authorities as the TRA and the resulting requirement to pay appropriate taxes, fees and fines. The most important thing in this context is to remove the unnecessarily high tax rates and relatively many types of taxes and to improve the tax collection procedures and the use of the same. Institutionalization of informal economic activities is essential in a modern economy, but the process in Tanzania is full of constraints. These have to be dealt with accordingly. Policy Implications Institutions and authorities involved should be aware of the fact that for successful institutionalization of informal economic activities, the process has to be gradual as opposed to an abrupt (big bang) institutionalization. The process needs to have a human face not only pecuniary face. Where necessary, carrots and sticks should be used accordingly. Relevant policy and decision-making and implementation institutions and authorities have to always be practical and realistic in as far as institutionalization of informal economic activities is concerned. They have to consider and be sensitive to the actual informal sector arrangements on the ground. They have to recognise and appreciate the hardly-earned assets and activities of this sector without stultifying them. They should not crack down, harass, arrest, jail, evict and/or intimidate the actors in the sector as a strategy to force them to institutionalize their activities. The informal sector should be gradually absorbed and appropriately institutionalized and linked into the formal sector. The gradual, step-by-step institutionalization process has to be lenient and participatory in nature. A fair representation of all the key stakeholders 118

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in the process should be observed. Policy and decision-making and implementing institutions and authorities should always facilitate adequate empowerment of the appropriate institutions and/or individuals both in the formal and informal sectors concerned with institutionalization. An enabling environment for building and enhancing appropriate capacities for the individuals and/or institutions to handle the delicate institutionalization process should be in place. Agents in the informal sector have to be mobilized and properly prepared to enter and stay in the formal institutionalized sector. They have to recognize the real, short-run, long run, sustainable opportunities and challenges in the formal sector and alternatives of overcoming the ever-emerging challenges and problems of institutionalizing their activities. The institutionalization process has to take place in decentralised one stop shops. It is essential to understand that full-scale institutionalization across the economy will necessarily take time. Policy and decision makers should remember that Rome was not built in a day. Recommendation for further research Most of the issues presented in this work could be further researched on if resources permitted. It would be desirable to conduct empirical studies on most of the issues raised in this chapter. Some case studies and/or surveys could be conducted to qualify and quantify most of the issues discussed at theoretical level in the chapter. Specific topics for further research may include the following: Why would some specific actors in the informal sector be willing or not willing to institutionalize their economic activities?; What are the current monetary and non-monetary actual costs and benefits of institutionalizing economic activities from the point of view of those who have recently institutionalized their businesses? How can the wealth in the informal sector be used more productively even if they do not institutionalize their activities? Several research institutions and individuals can take the debate initiated in this chapter into higher and newer levels by engaging themselves in addressing the areas for further research identified in this chapter.

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References Adam, S (1998). Application of a Guideline for Curricular Work and the Development of a Curriculum Concept for Food Processing in the Informal Sector in Tanzania Vocational Education and Training Authority (VETA); German Agency For Technical Cooperation (GTZ) -- Dar es Salaam.. Bangasser, P. E.; (2000). The ILO and the informal sector: an institutional history. Employment Paper 2000/9 Charmes J. (1999). Informal sector, Poverty and Gender. A Review of Empirical Evidence, Background paper for the World Development Report 2001, Washington, The World Bank. Claussen, J., Kaarhus, R., Ngowi, H. P., and Onsrud, H. (2005). Review of the Property and Business Formalisation Programme (PBFP) in Tanzania. Coase, R. (1998). Newsletter of the International Society for New Institutional Economics, spring 1998. Hodgson, G. M (1988). Economics and Institutions. University of Pennsylvania Press. Kaare, S (1999). Bridging the livelihood insecurity gap: the role of informal credit in Tanzania. I African Journal of Finance and Management, Vol. 7 No. 2, Dar es Salaam. Kashuliza (1993). Perception and role of informal rural finance in developing countries: the example of Tanzania. Sokoine University of Agriculture Nkya, E (2003). Institutional Barriers to Small-Scale Business Development: A Need for Flexibility in Tanzanian Tax and regulatory Systems. In The Journal of Entrepreneurship, Vol. 12 No. 1, January – June 2003. Pp. 43 – 73. North, C. D (undated). The New Institutional Economics and Development. Washington University, St. Louis. North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press, Cambridge England. Schneider F. and Enste D. H. (2000). Shadow Economies: Size, Causes, and Consences, Journal of Economic Literature, Vol XXXVIII.Pp. 77114.

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Shaffer, J. D (1995). Institutional Behaviour and Economic Performance: Comments on Institutional Analysis. Department of Agricultural Economics Staff Paper No. 95-52, Sept. 1995 Michigan State University. Shaffer, J. D. (1969). "On Institutional Obsolescence and Innovation: Background for Professional Dialogue and Public Policy,”. American Journal of Agricultural Economics, May 1969, pp. 245-267. Samuels, W. (1992). Essays on the Economic Role of Government. Vol 1: Fundamentals, New York University Press, N.Y. TOMRIC Agency, 3 May 2000

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Chapter 6 Small and Medium Sized Enterprises Development in a Liberalised Economy of Nigeria: Problems and Prospects

Lawrence Ogechukwu Obokoh Introduction Small and Medium-Sized Enterprises (SMEs) are perceived as one of the prime contributors to economic growth and development, especially in the developing countries. SMEs have been described as a bed rock of sustainable economic development because of their role in job creation and contribution towards poverty alleviation (Udechukwu, 2003). Recent findings suggest that SMEs` contribution go beyond job creation as they also tend to utilize and provide local markets for raw materials to large industries, and serve as training grounds for local entrepreneurs (Musa and Danjuma, 2007). Also, due to their small size, SMEs have been able to provide goods and personalized services that are considered negligible for large companies to partake. SMEs are flexible in their specialised area of operation and this gives them the advantage of adapting to competitive changes in the business environment. The ability of SMEs to adapt to different economic conditions prompted many business analysts to believe in the strategic role of SMEs towards the industrial development of less developed countries (Berry, 2002). Also, writing on Nigerian SMEs, Uba (2006) suggests that SMEs function as shock absorbers, innovators and contributors to economic growth (through higher total factor productivity – TFP)31.

UBA, CHRIS (2006) SMEEIS headache for banks. The Daily Sun Newspsaper. By Thursday, June 29, 2006

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Governments in industrialised and especially in less developed countries have recognized the need to provide an enabling business environment for the development and operation of SMEs. The new emphasis for SME development in developing countries, especially in Nigeria, is aimed at stimulating economic growth and development through private sector participation (Akinlo, 1996). In addition, the increasing policy attention in recent years is partly due to the growing disappointment with the results of development strategies focusing on large scale, capital intensive and high import dependent industries. The Nigerian government has over the years formulated and implemented a number of policies designed to assist SMEs especially in the manufacturing sector because the sector remains one of the most critical components of economic growth and development (Albaladejo, 2003). However, it is shocking to note that despite these policies, it is still evident that their impact on the performance of SMEs has been less than satisfactory (Manbula, 2002). According to reports, SMEs are still struggling to survive in developing countries, while the transition from small to large firm is missing. This is because most SMEs either remain small, moribund or shut down within few years of operation often due to constraints beyond their control (Rodriguez and Berry, 2002). Moreover, the persistence of unstable macro-economic environment, arising mainly from fiscal policy inconsistencies over the years has often smothered many SMEs especially in the manufacturing sector (Ekpenyong, 2002; Ikpeze et al, 2004). The dismay state and level of SMEs development in Nigeria became evident in the early 1980s following the fall in the international market price of crude oil. With the drop in the revenue from the sale of crude oil accruing to the Nigerian government, the government was unable to meet up with her import bills. This then led to a serious balance of payment deficit (Adenikiju and Chete, 2002). The private sector-hence SMEs that would have provided substitutes for imported goods lacked the ability and capacity to meet with the situation. So the recognition of the vital role of the private sector, especially manufacturing SMEs necessitated the need for economic reform that cumulated in the liberalisation of the economy by the Nigerian

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government. The reform exercise was aimed at creating level playing field that will enhance competition and help reduce wastage of scarce economic resources. It was widely believed that the Nigerian economy was highly controlled by the government through import and export restriction, regulation of the interest rate and exchange, and credit directives through the Central Bank of Nigeria (Akinlo and Odusola, 2003). In order to free the economy from the government control, the government then embarked on a reform process- the Structural Adjustment Programme (SAP) on the recommendation of the International Monetary Fund (IMF) and the World Bank. This programme led to the complete liberalisation of the economy through privatisation and commercialisation of all public parastatals. Therefore, liberalisation process discussed in this study will address some elements of trade and financial market deregulation. For instance, McCulloch et al (2001) have argued that trade and financial market liberalisation are linked, particularly in developing countries where the governments are pursuing simultaneously macroeconomic stabilisation and adjustment programmes that contains elements of many forms of liberalisation. Liberalisation is an unwritten requirement for economic integration which is the conditional lending policy of IMF based on adherence to SAP (Aisbett, 2003). This chapter focuses on the impact of liberalisation on manufacturing SMEs in Nigeria because of the sectors’ importance to economic growth and development. The study covers the period 1980 to 2004 and will focus on liberalisation and policy issues that resulted in the deregulation of the interest and exchange rates, and the removal of export and import restriction on the backdrop of infrastructural facilities available to SMEs. The aim is to find out if the liberalisation of the economy has really eased SMEs problems vis-à-vis access to finance and the availability of infrastructure, and if their competitive ability has improved since the commencement of the liberalisation process in Nigeria. The rest of the study is organised into five sections. Section II, gives the definition and features of SMEs, in section III, a brief breakdown of the role of SMEs in Nigeria is provided while section IV will give an insight into the constraints that hinder SMEs in Nigeria from playing their role. Section V takes us through the rationale for liberalisation in Nigeria. The methodology of the study is contained in section 6 while the concluding remarks are provided in the last section. 125

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Definition and Features of SMEs A common feature of SMEs all over the world is that they are organizations with insufficient funds and capacity to enjoy large-scale production compared to well-established MNCs (Oviatt and McDougall 1994). In Nigeria, the capital base as well as the number of employees that constitute the firm was used to define SMEs. The Small and Medium Industries and Equity Investment Scheme (SMIEIS) defines SME as any enterprise with a maximum asset base of N500 million32 excluding land and working capital and with the number of staff employed not less than 10 or more than 300 (IFC, 2001). These SMEs are found in all sectors of Nigerian economy such as manufacturing, service and retail business. The Nigerian government has in the past used high tariffs and import restrictions to protect SMEs in Nigeria from competition against MNCs. Depending on the age and size of SME, there are some features which differentiate SMEs from large enterprises in Nigeria. In terms of ownership, SME may either be owned by a sole proprietor or by a partnership even if they are registered as a limited liability company. In other words, SMEs are characterised by family ownership which tends to make them small and the transition to large scale business is often very difficult because the owners are reluctant to lose control of their business through larger ownership structure. The following are some of the feature that distinguishes SMEs from large businesses: Centralised Management Structure The management of SMEs are often centralized and their method of production in most cases is labour-intensive. According to Gélinas and Bigras (2004) SMEs` structures are often very simple which makes the owners more directly in contact with the firm’s operational functions. This can be an advantage in terms of operation and logistics integration. Apart from this, owners of SMEs are people who are likely to develop and carry out visions which are translated into objectives. The fact that SMEs management is centralized makes them lack

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appropriate managerial skills in taking decisions and is often ignorant of technological advances. Such SMEs managements often purchase obsolete and inefficient equipment thereby setting the stage for low productivity and poor product quality which has serious consequence on product output and market acceptability (Udechukwu, 2003). SMEs Small Capital Size This constitutes an obstacle to their access to long-term capital and even access to short-term finance. As a result access to finance whether formal or informal is normally at a very high rate of interest and unfavourable conditionality. Bhavani (2006) argues that the SME sector in many developing countries is usually neglected and discriminated against in terms of access to government attention, access to finance, management and marketing expertise and technology, as compared to large scale enterprises. This has been particularly so in the economies in transition, where the state-owned enterprises assume the major role in the economic and industrial development. Quick Decision Making Decision making is faster because SMEs are flexible and easily adapt to changes due to their size and ownership structure that does not require extensive consultation before decisions are taken. According to Gélinas and Bigras (2004: 270) large firms do have some limitations due to their large size and inflexibility, irreversible production capacities, and extensive bureaucracy among others. The quick decision-making process leads to speed up changes that are necessary for quick transformations in the downstream markets. Personalised Services As result of SMEs small capital and size,(some words are missing here) are able to perform some personalised services in Nigeria which are often too small for large firms to handle. For instance, watch repair and after sales services of broken home appliances are serviced by SMEs after their warrantee dates have expired. Besides, there other services such as medical treatment that requires personal contact with 127

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patients which prove difficult for large firms to perform. This is because most patients would prefer to seek medical attention from a doctor that they are acquainted with and are free to relate their problems to. Role of SMEs in Nigeria The role of SMEs is felt in the following areas amongst others in Nigeria: • • • • • •

Generation of employment and avenue for self-employment; Creation of avenues for greater utilisation of local raw materials; Encouragement of the development of the rural areas and help in an even spread of investments; Assistance in the transformation of the indigenous technology to meet their meets; Development of entrepreneurs and linkages with bigger industries; Helps in the mobilisation of local savings and provision of opportunity for the training of future managers.

Generation of employment and avenue for self-employment SMEs’ innovativeness helps in employment creation in that they employ a significant proportion of the Nigerian population either through self employment or direct employment by entrepreneur of those willing to work. Mahemba and De Bruijn (2003) assert that innovative SMEs make significant contribution in the global economy with respect to job creation and enterprise development in developing countries. The government economic development policy before now was not geared toward the development of manufacturing SMEs in Nigeria despite the indigenization policy, which was aimed in part at producing local entrepreneur. According to Ikpeze (1991) government policy encouraged public ownership of heavy industries through protection and subsidies prior to the implementation of SAP. He noted that there was no serious attention paid to the vibrant and huge manufacturing SMEs which employ about 875,000 persons in 1987 as 128

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against large manufacturing enterprises which employed 48,000 persons in 1985. SMEs creates avenue for greater utilisation of local raw materials SMEs utilise local raw material for the production of locallyconsumed goods and also exports. For instance, most SMEs utilize recycled materials as raw material for production. According to Dawson (1994) there was an increased cost of imported raw materials after the implementation of the liberalization policy in Nigeria. This led to increase in competition for and the costs of local raw materials and also recycled products in Nigeria. Previously small-scale enterprises had little competition for recycled materials such as rubber, metals and plastics. As the costs of import of raw materials rose large-scale enterprises recognized the benefits of using and recycling existing materials, the consequence of this is increase in cost due to the increased demand for these items. Ekpenyong (2002) asserts that SMEs the world over are strong agents of economic growth in that they stimulate the mobilization of local resources and linking up other domestic sectors. Development of the rural areas and even spread of investments: SMEs assist in the development and the even spread of investment in the rural areas. Most large organization would prefer to locate in developed or urban centres where there are ready infrastructures to help reduce their cost of operation. According to Kimuyu and KayizziMugerwa (1998) infrastructure availability impacts on the profitability and the long-term viability of firms, its quality and availability influences the firm’s localisation decision. Firms will normally locate in regions or countries where infrastructures are available. But SMEs through indigenous entrepreneurs take the initiatives to set up businesses irrespective of available infrastructure and help to bring to the grass root needed goods and services to the local community. This action leads to the opening up of the area for other development projects and investments.

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Transformation of indigenous technology SMEs have been known to transform indigenous technology to their own advantage because of their innovativeness and flexibility. This contributes to their competitive capability and their ability to cope with technological changes (Tornatzky and Fleischer, 1990; Subrahmanya, 2005). Most economies transited from household artisan industries over time to the modern industrial set-up which has witnessed phenomenal upgrading in skills, machinery and equipment, and management practices. Empirical evidence indicates that most of today’s giant corporations began as very small firms. Good instances are Guinness of Dublin and Philips international of the Netherlands (Salami, 2003). Nigeria and other developing countries can learn from the experience of these countries and giants companies by creating enabling environment that will enable SMEs to adapt imported technologies, modernize their process and grow to become large corporation. According to Mahemba and De Bruijn (2003), the role of SMEs towards economic growth and technological development in developing countries where liberalization and globalization of the economy is currently taking place has increased in recent times. Development of entrepreneurs and linkages with bigger industries SMEs, apart from producing products for final consumption for consumers, they also engage in the production of intermediate goods that serve as raw materials for large firms. This helps create good linkage between the two industries which contributes to economic self dependence and sustainability. In industrialised economies, this symbiotic relationship is so developed that the sectors extensively depend on each other for survival. For instance about 70 per cent of the value of exports of large firms from Japan are products of SMEs (Salami, 2003). Increase revenue base of the Government SMEs activities help increases the revenue base of the Government through the various tax and levies paid to the government. Some engage in export activities thus generating huge foreign exchange 130

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earnings at the same time and they pay duties directly or indirectly on imported material (Ekpenyong, 2002). Development of local entrepreneur The development of local entrepreneurs is made possible through the setting up of SMEs by innovative and creative individuals. These entrepreneurs are able to link up with large firms either on a subcontracting basis or suppliers of raw materials or semi finished product which most times serve as inputs for large firm production. It is by setting up small businesses that people with bright ideas transform their ideas into reality. Mobilisation of local savings and training of future managers SMEs help in the mobilisation of local savings and provision of opportunity for training future managers and semi-skilled workers for large firms. Since the management of most SMEs are centralised and are not separated from the owners, they are able to secure loans from informal money lenders and cooperatives societies. This source is the major sources of loan since most SMEs do not keep proper records to be able to secure loans from banks. Besides banks do shy away from granting loans to SMEs due to the perceived risk of small businesses (Manbula, 2002). Constraints to the Role(s) of SMEs The trends in extant literatures; result of various studies in the past and the outcomes of policy initiatives on the promotion of SMEs in Nigeria indicate that finance still remain the major constraint to the development of SMEs, though it is by no means the only critical constraint. The effective utilisation of the financial resources provided under the various past SMEs development programmes, was constrained by such factors as: • • •

Lack of adequate entrepreneurship and managerial skills; Absence of enabling environment for investment in small and medium scale industries; Absence of infrastructure 131

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• • •

Restricted access to finance; Absence of Credit Guarantee Fund; Low level of Technological Development

Lack of adequate entrepreneurship and managerial skills Most owners of SMEs lack needed managerial skills to manage their businesses either because they do not have the basic education due to poor family background or they went into the business in search of something to do. As a result of their poor educational background and poor managerial skills, these entrepreneurs find it difficult to keep records and make quality decisions that will help the business grow. Most entrepreneurs on the other hand lack creativity and hence find it difficult to come up with new ideas to survive in the changing business environment. Even some of these entrepreneurs that are educated may not have had the opportunity to have received entrepreneurship training which would have adequately prepared them for the future. Restricted Access to Finance: SMEs lack access to finance and credit to set up their initial production line despite the liberalization of interest rates and exchange rates. The premise upon which the financial market was liberalized was to attract foreign funds and the allocation of these funds to areas of scarcity. Savings in Nigeria are still very low as a result of the low per capita income. Majority of Nigerians are living below the poverty line and spend most of their income on essential food items, while little or nothing is set aside for savings. A study carried out in Nigeria in 1996 by Aigbokhan (2000) reveals that 37 percent of the total population surveyed live below the poverty line in the urban areas and 51 percent in the rural areas. The high level of poverty makes savings difficult which translate into non availability of investment funds in the financial sector. As a result of lack of funds for investment, most SMEs find it difficult to raise the required funds from banks and financial institutions to set up their businesses (Tagoe, Nyarko, and AnuwaAmarh, 2005). Most SMEs are then forced to seek loans from the informal sector at very exorbitant rate of interest (Aryeetey, 2005). Banking institutions tend to turn their backs on SMEs due to their 132

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inability to meet with the stringent conditions for loan procurement and the perceived high risk nature of SMEs. Banks and financial institutions are more interested in granting short-term loans to firms that are into importation rather than long-term loans to manufacturers. Financial institutions on the other hand have to meet the profit interest of their shareholders instead of reporting losses at the end of the financial year. Lewis (1996) argues that the lure for gains from financial arbitrage makes banks shun commercial borrowers, creating severe restraints among manufacturers. Apart from the preference of banks to grant short term loans for financial arbitrage, the procedures to obtain these loans are often difficult and cumbersome for SMEs. Mambula (2002) reports that bank officials refuse to grant to loans to SMEs because of their inability to present convincing feasibility study report or attractive business plans. Above all most banks are wary of the financial risk and the uncertainty surrounding the activities of SMEs. Absence of enabling business environment for investment in SME industries It is often difficult to set up and register small businesses due to the bureaucratic processes involved in formalisation. In most cases, the industrial policies guiding business operations in developing countries often favour large businesses to the detriment of SMEs. These bureaucratic bottlenecks often create opportunity for corruption which SMEs do not have the economic and political clout to deal with. Government agencies handling SMEs development programmes are often aware of these problems, but are at a loss to address it (Vachani, 1994). Poor State of Infrastructure The level of infrastructure such as good roads, electricity and communication facilities in Nigeria are not adequate to support SMEs despite all budgetary allocation over the years to improve these facilities. Only recently did the Mobile System of Communication (GSM) come to Nigeria. This has helped to some extent to improve communication in Nigeria, but the cost is still very high compared to what obtains in other developed countries. The absence of these infrastructure make SMEs in Nigeria bear unnecessary cost which is transferred to the price of their products. This in turn makes their 133

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product uncompetitive both locally and internationally. Beyene (2002) argues that the availability of infrastructural facility provides an enabling environment for productive activities and facilitates growth of any enterprise. Production process and location advantages can only be optimised when there are adequate power supply, water, transport and communication facilities. Successful competition by SMEs in the regional and global market hinges on the availability of adequate and efficient infrastructure which foreign firms have at their disposal for cost effective production (Briggs, 2007). Low cost and high quality infrastructural services will improve SMEs’ price and competitiveness if SMEs do not have to put needed scare resources to finance it on their own. As pointed out in the study carried out by the Economic Commission for Africa (ECA 2001:22), the “importance of infrastructure function has increased in recent years, because of the changing nature of the competition in regional and global markets. Speedy and punctual delivery of manufactured goods has become a major parameter in the new competition. A welldeveloped infrastructure for moving goods from factories to ports and far rapid international communication-air cargo space and high charges feed into non-competitive pricing, missed deadlines, poor reputation and cancellation of orders. Long delays in obtaining telephone and electricity connections raise production costs and waste scare management time”.

The poor state of infrastructure has been a problem for SMEs in Nigeria and has crippled the operations of most of them. Absence of Credit Guarantee Fund The Nigerian Government has not established a well-funded National Credit Guarantee Fund that will act as buffer for credit facilities for banks and other financial institutions over and above the equity provided under SMIEIS (Small and Medium Industries Equity Investment Scheme). SMIEIS is a voluntary initiative of the bankers’ committee whose membership includes all the Managing Directors and Chief Executive Officers of banks in Nigeria, which requires all licensed banks in Nigeria to set aside 10% of their annual profit before tax (PBT) for equity investment and promotion of SME. Currently, this 134

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fund is not available to all SMEs, as most of them cannot meet the stipulated conditions required to benefit from this fund. This fund, when established, will provide the necessary finance to SMEs and protect banks from bad debt. Manbula (2002) argues that SMEs in Nigeria are not given concession on loans because there are no existing or enabling laws that protect bankers against loan defaults. Low level of Technological Development The level of technological development in Nigeria is still at the basic stage, which makes most SMEs dependent on imported equipment and raw materials for their production process. “The present technological backwardness in Nigeria and the current dependence on the West for capital is a legacy of the colonial past. It will certainly take some time to develop competitive domestic production of machinery and capital goods” Manbula (2002:63). Some SMEs that cannot afford imported capital equipment due to financial constraints are forced to adopt labour intensive production process. Most SMEs employ unskilled labour and give them on-the-job training in an attempt to save costs. The final products turn out to be too expensive and the quality in most cases are not standardised because of the manual process of production. The above discussed constraints have effectively hindered SMEs in the performance of their role towards economic growth and the alleviation of poverty in developing countries especially Nigeria. It is the realisation of these constraints and the importance of SMEs by the Nigerian government that partly explains the need for the rationale for economic reform that lead to the liberalisation of the economy. Background to Economic Liberalisation in Nigeria The process of the economic liberalisation commenced with the adoption of Structural Adjustment Programme (SAP) in 1986 by the Federal Government of Nigeria on the recommendation of the International Monetary Fund (IMF) and the World Bank (Okome, 1999). The recommendation was necessitated by the balance of payment difficulties experienced by Nigeria in the early 1980s following the fall in the international market price of crude oil and the inability of Nigeria to meet her import bills (Mosley, 1992). SAP which 135

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was an economic reform package and a set of condition for Structural Adjustment Loan (SAL) included measures such as cuts in government expenditure, removal of subsidies, and liberalisation of trade and financial market, which resulted in the devaluation of the local currency, the Naira and the privatisation of government parastatals. These measures were found to initially improve the trade balance on the one hand but the devaluation of the Naira worsened the burden of financing international trade on the other hand (Adenikinju and Chete, 2002; Onyeonoru, 2003; Khattry, 2003). The theory underlying SAP is to allow market forces to determine the exchange rate, devaluation of the currency to drive up the price of imports, while the removal of import and export licences will neutralise the monopoly power of large firms. This will promote local producers operating at a small scale with limited import content in their products (Dawson, 1994). The objectives of the trade and exchange rate policies during SAP were to reduce dependence on the oil sector for foreign exchange at the same time as encouraged more efficient manufacture of goods domestically based on local raw materials (UNEP 2005). The main objectives of the SAP were to introduce locally manufactured products to international markets through increased output, which was envisaged would help increase government earnings and provide employment both in industry and agricultural sectors (Madeley, 2000). Improved agriculture was aimed at discouraging food imports and the production of domestic staple crops; boosting the competitiveness of local producers; and broadening non-oil exports. Before the liberalisation of the economy, government policy encouraged public ownership of heavy industries through protection and subsidies with no serious attention paid to the vibrant and huge manufacturing SMEs (Ikpeze, 1991). The protectionist policies were serious hindrance to the existence and development of SMEs because they were designed mainly to strengthen the role of public sector. These policy measures include export and import licensing, price controls, exchange rates controls, high tariffs and quotas (Ekpenyong, 2002). In order to allow for competition and improve efficiency in resource allocation, it was recommended by IMF that the Nigerian government should liberalise the economy to allow market forces to determine resource allocation. Liberalisation of trade 136

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including capital account liberalisation is part of the conditions for the IMF’s Structural Adjustment Loan (SAL) to Sub-Sahara countries like Nigeria that were experiencing balance of payment crisis in the 1980s (Schatz, 1994; Greenaway, 1998). The liberalisation policy prompted the Nigerian government to remove all forms of protection most of the protection for SMEs in terms of sourcing for raw materials and foreign exchange. The bureaucracy on credit provision was also removed in 1992 with the hope that it would make SMEs have easy and cheap access to credits (Ikhide and Alawode, 2001). The removal of credit control/directives on banks then gave financial institutions the freedom to grant credits to their customers irrespective of the area of investment. It is pertinent to state that financial institutions prefer to grant credits to large firms in developing countries because they perceive SMEs as high risk ventures for loans (Aryeetey, 2005). The removal of credit control is contrary to the method used by some Asian countries for instance China and India, which used credit control to direct credit to critical areas that needed urgent investment (Stiglitz, 2004). Despite these development policies embedded in the liberalisation policy, SMEs credit problems still persist as they are still finding it difficult to survive the business environment created by the economic reform that led to the liberalisation of the economy. Methodology This study used qualitative method to ascertain if the liberalisation of the Nigerian economy has really eased SMEs problems vis-à-vis access to finance and the availability of infrastructure, and if their competitive ability has improved since the commencement of the liberalisation process in Nigeria. The study conducted face-to-face semi-structured interview of 20 entrepreneurs in Lagos State. The interview texts were analysed using content analysis (Stemler, 2001). Panel data from Central Bank of Nigeria (CBN) covering the period 1980 to 2004 was also used to complement the qualitative data. Given the time and budget constraints, the study limited the number of respondents to 20 entrepreneurs operating in Lagos State. The respondents that took part in the interviews were those willing and who made themselves available for the interview. Some of the entrepreneurs that were approached for interview for this study gave 137

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time they were not going to be in their business premises. Lagos State was chosen for this study, because available records from the CBN indicate that it has the highest number of SMEs and is the commercial nerve centre of Nigeria. It is pertinent to state here that the emphasis of the interviews conducted were not to achieve a statistically representative result but to give an idea of the problems SMEs face before and after the implementation of economic reform. The analysis of the responses given by the respondents as the reason for the failure of government programme for SMEs development are institutional problems and some are basically outside the control of SMEs and outlined below. Breakdown of Respondents’ Reasons on Why Government Programmes for SMEs Development Have Failed to Achieve their Objectives During the interview respondents gave the following reasons as why government programmes designed for SMEs development have not been able to achieve their desired objectives: Lack of access to credit Majority of the respondents stated that despite the liberalisation of the financial sector, they still find it difficult to secure loan from the banks. They stated that they are either put off buy the high interest rates or the strict conditions in terms of collateral requirements of the banks which they do not have. The complaint about the high interest rates is clearly visible when we look at the interest rate records from the Central Bank of Nigeria, interest rates from 1992 has been above 20 percent up till 2004. The interest rate went as far as 36.09 percent in 1993 with the inflation rate standing at 57 percent (See table 1). After series of disappointments from banks, some of the respondents were forced to seek loans from the informal money lenders which charge interest at the rate of 100 percent. Those who borrowed from informal source regretted their action because they had to pay back the loans partly from their capital and partly from money borrowed from family members. What SMEs do to cope with the lack of credit facility is to plough back the little profit they make from their 138

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business to finance any expansion, replacement of old equipment or raw material purchase. Lack of information and awareness: There is lack of information and awareness on the part of proprietors of SMEs about schemes that are meant to reduce their administrative and production costs of operation at the initial stage of operation. Most SMEs are not aware of the tax holiday granted by the Nigerian government under the pioneer status that grant five years tax holiday (and can be extended for a further two years) to a new company registered in Nigeria. Improper programme design and implementation: SMEs’ development programmes are often not properly implemented due to inconsistency in guidelines on application and lack of information on the needs and operational difficulties of SMEs. Most programmes are often designed without putting into consideration the peculiar nature and level of education of entrepreneurs that are supposed to benefit from the programme. Some of the programmes are designed by World Bank experts who are not familiar with the peculiar problems faced by SMEs in Nigeria. Lack of infrastructures: There is Lack of infrastructural facilities such as steady power supply, good access roads, telecommunication especially in the rural areas and constant water supply have hindered the attainment of SMEs development objectives. The operating cost of most SMEs is very high because they now spend a lot of money to generate their own electricity. Weaknesses in the legal and regulatory framework: The legal and regulatory framework does not protect creditors (Banks) against loan default from SMEs and the enforcement process through the courts is often slow. This and collateral security requirements combine to constitute barriers to SMEs’ access to finance. 139

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Lack of support services: There is also the lack of support service such as consultancy advice from professionals. SMEs cannot afford the services of these professional due to their meagre resources. Most SMEs venture into businesses by accident of which they do not have the idea of the cost implication or as a means of survival without carrying out feasibility studies. Lack of transparency from coordinators of programmes: Most of the respondents pointed out that some officials are not transparent in the disbursement of loans and also in the selection process of skill acquisition programme designed for young and potential entrepreneurs. Lack of subsidies especially to farmers: With liberalisation, the government removed all forms of subsidy on petroleum products and fertiliser which indirectly increased the cost for the SMEs that are into primary production. Some of the respondents are of the view that if farmers in industrialised countries are subsidised, government should also help SMEs that produce industrial inputs. The above reasons of why government programmes have failed to achieve its objective is not exhaustive. It should be noted that if the structural framework upon which a well designed programme is anchored is lacking, the programme, no matter the amount of resources put into the design, will definitely fail. Conclusion The assumption under which SAP was implemented was to allow market forces to play a greater role in the determination of the exchange rate with the devaluation of the currency driving up the price of imports, while the removal of import and export licences will neutralise the monopoly power of large firms. This will then promote 140

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local (SMEs) operating at a small scale with limited import contents in their products. The result of this policy, instead of helping SMEs to improve their performance, have hindered their growth due to poor regulatory monetary system that allows astronomical increase in interest rates and absence of good infrastructural facilities. The promised access to credit was never achieved since the cost of borrowing was still high, while SMEs have continued to incur cost of providing their own power for their operation. The deregulation of the financial market did not provide additional funds or investment as was envisaged by the liberalisation policy. The assumption that devaluation will drive up the price of imports to help SMEs operating at a small scale level in Nigeria and break the monopoly of large firm seems to be wrong. The increase in the cost of imported raw material favours large firms that are able to take advantage of large quantity discount due to their large financial resources. It was observed that most of the manufacturing SMEs either import raw material for production or import production equipment which then translate to high production cost. This adversely affects SMEs’ competitiveness because imported finished products are cheaper considering the fact that the imported products are imported from countries with lower cost of production than Nigeria. Considering the importance of SMEs to sustainable economic growth and development, the Nigerian government needs to take holistic approach to improve access to finance for SMEs by enhancing micro lending by banks; strengthening financial institutions that are involved in credit delivery to SMEs; promoting financial sector development and proper regulation of the financial sector to stop malpractices that tend to truncate the financial system. Government should also improve the business environment and investment climate by removing registration bottlenecks that delay or make registration of new businesses especially, by foreign investors difficult. There is also the need for government to set up institutional mechanisms, such as business incubation centres to encourage young entrepreneurs, enforcement of property rights, fighting corruption to ensure commitment by various stakeholders to SMEs development. The government should have an infrastructure development policy to ensure adequate provision of infrastructure such as good roads and communication facilities, and proper coordination in the maintenance of new and existing roads. Roads are needed to move products from 141

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production sites to locations where they are consumed. Priority should be given to upgrading roads, which can be an opportunity for developing SMEs in the construction sector. Given the enormous costs involved in infrastructure provision, and since the major responsibility for infrastructure development is that of the government, private sector participation should be encouraged to reduce the burden on government and improve the efficiency of infrastructures provision. References Adenikinju, A.F. and Chete, L.N., (2002), “Productivity, Market Structure and Trade Liberalisation in Nigeria”, AERC Research Paper 126, African Economic Research Consortium, Nairobi. Aigbokhan, B.E. (2000) “Poverty, Growth and Inequality in Nigeria: A Case Study”, African Economic Research Consortium, Nairobi, Kenya. Aisbett, E. (2003), “Globalization, Poverty and Inequality: are the criticisms vague, vested, or valid?” a Paper prepared for the NBER Pre-conference on Globalization, Poverty and Inequality. Akinlo, A.E. (1996), “The Impact of Adjustment Programme on Manufacturing Industries in Nigeria, 1986-1991: A Sample Study”, African Development Review, Volume 16, pp73-93. Akinlo, A. E. and Odusola, A. F. (2003), “Assessing the impact of Nigeria's Naira Depreciation on Output and Inflation”, Applied Economics, Volume 35, No.6, pp. 691 -703. Albaladejo, M. (2003), “Industrial Realities in Nigeria: From Bad to Worse”, QEH Working Paper Series QEHWPS101, pp 1 – 23. Aryeetey, E. (2005),“Informal Finance for Private Sector Development in Africa”, Journal of Microfinance, Volume 7, No.1, pp.12-38. Berry, A. (2002),“The Role of the Small and Medium Enterprise Sector in Latin America and Similar Developing Economies”, Journal of Diplomacy and International Relations, Seton Hall. Beyene A. (2002), “Enhancing the Competitiveness and Productivity of Small and Medium Scale Enterprises (SMEs) in Africa: An Analysis of Differential Roles of National Governments through Improved Support Services”. Africa Development, Vol.XXVII, No.3, pp 130-156. Bhavani P.D. (2006), “Strengthening the Competitiveness of Small and Medium Enterprises in the Globalisation Process: Prospects and

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Challenges”. http://www.unescap.org/tid/publication/chap!_Indpub2259.pdf. Briggs, I. N. (2007), “Nigeria: Mainstreaming Trade Policy into National Development Strategies”, African Trade Policy Centre (ATPC) Work in Progress No.52, Economic Commission for Africa. Dawson, J. (1994) Responses to Adjustment- the Marginalisation of Small Enterprises in Nigeria. Small Business Enterprise Development, Volume 5, No.2, pp.18-24. ECA (2001) “Enhancing the Competitiveness of SMEs in Africa: A strategic Framework for Support Services”, Economic Commission for Africa, ECA/DMD/PSD/TP/00/04. Ekpenyong, D.B. (2002), “Performance of Small Scale Enterprises in Nigeria during the Structural Adjustment Programme Implementation: Survey Findings”, Journal of Financial Management & Analysis, Volume15, No.1, pp38-50. Gélinas, R. and Bigras, Y., (2004), “The Characteristics and Features of SMEs: Favorable or Unfavorable to Logistics Integration?” Journal of Small Business Management, Volume 42, No.3, pp. 263–278. Greenaway, D., (1998), “Does Trade Liberalisation Promote Economic Development?”, Scottish Journal of Political Economy, Volume 45, No.5, Pp. 491-551. Ikpeze N.(1991) “New Industrial Policies and Perspectives for Manufacturing in Nigeria,” In Hans, H. Bass et al (Eds.), African Development Perspective Yearbook 1990/91 Vol. II. Hamburg: Lit Verlag. Ikhide, S. I. and Alawode, A.A. (2001), “Financial Sector reforms, Macroeconomic Instability and the order of Economic Liberalization: The Evidence from Nigeria”, African Economic Research Consortium, Nairobi, Kenya. African Economic Research Consortium (AERC) Research Paper 112, pp 1-41. Ikpeze, N.I., Soludo, C.C. and Elekwa, N.N. (2004) “Nigeria: The Political Economy of the Policy Process, Policy Choice and Implementation”. IDRC Publications available at www.idrc.ca/en/ev. Visited on 20/02/06. IFC (2001), International Finance Corporation, Publications, Washington D.C. Khattry, B., (2003), “Trade Liberalization and the Fiscal Squeeze: Implications for Public Investment”, Development and Change, Volume 34, No.3, pp. 401-424. 143

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Kimuyu, P. and Kayizzi-Mugerwa, S. (1998), “Enterprise Response to Deficient Infrastructure in Kenya”, IPAR Discussion Paper No.DP/011198, Institute of Policy Analysis and Research, Nairobi, Kenya. Lewis P.(1996), “From Prebendalism to predation: The Political Economy of Decline in Nigeria”, The Journal of Modern African Studies, Volume 34, No.1 pp79-103. Madeley, J. (2000), Trade and Hunger: An Overview of Case Studies on the Impact of Trade Liberalisation on Food Security, available at: www.forumsyd.se (accessed 20 May 2006). Mahemba, C.M. and De Bruijn, E.J.(2003), “Innovation Activities by Small and Medium-sized Manufacturing Enterprises in Tanzania”, Creativity and Innovation Management, Volume 12, No.3, pp.162-173. Manbula, C. (2002),“Perceptions of SME Growth Constraints in Nigeria”, Journal of Small Business Management, Volume 40, No.1, pp.58-65. McCulloch, N., Winters, L.A., and Cirera, X. (2001) Trade Liberalisation and Poverty: A Handbook, Centre for Economic Policy Research, 90-98 Goswell Road, London EC1V 7RR, United Kingdom. Mosley Paul (1992), “Policy-Making without Facts: A Note on the Assessment of Structural Adjustment Policies in Nigeria, 19851990” African Affairs, Volume 91, No.363, pp.227-240. Musa, Y. W. and Danjuma, D.M. (2007) Small and Medium Scale Enterprises:A Veritable Tool for Sustainable Job Creation in Nigeria. Journal of Business and Public Policy, Volume 1, No.4, 1-25. Onyeonoru, I. (2003), “Globalisation and Industrial Performance in Nigeria”, Africa Development, Vol. XXVIII, Nos.3 & 4, pp36-66. Okome, M. O. (1999) State and Civil Society in Nigeria in the Era of Structural Adjustment Program, 1986-93. West Africa Review: Volume 2, No.1. [iuicode: http://www.icaap.org/iuicode?101.1.1.9] Date of access 17/11/2005. Oviatt, B.M., and McDougall P.P., (1994), “Toward a Theory of International New Ventures”, Journal of International Business Studies, Vol.25, No.1, 45-64. Rodriguez, E and Berry, A. (2002) SMEs and the New Economy: Philippine Manufacturing in the 1990s. In Charles Harvie and

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Boon-Chye Lee, eds., The Role of SMEs in National Economies in East Asia. Cheltenham: Edward Elgar. Salami, A.T., (2003), “Guidelines and Stakeholders Responsibilities in SMIEIS”, in Central Bank of Nigeria (eds) Seminar on Small and Medium Industries Equity Investment Scheme (SMIEIS) CBN training Centre, Lagos, pp 50- 65. Schatz, S.P. (1994), “Structural Adjustment in Africa: A Failing Grade So Far”, The Journal of Modern African Studies, Vol. 32, No.4, pp 679692. Stemler, S.E. (2001). An overview of content analysis. Practical Assessment, Research & Evaluation, 7(17). Stiglitz, J.E. (2004), “Capital-Market Liberalisation, Globalisation, and the IMF”, Oxford Review of Economic Policy, Vol.20, No.1, pp57-71. Subrahmanya, M.H.B., (2005), “Small-scale industries in India in the globalisation era: performance and prospects”, International Journal of Management and Enterprise Development, Vol.2, No.1, pp122-139. Tagoe N., Nyarko, E. and Anuwa-Amarh, E. (2005), “Financial Challenges Facing Urban SMEs under Financial Sector Liberalisation in Ghana”, Journal of Small Business Management 43(3), pp. 331-343. Tornatzky, L.G. and Fleischer, M., (1990), The Processes of Technological Innovation, Lexington Books, Toronto, Canada. Udechukwu, F.N. (2003): “Survey of Small and Medium Scale Industries and their Potentials in Nigeria”, Central Bank of Nigeria Seminar on Small and Medium Industries Equity Investment Scheme (SMIEIS) CBN training Centre, Lagos pp6-18. UNEP (2005), “Integrated Assessment of the Impact of Trade Liberalization- A Country Study on the Nigerian Rice Sector”, United Nations Environment Programme, Geneva Switzerland. Vachani, S. (1994), “The Impact of Economic Liberalisation on Small Companies’ Competitiveness”, Small Enterprise Development, Volume 5, No.4, pp.41-46.

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APPENDIX

Table 6.1 Movement in Market Interest Rate, Exchange Rate and Inflation Rates: Nigeria Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Exchange Rate(N/$) 0.55 0.61 0.67 0.72 0.76 0.89 2.02 4.02 4.54 7.39 8.04 9.91 17.30 22.05 21.87 81.02 81.25 81.65 83.81 92.34 100.80 111.70 126.26 134.04 134.73

Interest Rate

Inflation Rate

7.5 7.75 10.25 10.00 12.50 9.25 10.50 17.50 16.50 26.80 25.50 20.01 29.80 36.09 21.00 20.18 19.74 13.54 18.29 21.32 17.98 18.29 20.48 21.16 19.47

10.0 21.4 7.2 23.2 40.7 4.7 5.4 10.2 56.0 50.6 7.5 12.9 44.5 57.3 57.0 73.1 29.1 8.5 10.0 6.6 6.9 18.9 12.9 14.0 19.4

Source: Extracted from Central Bank of Nigeria Statistical Bulletin (2004).

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Chapter 7 A framework for understanding the imperative role of the informal sector as enabler of economic development in developing countries

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Introduction The basic tenet upon which this chapter rests is a recognition that the informal sector is an oxymoron – on the one hand it is an unorganized “nuisance” sector whose members, for example, do not pay any form of tax; on the other hand, it provides jobs and increases incomes of the most vulnerable groups in a city - the very low-income group. According to Pratap and Quintin (2006), a distinguishing feature of developing economies is the importance of untaxed, unregulated activities. The traditional sector, the “survival” sector, the unregulated sector are all terms that are used to describe it. Indeed, one study, quoting De Soto (1989), likens the informal sector to an elephant:” we may not quite be able to exactly characterize its true nature but once we see it, we have no doubt what is in front of us” (Mead and Morrisson 1996). Extensive attention has been given in recent years to the role of entrepreneurship in facilitating global economic development, with research indicating that much employment growth originates from the “entrepreneurial sector” of the economy (Morris et al. 1996; Leitch and Harrison, 1999; Thurik and Wennekers, 2004; Plummer and Taylor, 2004; Goh, 2002; Chowdhury, 2007; Sriram et al. 2007; Thierry, 2007; Osarenkhoe, 2008). Comparatively lesser attention has been focused on the role of the informal sector (comprising all activities that fall outside the formal net of registered, taxed, licensed, statistically documented business enterprises) as a contributor to the economic welfare of society (Gang and Gangopadhyay, 1990; Lubell and Zaroun, 1990; Harrison and Mason, 1996; Coate et al, 2006). 149

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We recognise in this chapter that industry, or the modern sector, in developing countries is composed of an overregulated formal sector and a free-entry informal sector (Morris et al. 1996). Because of the nature of the regulations and the influence environmental factors exert on the operating characteristics of most firms, we can, in general, identify the formal sector with large industry and the informal sector with small and atomistic industry (Osarenkhoe, 1992). The informal modern sector is often a dynamic actor in the process of economic development, frequently outpacing the growth of the formal modern sector (Gang and Gangopadhyay, 1990). We are aware that by its nature, the informal sector is difficult to quantify (Morris et al 1996). That notwithstanding, the vital role that this sector plays in both developed and developing countries cannot be overemphasized, and is estimated to contribute between 16 and 75 per cent of many nations’ employment (Amin, 2004). Given that in many developing countries just over 70 per cent of the population is employed in the informal sector of the economy. There is a need for policy makers to direct strategies to reflect measures that are broadly supportive of the informal sector across different industries. Moreover, the informal sector represents a parallel economy that is directly affected by conditions within the formal economy (Morris et al, 1996; Coate et al, 2006). According to Pratap and Quintin (2006, p. 1), “…it is not unusual for the informal sector to account for over half of GDP and employment in low-income nations.” The prevalence of informal activities in these nations is a natural response to burdensome regulatory and tax environments. However, it comes at a cost. Small tax bases constrain fiscal authorities to raise revenues through inefficient means and to delay necessary investments in infrastructure and education. Furthermore, resources are not likely to be directed to their most efficient uses if production is carried out in an environment where formal mechanisms of contract enforcement and dispute resolution are not available”. Governments in developing nations resort to a variety of policies to try and bring more economic units into the tax-paying fold. These range from sporadic crackdowns on undeclared economic activities, to subsidies and tax breaks for firms that agree to register legally and maintain legitimate tax accounting practices”. Understanding the intended and unintended effects of these 150

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policies (and their often limited success) is an important area of research. These observations are also consistent with those by Osarenkhoe (1992) in his doctoral dissertation in which encompasses a study of 700 participants in the distributive trade in Nigeria. According to Osarenkhoe (1988 and 1992), the salient features of the structure, conduct and performance is strongly related to the nature of the forces prevailing in the economic environment in Nigeria. However, among the myriad of constraints that affect their scale and mode of operation, shortage of fund and lack of incentive to expand was ranked highest by the majority of the 700 traders included in the survey. The magnitude of the financial problems is equally profound in both formal and informal sectors. According to Oladeji & Abiola, 2000), one of the most major problems which have militated against the development of Nigeria’s small-scale industrial sector is the inability of the operators to secure investment capital. Banking establishments insists on promoters of small-scale ventures bringing collateral security. Property which banks insist on for placement as collateral is beyond the capability of small-scale business promoters. Until now, in discussions of economic development, industrial dualism is often ignored. For example, Maloney´s (2004) study concludes that compelling evidence that labour markets are dualistic in developing countries has yet to be produced. We fill this void by answering the following questions: • • •

What constitutes the informal sector? What is the role of the informal sector in poverty alleviation? What is the relationship between the informal sector and the formal sector and where do the informal sector end and the formal sector start?

The purpose of this paper, therefore, is partly to present a framework for understanding the role of the informal sector in the process of economic development, and partly to accentuate the continuum or interconnectedness between the informal and the formal sectors and the role international NGOs, small community based or local NGOs as well as government authorities can play in this process. The rest of this paper proceeds as follows: First, a number of development paradigms are compared to the informal sector concept. 151

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The five variables that emanate from the review of the paradigms are used to construct a framework that can be used for understanding the informal sector. This section will not only provide a general description of the setting but will also contain background information needed for the concluding remarks and to illuminate some policy implications of this chapter. Theoretical Framework The Informal Sector and some Development Paradigms Thinking about poverty alleviation depends greatly on one’s underlying theory about the way the global economy works and, therefore, about the reasons for the existence of poverty. According to Trainer (2002), the development literature does not sufficiently acknowledge the contradictions that exist between the conventional or neo-classical position on development and the critical and “appropriate development” perspective. Trainer´s paper discusses the main differences between these two positions and argues that the neoclassical position must be abandoned. Amongst the major development problems facing many of the developing countries is the increasing levels of poverty and income inequality (Oladeji and Abiola, 2000). Economic growth in the 1950s, 1960s and 1970s was seen as a panacea for reducing poverty (Lewis, 1954; Solow, 1956; Hirschman,1958; Prasad, 1970).While the key to development progress is still achieving economic growth, according to Prasad (1998), the means to do so is based on the ability of governments to move towards a free market type economy. The concern today is the impact of economic structural adjustment policies (SAPs) on the levels of poverty and inequality. In most cases the evidence on the impact of SAPs shows that despite sustained economic growth the poverty level has increased in many developing countries (Oladeji and Abiola, 2000). In addition to the preceding discussion, a number of development paradigms that have been in vogue are here evaluated and compared to the informal sector concept. Srinivas (1997 & 1998):

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Growth The development decades of the 50s and 60s (Lewis, 1954; Solow, 1956; Hirschman, 1958) first advocated this strategy of “growth”. Aiming for an economic growth of five percent of the GDP, it was assumed that the benefits of this growth would reach all the sectors of the economy. This did not actually take place. Consequent to the pursuance of this strategy, inter-personal and inter regional disparities, in fact, increased. The urban informal sector could be seen here as an answer or solution to the failure of the “trickle down” growth strategies (Srinivas, 1998). Growth with Distribution/Equity: Since the growth strategies brought about disparities (Srinivas, 1997), later economic and developmental strategies stressed on “growth with distribution/equity”. It was assumed that strategies which stressed on equitable distribution of growth would be more appropriate (Davin, 1964 &1965; Bouderville, 1966; Prasad, 1970). For various reasons, this distribution again did not take place (Timmer, 2000). In this respect, the urban informal sector, in fact, ensures a more equitable distribution of income among the poor, by employing migrants to the city, through it may be thinly spread - since the job which could be done by one person, is actually done by five or ten persons (Oladeji and Abiola, 2000). Employment Generation As a result of the failure of the “growth with equity” strategy, the focus of development shifted to strategies on 'employment generation (Stöhr, 1975; Funnel, 1976), since it was found that the growth-withequity strategy did not actually generate employment (ILO, 1997; Cross and Johnson, 2000). Even though this did work to an extent, the formal sector, which these developmental strategies were aimed at, was not able to absorb the multitudes of semi-skilled and unskilled migrants to the city (Osarenkhoe, 1988 and 1992; Charmes, 2000; Pratap and Quintin, 2006). The urban informal sector has been able, on the other hand, to generate employment for these people with few skills or 'undesirable personal characteristics', since it used technologies, which 153

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were appropriate and labour-intensive (Williams, 2007). Appropriate technology One glaring drawback thrown up by the employment-oriented strategies was a lack of technology, which suited the less developed countries' economies (Soetan, 1995). Blind adoption of western technologies only compounded the problem (Phillips et al., 1994). So later strategies stressed on “appropriate technologies” as a necessary ingredient of development. Technology is a major supply-side factor and a key determinant of income, productivity, and employment for the female entrepreneurs (Soetan, 1995; Iwe, 2005). The process of acquisition of technological inputs has been severely constrained in the past 7 years (Ibid). In addition, suppliers of technological inputs depend mainly on imports and only minimally on local fabrication. Lack of access to credit and to training has also hindered the adoption of new Technologies (Osarenkhoe, 1992; Okurame and Balogun, 2005). According to Soetan (1995), structural and institutional imperfections limit productivity and income. Policy intervention is needed to control inflation and make technological inputs more accessible and affordable. Local production of spare parts should also be encouraged (Ibid; Adekanye, 1985; Chowdhury, 1999, 2002). Human resource development Many current economic intervention practices stem from the failed economic policies of developed nations, which rely primarily on structural adjustment as the dominant aspect of international (money lending-based) support for development (Taylor and Plummer, 2003). This approach is still popular, even while the number of people in the world who fall below the poverty level is increasing (Geroy et al., 1997; Goh, 2002). Microenterprise can be defined as development from the bottom-up (Geroy et al., 1997, p. 65). HRD microenterprise processes concentrate on empowering individuals to take ownership of their means of subsistence and development, while working towards an end, because they care about the goals and own the processes to achieve these goals (Choudhury, 1999, 2002; Goh, 2002). This implies that HRD microenterprise processes facilitate participation by ensuring that all 154

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stakeholders will be heard in the decision-making processes, thus decreasing dependency. While the stress on appropriate technologies was a desirable direction in development strategies, a need for developing skills for these technologies arose (Wright, 2000; Taylor and Plummer, 2003). Thus, there was a shift in focus towards the development of human resources. The urban informal sector has, in this respect, absorbed migrants with little or no skills, trained them in various skills in an informal apprentice way and used it in its own growth - using very little of the formal education processes (Osarenkhoe, 1998 and 1992; Pratap and Quintin, 2006). Basic needs The present thrust of most strategies has been the provision of basic needs like food, clothing, shelter etc. to the population and effect overall long-term growth as a result. The urban informal sector has been providing basic needs for urban populations and migrants at affordable prices and qualities. Further to a critical review of the informal sector and some development paradigms, five variables are identified in this section and the conceptual framework constructed serves. Thus, the review above necessitates more knowledge on the following: distinguishing salient features of the informal sector, the definition of what the informal sector entails, the issues pertaining to the interconnectedness and relationship between the formal and informal sector. What are the distinguishing salient features of the informal? Despite substantial research since the 1970s, the meaning and scope of the informal sector remains a controversy, as its magnitude, nature and composition vary between regions and countries. A study by ILO (1997) uses the term "informal sector" to describe a "range of economic units in urban areas which are largely owned and operated by single individuals with little capital and labour, and which produce and distribute goods and services with a view to generating income and employment" (ILO 1997: World Employment Report, Geneva). Other characteristics include labour-intensive technology, easy entry, high levels of competition, production of low-quality goods and services, 155

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limited capacity for accumulation and restricted access to assets, credit and other services, as well as undeclared and unprotected labour and unstable relationships of production. The main features of the informal sector are described below: Employment The following are the characteristics of the people engaged in the informal sector; Absence of official protection and recognition; non coverage by minimum wage legislation and social security system; predominance of own-account and self-employment work; absence of trade union organization; low income and wages; little job security; no fringe benefits from institutional sources; Enterprise The characteristics of the activities in the informal sector include Unregulated and competitive markets; small scale operation with individual or family ownership; ease of entry; reliance on locally available resources; family ownership of enterprises; labour intensive and adapted technology; absence of access to institutional credit or other supports and protections; Habitat Some characteristics of the informal sector land and housing include - unauthorized use of vacant public or private land; illegal subdivision and/or rental of land; unauthorized construction of structures and buildings; reliance on low cost and locally available scrap construction materials; absence of restrictive standards and regulations; reliance on family labour and artisanal techniques for construction; non-availability of mortgage or any other subsidized finance. Credit The characteristics of informal credit markets include - unregulated and non-subsidized; easy accessibility; availability in very small size 156

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and for short terms; low administrative and procedural costs; little or no collateral requirements; flexible interest rates (from very high to no interest at all); highly flexible transactions and repayments tailored to individual needs. Figure 7.1 A framework for understanding the role of the informal sector in the process of economic development

The continuum between informal and formal sectors

Link between informal sector with formal agencies

Characteristics of the informal sector

INFORMAL SECTOR

Poverty alleviation and job creation

Operational definition of the informal sector

Source: Author

Key constraints in the informal sector include saturated and stagnant markets, inadequate access to credit and savings services, weak technical skills, inadequate information, and poor infrastructure (see also Osarenkhoe, 1988 & 1992). Micro entrepreneurs rely mainly 157

A framework for understanding the imperative role of the informal sector

on family, friends, moneylenders, and tontines for financial services. Microenterprise assistance programs, although numerous, are unevenly distributed throughout the region and of varying quality (Goetz and Gupta, 1996; Osarenkhoe, 1988 & 1992). The appraisals of the microfinance institutions gave the institutions high marks for outreach, finding that most provide financial services to very poor, underserved people in remote areas. The scale of operations generally has remained small, in part because most institutions are less than five years old and in part because of the difficulties of scaling up in sparsely populated areas. The quality of financial services offered is high: loan terms and conditions are tailored to the needs and capacities of clients; borrowers can obtain small loans using simple procedures; and requirements for loan security, character–based guarantees, collateral, and savings deposits are appropriate for local conditions. Revenues cover on average 30-40 percent of operating expenses, high administrative costs inflate transaction costs, and the expenses of employing expatriates often drain program funds (Goetz and Gupta, 1996). Defining an Informal Sector The definition of the informal economy is an elusive one and has always been somewhat problematic. Studies by ILO and many government censuses provided an operational definition of the informal sector mainly in terms of size and capitalization criteria (Sethuraman, 1980). However, these criteria have no theoretical grounding (Cross, 2000, p.32). The informal sector was earlier compared to large-scale “modern” development, whether sponsored by the state or large corporations that were failing in their efforts to “develop” the developing world with small-scale economic practices carried out on an individual or family basis primarily for immediate survival (Hart, 1970 cited from Cross 2000, p. 30). Hart (1971), in his study, argues that these activities, previously denigrated as “marginal” or “black market”, could be seen as entrepreneurial in their own right, and thus as a potential source of development. Unfortunately, neither Hart nor the ILO´s definition of the informal sector could adequately distinguish between entrepreneurial activity that was worthy of support and activity that could be seen a predatory. A small unlicensed 158

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“shop” selling candy out of an apartment window to neighbouring children could possibly be seen as a form of positive entrepreneurship worthy of support because jobs are being produced. Since the reality of the informal sector was first realised (Hart, 1971), there has been a growing body of literature focusing on its different aspects: meaning, measurement and social significance of the informal sector (Renooy, 1990; Williams, 2007); modelling the informal sector formally (Rauch, 1991); undeclared work (European Commission, 1998 & 2005); undeclared employment (Williams, 2007); individuals working in the informal sector suffer from a wage penalty as is commonly believed (Badaoui et al., 2007); the use of emergent paradigm based on dual labour theory to compare and contrast the informal and illegal sectors (Cross and Johnson, 2000); competition in the informal sector (Amaral and Quintin, 2006); atomistic or small-scale and under-capitalised (Osarenkhoe, 1998 and 1992; Pratap and Quintin, 2006). Specifically, the informal sector emphasizes self-financed, undercapitalized, small-scale, unskilled-labour intensive production. According to Charmes (2000), the informal sector was internationally defined as a concept of labour force by the XVth International Conference of Labour Statisticians held in Geneva in 1993 (ILO, 1993). In the early 70s, it was up to the International Labour Office to propose the first multicriteria definition of the notion in its famous report on Kenya for the World Employment Programme (ILO, 1972). But labour economists and statisticians who paid attention to this rising phenomenon in a context of increasing rural-urban migration, urban growth and decreasing employment creation in the modern sector, had not been the first to try to analyse and circumscribe the informal sector. At this juncture, it is pertinent to define what is meant by the informal sector and a definition adopted in this paper on which there exists a strong consensus. Hereafter in this paper, informal sector is referred to the paid production and sale of goods and services which are unregistered by or hidden from the state for tax and/or benefit purposes but which are legal in all respects (European Commission, 1998; Hyden and Wright, 1997; Williams and Windebank, 1998). Hence, the informal sector includes only paid work that is illegal because of its non-declaration to the state for tax and/or social security purposes. Paid work in which the good and/or service itself is illegal (e.g. drug trafficking and money laundering) is excluded, as is unpaid work (Williams, 2007, p. 350). However, we are aware that operationalizing 159

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the concept of informality for the purpose of measurement is not easy both because the two categories of the informal sector overlap and because the border between the informal and the formal sector is blurry. First, if unofficial earning strategies are exercised by a lowprofit small enterprise with low quality working conditions, then workers of this enterprise and the enterprise itself can be classified as belonging to both informal market categories. An example of such a case is an unregistered one-person low-profit street trade enterprise these characteristics combine unofficial and survival activities. Second, some formal market jobs or enterprises can be classified as informal if it is found that they have poor work protection or if the life style and opportunities they entail are considered undesirable. If the street trader from the previous example registers her enterprise, the enterprise and the trader herself could be categorized as belonging to the formal sector if the profit is considered above the survival level. What is the role of the informal sector in poverty alleviation and job creation? The informal sector has traditionally been viewed as a temporary alternative to unemployment and poverty (Fields, 1975) which tends to disappear as an economy matures and becomes more developed. It is not surprising then that many economists initially associated informal economic activity with developing countries (De Soto, 1989; Marshall, 1987) where decent work deficits are most pronounced and social security nets are relatively underdeveloped. However, in contrast to such a view of the informal sector as a transitional marginal phenomenon, recent evidence seems to indicate that it may be more of a long term feature of developing economies (Bekkers and Stoffers, 1995; Charmes, 2000), particularly in Africa and Latin America where there seems to be expansionary tendencies. If informal sector employment is indeed a more permanent, not necessarily self eradicating feature of developing countries, then clearly understanding its workings is essential to comprehending labour markets and, more generally, poverty in developing countries. In other words, poverty is a key characteristic of the informal sector (Pradhan et al. 1999). One seemingly stylized fact is that informal sector workers, even if equally productive, are subject to lower remuneration than their formal 160

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sector counterparts, as suggested by many empirical studies (See, for example, Badaoui et al., 2007; Mazumdar, 1982; Heckman and Hotz, 1986; Roberts, 1989; Pradhan et al 1999; and Gong and Van Soest, 2002). There a number of explanations that has been offered in this regard, mostly based on a segmented view of the labour market. For instance, the presence of barriers to entry into the formal sector could pose a possible cause, so that working in the informal sector is associated with a negative wage premium even for equally productive workers; see Fields (1975) and Mazumdar (1975). However, several studies postulate that it is more efficient for entrepreneurs to remain outside the often underdeveloped and inefficient regulatory umbrella of the formal sector (see Tybout 2000). Similarly, Maloney (2004) introduces a dualistic perspective according to which workers may find informal sector employment a desirable alternative, both due to inefficiencies in the formal sector and low levels of labour productivity. A wage penalty for informal sector employment may also be due to sorting, where those with low levels of human capital are also those more likely to work in the informal sector (Tokman, 1982). Such sortings may arise in part because firms’ access to financing is relatively more limited in the informal sector and because employers with low degrees of capitalization tend to recruit less able workers (see, for example, Amaral and Quintin, 2006). Relationships of informal sector with the government or formal agencies According to Maloney (2004), the informal sector comprises 30-70 per cent of the labour market of most Latin American countries. Friedman et al. (2000) estimate that 14-62 per cent of output comes from the informal sector across a range of transition economies. The relationship between informal sector and formal agencies has been a cold one (Osarenkhoe, 1988 & 1992). How do we deal with the informal sector? This is a question that has dogged governments, particularly at the local level, forcing them to take ad-hoc short-term decisions that neither benefit the informal sector, nor help improve the quality of life of the citizens. Government efforts in recognizing the important role that the informal sector plays, or in its attempts in formalizing it are issues that deserve more attention. High population growth rates, shrinking public budgets, urban migration, and negative economic 161

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growth have all increased the demand for jobs in West Africa. This increased demand cannot be met by the formal or public enterprise sector, and the informal sector has absorbed much of the shock of the economic contraction in the region. As a result, the informal sector in West African countries is quite large, accounting for roughly a third to a half of GDP and a third to three–quarters of employment (World Bank, 2006). (For detailed information about the size of the informal economy in developing countries see Schneider and Enste, 2000). A study conducted by World Bank (2006) profiled the informal sector in 12 West African countries, identifying the characteristics of micro entrepreneurs and their enterprises, key constraints to enterprise growth, and the types of assistance programs in place. The World Bank´s study also analyzed nine microfinance institutions recognized as effective and assessed their outreach and sustainability on the basis of recognized best practice. The 12 country studies were based primarily on desk studies, with field visits to Burkina Faso, Cape Verde, Guinea–Bissau, Mali, and Mauritania to verify and update information. The nine institutional appraisals were based almost entirely on field research by Bank staff and consultants, who spent considerable time at each institution talking with managers, visiting local branches, interviewing clients, and reviewing financial data. The country profiles confirmed that the West African informal sector is large and growing, particularly in urban areas, although the sectoral concentration in trade, services, and production varies across countries. Women are important informal sector participants in all 12 countries (World Bank, 2006). According to the Economic Commission for Africa (ECA 1991), next to the agricultural sector, the informal sector is the largest employer of women in most African countries. There were an estimated 16 million women in sub-Saharan Africa engaged in the sector in 1990 (ILO 1990). Although the representation of women in the informal sector is higher than that of men (Berger and Byvinie 1989), the participation of women is underestimated. This is because women's activities, which are often excluded from national Census of Production Surveys, are unaccounted for in the calculation of the gross national product (cf. Soetan, 1995). The World Bank´s research raises three critical issues. First, the large size of the informal sector in West Africa indicates its importance as a major employer in the region and thus its critical role in 162

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development efforts. Second, governments could provide important support to the informal sector by creating a friendly environment for microfinance institutions. Interest rate ceilings, unnecessarily high minimum capitalization requirements, and undue restrictions on deposit mobilization undermine microfinance institutions` ability to become financially viable. Third, the research raises questions about the potential of microfinance institutions to attain financial sustainability in regions such as West Africa, where population density is low and physical infrastructure poorly developed. Where does the informal sector end and the formal sector start? The informal sector does not exist in vacuum - there are clear interconnectedness, partnerships and continuity with the formal sector - maintaining a two way flow of labour, goods, finances etc between the two sectors (Ratman and Jain, 2002; Coate, 2006). The dividing line that separates the two sectors is also hazy, further building a “smooth continuum” between them. The formal sector is usually sub-divided into small, medium and large-scale enterprises (Amini, 2004; Cross and Johnson, 2000). With the growing size of the enterprise, control by, but also promotion through, the government normally increases. Smallscale formal enterprises may face to some extent similar problems as the informal sector. However, the dividing line between the two consists in the fact that the latter is left more or less completely to itself, whilst the former has easier access to assistance. Especially in urban areas, there exist links between the formal and the informal sector (Pradhan et al., 1999; Pratap and Quintin, 2006). In periods of economic difficulty when the formal sector is obliged to reduce manpower, this may be partly absorbed by the informal sector on a temporary or permanent basis (Williams, 2007). Skills acquired in the formal sector are thus put to use in the informal sector. Furthermore, the informal sector sometimes works under subcontracts for the formal sector (Gang and Gangopadhyay, 1990; Lubell and Zaroun, 1990; Harrison and Mason, 1996; Coate et al, 2006). The supply (backward linkages) and demand (forward linkages) conditions of informal sector enterprises can best be studied using the framework of analysis provided by the 'industrial organization analysis' (Bain, 1956, 1968). Industrial organization analyses is a menu or taxonomy of concepts such as allocative efficiency (maximum 163

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advantage for both customers and suppliers); dynamic efficiency (including dynamic aspects such as changing customers' preferences or technological progress); X-inefficiency (taking into consideration the efficiency with which firms make use of available technology and the rate at which they innovate); and other concepts (Gueye and Gauci, 2003). This framework identifies the following criteria which have to be studied when the urban informal sector is studied as an 'economic unit'. The Supply and Demand Linkages of Informal Sector Enterprises are introduced below: Supply - Backward Linkages - raw materials used; access to credit facilities; process of manufacture; level of technology use; availability of basic services such as electricity, water etc; type of ownership; education and skill requirement; supply of labour; location characteristics (home-based, open space, squatter settlements); wages provided to labourers. Demand-Forward Linkages - price and quality of informal sector products/services; marketing procedure adopted; economic development levels (at the macro level); purchasing power of consumers. Concluding remarks and Policy Implications In this chapter, informal sector is conceptualised as an oxymoron. Against this background, a framework for understanding the role of the informal sector in the process of economic development and symbiotic relationship between the informal and the formal sectors is developed. Earlier in this paper, we show that a distinguishing feature of developing economies is the importance of untaxed, unregulated activities. According to existing estimates, it is not unusual for the informal sector to account for over half of GDP and employment in low-income nations (Pratap, S. and Quintin, 2006). The prevalence of informal activities in these nations is a natural response to burdensome regulatory and tax environments (Williams, 2007). However, it comes at a cost. Small tax bases constrain fiscal authorities to raise revenues through inefficient means and to delay necessary investments in infrastructure and education. Furthermore, resources are not likely to be directed to their most efficient uses if production is carried out in an environment where formal mechanisms of contract enforcement and 164

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dispute resolution are not available. Governments in developing nations resort to a variety of policies to try and bring more economic units into the tax-paying fold (Barrientos and Barrientos, 2002). These range from sporadic crackdowns on undeclared economic activities, to subsidies and tax breaks for firms that agree to register legally and maintain legitimate tax accounting practices. Understanding the intended and unintended effects of these policies (and their often limited success) form an important area of research. This requires models that are consistent with the existing evidence on the nature and determinants of informal economic activities. According to the Economic Commission for Africa (ECA 1991), next to the agricultural sector, the informal sector is the largest employer of women in most African countries. There were an estimated 26 million women in sub-Saharan Africa engaged in the sector in 2000 (Charmes. 2000, Friedman et al 2000). As far as poverty alleviation in developing countries is concerned, exclusive reliance on the natural forces of economic growth may be inadequate. But the various antipoverty programmes, vital though these may be, are no substitute for efforts to gear the broad thrust of development policy to the needs of the poor. The aim of policy should be to promote growth conducive to the pursuit of poverty reduction. This includes employment-generating growth, coupled with massive investment in human capital. And to meet the challenges of the "poverty alleviation with growth strategy in developing countries, concerted efforts is needed not just in economic policy reforms, the urgency of investing in people has to be grasped and acted upon. In addition to the above remarks, a number of implications of this paper are unearthed below: 1) The government and nongovernmental organizations (NGOs) should provide credit assistance to entrepreneurs operating in the informal sector as lack of credit is a major constraint (Barrientos and Barrientos, 2002; Osarenkhoe, 1992 & 1988). Credit can be channelled through, for example, women's associations. No collateral should be required; the association would guarantee the loans and monitor both repayment and the use of the credit. Distinctions should be made between different categories of enterprises, and the specific needs of particular categories of enterprises should be considered. Some enterprises have a greater need for working capital than for investment capital (Maloney, 2004). Hence, a participatory approach should be taken (e.g., getting feedback from the entrepreneurs and asking them 165

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about their specific needs) before credit is provided. 2) Linkage strategies that open up access to existing credit institutions, such as the peoples' banks and community banks, and other micro credit institutions should also be used to widen access to credit. Many women find filling out loan applications both cumbersome and discouraging (Soetan, 1995); either this should be minimized or bank officials should be trained to assist women with such details. One of the recommendations of a World Bank Poverty Assessment Workshop in Lagos, Nigeria, was the establishment of a social fund, financed by both private and public organizations, to channel resources to the poor. These should be created outside the government bureaucratic structure to assist local groups with capital. 3) Although lack of credit is a major constraint in the informal sector, lack of technical training, which was a major factor hindering them from keeping pace with technical progress is equally an impediment for Informal Sector operators to progress. A study conducted by Haan (2002) concludes that there is an urgent need for changes in the provision of training for the informal sector in Africa. It is important that the training should be made demand-driven and flexible, moving away from standard, centre-based courses offerings by permanent staff. To prepare youth for successful entry into the informal sector, technical skills training should be complemented with business skills development. Such a change in focus has important consequences for the design and delivery of skills training. The study does not yield an immediate unequivocal answer to the question of what kind of training provider is most appropriate for training for work in the informal sector. It feels that public sector training providers do not have necessarily had major comparative advantages in the organization and delivery of training for Informal Sector operators. Although they still have existing facilities, staff, training content and experience - a host of criticisms applies to each of these. Moreover, their budgets have shrunk to such an extent that their operations are now seriously affected. However, at the same time, church-based training providers are not much different and there were few examples identified of interesting training activities of other types of NGOs. Private sector training providers of technical training appear to be coming up only now. 4) Haan (2002) however refers to the need to reflect the segmentation 166

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of the informal sector in the organization and delivery of skills training offerings. Depending on their strategies and target group, training providers could (i) direct their training at the ‘high-end’ of the informal sector, i.e. providing courses for wage employment in, for instance, small manufacturing workshops, (ii) focus on self-employment in micro-enterprises, which requires preparing trainees for starting their own business, or (iii), contribute to the promotion of income-generating activities. The option of preparing trainees for subsequent wage employment in small workshops would require least changes for the existing training providers. Such training could be made more effective, for instance by ensuring that the courses are indeed responding to the demand for skills by local small enterprises. Other changes are needed in the delivery of the training. Such a focus appears to be especially relevant for urban areas. 5) Concrete assistance is needed from both government and NGOs in the form of on-the-job training or short courses to familiarize the entrepreneurs with new methods, machines, equipment, processes, and management training. Entrepreneurs hardly keep records (Osarenkhoe, 1992), and this is a major reason for their poor performance. These policy initiatives should incorporate the gender dimension, given the increasing feminization. Enhancing the skills of these female entrepreneurs would increase their productivity and income, both as a group and within different business categories. 6) Technology is a major supply-side factor and a key determinant of income, productivity, and employment for the actors in the informal sector (Byrne and Strobl. 2004). The process of acquisition of technological inputs has been severely constrained in the past. all along. In addition, suppliers of technological inputs depend mainly on imports and only minimally on local fabrication. Lack of access to credit and to training has also hindered the adoption of new technologies (Tybout, 2000). Structural and institutional imperfections limit productivity and income. Policy intervention is needed to control inflation and make technological inputs more accessible and affordable. Local production of spare parts should also be encouraged. 7) The negative impact of SAP on the Informal Sector needs little elaboration (Oladeji and Abiola, 2000). The informal sector has swelled as a result of retrenchment in the formal sector, which is due to rationalizations and to privatization of government-owned enterprises (Soetan, 1995); Unemployed graduates are also looking for 167

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employment in the urban informal sector ((Kingdom and Knight, 2000 & 2003). Usually, women are disadvantaged in the competition for resources (Amaral and Quintin, 2006). Inflationary pressures have eroded profits and increased the prices of technological inputs and raw materials, as well as the prices of final products and services. Deregulation has not had any salutary effects on the agricultural sector; hence, migration from the rural areas to the Informal Sector has worsened. Under these circumstances, women will be increasingly marginalized because SAP policies are also gender blind. The appropriate policy approach is both sectoral and gender sensitive, incorporating different budgetary allocations to disadvantaged sectors and groups. 8) Formal and informal firms operate under very different constraints. Most obviously, formal employers bear a number of regulatory costs that unregistered firms can typically avoid. These costs include licenses, bureaucratic approvals, bribes and other fees. De Soto (1989) estimated that setting up a legitimate business in Lima, Peru required a 10 month waiting period (estimated to cost over a thousand dollars in lost profits) and about US$200 in fees. The same operation took 3.5 hours in Florida and four hours in New York (Chickering and Salahdine 1991). Djankov et al. (2002) estimate these costs of entry in 85 countries and find that they range from 2.63 per cent of per capita GDP in Canada to 463 per cent of per capita GDP in the Dominican Republic. Perhaps the most important cost borne by producers who choose to enter the formal sector is that they become subject to profit and payroll taxes (Pratap, S. and Quintin, 2006). Tax rates are often set high in developing nations since governments are constrained to rely on a very small tax base. Other regulations such as environmental and zoning rules and restrictions in the use of imported inputs are also important in some countries Morris et al 1996). Finally, formal producers must typically comply with the stipulations of the labour code including minimum wage restrictions, severance payments, and social security requirements. In the light of this, reduction of barriers to entering formal sector can have profound impact on the transformation process from informal sector business activities to formal firms, thereby accentuating the continuum or interconnectedness between the informal and the formal sectors. One area where much work remains to be done is in the measurement of 168

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informal wealth. Estimates of the asset size of the informal sector are rare and imprecise when they exist. A satisfactory analysis of wealth inequality across households and across countries demands better data. Furthermore, in order to introduce gender issues in economic development, future research should also illuminate the visibility of women's contribution to developing regions´ informal sector by examining the role of technological inputs in employment and income generation for women entrepreneurs.

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Gang, I.N. & Gangopadhyay, S. (1990), A Model of the Informal Sector, Journal of Economic Studies, Vol. 17, Issue 5, pp Ghana Statistical Service (1996), Measuring Informal Sector Activity in Ghana, Proceedings of a Ghana Statistical Service - Overseas Development Administration Workshop, Accra, January 1995, 144p. Goetz, A.M. and R. Sen Gupta, 1996. "Who takes the credit? Gender, power, and control over loan use in rural credit programs in Bangladesh", World Development, Vol.24, No.1. Goh, S.C. (2002), Managing effective knowledge transfer: an integrative framework and some practice implications, Journal of Knowledge Management, Volume: 6 Issue: 1 Page: 23 – 30 Gong, Xiaodong, and Arthur Van Soest. (2002). Wage differentials and mobility in the urban labour market: a panel data analysis for Mexico. Labour Economics 9 (September): 513-529. Gueye, A & Gauci, A. (2003), Pro-Poor Growth Strategies in Africa Pro-poor education policies and labour demand , Economic Commission for Africa , Economic Policy Research Center, Nr ESPD/NRP/2003/3. Haan, H.C. (2002), Training for Work in the Informal Sector: new evidence from Eastern and Southern Africa, Turin, Italy: International Training Centre of the International Labour Organization Hart, K. (1971), “Informal Income Opportunities and Urban Employment in Ghana”, in: Heckman, and Hotz, J. (1986). An Investigation of the Labour Market Earnings of Panamanian Males: Evaluating the Sources of Inequality. Journal of Human Resources 21 (Autumn): 507-542. Hirschman, A. O. (1958). The Strategy of Economic Development. New Haven, CT: Yale University Press. ILO (1972), Employment, Incomes and Equality. A Strategy for Increasing Productive Employment in Kenya. ILO, Geneva. Hyden, T.J & Wright, P.C. (1997), HRD and Microenterprise: socioeconomic capacity building in LDCs, Empowerment in Organizations, Volume 5, Issue 2, pp 65– 75, International Labour Organization (1990), Women's employment promotion in Africa: Patterns and relevant issue, Geneva, Switzerland: ILO.

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Niels-Hugo Blunch, Sudharshan Canagarajah, Dhushyanth Raju (2001), The Informal Sector Revisited: A Synthesis Across Space and Time, Social Protection, Discussion Paper Series, No. 0119, Social Protection Unit, Human Development Network & The World Bank Okurame, D.E. & Balogun, S.K. (2005), Rol, e of informal mentoring in the career success of First-line bank managers: A Nigerian case study, Career Development International, Volume: 10 Issue: 6/7 Page: 512 – 521 Oladeji, S.L. & Abiola, A.G. (2000), Poverty Alleviation with Economic Growth Strategy: prospects and challenges in contemporary Nigeria, Journal of Social Development in Africa, Vol. 15, No. 2, (July), pp 33-53. Osarenkhoe, A. (1992), Improving Food Products Distribution in Developing Countries: an analysis of environmental forces influencing food distribution and recommendation for policy reforms. Doctoral thesis, School of Business Administration, University of Stockholm, Sweden. Osarenkhoe, A. (1988), The Structure of Food Distribution Systems: a description of the salient features of the channels of distribution and channel participants. Master Thesis. Department of Business Administration, University of Stockholm, Sweden Phillips, L.A. Calantone, R. & Lee, M-T (1994), International Technology Adoption: Behavior Structure, Demand Certainty and Culture, Journal of Business & Industrial Marketing, Volume: 9 Issue: 2 Page: 16 – 28 Pradhan, K., Roy, P. K & Saluja, M. R. (1999), Informal Sector in India: A Study of Household Saving Behaviour. Contribution of the Informal Sector to the Economy, Report no. 1, National Council of Applied Economic Research, New Delhi August 1999. Pratap, S, and Quintin, E. (2006). Are Labor Markets Segmented in Argentina? A Semiparametric Approach, European Economic Review 50 (October): 1817-1841. Pratap, S. and Quintin, E (2006), The Informal Sector in Developing Countries: Output, Assets and Employment, Research Paper No. 2006/130, World Institute for Development Economics Research (UNU-WIDER), Helsinki, Finland. Prasad, B.C. (1998), The woes of economic reform: poverty and income inequality in Fiji.

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Chapter 8 Local Economic Growth in Tanzania: Institutions and the Service sector-led growth in an agrarian Economy

Imani Silver Kyaruzi33

Introduction Tanzania’s economy is in rapid transition from a centrally-planned, government-controlled economy to a liberalised private sector-led economy. However, the establishment of locally-owned economic growth policies, private sector development and the creation of competitive economic environment have proved problematic. To address such weaknesses, the government has established a number of service sector-led growth policies at the national level in an attempt to integrate the Tanzanian economy with the world’s economy. Such transition has suffered significantly due to the “local-specific factors” and infrastructural constraints. Therefore, the arguments presented in this chapter seek to elaborate on the social, cultural and economic factors in relation to the service sector economy and how they impact on local economic growth initiatives in Tanzania. First, there is a need to examine the current economic system and the local economic policies in order to assess their suitability in the local economic growth scheme. As Treichel (2005:4) puts it, “…Tanzania, unlike many other African countries, was a highly state controlled economy engaged in the pursuit of socialist objectives. As a result, it had an inflexible economic system that was characterized by monopolistic and heavily regulated production structures in all sectors of the economy [Pre-structural adjustment programmes]”.

Therefore, the rigidity of the economic system and the number of policies that have been introduced following the failure of socialist 33 Part of this paper was submitted for the IAABD conference in Florida, May 2008

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policies necessitates the need to review the role of the state in the private sector-led economy where the service sector plays a major role. Second, there is the need to question the role of the service-led initiatives in an agrarian economy like Tanzania. Due to globalisation pressures and the need for a more deregulated economic system, the government was compelled to introduce specific measures to support this move. This includes idolisation of the private and service-sectorled policies. As a result, the adoption of the private sector-led policies in the early 90s opened the doors to foreign investments and the influx of Translational Corporations (TNCs) such as high tech firms, telecommunication and large retailers, mainly from South Africa. Also, within the country, much was done to popularise the use of ICT in almost every aspect of the economy. The Tanzanian government still continues to show the desire to invest in ICT (Matambalya and Wolf, 2001). However, despite such initiatives, the government is faced with the challenge of translating the outcomes of the service sector initiatives in the local economic growth. Is it too early to rely on a service sector-led economy? This chapter seeks to identify the significance and the processes behind the introduction and the application of the service sector to the agrarian economy of Tanzania. The paper is divided into three parts. First, the paper seeks to explore the adoption and application of the service sector-based economy in Tanzania. The approach is based on literature review and recent arguments on the subject. Second, we discuss the ways of integrating the service sector economy in the country’s economic growth initiatives. Finally, based on these discussions, a framework is proposed that shows the steps to be followed in order to integrate the economy and realise the possible benefits a service sector-led economy offers towards the national economic growth. The paper does not seek to provide definitive answers to Tanzania’s economic problems, but to initiate the debate on the often wrongly perceived and generalised section of the economy. This is to be able to define the service sector economy, not by just appreciating its role in meeting foreign institutions` demands, but to be able to see the service economy through its roles in local economic growth and through social and, economic well-being of the nation.

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Service Sector-led Economy In the past, Tanzania was a socialist country with excessive state control in major economic activities including the service sector. According to Temu and Due (2000: 684) past policies “are now widely blamed for the productivity downswing and macroeconomic imbalance”. Wobst (2001:2) argues that despite the introduction of macroeconomic reforms, policies and market liberalization, “many countries of Sub-Saharan Africa (SSA), of which Tanzania is one of the poorest, have experienced, only moderate improvement in their general social and economic condition”. Basic services such as telecommunication, infrastructure, power and water and the legal frameworks that support the private sector are not yet fully developed (Wangwe, 1995:8). Since 1986 Tanzania’s economy has undergone rapid economic changes. The WTO report (2000) suggests that the service sector has undergone significant liberalization including the telecommunications, insurance and financial service sectors which is a binding agreement under the General Agreement on Trade in Services (GATS). However, these initiatives have been plagued by inconsistency in economic policies and the poor state of infrastructure. In Tanzania, the agricultural sector dominates the economy and provide more than 50% of GDP, 75% of export and 85% of employment (Tanzania Economic Forum, 2006) while the service sector ranks second in employment generation (Kweka and Kabelwa, 2004). In recent years, the services sector has undergone significant liberalization. This can be seen through the government’s efforts to privatize a number of sub-sectors including telecommunications, insurance, and financial services. Among these, tourism constitutes the largest component of services GDP and holds promise for continued growth (World Fact Book, WTO Secretariat, 2008). Services account for about 35% of Tanzania's GDP, and are characterized predominantly by public services and tourism, which generate around 30% of the country's foreign exchange earnings (WTO, 2007). Despite these promising figures, it has been noted that; “Tanzania’s services sector is still characterised by an inadequate regulatory and institutional framework and the regulations already in place need further restructuring. Others have argued that the sectors are so underdeveloped that they cannot compete in the world economy” 179

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(Kweka and Kabelwa, 2004:15). Services Sector and Local Economic Growth The service sector and specifically the information and communication technologies (ICT) sector are rapidly transforming business practices in many parts of the world. However, the role of the widely documented “service sector-led economy” does not explain how the outcomes can foster local economic growth in least developed economies like Tanzania. One possible explanation for this could be the fact that much of these literature on new service-sector economy come from the developed world where the infrastructures are well laid to accommodate such changes i.e. a move from labour-intensive to service sector-led economy. Also, countries like Tanzania are still in transition from command to a market-led economy thus still weighing out the options available, and specifically, searching for best ways of stimulating local economic growth (Kyaruzi, 2006). However, despite the lack of common views on what exactly stimulates faster growth in Africa, there is some degree of consensus amongst authors of local economic growth in developing countries that to stimulate economic growth there are factors that are prerequisites. First, it appears that to achieve local economic growth the country needs a set of growth determinants (see Bigsten and Danielsson, 1999:3). The arguments presented by Bigsten and Danielsson (1999:3) suggest that there are three (possibly more) major factors that determine income growth in African economies. These are: 1) Factor accumulation and technological progress; here they argue that accumulation of physical and human capital, efficiency in resource allocation, and ability to acquire and apply modern technology are basic determinants of growth in any economy. 2) Institutions and transaction costs; an effective economic system requires an efficient set of institutions that can sustain low economic transaction costs. 3). Governance and politics; the views that the influence of politics (or policy interventions) on economics in African economies is of strategic importance to growth prospects. To expand these arguments technological advancement, institutional arrangement and government policies in relation to service sector-led economy can be discussed as follows: 180

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Technology First, in an attempt to improve technological progresses amongst businesses and institutions, Tanzania has introduced the National ICT policy (2003) that recognizes the roles of knowledge management and human resource development in local economic growth. Also, the policy recognizes that “all forms of public utilities and services in Tanzania can be significantly improved and expanded by embracing ICT…[this can be achieved through]… appropriate use of information flows, leading to accurate decision-making, resource allocation, risk and operational control management” (ICT Policy, 2003: part 3.7). The policy has specific objectives including: a) The establishment of an environment conducive for e-commerce transactions and competition. b) To encourage more usage of ICT in financial services (banking, insurance, etc). c) To promote the use of ICT to enhance efficiency, effectiveness and continuity in the provision of services and basic utilities from both private and public sectors especially in billing and payment systems. d) To develop and deploy a nationwide e-Health system that supports medical facilities in the under-served areas. e) To develop and deploy a nationwide e-Tourism system. f) To encourage cyber-café owners to diversify their enterprises in order to build multiple revenue streams. (ICT Policy Report 2003: 17) However, very few have been achieved since inception. For instance, the nationwide e-Health system and e-Tourism systems do not exist. Much of what has been achieved is seen in item (f) above where most cyber-cafes are still growing in number. Items a, b, and c are typical practices of developed economies whose applicability in Tanzania would take a few more years if not longer. For the cyber cafes (which seem to highlight the most achievement of this sector), their contribution to the services sector economy and economic growth has not been empirically tested. Therefore, we are unable to draw conclusions on such initiatives. Despite the fact that almost 80% of Tanzanians reside in rural areas 181

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the ICT policy is silent and fails to establish the link between ICT, agriculture (which is the main economic activity) and local economic growth where majorities live. These figures are not congruent with the justification and prioritization of the service sector-led economy over other sectors. The rural community can benefit from the service sectorled economy by using technology to improve their productivity, exchange and improve knowledge on modern farming, participating and reaching foreign markets. However, there are many hindering factors such as the low level of education, poorly developed infrastructures and low connectivity. All these factors militate against the effective introduction of such initiatives. Therefore, for this segment of the population to be able to rely on services sector-led initiatives these obstacles will have to be dealt with to ensure their participation and contribution to the nation’s economy. This is due to the fact that, the current Tanzania ICT situation requires urgent steps to enable Tanzanians to participate meaningfully in the knowledge economy, recognising that Tanzania has low levels of human capital development, local content creation; ICT infrastructure and access, which together lead to high costs of participation (ICT Policy, 2003). It is these high costs of participation that raises questions of whether the country is right to over-rely on this sector for its economic development. Institutions Institutional reforms are essential in post socialist countries (Dawson, 2003). However, it is argued that the knowledge of how to transform institutions especially in the Sub-Saharan countries remains weak (Henisz, 2002). Most of the institutions in Tanzania were set up in the early 90s following pressures from bilateral and multilateral institutions. Dawson (2003) argues that “…market institutions could not have been developed in a laboratory setting and then transplanted into the economy”. This statement calls for locally-owned or cultural– specific institutions that focus on local growth rather than those that mimic the growth initiatives of developed economies. For instance, institutions should be pushing to establish how the service sector-led growth can be used to stimulate growth in agrarian economies. In rural areas, there are agricultural firms whose ability to utilise services such 182

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as insurance and telecommunication is hampered by poverty, low skills and poor education. Also, in private sector-led growth initiatives encourage firms are treated as engines of economic growth. However, the experience of most African countries suggest that at the firm level, there are weak institutional and business support frameworks that are incapable of serving local businesses efficiently (Kyaruzi, 2006). These institutions are often under- funded and suffer from skill shortages (ibid). Earlier, Wangwe (1997:13) noted that the capacities of local institutions were too scattered and this has had implications for institutional effectiveness. Majorities of services institutions are situated in urban areas closer to the 20% of the population thus locking those in rural areas. Also, since most firms in Tanzania are of survivalist nature and are mainly of single transactions (Kyaruzi, 2006) and some are involved in unregulated informal business activities they have little or no access to organized markets, credit institutions, formal education and training (Maliyamkono and Bagachwa, 1990). These firms` role in local economic growth through ICT adoption, knowledge transfers and service-based transactions are minimal. There are no specific policies to transform the rural economies using the service sector. It appears that the rural population exists to meet the needs of the urban population who seem to benefit more from service sector-led activities. The local institutions have been weak or inadequately prepared to address these structural problems. Government Policies Government policies have a role to play in local economic growth. Although the country is in transition to the private-led economy, the government still has a role to play in aiding this process. For example, by introducing policies that could aim at improving the infrastructure for the service sector, reducing the costs of doing business and minimising the effect of “dolarisation” of the economy that seem to favour foreign firms. A certain degree of government intervention is required, as it has been argued that a poorly developed service sector can affect other areas of the economy. For instance, Wangwe and Rweyemamu (2002: 5) observed that:

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“…infrastructure is an important pre-requisite for successful industrialization. Expensive, sporadic and unreliable transport and communications are a serious impediment to industrial growth. High transport costs, poor infrastructure and constant power and water interruptions raise the costs of doing business and compound the problem of lack of information”.

Similarly, the service sector economy relies heavily on the flow of information. Therefore, to have the type of growth the policy advocates, there is the need to improve the flow of communication and power supply, which would minimise the costs of transactions and lead to rapid economic growth. A Proposed Framework: Service Sector-Led Initiatives In An Agrarian Economy There is a growing attitude that “service sector” and “service firms” are essential for fostering economic growth in developing countries. These phenomena are often problematically treated as prescriptions for fostering economic growth in developing countries without assessing their impact at the ground level. Also the service sector-led initiatives have a few blind spots such as their inability to address their usefulness and functions in the agrarian economies, a universalised concept that assumes they could be easily absorbed by developing countries and the lack of blueprints of an agrarian economy that has managed to rely purely on service for its growth. Based on the literatures on the service sector-based economic growth initiatives in the Tanzanian context, a framework for fostering economic growth and development should therefore, have the following components; the role of the state, taxation and price system, and transformation of the education system to accommodate the service sector-led initiatives in the existing local economic growth models. The role of the state in improving the environment Rather than focusing on how the service sector can improve people’s lives, emphasis should be on what should be done to improve the institutions to realise the economic outcomes of the service sector, 184

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in rural areas in particular. Since the country is still in transition, necessary steps are required to allow the private sector to grow with less state intervention. There are other areas that need to be improved alongside the service sector. Odling-Smee (2002) believes that the key to unlocking the long-run growth potential of postsocialist countries is to push forward with structural reforms. These include further reducing the role of the state; maintaining hard budget constraints on all enterprises; correcting price distortions, and fostering competition and a conducive business environment; improving the social safety net; developing financial markets; and building institutions to promote good governance (See also Dawson, 2003). A move to a full service sector-led economy is gradual and needs careful implementation. These institutions should seek to balance the outcomes of the service sector in both rural and urban areas. By doing so, they will be able to address the unequal distribution of income between the two sections. Fair Taxation and Price System In recent years the government imposed zero tax on the importation of ICT equipment. However this has not meant that majority of people (especially in rural areas) and SMEs have now invested in such technologies. It is the issue of affordability and the knowledge of how to turn this concept into value generating opportunity. And for those who have managed to invest in ICT, their growth potential has not been empirically tested. It is for a few urban residents who form a small percentage of the whole population. Kweka and Morrissey (2000:1) present the views that “public expenditure, notably on physical infrastructure or human capital, can be growth-enhancing although the financing of such expenditures can be growth-retarding (for example, because of disincentive effects associated with taxation)”. Also rather than diverting our attention by investing heavily in the new concepts it is also important to seek to integrate services elements in the agricultural production systems. Education system The service sector industry needs people who are qualified to perform different sophisticated tasks. Therefore, there is a need to improve or revamp the Tanzanian education system [especially at 185

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higher levels] to reflect the needs of the current global economic situation. For instance universities and incubators are seen as a strategy to diffuse technically feasible and economically viable technologies and they act as channels to provide services to SMEs (Nanyaro 2003). Also, incubators can be used to nurture local business by providing them with knowledge required to compete in the global economy (Kyaruzi, 2006). Since the majority of the population live in rural areas, then, special educational tools such as an introduction of agribusiness incubators and rural education centres could bridge the knowledge gaps between the rural and urban communities. This framework is specifically useful for realising the potential benefits of the service sector-led economy. The framework is not in conflict with other local growth models such as; the government expenditure and economic growth model (Kweka and Morrissey, 2000), business incubation and clustering model (Kyaruzi, 2006) and import substitution model (Wangwe, 1997), but, it seeks to addresses how specific elements could be integrated within the existing models. All these elements will depend on the strength and structure of the institutions involved. As indicated above, the institutions include the government policies and the education system. The institutional arrangements are the most important factor for progress toward durable growth. It is argued that unlike certain liberalization measures, institution- building by its nature must be a gradual process (Dawson, 2003). We could agree with such views as Tanzania is still in transition and rushed programs that led to duplication of economic activities in the past could be avoided (see also Cooksey et al, 2001). Technology forms an essential part of the service industry. However for countries in transition the infrastructure is not well laid to support the everincreasing demand. Lalkaka (1997) warns that in the post socialist countries, much should not be expected within a short period of time, he believes that… “…the process of technological transformation is even more complex and painful due to the legacy of systemic problems… [as a result]…these countries are in a situation of massive budget cuts, exodus of talented scientists, shortages of research equipments and supplies, absence of finance, regulatory barriers and painful process of

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reconversion”.

Conclusion In this chapter, some arguments have been presented to show the significance of the service sector-led growth for the local economic growth initiatives in Tanzania. No one can claim to have a complete knowledge of how to transform agrarian economies into full service sector-led economies. This paper was an attempt to unlock such mysterious concepts behind the agrarian economies’ attitudes towards the adoption and over-reliance on services, which has been fashionable in most developing countries in recent years. Theories suggest that the service sector, although suffering from a number of policy inconsistencies, poor infrastructural and cultural impediments, can still form an essential part of the drivers of local economic growth. However, since the majorities of the (80%) live in rural areas where there is poor infrastructures, poor education and poor health systems it is wrong to over-rely on service sector-led economic growth initiatives for solving all economic problems. Other areas of the economy such as the agricultural sectors are equally important and the growths they create tend to have longer effects on the economy. The agricultural sector can also be transformed to contribute to economic growth by adopting specific elements of the service sector-led initiatives. From such realisations, it can be suggested here that drivers of local growth have to be rooted within the culture of the place they seek to develop. This is essential as it could enable the Tanzanian government to identify and set up realistic economic growth targets based on what they have rather than idolising the successes of the services sector-led initiatives of the mature economies. From the literature different approaches can be identified that are likely to explain the factors behind the adoption of service sector-led economy initiatives. To stimulate economic growth in agrarian economies we need a set of proactive institutions, education and technological transformation. Lastly, it is important for the policymakers to ensure that service sector-led growth initiatives are compatible with the other sections of the economy. And since there is a lack of blueprints and, our knowledge of how to transform an agrarian economy into a full service-sector-led economy remains weak. It would be wise for the economic policies to focus at what the economy and its people are good 187

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at while introducing service sector-led initiatives as opportunities rather than prerequisites. This is due to the fact that this type of growth is dependent on the development of other areas of the economy such as the main resources, knowledge capital, education systems, institutions and technology. Having developed the highlighted areas, it would be easier to weigh the options and provide a justification for prioritizing and relying on the service sector-led policies for economic development. References Bigsten, A and Danielsson, A (1999). Is Tanzania an emerging economy? A report for the OECD project ”Emerging Africa” Cooksey, B., Levey, L., and Mkude, D. (2001). Higher Education in Tanzania: A case study. Pertnerships For Higher Education In Africa. Carnegie Corporation of New York (http://www.foundation-partnership.org Dawson, T.C (2003). Globalization, the Transition Economies, and the IMF. Background text for remarks to the IMF Seminar for Parliamentarians from Transition Economies. Joint Vienna Institute Vienna, March 14, 2003 Grenier, L, Morrissey, O., Mackay, A., (1999). Exporting, Ownership, and Confindence in Tanzanian Enterprises. The world Economy. Blackwell Publishers. Oxford Vol 22 Issue 7September 1999 Henisz, W (2002). The Institutional Environment For Infrastructure Investment. Journal of Industrial and Corporate Change, Volume 11, Number 2, pp.355 – 389 Kweka, J. and Kabelwa, G (2004:15). Opportunities and Risks in Liberalising Trade in Services in Tanzania. Bridges. No.10. November 2004. www.ictsd.org Kweka, J.P. and O. Morrisey, (2000). “Government Spending and Economic Growth in Tanzania, 1965-96” CREDIT Research Paper. No 99/2, University of Nottingham. Kyaruzi, Imani Silver (2006). Business Incubation and Clustering in Tanzania: Local Economic Growth, Institutions and Policies. Unpublished thesis. University of Birmingham, United Kingdom

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Lalkaka, R. (2002, December). Technology business incubators to help build an innovation-based economy. Journal of Change Management, 3(2), p.167-176. (PQ) Lalkaka, R. (2003). ‘Business incubators in developing countries: characteristics and performance’, Int. J. Entrepreneurship and Innovation Management, Vol. 3, Nos. 1/2, pp.31–55. Lalkaka, Rustam, and J. Bishop (1995), "Role of Business Incubators in Enterprise Creation and EconomicDevelopment." New York: United Nations Development Programme, One United Nations Plaza, N.Y., N.Y. 10017 (September). Odling-Smee, John (2002). Press Briefing on Developments in Baltic and CIS Countries, Opening Remarks by, September 28, 2002 (http://www.imf.org/external/np/speeches/2002/092802.htm). Wangwe, Samuel M. 1997. The Management of Foreign Aid in Tanzania. Economic and Social Research Foundation. Discussion Paper No 15. Dar es Salaam: ESRF. World Trade Organisation (2000). Trade Policy Reviews: First Press Release, Secretariat and Government Summaries. WTO Tanzania: February 2000 Malyamkono, T. and Bagachwa, M. S. D. (1990). The Second Economy in Tanzania. London, James Currey. Treichel, V (2005). Tanzania’s Growth Process and Success in Reducing Poverty. IMF Working Paper. African Department. February 2005. WP/05/35

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Chapter 9 Foreign Direct Investments (FDIs) Factor in Economic Growth and Development: Tanzania’s Efforts to Reform Institutions to Attract More FDIs Honest Prosper Ngowi Introduction Most countries have recognized the importance of Foreign Direct Investments (FDs) inflows for their economic growth, poverty alleviation and development in general. FDIs are widely acknowledged to be crucial engines of growth and development especially in the developing countries. FDIs are said to contribute to the economic growth and development process of host economies in various ways. These ways include creating both direct and indirect employment; transferring technology; increasing government revenues through payment of taxes, fees, royalties and privatization proceeds; connecting local firms to global market chains; being linked to the rest of the economy; promoting more efficient use of local resources; increasing export earnings and contributing positively to the capital formation process (for detailed discussions of the above, see among others, Ngowi (2002, 2007), Aliber (1970), Ayiku (1995), Bjorvatn (2000) and Blomstrøm and Kokko (1994, 1997). As a result of these and other potentially positive roles that FDIs can play in host economies many countries wish to attract more of these investments. The would-be host economies need to make various efforts to attract more FDIs. This is because FDIs are scarce relative to the demand for them. Countries have to compete for the limited FDI projects from Multinational Enterprises (MNEs)34. Those countries that choose appropriate strategies to attract FDIs are more likely to succeed than those which do not. There are several strategies to attract FDIs into a country. These 34

Also known as Transnational Corporations (TNCs) or simply multinationals. The terms will be used interchangeably in this work to mean one and the same thing unless otherwise specified.

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include marketing of the available investment opportunities and creating conducive investment environment. The latter takes many forms including having good infrastructure, good legal and regulatory framework for investments and efficient and effective institutions. This chapter focuses on institutional reforms as one of these important strategies to attract FDIs. It documents some institutional reforms that have been undertaken in Tanzania as a strategy to attract FDIs which are potential engines of economic growth and development. On FDIs FDI is an investment made to acquire a lasting interest in a foreign enterprise with the purpose of having an effective voice in its management. It is an investment in business of another country, which often takes the form of setting up local production facilities or the purchase of existing business. FDIs are normally undertaken by MNEs in different countries. They may take the form of new investments, also known as green field investments. Alternatively they may take the form of acquisitions of existing projects through mergers and acquisitions (M&A). FDIs in Tanzania FDI is still in its infancy in Tanzania. It is still a relatively new concept in this country which had a socialist orientation until in the recent past. Efforts in the past have been made by the Tanzanian government to attract more investments from abroad. The early intention of the government was shown in 1963. Foreign Investment Act was passed in order to persuade FDI in the newly independent Tanganyika – the then name of mainland Tanzania before the 1964 union with the island of Zanzibar (Green, 1982). Such efforts were somewhat unsuccessful since the government opted for a socialist path of economic development in 1967 following the Arusha Declaration. The Arusha Declaration pronounced a socialist policy that was to be followed by the country. The Ministerial Order under the Industrial (Acquisition) Act Number 5 of 1967 required all MNEs operating in the country as well as big private businesses owned by Tanzanians in 192

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Mainland Tanzania to make the government of Tanzania the majority shareholder of such companies. The majority of the MNEs and big local companies operating in Tanzania were nationalized. The Public Corporations Act Number 17 of 1969 was created to put all nationalized companies under the government control and management. The revival of the foreign investment attraction came in 1985 when, among other things, Tanzania found that it could not cope with the ailing and ill-managed public enterprises and companies. Deliberate economic liberalization policies were initiated and implemented. Reforms in financial institutions, public sector, civil service and other areas were made and are still underway to fine-tune the attraction of FDIs in the country. The National Investment Act of 1997 was passed in order to promote local and foreign investments in the country. FDI Overview in Tanzania In what follows, an overview of FDIs in Tanzania since the mid 1980s is presented. FDI inflows into Tanzania have been increasing over time. The increase from 1996 is both in absolute terms and in relation to other countries, including Kenya. The increased inflow can be attributed to, inter alia, the far-reaching reforms that Tanzania has been undertaking – and is still at the midst of - mainly from the mid1980s. BoT et al (2001:9) point out that the monetary value of the FDI inflow into Tanzania increased sixteen-fold from US$ 47 million in 1990 to US$ 768 million by 2000. This is an increase of 15.3% over a decade or an average of 1.53% annual increase. There has been an increase in FDI stocks in Tanzania from 1985 to 1990. Then there was a dramatic decline in 1995, before peaking up in 1998 and 1999. Sectoral distribution of FDI projects in Tanzania According to BoT et al (2004: 21), the sectoral distribution of FDIs in Tanzania generally, mirrors policy measures implemented by the government in attracting these investments. FDIs are concentrated in manufacturing; mining and quarrying; catering and accommodation services. Agriculture, although contributing about 50% of Gross 193

Foreign Direct Investments (FDIs) Factor in Economic Growth and Development

Domestic Product (GDP) in the country, accounted for an annual average of 7.0 percent of FDIs inflows between 1999 and 2001. Table 1 below presents figures for sectoral distribution of FDIs in Tanzania in stocks and in flows.

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Table 9.1 Sectoral Distribution of FDI Stocks in Tanzania, 1999 – 2001 (Values in USD Million). Sector and Subsector

1999

%

2000

%e

2001

%

Agriculture, hunting, forestry and fishing - Crops -Hunting and forestry -Livestock -Fishing Mining and quarring Manufacturing -Other manufacturing -Food and beverages -Chemicals and petroleum -Agro-industry -Machinery, motors and equipment Utilities -Gas -Electricity -Water Construction Wholesale and retail trade, catering and accommodation services -Accomodation, tourism and catering -Wholesale and retail trade Transport, storage and communication -Communication -Transport and storage Finance, insurance, real estate and business services

154.1

6.4

272.6

9.0

252.4

6.7

140.6 5.3 0.4 7.8 817.8 501.6 151.1 168.7 31.8

5.8 0.2 0.0 0.3 33.8 20.7 6.2 7.0 1.3

223.1 36.7 9.8 2.9 814.2 1,031.8 449.7 298.8 154.4

7.3 1.2 0.3 0.1 26.8 34.0 14.8 9.8 5.1

216.7 23.1 8.5 4.1 1,056.9 1,264.6 574.0 413.1 162.7

5.7 0.6 0.2 0.1 28.0 33.5 15.2 10.9 4.3

133.5 16.5

5.5 0.7

125.6 3.4

4.1 0.1

111.0 3.8

2.9 0.1

37.1 0.0 37.1 0.0 136.9 518.1

1.5 0.0 1.5 0.0 5.7 21.4

36.7 0.0 36.7 0.0 79.2 378.0

1.2 0.0 1.2 0.0 2.6 12.4

127.4 90.0 37.3 0.0 100.5 400.3

3.4 2.4 1.0 0.0 2.7 10.6

352.4

14.6

275.1

9.1

306.9

8.1

165.7

6.9

102.9

3.4

93.4

2.5

50.2

2.1

145.4

4.8

284.8

7.5

27.2 23.0 197.4

1.1 1.0 8.2

92.0 53.4 219.0

3.0 1.8 7.2

238.5 46.3 225.2

6.3 1.2 6.0

Source: BoT et al (2004: 23 - 24) 195

Foreign Direct Investments (FDIs) Factor in Economic Growth and Development

The table 9.1 above shows that there has been an increase in the FDI stock in Tanzania in the years under consideration. This is the case for almost all the sectors and especially from the year 2000 to 2001. The total stock increased from 2,418.7 in 1999 to 3,038.3 in the year 2000. This is an increase of 25.6%. From the year 2000 to 2001, the stock increased from 3,038.3 to 3,776.6. This is an increase by 24.3%. The increase from 1999 to 2001 is by a whole 60.3%. Among the major explanatory factors in the observed substantial increase in the FDI stock in the years under consideration is institutional reforms that have been undertaken in Tanzania from the mid 1980s. The reforms are discussed at length elsewhere ahead in the chapter.

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Table 9.2 Sectoral Distribution of FDI Inflows in Tanzania, 1999 – 2001 (Values in USD Million). Sector and Sub-sector

1999

%

2000

%

2001

%

Agriculture, hunting, forestry and fishing - Crops -Hunting and forestry -Livestock -Fishing Mining and quarring Manufacturing -Other manufacturing -Food and beverages -Chemicals and petroleum -Agro-industry -Machinery, motors and equipment Utilities -Gas -Electricity -Water Construction Wholesale and retail trade, catering and accommodation services -Accommodation, tourism and catering -Wholesale and retail trade Transport, storage and communication -Communication -Transport and storage Finance, insurance, real estate and business services - Finance, insurance -Other business services -Real estate Community, social and personal services -Health

23.4

4.3

50.4

17.9

47.7

10.2

21.2 1.3 0.2 0.7 296.5 94.9 18.7 43.1 14.3 16.4 2.4

3.9 0.2 0.0 0.1 54.8 17.5 3.5 8.0 2.6 3.0 0.4

50.0 0.1 0.4 0.0 5.6 50.4 20.0 6.7 4.2 19.4 0.1

17.7 0.0 0.1 0.0 2.0 17.9 7.1 2.4 1.5 6.9 0.0

46.5 -0.1 0.6 0.7 41.6 57.5 7.3 18.1 16.0 15.7 0.5

9.9 0.0 0.1 0.1 8.9 12.3 1.6 3.9 3.4 3.4 0.1

0.0 0.0 0.0 0.0 28.4 65.3

0.0 0.0 0.0 0.0 5.2 12.1

0.2 0.2 0.0 0.0 8.7 59.2

0.1 0.1 0.0 0.0 3.1 21.0

83 82.5 0.5 0.0 8.9 59.0

17.8 17.7 0.1 0.0 1.9 12.6

21.0

3.9

11.5

4.1

26.0

5.6

44.3 15.8

8.2 2.9

47.7 100.7

16.9 35.7

33.1 158.3

7.1 33.9

9.4 6.4 15.1

1.7 1.2 2.8

100.0 0.6 3.5

35.5 0.2 1.2

156.8 1.5 8.9

33.6 0.3 1.9

7.2 4.3 3.6 2.1

1.3 0.8 0.7 0.4

3.0 0.4 0.1 3.5

1.1 0.1 0.0 1.2

1.0 0.8 1.2 2.2

1.5 0.2 0.3 0.5

0.5

0.1

0.6

0.2

0.8

0.2

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Foreign Direct Investments (FDIs) Factor in Economic Growth and Development

-Other community, social and personal services -Media -Education

0.4

0.1

2.8

1.0

0.2

0.0

1.2 0.0

0.2 0.0

0.0 0.1

0.0 0.0

1.2 0.0

0.3 0.0

Total

541.5

100.0

282.0

100.0

467.2

100.0

Source: BoT et al (2004: 26).

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Table 9.2 above shows that the FDI inflows into Tanzania fluctuated somehow in the years under consideration. Generally however, there has been an increase mainly between the year 2000 and 2001. The total flows declined from 541.5 in 1999 to 282.0 in the year 2000. This is a whole 47.9%. The flows increased from 282.0 in the year 2000 to 467.2 in 2001, being an increase by a whole 65.7%. While the reasons for the declined inflows between 1999 and the year 2000 are not clear, the increased flows between the year 2000 and 2001 can be attributed to the various institutional reforms that are discussed elsewhere in this chapter. The BoT et al (2001) survey found that, consistent with the country’s privatization policies (which is one of institutional reforms discussed in detail in forthcoming section of this chapter), FDI stocks are skewed in favour of mining (about 40% in 1999), manufacturing (22%) and tourism (13%). FDI countries of origin in Tanzania BoT et al (2004: 31) figures show that FDIs in Tanzania originate from a number of countries – both traditional and new sources. FDIs from the Organization for Economic Cooperation and Development (OECD) countries dominate in Tanzania. These accounted for about 60 percent of total FDI stocks between 1999 and 2001. FDIs from Southern African Development Cooperation (SADC) countries contributed to about 19 percent in the same period, while those from the East African Community (EAC) were 5 percent only. Geographical distribution of FDI projects in Tanzania Regional FDIs distribution in Tanzania has not been even but skewed. This reflects the differences in the FDI pull factors (determinants) across the country. According to BoT et al (2004: 30), Dar es Salaam had about 76.0 percent of total FDI flows in 2001. Other administrative regions in Tanzania which had relatively high FDI inflows in 2001 include Morogoro, Shinyanga, Mwanza, Arusha and Kilimanjaro. Pull factors in Dar es Salaam include the fact that most of privatized manufacturing companies are located there. Pull factors for Mwanza and Shinyanga include availability/endowment of mineral 199

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deposits that attract mining companies, and Lake Victoria which attracts fish processing companies. Institutions and Institutional reforms “…However, the level of transaction costs depends on the institutions in a country, its legal system, its political system, its culture and so on. This is why we must include the influence of these institutions in our study of the working of an economic system” - Ronald Coase. (Newsletter of The International Society for New Institutional Economics, Spring 1998)

This subsection borrows much from the ideas of Shaffer (1969, 1995), Hodgson (1988), North (1990) and Samuels (1992) on institutions as it does from the perspective and challenge of Ronald Coase on institutions35. The above cited authors correctly perceive institutions as formal and informal rules which govern or at least influence the behaviour of participants of a society as they interact in political and economic activities. They include such things as laws, customs and social norms. The formal rules include laws and regulations as interpreted and enforced by political authority. The informal rules are the shared beliefs about acceptable and unacceptable behaviour enforced by conscience, a result of socialization, based upon the actual and expected reactions of other members of the society. Both the formal and informal rules reflect or embody views about fairness, legitimacy, good and evil, right and wrong. Institutions are the product of collective action. They both constrain and liberate behaviour and may promote cooperation or conflict. A class of institutions provides order in every one’s interest with little or no influence on the distribution of benefits and costs. One of the important general functions of institutions is to make the behaviour of others more predictable and reduce mistakes and conflicts arising from unpredictable behaviour. Many of the working rules for markets, for example, facilitate trade to both parties’ advantage. At the same time market rules defining property rules which define what has 35

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to be taken into account in economic activity, greatly influence not only the organization of the economy, but also the distribution of benefits and costs from that economy. Shaffer (1995:1) argues that the “relationships between and among institutions, participant's behaviour and economic performance are important in several academic disciplines, in the practical affairs of governments, and in the decisions of firms, households and individuals” Social, political, economic and physical environments shape or at least influence human behaviour. The resulting behaviour influences decisions and performance of economic actors including investors in general and foreign investors in particular. The decisions taken by economic actors – investors in particular - in turn influence economic growth. It is in this context that institutional reforms to attract FDIs as a factor in economic growth are discussed. Decisions and performance of economic actors are influenced by both the existing and missing institutions in a country. The behaviour of economic actors is influenced by a matrix of institutions, some formal and some informal. Formal rule changes intended to influence a particular decision may fail to produce expected results because of the informal institutions in the relevant matrix. According to Shaffer (1995), every society works out a matrix of institutions in an evolutionary process. Various economic actors, including investors, articulate preferences in support of or opposition to existing institutions. The articulation of these preferences is based upon theories about the relationships of institutions to economic performance. Economic actors, as is the case for other actors in a country, perform various kinds of institutional analysis. This analysis informs them in their various decision making processes. The economic actors perform institutional analysis as they try to understand institutional change. They also analyze institutions in order to understand the impacts of specific existing or alternative institutions. According to Roald Coase Institute (undated), institutions such as laws, customs and social norms profoundly affect the level of transaction costs which, according to Pass et al (2000: 523), are the costs incurred in the exchange of an input, good, service or asset between two or more individuals or firms. Coase (1998), drawing from Adam Smith, emphasises that the lower the transaction costs, the more specialization there will be, the greater productivity of the economy and the higher the standard of 201

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living of people in that economy. The level of transaction costs, however, depends on the institutions in a country, its legal and political systems, its culture and so on. These institutions vary from one country to another and from time to time within the same country. Institutions therefore, have great role to play in a country’s economy in general and in its economic development in particular. The author of this chapter is of the view that institutional reforms, meaning a planned and purposeful change of institutions, are extremely important in economic development. A country should reform its institutions as frequently as possible so as to reflect the changing realities of time on the ground. New institutions may be formed and existing ones abolished, strengthened or left untouched all depending on the needs of the time on the ground. Institutional reforms to attract FDI inflows This chapter focuses on institutional reforms to attract more FDI inflows in Tanzania. Institutions and institutional reforms are discussed in this chapter as among the essential FDI determinants. The determinants are the factors that influence FDI inflows into a given geographical location. The determinants give investors the confidence needed to invest in foreign markets. Other FDI determinants – other than institutions and institutions and institutional reforms have been outlined in UNCTAD (1998). These include the following: i) Policy framework for FDI: This includes economic, political and social stability; rules regulating entry and operations of FDIs; standard of treatment of foreign affiliates; policies on functioning and structure of the markets; international agreement on FDIs; privatization policy; trade policy (tariffs and non-tariff barriers and coherence of FDI and trade policy; and tax policy. ii) Economic Determinants: These include business facilitation; investment promotion (including image-building and investmentgenerating activities and investment –facilitating services); investment incentives; hassle costs (related to corruption and administrative efficiency); social amenities (for example quality of life); and afterinvestment services. The various mixture of the determinants above, coupled with 202

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appropriate, adequate, efficient and effective institutions stand to have a profound positive impact on a country’s efforts to attract FDI inflows. Given the role of institutions therefore, if countries are to benefit from the potentials posed by FDIs, they need to have strong, efficient, effective and adequate institutions. Among the strategies towards having such institutions include reforming the existing institutions and/or creating the missing ones. Institutions should be reformed in a way that will influence the behaviour (decision-making) of MNEs that carry out FDIs. Institutional reforms should result in, among other things, reduced transaction costs of doing business – including investing - in the reforming countries. This in turn should be seen as incentive by MNEs to locate their investments and/or retain them in these countries. Institutions do spell out what is fair, legal, wrong or right in a society. They liberate behaviour and provide order in an economy. They make behaviour for parties in a transaction predictable thereby reducing mistakes, conflicts and transaction costs. Change in rules, laws and regulations (institutional change) intend to influence behaviour change. Institutional reforms are aimed at creating opportunities. Economic agents are expected to respond positively to these reforms so as to maximise the opening opportunities. The Conceptual framework In what follows institutions and institutional reforms are conceptualised as among the important FDI determinants that would lead to attraction of more FDI inflows. Conceptually, institutional reforms lead to positive changes in the existing laws, rules and regulations that govern and influence FDI inflows. The new rules, laws and regulations are expected to create a better investment climate in an economy by, inter-alia, reducing transaction costs. They create new opportunities hitherto unavailable under the old set of institutions. Most institutional reforms to attract FDI inflows aim at reducing transaction costs incurred by investors. Rational as they are supposed to be, investors are expected to be cost-conscious. This is because they are profit maximising agents in the economy. Institutions therefore are among the important FDI determinants. In order to attract more FDIs (and local investments too) there is a need for reforming institutions so 203

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that they reflect the prevailing investors’ needs and social, political, economical and technological realities of the time. Various kinds of reforms (social, political, structural or economical) should aim at creating, maintaining and improving enabling environment for businesses and investments. Among the elements of economic reforms that may lead to the attraction of more FDI inflows include relaxation of entry restrictions in various sectors; deregulation in various industries; abolition of price controls; privatization; independence of the central bank; elimination of import licensing; removal of foreign exchange-, exchange rate- and interest rate controls; easing of controls over mergers and acquisitions (M&As) and trade policies. Institutional Reforms to Attract FDIs in Tanzania Since the mid 1980s, the Government of Tanzania has, with great determinations and ambitions launched a comprehensive economic reform and stabilisation programme. In pursuit of this, agricultural marketing has been liberalised, foreign exchange controls have been lifted, prices deregulated, private sector involvement in the economy has been enhanced and a new investment code offering competitive incentives has been put in place. These comprehensive economic reforms are expected to result in improved competitiveness, lower tariffs, increasing levels of foreign investment and trade, improved key economic indictors and rapid integration of the country into world markets. To this end, the Government of Tanzania is currently embarking on a strenuous exercise to reform its institutions and bring them at par with international standards. The expectation is to enhance the country's competitive position for investment flows destined for the region and meet the challenges of globalisation. The country is in the midst of implementing some of these far-reaching reforms in its economic management. Some pieces of evidence of some of these institutional reforms are discussed at some length in what follows.

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Pieces of evidence for the institutional reforms to attract FDIs in Tanzania In what follows some specific institutional reforms that have taken place in Tanzania with the aim of attracting more FDI inflows are presented. Needless to say, the list is not exhaustive. The discussion is not final and conclusive either. It cannot and should not be so in a limited chapter like this one. However, the general situation in as far as what has been done in reforming institutions in the context of this work is hopefully clearly documented. The institutional reforms that have been undertaken in Tanzania include the following: i) Privatization Pass et all (2000:220) describes privatization as the denationalization of an industry, transferring it from public to private ownership. The extent of state ownership depends on political ideology. In centrally planned economy – as Tanzania was between 1967 and mid 1980s - there would be more nationalization while under private- enterprise economy there would be little or no nationalisation at all. The major argument that privatization is a form of institutional reform is the fact that in privatization, there is a change in the formal rules and regulations relating to ownership of major economic activities in an economy. Before the privatization policy of the mid 1980s in Tanzania, parastatals were mainly owned and managed by the Tanzanian government. Government ownership and control of parastatals have its origin in yet another institutional reform in 1967. The laws, rules and regulations governing and influencing ownership and management of enterprises were changed under a policy statement in the Arusha Declaration in 1967. All major means of production were put under the direct ownership and control of the government. In the mid 1980s then, came up this institutional reform in the form of privatization. Among the major components of this institutional reform was the formation of the Presidential Parastatal Sector Reform Commission (PSRC), which was charged with the responsibility of overseeing the privatization programme in Tanzania. As a result of this institutional reform, Tanzania has privatized most of the about 400 parastatals earmarked for the exercise. Most of 205

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these privatized firms have been acquired by foreign investors in the form of mergers and acquisitions (M&As). This is one of the types of FDI entry modes (see Ngowi, 2002) for details. Without institutional reforms in form of changing the laws, rules and regulations governing property ownership in Tanzania, the observed FDI inflows in Tanzania from mid 1980s would not be possible. Institutional reforms in the form of privatization therefore, have been very instrumental in attracting FDI inflows in Tanzania, which are potentially good for economic development. Privatization as an institutional reform is consistent with the UNCTAD (1998) findings on FDI determinants where privatization policy is one of them. ii) Re fo r m s in the political system as an institutional reform to attract more FDIs. Political situation in the-would be FDI destination is among the important FDI determinants. This includes political stability and democratic system. Among the investors’ measurement of this is to look on whether a country has multiparty or single party democracy with relatively regular, free and fair elections. In 1992, a multiparty democracy system was introduced in Tanzania. Successful multiparty elections were held in 1995, 2000 and 2005. Institutional reforms in form of reforming the laws, rules and regulations pertaining to political parties and elections in the Tanzanian political system, are important signal to investors. They are part of the essential FDI determinants and inputs in the country’s bid to attract FDI inflows for its economic growth and development. iii) Reform from command-based to market economy Tanzania has practiced command and state-controlled economy since 1967 in the aftermath of the Arusha Declaration that placed the ownership and control of all major economic activities under the government/public sector. Under this regime the private sector- and market–led free interplay of the market forces of supply and demand was not allowed. In the mid 1980s – under the auspices of the Zanzibar Declaration - institutional reforms by ways of enactment and implementation of laws, rules and regulations allowing private sector 206

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and market economy – led economic growth and development were made. This set of reforms is arguably the greatest of all in the context of this work. It virtually encompasses all other institutional reforms that are necessary for FDI inflows. Without this important institutional reform, the private and most importantly, foreign ownership of the major economic activities in form of, inter-alia FDIs, would be impossible. Institutions that do not allow private sector and most importantly FDIs in an economy (as was the case under Arusha Declaration) and those that allow for the same (as is the case under the Zanzibar Declaration) therefore, have profound implications in the economic growth and development of a country as witnessed by Tanzania. It is only fair to conclude therefore that institutions and the reform of the same matter in economic growth and development. iv) Reforms in the trade regime Tanzania has greatly liberalized its trade regime since mid 1980s. Both internal and external trades are fully liberalized. For example, there is now liberalization on both import and export trade. The import and export procedures, rules, regulations and laws are increasingly being simplified. This too is among the important institutional reforms to attract more FDIs into Tanzania. Trade liberalization is one of the important FDI determinants. Among other things, it increases the possibility of smooth and convenient availability of imported factor inputs and export of goods and services produced by domestic economic actors including MNCs undertaking FDIs. Included in the trade regime reform too, is the partial liberalization of the financial account in Tanzania. Institutions governing both internal and external trade therefore are crucial for a country’s economic growth and development as is their reforms as has been witnessed by Tanzania. v) Reforms in the exchange rates and interest rates Before the ongoing institutional reforms that started in the mid 1980s in Tanzania, exchange rates and interest rates in the country were generally controlled by the monetary authorities of the country – the 207

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Bank of Tanzania. These were in most cases artificially and politically determined and fixed. There was no free interplay of the market forces of supply and demand in their determination as is the case today. Institutions governing exchange and interest rates therefore, are important for economic growth and development. Reforming them from over and undue regulations, artificial fixations and determinations to liberal regimes is essential for growth and development in general and for FDI-led growth and development in particular. Now that liberalized exchange- and interest rates are among the important FDI determinants, it is evident that Tanzania has gone a long way in this particular institutional reform to attract more FDI inflows . vi) Public sector service reform Before the institutional reforms that started in the mid 1980s, the public sector in Tanzania was typically characterized by overemployment; ghost employees; un-rationalized and un-streamlined functions, structures and salaries. Performance was not output-based and the local governments were generally weaker. All these resulted in inter alia, inefficient, overly bureaucratic, over-sized and ineffective public sector. The transaction costs of dealing with such a public sector are normally higher than would have been the case for an efficient, rightsized, none-bureaucratic and effective government. The role of institutional reforms in the form of public sector reform in order to attract more FDI inflows can therefore not be underestimated. Among the institutional reforms in the realm of the public sector in Tanzania include a cut down in the workforce in the government; rationalization and streamlining of functions and structures and salaries; and the introduction of new management systems that are performance, output, and/or contract- based; and strengthening of the local government through the formulation and implementation of Local Government Reform Programme. All these reforms are expected to play important direct and indirect roles in attracting more FDIs into Tanzania. The institutions pertaining to the public sector are among those that contribute in creating, improving and maintaining conducive investment climate. This in turn contributes into attracting FDI inflows 208

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that stand to contribute substantially in the economic growth and development process. vii) Establishment of Tanzania Investment Centre (TIC) Institutional reforms in the sense of changing existing rules, laws and regulations to new ones can be discussed, in our context, in the case of the establishment of the Tanzania Investment Centre. In order to attract more FDIs into Tanzania the government, in 1997, changed the old law that established the then Investment Promotion Centre (IPC) into one forming the Tanzania Investment Centre (TIC). This is a major institutional reform as TIC is more capable of attracting more FDIs given the other institutional changes that have been made in order to make TIC a truly “One Stop Shop”. TIC was established in 1997 by the Tanzania Investment Act No. 26 of 1997 to be "the primary agency of Government to coordinate, encourage, promote and facilitate investments in Tanzania and to advise the Government on investment related matters". All Government departments and agencies are required by the new law to cooperate fully with TIC in facilitating investors. TIC is supposed to be the focal point for investors and a first point of call for potential investors. It is also supposed to be an efficient and effective investment promotion agency, a "One Stop Facilitative Centre for all investors", engaging in the business of marketing Tanzania as an investment destination. As a primary agency of the Government in all investment matters, TIC is charged with the following functions: a) Assist in establishment of enterprises; b) Obtain necessary licenses, work permits, visas, approvals, facilities or services; o o o o

Sort out any administrative barriers confronting both local and foreign investments; Promote both foreign and local investment activities; Secure investment sites and assist investors to establish Export Processing Zones (EPZ) projects; Grant Certificates of Incentives, investment guarantees and register technology agreements for all investments, which are over and above US$ 300,000 and US$ 100,000 for foreign and local investments respectively;

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o

o

Provide and disseminate up to date information on existing investment opportunities, benefits or incentives available to investors; and Assist all investors whether or not registered by TIC.

In order to strengthen and expedite facilitation services, eight (8) Senior Officers from Government or its Executive Agencies have been permanently stationed at TIC to serve investors under the general direction of the TIC Executive Director. Presently these officers include those from Lands Department; Tanzania Revenue Authority (TRA); Immigration Department; Labour Division; Directorate of Trade and Business Registration & Licensing Agency (BRELA). Given the role and mandate of TIC in attracting FDIs, it becomes clear that the institutional reforms that led to the changing of the then IPC to TIC and the operationalisation of the latter are extremely important in attracting FDIs. These investments in turn are potentially importantly in the economic growth and development process of most economies. This is especially so for the developing and emerging economies. Institutions and the reform of the same therefore are central in the economic growth and development process of countries like Tanzania. Discussion of the reforms to attract FDIs In the discussion above, several kinds of institutional reforms to attract FDI inflows for economic growth and development in Tanzania have been documented. The list is not exhaustive but the major reforms have been captured. Most of the reforms are not of exclusive but of mutually reinforcing in nature. They both supplement and complement each other. It is through a careful and delicate mixture of these institutions and their reforms that is likely to result into the desired FDI inflows. A word of caution is essential with regard to the relationship between the various institutions and their reforms on one side and FDI inflows on the other. The author of this chapter is aware of possible causality (causal-effect) problems between the various institutions, their reforms and FDI inflows. A counter-factual situation where the FDIs could have flown into the country even without some of the 210

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institutions and/or their reforms can be discussed. It could also be possible to use a quantitative (econometric) approach where empirical data could be used to show the relationship between the various institutions, their reforms and FBI inflows. Data problem in the Tanzanian setting is however foreseen including unavailability, inadequacy, inaccuracy and reliability. The approach used in this chapter is among the best ones in the context of this work. It may be impossible to establish all the possible counterfactual arguments and to fully attribute the observed FDI inflows to particular institutions and/or their reforms. Econometric methods (assuming no data problems) could give quantitative relationships between variables but may not be the best approach for policy and decision making audience of this chapter. Conclusion From what has been presented in this chapter, it is clear that Tanzania has undertaken a number of institutional reforms to attract more FDI inflows into the country and retaining those already there. The reforms have created a better investment climate/environment in the country by, among other things, reducing transaction costs for investors. It is evident therefore that institutions matter in determining economic behaviour and performance of agents in the economy. The need to reform institutions from time to time so that they reflect the changing social, political, economic and technological realities in time and space, among others therefore cannot be over-emphasised and should not be underestimated. Policy implications Several policy implications emanate from this work. These include the need for policy and decision makers to understand and appreciate the role of institutions and their frequent reforms in economic growth and development in general and attracting FDIs in particular. Recommendations for Further Studies Due to resources limitations, the author of this chapter admits that the discussion has been limited to only few institutions and their 211

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reforms in a nutshell. Further research could cover the same institutions and their reforms presented here but in more detailed way. Alternatively other institutions and their reforms that have not been covered here could be added in the list. The study could also be extended to detailed case studies where, among other actors, investors could explain the role of different institutions and their reforms in their investment decisions. References Afriyie, K. (1998). “FDI in Ghana’s Emerging Market Economy”, in Dunning, J.H. (Ed) Globalisation, Trade and Foreign Direct Investment. Pp 217-236. Elsevier, Amsterdam. Afriyie, K. (1998) “Foreign Direct Investment in Ghana’s Emerging Market” in Globalization, Trade and Foreign Direct Investment. Pp 217236; Dunning, J. H. (Ed), Elsevier Amsterdam. Aliber, R. Z. (1970). A theory of foreign direct investment. In The International Corporation (Kindlerberger C. P., Ed.). Cambrigde, MA: MIT Press. Aliber, (R. Z. (1971). The Multinational enterprises in a multiple currency world. In Multinational Enterprises (Dunning, J. H., Ed.). London: Allen and Unwin. Ayiku, C.B. (1995). The Political Economy of Foreign Direct Investment in Developing Countries: Trends and Development Effects.(Unpublished Master of International Business Thesis at the Norwegian School of Economics and Business Administration, Bergen, Norway. Barlow, E. R. (1953). Management of Foreign Manufacturing Subsidiaries. Cambridge, MA: Havard University Press. Baumol, W. J. (1967). Business Behaviour, Value and Growth. Macmillan, New York. Bergsman, J. (1999). Advice on Taxation and Tax Incentives for Foreign Direct Investment. Online at www.unctad.org . Bjorvatn, K. (2000), FDI in LDC: Facts, theory and empirical evidence. Manuscript Norwegian School of Economics and Business Administration and Norwegian Centre for Research in Organization and Management (LOS), Bergen.

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Blomstrøm, M. and Kokko, A. (1994), Home Country Effects of Foreign Direct Investment: Evidence from Sweden. Stockholm School of Economics, Economics Research Institute, Working Paper No. 3. Blomstrøm, M. and Kokko, A. (1997), Multinational Enterprises and Foreign Direct Investment: Their Impacts on Developing Countries. Bos, H. C. et al (1974), Private Foreign Investment in Developing Countries: A Quantitative Study on Macro-economic Effects. D. Riedel Publishing. BoT, NBS and TIC (2001). Tanzania Investment Report. Report on the Study of Foreign Private Capital Flows in Mainland Tanzania. Dunning; J. H. (1992). Multinational Enterprises and the Global Economy. Addison-Wesley Coase, R. (1998). Newsletter of the International Society for New Institutional Economics, spring 1998. Green; R. H. (1992) ” Industrialization in Tanzania”. In Fransmann, M (Ed); Industry and Accumulation in Africa. London, Heinemann. Hodgson, G. M (1988). Economics and Institutions. University of Pennsylvania Press. Ngowi, H. P. (2008). Foreign Direct Investments (FDIs): Selected Theories, Practices and Lessons in the Tanzanian Context. A forthcoming book. Ngowi, H. P. (2007). Attracting Foreign Direct Investments (FDIs) into Africa: A Discussion of Rationales, Approaches, Results and Impacts in Tanzanian Context. A Paper Presented at the Organisation for Social Science Research in Eastern and Southern Africa (OSSREA) Eighth Congress, Cape Town South Africa, December 2007. North; C. D (undated). The New Institutional Economics and Development. Washington University, St. Louis. North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press, Cambridge England. Pass, C., Lowes, B., and Davies, L. (2000). Dictionary of Economics, 3rd Edition. Harper Collins Publishers, Glasgow. Shaffer, J. D (1995). Institutional Behaviour and Economic Performance: Comments on Institutional Analysis. Department of Agricultural Economics Staff Paper No. 95-52, Sept. 1995 Michigan State University. Samuels, W. (1992). Essays on the Economic Role of Government. Vol 1: Fundamentals, New York University Press, N.Y.

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Shaffer, J. D. (1969). "On Institutional Obsolescence and Innovation: Background for Professional Dialogue and Public Policy,”. American Journal of Agricultural Economics, May 1969, pp. 245-267. UNCTAD (1998). World Investment Report. United Nations, New York.

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Female Entrepreneurship, Marketing and Institutional support

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Chapter 10 Female Entrepreneurship: Business and Professional Associations in the Agribusiness and Textiles Sectors in Dakar, Senegal

Ahoefa Hales Introduction Business associations in Africa have been in existence for many years, but only recently have they been identified as important in the development of businesses (Goldsmith, 2002). In the past, women have channelled their financial and relational concerns through members of their family. However, things have changed and for the last few decades, women have been trying to improve their lives either through individual actions or by joining a number of national or grassroots organisations. Women’s associations in particular have become popular, destined to deal with women’s welfare and their community issues (Staudt, 1988, p.203). Business associations also play a key role in the improvement of the private sector-state relationship (Kraus, 2002), by facilitating the formulation, implementation, and monitoring of economic policies and by providing feedback to the government. While there is increasing research on associations (Bennett, 1999) there is a dearth of research on African women’s associations, particularly about the motivating factors and the nature of the relationships between the women concerned (Rosander, 1995). The purpose of this paper is therefore to explore the role and impact of women’s business and professional associations in the agribusiness and textile sectors in Dakar, with particular reference to their entrepreneurial businesses. The first section provides an overview of the themes underpinning the formation of business associations, while the second section takes a historical view of the formation of associations in Senegal, highlighting the main administrative procedures and the types of associations that exist. The third section focuses on the agribusiness and textile sectors in Dakar, using information from the depth interviews to inform an 217

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assessment of the role of government and aid donors in assisting business associations. The fourth section provides some recommendations based on the findings of the research. Definition and theoretical underpinnings There is no universal definition of an association, but most definitions tend to emphasise solidarity among members (Richardson et al., 2004), advocacy and provision of a voice for entrepreneurs, link between economic actors and the government in influencing policies (Parker et al., 1995), and the promotion of a range of advisory and support services to members. McQueen (2004, p.2) identifies the benefits of SMEs’ associations and the way they are realised, and defines an SME association as “any formal or informal grouping of SMEs at the firm level with an articulated common purpose”. While the analysis was based on forestry enterprises, the definition may be useful for the agribusiness and textile sector and consequently, has been adopted here. Much of the literature on associations has taken multiple strands. Some have brought to light the terminologies surrounding SMEs’ associations (Streeck and Schmitter, 1985; Bennett, 1997), while others have focused on the institutional structure, which brings about collective efficiency (McQueen, 2004) and the benefits which business associations can provide (Brautigam et al., 2002). Some of the terminologies have linked membership of associations to transaction costs (search and information costs, bargaining or negotiating costs, and contracts costs), particularly in relation to businesses attempting to control the market and competition (Bennett, 1998; Jones, 2004). Jones (2004) argues that these reduced transaction costs inform the benefits of associating. Elsewhere, terms such as clusters and industrial districts, which involve collaborations and cooperation between different businesses, but mainly deal with proximity and the geographical location of the business and the advantages that this brings, have also been tied to the concept (Nadvi, 1999). The literature on the drivers and motivations, durability and factors affecting the success and failure of business associations (Doner and Schneider, 2000) suggests that they are mainly driven by two logics (membership or services logic and influence logic). These are often 218

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conflicting as they can create tensions when setting an association’s priorities (Dixon, 2006). Membership logic refers to the services provided to members, and the influence logic focuses on representation and lobbying activities, which the association carries out on behalf of the members (Bennett, 1999). The dilemma between these two logics may be solved by reducing a dependency on each type (Wilts and Meyer, 2005) and balancing resource acquisition from government and members through exchange and organisation (Waarden, 1991, 1992). Another view of business associations reflects policy influence and economic development (Hage and Alter, 1997; Doner and Schneider, 2000). Here, the emphasis is on the role and functions of the associations in dealing with some critical development issues such as strengthening property rights, facilitating horizontal and vertical coordination, and improving training between other economic actors and producers (McQueen, 2004). It is suggested here that business associations play an important role in negotiating common grounds for better changes in the legal and regulatory environment within which businesses operate (Brautigam et al., 2002). They are effective tools to raise the profitability of enterprises through the provision of support networks, which can help deal with individual problems, as well as communicate with policy makers to address systemic issues (Parker et al., 1995). Governments often promote entrepreneurship through these associations and groupings and for these reasons, Goldsmith (2002) argues that countries are better off when enterprises work together and speak out collectively to solve public affairs, as they alone seldom have the expertise and resources required to engage in political actions affecting their businesses. Through Associations members can increase their social capital (relationship and networks within and outside the family), particularly African women who still have to rely heavily on social capital to support their businesses since they have traditionally been shut out of the mainstream. However, because social capital needed for establishing and sustaining a business is still very limited for women (Shaw, 2006), business associations play a key role in filling this gap and in providing the necessary collective social capital asset required to develop businesses (AfDB/AfDF, 2004). The review of literature can be used to inform the construction of a framework (Fig. 10.1) for considering the environment in which associations operate, and the exchanges taking place between them, and other institutions. At the centre of the framework is the association 219

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itself, with its available resources such as stock of information, membership fees, finance (which is obtained from donors and government institutions), and the manpower, which provides the expertise allowing it to be managed effectively and enabling the executive body to carry out its aims and objectives efficiently. Numerous exchanges occur between the various institutions: individual associations compete with other associations on the services offered to SMEs, although there is often some coalition and alliance between them; they cooperate with the government on public policy matters, and resources are often obtained from the government, processed or transformed and then passed on to members; they offer both collective and individual services (for instance, collective purchasing of raw materials) to members and perform a lobbying/representation role; and they seeks funds and other resources (from external bodies), which may also be processed and transformed before they are passed on to members. Exchange also occurs between the association and its suppliers, which may be the private sector, consultants, accountants and banks. Finally, the environment within which these associations operate will also influence positively or negatively the way in which these interactions are managed.

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Figure 10.1 Interactions between associations and the environment

Other SMEs, associations/competitors Alliance/Coalition

Suppliers (private sector, accountants, consultants, banks)

External bodies: Donors, NGOs

Cooperation Policy influence

Government

Association resources: staff, membership dues

Individual and collective services

Members: SMEs, Entrepreneurs

Source: Compiled from Bennett (1998); McQueen (2004); Bennett and Ramsden (2007) Despite their seemingly important roles, African business associations have been subjected to many criticisms. Some argue that they only exist on paper (Doner and Schneider, 2000) while others

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claim that they have low bargaining power36, are often underfunded, heavily dependent on foreign aid and often have little impact on policy making (Temu and Drue, 2000). They often lack focus on women entrepreneurs, even though they are very active, and for this reason, it is suggested that technical and institutional support should be offered to women to improve their capacity in assisting other women (AfDB/AfDF, 2004). Other weaknesses of business associations include poor leadership, poor membership, inefficient management and administration, and lack of finance (Mutalemwa, 2005). Organisational problems are often caused by the low social status and the informality of some members, which often deny membership to chambers of commerce (Meagher, 2005). Historical perspectives on Senegalese associations This section focuses on the history behind the formation of business associations in Senegal, the drivers behind their establishment, and the types of associations that currently exist. This section provides the background for the subsequent analysis. The business associations’ boom For many years, the chamber of commerce of Dakar was the leader of all chambers of commerce in the country, which were organised around a French-based union named SYNDICOA37, and as a result, business men and women in Dakar never saw the need to organise themselves into groups and associations. It was only after workers started to demand better rights in the late 1930s that the first associations started to emerge. Although the government attempted to replace associations by other organisations during the war, they were re-established and carried on after the war. Membership to these organisations was compulsory if businesses were to benefit from Some of the associations operate in very competitive markets and are very vulnerable, and their lack of linkages in formal markets gives them low bargaining power. 37 SYNDICOA stands for Syndicat de Defence des Interets de la Cote Occidentale. 222

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quotas and this resulted in the disappearance of old unions and the emergence of new ones. After independence, all existing unions started to group together to become what is known as the federation of the economic groups in Senegal (Federation des Groupements Economiques du Senegal), and later the national union of economic groups (Union des Groupements Economiques du Senegal, UNIGES) when it joined the union chambers (Thioub et al., 1998). UNIGES was very critical of Senghor’s regime for failing to promote national interest and to pursue economic strategies that would allow Senegalese businesses to develop. It was not until the unemployment crisis of the 1980s that Senegalese young men and women started “associating” and to claim a space for enterprises in an environment, which might be propitious for business. Within the informal sector a national union of Senegalese artisans, traders and manufacturers (UNACOIS) was established. The crisis of the 1980s led to the creation of a large concentration of unemployed youth and migrants from different background (race, religion and ethnicity), and this provided great opportunity for the formation and development of associations in urban spaces (Ndione, 1992). These associations provided ways of coordinating their activities and gave them the opportunity to pull their resources to reach social, economic and cultural goals. This also constituted a continuation or a substitution of their traditional ways of grouping (family grouping, age grouping, secular grouping, just to name a few), which could no longer provide support for responding to their immediate needs. By becoming members of a constituted group, these individuals were able to satisfy part or all of their material and non-material needs. This was the beginning of cultural, religious, and all other forms of grouping such as the Dahira38 grouping, which functions on the basis of moral, economic and social support of members who are in financial difficulties (Bop, 2005). The Dahira living in Dakar appear to have significantly contributed to the infrastructure (by collecting funds to improve hospitals and the refurbishment of the mosque) and cultural life of their locality (Beck, 2001). By belonging to the Dahira, individuals have less worry about satisfying some of their needs, since

38

Funds collected from the members of the Dahira are often used to participate in the pilgrimage to Mecca, where they purchase goods that are then sold upon their return in Senegal (Bop, 2005).

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their group becomes a vital resource. The oldest association in Senegal is the “Mbotaye39” where women gather on the ground of kinship, affinity or field of activity, and develop a system of mutual saving bank or tontine, allowing them access to working capital when setting up an economic activity. Setting up an association in Senegal In Senegal, the freedom to set up an association is widely recognised. Most associations are organised in a top-down manner with a president, a vice-president, a treasurer, a secretary or a number of secretaries, and the members (Fig. 10.2). The president tends to be an important member of society, a well-known entrepreneur and a role model with many connections, or powerful relatives, and often has runners40 or assistants to perform little jobs for her (Rosander, 1995). This is because, in the Senegalese society, being connected to others is an important part of daily life and hence an important reason for joining associations. The procedure for setting up an association takes approximately three months after the initial request has been made at the Ministry of the Interior by a member of the executive body of the association such as the president, treasurer or the secretary. Before the status of association is confirmed, the members must organise a preliminary meeting in order to formulate the aims and objectives of the association and make decisions regarding the name of the association, its location, its purpose, who the association is for, the role of the management team and the members, and how to dissolve the association. A set of documents is then provided at the prefecture and includes four copies of the legal status of the association with 1000 FCFA stamp (equivalent to £1) attached to each; four copies of the list 39

Mbotay is a social and economic type of association, which is set up by married women in child producing age. New members pay an entrance fee which is used to purchase party (child name giving parties, marriages) equipment (drinks, food). Each time a member is organising a party, other members unite to give a sum of money, some soap and tissues. The money is also used to pay off debts for purchase already made. 40 This term is used to show that the runners have no specific task and can perform any job set up by the association owner/president.

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of executive members (detailing their surname and first name, date and place of birth, address, profession and nationality); and four copies of the minutes taken at the preliminary meeting of the executive members. This is then followed by a police check of all the executive members of the association at the end of which a legal document confirming the establishment of the association is provided (Adepme, 2005). Figure 10.2 The organisational structure of an association

President

Vice President

Treasurer Secretary Runners

Members

Source: Author (Field survey, October – January 2006) Diverse types of associations Some associations are formed to take advantage of government or aid donors’ credit programmes, and others are established for social and environmental purposes (McQueen, 2004). They may be formal or informal associations (self-help groups), survivalist (artisan) 225

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associations or joint ventures, but the most common tend to be trade associations which may be organised by sector, locally or nationally, chambers of commerce which may represent the private sector within a specific area, umbrella associations or federations that may be smaller national bodies to work with the government, and employer associations which tend to be organised at the national level. Businesses tend to be members of trade associations, while individuals, members of professional associations (Bennett and Ramsden, 2007). In Senegal, the private sector mainly interacts with the government through the national council of employers (Conseil National du Patronat, CNP), which regroups multinational and large national companies (Thioub et al., 1998), or through the national employers’ association (Conseil National des Entreprises du Senegal, CNES), which regroups the legally established SMEs. Whilst these two bodies represent legally established businesses, the informal sector businesses, mainly microenterprises, are represented by the national traders’ union (UNACOIS). Evidence from research carried out on business linkages in Senegal (Rosander, 1995) revealed that some associations are set up in the form of administrative associations (cultural and support associations), legal associations, economic groups such as GIE, NGOs, or associations of individuals from the same village or region (e.g. the Mbotay and the Dahira). Informal associations do not have a legal status, and they are sometimes known of and tolerated by the government. In Senegal, these associations may be grassroots groups or local women’s organisations. Grassroots women’s groups, also known as survival associations, are found all over the country and are established for economic necessity. They are self-help groups involved in incomegenerating activities, where women join resources together to reduce their workload, to invest in saving societies or in cooperative business ventures, with the ultimate goal of accumulating enough capital for themselves and achieving economic independence from their husbands (Tripp, 2004). Women’s saving associations in particular provide credit for members to start an activity such as selling processed food, soap or handicrafts (Pedersen and McCormick, 1999). Many of these groups however, fail due to their small size, lack of education and management skills of the executive body, lack of access to capital for the members and legal constraints. Some argue that they are survival 226

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strategies that reinforce patriarchy, which perpetuates the idea that women’s role in the community should be an extension of their domestic work (Gordon, 1996). Formal associations on the other hand, are those with legal status, recognised by the authorities, have set rules and procedures and often benefit from various government and non-government support (training, access to finance). They can appear in different forms and under different names depending on their objectives. Associations with a national coverage and membership are those operating in different geographical spaces and are usually incorporated under national legislation of some kind. The Dakar Chamber of Commerce is an example. It has been in existence since the 1900s and centralised all decisions of all Chambers of Commerce of French West Africa. Poor management resulted in a decision to break up with this union of chambers of commerce, and the Dakar Chamber of Commerce was reestablished to deal with the needs of its members, since the majority of business activities within the country, are located in Dakar (Marfaing and Saw, 1999). Today, the Dakar Chamber of Commerce fulfils various roles, from the representation of the interest of enterprises, training and assistance, to the contribution to the development of Dakar (www.cciad.sn). However, it appears that the services it offers are limited due to restrained human resource availability. Development associations however, are associations, which have economic, social or cultural goals and aim to ensure the promotion of its members in the different areas they specialise in. Because of these associations, women have a stronger presence in NGO movements, which include projects and programmes that address issues which are important to women (e.g. health, education, credit) (Kante et al., 1994 in Tripp, 2004). Development associations may be EIG or ROSCAs. EIG emerged in the 1980s, automatically had legal status, can be formed on any type of activity, and allow groups to organise themselves into economic entities. Once established, EIG were able to benefit from assistance from the government and other aid donors. In Senegal an association, which has legally been in existence for at least two years may acquire the status of an NGO; this has encouraged some entrepreneurs who have established business associations or EIG to set up NGOs.

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Women entrepreneurs’ associations in agribusiness and textiles This section explores female entrepreneurs’ associations in the agribusiness and textile sectors in Dakar using data from the depth interviews conducted in 2005. Here, the emphasis is on the types of services offered to the respondents. Motives for joining business associations Association membership is “a choice” by firms and individuals who want to access individual or collective benefits (Bennett, 2000). Within the agribusiness sector, motives for joining associations and the benefits, which women gain from them vary. Women have set up a number of associations and networks in order to deal with common problems and to support one another, and members have joined in order to benefit from a bundle of services such as networking, representation, advice and information sharing. Many of the associations approached also have an EIG unit, which they run alongside the association. This is the case of the Association of the Processors of Local Cereal (ATCL)41 which is also an EIG and was initially set up to manage the acquisition of raw materials for the members and to put pressure on government and other bodies to negotiate funds and access to credit for members. When the issue of perceived benefits was raised, most respondents’ emphasised opportunities for training skills upgrade. For instance, AB7 (November 2005) joined associations because they allow her “to be recognised at the national level”. As she indicated, “that is already something. Sometimes, training support is directed towards us”. AB3 (November 2005) on the other hand joined in order to “increases (her) knowledge”, and for her, “going and meeting women like you allows women to change. It allows you to know many things. Sometimes, when you meet, someone talks about their experience and with this experience you can go forward”. In other words, women join associations for a specific purpose.

41

ATCL stands for Association des Transformateur de Cereale Local

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Table 10.1 Motives for joining and leaving associations Motives for associations

joining

business

Major source of information Vehicle for advocacy and representation Provide support to one another Share experience/increase knowledge Networking Provide assistance to individual businesses Access vital training skills Access financial assistance Recognition Social responsibility (Promote women) Access international markets

Motive for associations

lapsing/leaving

Unaware of existence of associations Unhappy about services Associations are linked to politics Service provided only benefits associations’ owners and managers High membership fees Poor governance Waste of money Waste of time Lack of time

Source: Author (Field survey, October – January 2006)

Within the textile sector, the respondents stress various benefits from belonging to an association including, the need to help, learn from one another and access vital training skills. While the majority are members of three associations simultaneously, there are also many textile sector entrepreneurs who are unhappy about the way their associations operate and the benefits they provide. TE14 is a wellestablished entrepreneur who belongs to a number of associations, but argues that she is only a member in name because of the lack of expected benefits. TE17 however, is happy about her membership of two associations because of the Mutual Saving and Credit Association (MCSA) which is available and which allows women to access loans of up to 2 millions FCFA42. Interestingly however, she is also a founding 42

Equivalent to £2042.41 (January 2007 est.) 229

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member of an association and complained about the members’ constant criticism of the way the activities are carried out. She indicated that: “The association is set up. Great, everybody attends. After that, nobody shows up. Then you take some initiative to set things up for members and it comes back to haunt you. People should be more organised, know where they are going and what they want. There are 12,000 members in this association, but only a dozen people work. It is only this small team, which fights to have things done. Everybody else, most of the time, is complaining”. TE17 (December 2005)

While criticising members of her association, TE17 also stresses some of the problems within her own association, which are similar to the problems identified within the associations in the agribusiness sector. She claims that the small size of the management team is partly to blame, findings that also reflect other studies on the weaknesses of business associations in Africa (Mutalemwa, 2005). For instance, a study on female entrepreneurs in Ethiopia (Stevenson and St-Onge, 2005) revealed that lack of management capacity; weak organisational structure and the inability to pay contributors were to blame for the poor membership. Multiple memberships to business associations in agribusiness and textiles In most districts in Dakar, women appear to hold membership of various associations simultaneously in order to meet all their different needs and because they are in search of support or integration in a network and will join any association. In both sectors, there was high membership of up to three associations (Table 1.2). Entrepreneurs who had not joined associations argued that it is because they are either unaware of the existence of the associations, are unhappy about the perceived benefits or because of a belief that some associations are linked to politics. The latter was also noted in a survey of 123 Ethiopian female entrepreneurs (ILO, 2003). Here, it seems that women were forced to join associations and pay membership fees for fifteen years

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during the Derg regime43 and this apparent fear and lack of democracy was the reason behind the reduced membership of associations. While there is no indication that Senegalese entrepreneurs have been or are forced to join associations, evidence still shows that because some respondents do not want to be associated with politics, they will not join associations. When asked whether her association was involved in lobbying to influence policies favouring female entrepreneurship, AB15 indicated that: “We would love to do it (put pressure on the government), but you know, when you are not into politics, it is difficult to get help. You see, you have to get into politics to get some help. We are women of development and we are little involved in politics. There are many groupings and all these groups are involved with many political parties” (AB15, November 2005).

In another study carried out on the perception of businesses and governance in Africa using the sample of eight African countries including Senegal, Goldsmith (2001) argues that business leaders in Senegal believe that associations are part of or arms of the government, confirming the above statement. However, the respondents in the sample also state that membership of associations was a major source of information and a vehicle for advocacy and representation. In other words, while some entrepreneurs may fear their associations’ relation with the government they are still aware of the benefits which they can provide.

43

During the former Ethiopian government ruling, also known as the “Derg regime” (1974-1991) the country experience political turmoil and women associations were organized to mobilize revolutionary mass support (Centre for International Private Enterprise, 2005).

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Table 10.2 Membership of business associations

Membership No membership Member of 1 to 3 associations

Agribusiness (No) % 2 10 13 65

Textiles (No) % 6 30 12 60

Member of 4 to 5 associations

4

20

1

5

Other (O - unsure, don’t remember)

1

5

1

5

Total

20

100

20

100

Source: Author (Field survey, October – January 2006) The agribusiness sector Six associations were mentioned more than once but the most popular (mentioned five times) were the Association of the Processors of Fruits and Vegetables (TRANSFRULEG44), a widely acclaimed association to which many entrepreneurs in the fruit and vegetable processing industry are affiliated and for the Professionals in Agribusiness (FP2A) (Fig. 10.3). Other associations mentioned include the Association for the Promotion of Women (APF), the Association of the Processors of Local Cereals (ATCL) and the African Network for the Support of Female Entrepreneurship (RASEF). Interestingly, some of these associations are broad in their objectives and relevant to both the agribusiness and textile sectors (e.g. RASEF). Others are organised by production sector, area of production or by the objectives of the founding members.

44

Transfruleg stands for Transformateurs de Fruits et Legumes; FP2A stands for Federation pour la Promotion de l’Agroalimentaire;APF stands for Association pour la Promotion de la Femme; and RASEF stands for Reseau Africain pour le Soutien a l’Entreprenariat Feminin.

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Figure 10.3 The main Associations identified within the agribusiness sector

Most popular associations in agro-business

TRANSFRULEG ATCL RASEF Associations FP2A APF AAFEX 0

1

2 Number3 of 4 mentioned times

5

6

Source: Author (Field Survey, October – January 2006)

The textile sector Of the fifteen associations mentioned, the majority are nationally established and only very few are regional associations (Fig. 10.4). Of these, ten were mentioned more than once, the most popular being the association of the professionals in clothing (FENAPH) (mentioned five times). The FENAPH45 is one the most popular associations which entrepreneurs in the textile sector, particularly in clothing, belong to. Interestingly, the FP2A also scored highly and received the same count as the FENAPH, despite the fact that it still remains a newly established FENAPH stands for Federation Nationale des Professionelles de l’Habilement. 45

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sector specific (agribusiness) association. The fact that FP2A was mentioned by many entrepreneurs in the textile sector raises some questions about the women’s perception of the goals and objectives of the association since it is an agribusiness sector association and these women operate in the textile sector. One explanation may be that the women anticipate setting up an agribusiness, or are simply confused about the name or type of association they belong to. This may also explain why some respondents referred to the association as “FP3A” or “the association set up by ADEPME”. Figure 10.4 Most cited Associations in the textile sector

Most mentioned associations in textiles

RASEF Associations FENAPH

FP2A

0

2

Numbermentioned of 4 times

6

Source: Author (Field Survey, October – January 2006)

The majority of the respondents who mentioned FP2A did not previously belong to any association, and were all excited about the benefits that it would provide them. They seemed content with the fact that FP2A was funded by a government body, and they believe that they were more likely to access more benefits than they would if it was set up by another entrepreneur. Contrary to the agribusiness sector, it appears that women in textiles would rather associate themselves with 234

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a government-led association than one set up by a fellow entrepreneur. Another group of respondents argued that they were members of three associations or more, but could not remember their names. This may be explained by the fact that some entrepreneurs joined numerous associations simultaneously for the perceived benefits. Once they realised that they were unable to access the benefits, they stop attending meetings until they stopped altogether. Furthermore, others join well-known associations so that their business is attached to the associations’ name, or identified as part of an important network. This is the case of the African network for the support of female entrepreneurship (RASEF), the third most mentioned association, the cultural association for support to education (ACAPES)46 and the regional centre for adult education (ASFEC). While membership to some of these networks may not directly affect business performance, it may add to the business’s reputation or to the entrepreneur’s reputation as an individual who is socially responsible. TE19 joined an international Senegalese-Canadian association in order to “to give back to society” and provide training support for young women divorcees who are unable to attend school. As she explains, “We have taken young divorcees with children, who have nothing to do; we have taken these young mothers, those who do not want to go to school. We wanted to provide them with training, and between us, that’s what we do. I train them in modern jewellery making, dolls and shoe making”. TE19, December 2005.

46

ACAPES stands for Association Culturelle d’Aide a la Promotion Educative et Sociale. 235

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Figure 10.5 Sectors and business support institutions

Figure 1.5 Multiple memberships of business associations Source: Author (Field survey, October – January 2006)

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Balancing membership to regional and international networks Most entrepreneurs belong to local and national associations, with some membership of regional networks such as the PROCELOS47, the West African network on Sorgho (ROCARD), the West African Network for research on Millet (ROCAREMI) and the RASEF also mentioned. Regional associations promote African unity through various activities such as seminars, conferences and workshops, and allow the associations involved to share experiences, examine problems, provide solutions and identify strategies for the future (Kabumba, 1999). As a member of an African network AB11 is able to receive assistance in improving her enterprise as well as for her business association. When asked why she joined a regional network, she commented that: “We have meetings to deal with our problems. Because this is a panAfrican network, we try to solve problems, because there are the UEMOA and the CEDEAO. There is the harmonization of taxes, prices and export barriers and we want to see how to cross borders without too much harassment. This means respecting laws, regulations within the community and establish exchanges within the sub-region, among us Africans. In other words, if you do not have bread and I have bread, then I can sell you bread. Within the community exchanges should be enabled, we should help each other so that Africa can develop”.AB11, December 2005.

In both sectors, only a few entrepreneurs are members of or owner/manager of regional business associations. It seems that regional business associations are very weak and suffer from similar problems, which local and national associations have to deal with. For instance, they are over-dependent on external funding, there is lack of democracy, and members suffer from an “inferiority complex” which pushes them to join non-African associations. Because some of these associations are purely set up to tap into donors’ funds, even though their objectives may state otherwise, their long-term viability can also be questioned. In addition, regional associations operate across several 47

PROCELOS stands for Promotion de Cereales Locales; ROCAR stands for Reseau Ouest et Centre Africain de Recherche sur le Sorgho; and ROCAREMI stands for Reseau Ouest et Centre Africain de Recherche sur le Mil.

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sectors of activity or industries and hence have to ensure that the membership and the influence logics are equally balanced. This is because resources have to be shared between representative and membership work carried out at the national as well as at the regional level. Unfortunately, this is not always the case, causing poor balance and affecting entrepreneurs’ decision to leave associations (Wilt and Meyer, 2005). Stages of membership Evidence from the findings also suggests that newly established micro entrepreneurs and some members of GIE would first join local associations and later move on to national associations where they perceive benefits to be greater than in locally established associations. Well-established and successful entrepreneurs, especially those who pursue pan-African international trade and commercial ventures however, seem to join national, regional and/or international networks as the benefits are also greater. These findings reflect a study by Spring and McDade (2005) on a new generation of African female entrepreneurs, where they argue that well-established entrepreneurs would have a system of business enterprise network which would consist of national, regional and pan-African organisation. Goldsmith (2001) also carried out a study on eight African countries (Senegal, Zambia, Ghana, Uganda, Kenya, Tanzania, Malawi and Madagascar), and found that almost all enterprises with more than 100 employees and a significantly large number of smaller businesses (67%) were members of a trade association. The survey, which was carried out on 100 businesses in each country, the majority of which are SMEs, also suggested that business leaders in Senegal, Uganda and Madagascar saw associations as part of the central government whereas leaders in the other five countries saw business associations as being societycentred. While the findings seem to agree with some of the respondents’ statements that associations are political organisations, they are inconclusive as the research was carried out on a small sample. Consequently, it can not be concluded that associations in the agribusiness are either society centred or part of central government.

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Conclusion This chapter has explored the development and roles of business associations in Senegal, while focusing on the agribusiness and textile sectors. Having brought to light some theoretical key concepts underpinning business associations, the chapter provided an insight into the development of associations in Senegal. The empirical findings suggest that women’s business and professional associations in Senegal have increased significantly over the years, either for business development and social development purposes or because of the availability of external funds. Evidence collected in the agribusiness and textile sectors has enabled the identification of characteristics of business associations in Dakar. Women in the agribusiness and textile sectors join business and professional associations for various reasons but most importantly, to access a bundle of benefits, which they believe will provide them with the tools to develop and grow their businesses at the local, national, regional and international levels. Simultaneous membership to various associations was observed in both sectors as entrepreneurs believe they would meet all their different needs through them. Unfortunately, it appears that not all the members’ needs are being met, resulting in entrepreneurs pulling out of associations. Some argued that this is caused by poor organisation and governance, and lack of trust in some associations. Reduced membership to associations is therefore an increasingly emerging issue, which, if not dealt with, will significantly influence the future of women’s associations. What the future holds for business associations in Dakar will be dependent on how well the associations are managed, how their relationship with the government and other external donors are controlled in terms of resources acquisition, transformation and delivery to members in forms of benefits. Bennett and Robson (2001) suggest bundling benefits to members and bringing a range of services under one business and marketing strategy. Furthermore, additional training could be provided to the management team on organisational and governance issues within the association; a local or national association newsletter in the official and local language could be set up to discuss association management and other related issues (marketing, promotion), and could feature good practice and role models; and more exchange between associations could be established to allow groups to learn 239

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from each other and to share experience and expertise. This will also raise the competitiveness of the associations at the regional level. In regards to the exchanges taking place between the associations and other bodies in the environment, it appears that there is some ambiguity about the impact of the government and the exchanges taking place between the state/government and business associations, as some entrepreneurs fear that associations are becoming too political to join, while others argue that the government’s influence is a positive influence on their operations. It is clear from the evidence that some members are more concerned about the services offered than the association’s relationship and influence on government policies. Perhaps the provision of information to entrepreneurs to clarify the goals and objectives of the associations as well as the exchanges taking place with the government may solve this problem. This could be done by reinforcing the provision of membership manuals to potential members before they join the associations.

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Bop, C. (2005). "Roles and the Position of Women in Sufi Brotherhoods in Senegal " Journal of the American Academy of Religion 73(4): 10991119 Brautigam, D., Rakner, L. and Taylor, S. (2002). "Business associations and growth coalitions in Sub-Saharan Africa." Journal of Modern African Studies 30(4): 519-547 Dixon, L. (2006). "The representative role of regional business associations: the Engineering Employers' Federation Northern Association in North East England " Regional and Federal Studies 16(2): 179 – 196 Doner, R. F. and Schneider, B. (2002). The New Institutional Economics, Business Associations and Development. Business and Society Programme. International Labour Organisation. Goldsmith, A. A. (2002). "Business Associations and Better Governance in Africa." Public Administration and Development 22: 39-49 Gordon, A. (1996). Transforming Capitalism and Patriarchy: Gender and Development in Africa. Oxford, Boulder, CO. IDS Policy Briefing (1996). "Business Associations in Developing Countries." IDS Policy Briefing (6): 6 Jones, P. (2004). "‘All for One and One for All’: Transactions Cost and Collective Action." Political Studies 52: 450–468 Kabumka, I. (1999). "The Role of Regional Associations in African Development Contribution, Limitations and Future Prospects: Forum of Directors of Regional Development Institutions in Africa." Review Of African Development 4(7) 1-16 Kraus, J. (2002). "Capital, power and business associations in the African political economy: a tale of two countries, Ghana and Nigeria." Journal of Modern African Studies 40(3): 395-436 Macqueen, D. J. (2004). The role of small and medium forest enterprise associations in reducing poverty. Edinburgh, Scotland, International Institute for Environment and Development (IIED), Natural Resources Group. Marfaing, L. and Sow, M. (1999). Les opérateurs économiques au Sénégal. Entre le formel et l’informel (1930-1996). Dakar, Karthala. McDade, B. and Spring, A. (2005). "The ‘new generation of African entrepreneurs’: networking to change the climate for business and private sector-led development." Entrepreneurship and Regional Development 17(26): 17-42 Meagher, K. (2005). Social Networks and Economic Ungovernance in 241

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African Small Firm Clusters. Queen Elizabeth House 50th Birthday Conference (New Development Threats and Promises), Oxford University. Mutalemwa, D. K. (2005). Small and Medium Enterprises in The Manufacturing Sector of Tanzania: Initial Conditions, Networks and The International Environment. Norwich, School Of Development Studies, University of East Anglia. Nadvi, K. (1999). Facing the new competition: Business associations in developing country industrial clusters. Business and Society Programme. Brighton, Institute of Development Studies. Ndione, E. S. (1992). "Le don et le recours : ressorts de l’économie urbaine." (151): 152-153 Niang, A. (2000). "Les associations en milieu urbain dakarois: classification et capacités développantes " 1225(2): 99-160 Pedersen, P. O. and McCormick, D. (1999). "African business systems in a globalising world." The Journal of Modern African Studies 37(1): 109-135 Richardson, Pat, Howarth, R. and Finnegan, G. (2004). Jobs, Gender and Small Enterprises in Africa- A study on Women's Enterprise Development: Key Issues from the Research. Rosander, E. E. (1995). Female Linkage in Morocco and Senegal. The third Nordic conference on Middle Eastern Studies: Ethnic encounter and culture change, Copenhagen Shaw, E. (2006). "Small Firm Networking An Insight into Contents and Motivating Factors." International Small Business Journal Copyright 24(1): 5-21 Stevenson, L. and St-Onge, A. (2005). Supporting Growth-Orientated Women Entrepreneurs In Ethiopia, Kenya & Tanzania. Enhancing Development in Africa. ILO, et al., International Labour Organisation, the African Development Bank and the Private Sector Department. Streeck, W. and Schmitter, P. C. (1985). "Community, Market, State-and Associations? The Prospective Contribution of Interest Governance to Social Order." European Sociological Review, 1(2): 119-138 Temu, A. E. and Drue, J. N. (2000). "The business environment in Tanzania under socialism." Journal of Modern African Studies 38(4): 683–712 Thioub, I., Diop, M.C. and Boone, C. (1998). "Economic Liberalization 242

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in Senegal: Shifting Politics of Indigenous Business Interests." African Studies Review, 41(2): 63-89 Tripp, A. M. (2004). "Women's Movement, Customary Law, and Land Rights in Africa: The Case of Uganda." African Studies Quarterly 7(4): 20 Waarden, F. V (1991). Two Logics of Collective Action? Business Associations as Distinct from Trade Unions: The Problems of Associations as Organisations. In: D. Sadowski and O. Jacobi (Eds.) Employers’ Associations in Europe: Policy and Organisation. pp. 5184 Waarden, F. V. (1992). "Emergence and Development of Business Interest Associations. An Example from The Netherlands." Organization Studies 13(4): 521-561 Wilts, A. and Meyer, M. (2005). "Small firm membership in national trade associations." Journal of Public Affairs 5: 176-18

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Chapter 11 ICT, Institutions and Entrepreneurial Marketing Development: A catalyst for SME growth in Tanzania? I ma n i S i l v e r K y a r u z i & Charles Bekoni Russel Pilli

Introduction This paper seeks to examine the interplay between ICT, institutions, entrepreneurial marketing concept and growth. Business support institutions in developing countries have been increasing their efforts to include Information Communication Technology (ICT) in their economic policy agenda. In the search for integrating local businesses with the global economy, the marketing discipline has been targeted and transformed to respond to the current global businesses’ demands. As a result, in recent years, marketing in developing economies has witnessed an increasing use of Information Communication Technology (ICT) in marketing activities. This has been in the form of online transactions, increased use of internet and the number of service sector-based companies. While the increased use of technology has been praised for this transformation, our argument will not be complete without a mention of global entrepreneurship revolution. The development and popularity of entrepreneurship concepts in developing countries have transformed the ways local businesses view and perform their marketing activities in particular, a move from the traditional assumption that marketing is just about buying and selling to a new view that treats businesses as a set of transactions. New theories have also been developed to improve the conceptualisation of the two fields of marketing and entrepreneurship (Miles, 1991; Fillis, 2001). ICT is defined by Organization of Economic Cooperation Development (OCED) as a combination of manufacturing and service industries that capture transmit and display data and information 245

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electronically (OCED, 2002). ICT plays a crucial role in all aspects of people’s life; it facilitates the way businesses are conducted, access of information and services, communication and entertainment. Wolf (2001) suggests that the spread of ICT has led several scholars to argue that these technologies are creating a new information economy in which information is the critical resources and the basis for competition in all sectors of the economy. For small business which operates in a complex, dynamic competitive business environment, ICT offers improved efficiency and increased productivity. For the purpose of this study, we have adopted a definition of small businesses as those having between 5 and 49 employees or with capital investment between Tshs.5 million to 20 million (SME Policy, 2003). Tanzanian small firms play a crucial role in economic development and they are believed to be an engine of local economic growth (Olomi and Rutashobya, 1999; Kyaruzi, 2006). They create employment for growing populations, they fill gap in unsatisfied customers through innovations in product offering, and they increase economic productivity in a country (Mwaipopo, 2004). It has been also been documented that SMEs in Tanzania are facing several problems that include unfavourable legal and regulatory framework, undeveloped infrastructure, poor business development services, limited access of SMEs to finance, ineffective and poorly coordinated institutional support framework (SMEs Policy, 2003). At a micro-perspective level, Tanzania’s SMEs are facing a number of constraints that are mainly exacerbated by the following factors; lack of capital and entrepreneurial skills (Rutashobya and Olomi, 1999; Wangwe, 2001). Marketing and Entrepreneurship in small firms could solve most of these problems. Narver and Slater (1990) and Jaworski and Kohli (1993) suggest that development and performance of firms depends on marketing. Combination of marketing, entrepreneurship and SME yield a powerful approach to doing business (Hills et al, 1995). This is due to the fact that small firms have unique characteristics and attributes different from large firms, which are reflected in the manner in which they are organized and managed. The gaps exist in most researches on small business marketing and entrepreneurship. Most researches are based on conventional marketing theories that might not be appropriated for today’s changing 246

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business environment. Thus small businesses are supposed to look at marketing strategies that takes into consideration risk management and environmental changes and its corresponding contributions to the competitive nature of small business environment. As traditional marketing approach has failed to provide appropriate strategy for SMEs marketing there is a need to identify modern ways of approaching marketing. However, this task faces some limitations. For instance, it is argued that in small firms, marketing is mostly informal, unplanned and relies on institution of owner – managers and differs from that of large companies (Stokes, 2002). The new approach is more structured and follows a certain pattern. It is also argued that in both entrepreneurship and marketing research it has been noted that information on customers and competitors has significant effect on marketing decision-making (Deshpande and Zaltman, 1982). An appropriate strategies for SMEs’ marketing is that which enables small firms to compete despite its resource constraints. Within small businesses, ICT is expected to offer new opportunity for business development and competitive advantage However, in developing countries like Tanzania, the use and adoption of ICT by small businesses is still at an infancy stage. Majority of firms are still in dilemma as to whether they should adopt ICT or not, while others are still contemplating the advantages and disadvantages of using technology in their business. On the other hand, to others, the use of ICT in marketing activities may appear to be more associated with large corporations and well-established institutions. An Entrepreneurship Marketing (EM) concept, if combined with the use of ICT, appears to solve some of the problems associated with marketing within SMEs. This is a concept that goes beyond marketing in a sense that it offers modern marketing strategies that are essential in a dynamic, competitive and complex business environment within which Tanzania firms operate. However, although there is potential for small firms to use entrepreneurial marketing approach for growth and development, which could associate ICT use as a strategy to be used by resource constrained firms to compete, there is still lack of use of ICT in daily business undertaking of small firms in Tanzania. It is in this context that this paper seeks to review the role of ICT on entrepreneurial marketing and local economic growth in Tanzania.

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Marketing and ICT In the past, international business was regarded as the domain of large, resource rich companies (Root, 1994). Recently, Information and Communication Technology (ICT) are changing the way most companies trade with suppliers and customers. Through rapid spread of ICT and ever decreasing prices for communication, market in different parts of the world becomes more integrated (Wolf, 2001). With advances in ICT, the globalization of market and other facilitating trends, there is an increase in participation of more small business in international market (Bell, J., 1995). Customer facing activities such as online publishing, advertising and marketing are critical in today’s competitive business environment. Information and knowledge are expanding at tremendous rates not only in quantity but also in quality (ITU, 2002). Through networked computers (internet), people can codify, store and share certain kind of knowledge worldwide more easily and cheaply than ever before (Nawe, 2000). ICT has been accepted as being an essential element of marketing. According to Kotler (1999) marketing means managing marketing to bring about exchange for the purpose of satisfying human needs and wants. The impact of ICT on marketing has been dramatic and is continuing to grow as most companies realize its importance by using ICT to change the way they market their products and services in order to better satisfy their customer’s need. Traditional marketing has become more expensive and less effective over time. ICT increases competition in global market due to its ability to offer various alternatives to customers hence forcing businesses to concentrate on masterminding customer satisfaction. The most critical technological development that affects marketing approach is the widespread use of the internet (Chen, 2004). In fact, the web has turned more than 30 million people into potential information consumers worldwide. Although the use of ICT can help bigger firms to increase their flexibility through restructuring of the organization which will enable them to adapt quicker changing condition that could cause decline of small firm competitiveness, they also increase the competitiveness of SMEs as they enable the creation of more flexible links with trading partners because of faster and more reliable communication channels 248

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(Mutambalya and Wolf, 2001). Thus, in today’s global market, SMEs can use ICT to increase their market competitiveness position along with their large counterparts (Beheshti, 2004) and engage in international market (Fillis, 2001). Small Firm, Entrepreneurship and ICT Many studies on the competitiveness advantage of small firms emphasized the importance of marketing, strategic position and entrepreneurship as the key factors in business development (Kyariazopoulos et al, 2001). Authors claim that despite the widespread acceptance of the relevance of the marketing concept for small firm development, there has been no clear factor that contributes to business growth and survival. It can be argued that overall performance of firm is a result of the way operational performance interacts with the entrepreneurial and marketing orientation. Although there are several definitions of the term entrepreneurship or who are entrepreneurs, entrepreneurship can be best explained as the process, which entirely involves activities of individual person (Olomi, 2001). A growing body of evidence suggests that in small business, entrepreneurship is related to owner-manager since activities of small firms are strongly influenced by his/her attitudes and behaviours, the success or failure of small firms depends on managerial competence of the owner-manager (Jennings and Beaver, 1995) and his/her influence (Stokes, 1995). Hence, entrepreneurship is always related to small firm management. Carson and Coviello (1996) emphasized the importance of the marketing/entrepreneurship interface. His research provided evidence of linear relationship and claimed that marketing and entrepreneurship represents the same construct (Miles and Arnold, 1991). It can be argued that creative (or innovative behaviour) is a significant feature of marketing success of successful entrepreneurs. Evidence suggests that there is a strong link between entrepreneurship and marketing as they complement each other to form a strong catalyst for firm growth (Hills et al, 1995). Development and performance of firm depends on marketing (Narver and Slater, 1990; Jaworski and Kohli, 1993) and the combination of marketing, entrepreneurship and SMEs yield a powerful approach of doing business (Hills et al, 1995) Within small firms, the combination of marketing and 249

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entrepreneurship can have synergetic effects upon the overall performance of the small firm. Evidence has been produced which suggests that firm performance is related to entrepreneurial orientation (Colvin and Slevin, 1991). Firms with strong level of entrepreneurial orientation tend to constantly scan and monitor their business environment to seek for opportunities and enhancing their competitive position (Ng. et al., 2006). Competitive advantage of small firms comes from advantages they have over large organization in the way they are operated. Previous researches found that the main competitive advantage of small firms arose from their personal attention to customers needs, although establishing reputation, the provision of specialized expertise and product quality were also believed to be important factors (Colvin and Slevin, 1998). Moreover, organic structure of small firms facilitates innovation more readily than the more bureaucratic structure of many large firms (Cannon, 1991). Organic structure promotes entrepreneurial activities and enables the firm to respond rapidly to the competitive action (Covin and Slevin, 1998). Small firms are more flexible, can respond quicker to business changing environment that gives small firm a vital competitive advantage (Hills et.al., 1995). It can be argued that small firms can use these competitive advantages to grow and survive. However, small firms faces several challenges that includes; lack of resources, a limited customer base, limited marketing activity, expertise and impact, reliance of owner-manager decisions (Hills et, al 1995). Use of technology can be the only option for small firms to have a competitive advantage. Institutions and ICT usage in Tanzania Science and Technology are central elements of a dynamic business environment that could contribute to increased productivity and competitiveness in global economy (USAID, 2005). A number of institutions have been put in place to support the development and growth of ICT in Tanzanian. It can be argued that transformational development depends on the ability of developing countries to acquire and adopt technology from the global economy. While a lack of ICT infrastructure in Tanzania has been known to prevent an economy 250

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from leveraging the benefit of globalization, institutions have been slow to react to this. And, in particular, the adoption of ICT for small businesses has been poor. WSIS (2003) declared that “the private sector and civil society, in dialogue with government have an important role to play in devising national e-strategies. The commitment of the private sector is important in developing and diffusing information and communication Technologies (ICT), private sector is not only a market player but also plays a role in wider sustainable development context. In Tanzania, the government has embarked upon improving the business environment to stimulate private sector led growth and small business development. However, short-term emphasis has been given on the urgent need to develop ICT skills, rather than just enhance the primary education system (UNDP, 2001). In Tanzania, there is significant increase in use of ICT despite the 1974 Prohibition Order on electronic computers and Television sets (URT, 2005). The achievements were as a result of various adjustments since the early nineties in policy, regulatory and commercial facets. The private sector has actively contributed to these developments by investing in among others, support facilities, training needs and sales outlets (URT, 2005). The government aimed to reposition the country in the global economy to leverage the benefits of ICT for its national priorities of growth and poverty reduction (Kaliba, 2003). The author claimed that government initiatives including the establishment of esecretariat; including key stakeholders to create supportive leadership for ICT development; improving communication infrastructure; and restructuring of the financial sector to sustain a more market-driven economy. However, despite all these initiatives, uses of ICT in local firms have been disappointing. Although, according to the TCRA (Telecommunication Regulatory Authority) the number of customers in Tanzania who are accessing communication service has increased dramatically from around 100,000 (1993) to 2,100,000 (January 2005) due to the spread of service and the gradual fall of tariffs and prices (Cook, 2005), the demand need which is about 35 million is still higher than supply that could not be easily met due to the size of the country, high tariffs and poverty. For instance, the telephone density for Tanzania is 0.32 telephones per 100 inhabitants (URT, 2005). This figure is very low compared to the neighbouring country of Kenya (0.92) and much lower to SADC (3.4); 251

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Asia (3.86); Europe (35.36); and the rest of the world (10.49). In terms of internet access, there are only between 14 – 18 internet providers in Tanzania and all use satellite or wireless through internet satellite earth station situated in Dar-es salaam whose cost is very high because international call is through Europe or the USA (Cook, 2005). It has been very expensive for small business owners to be able to use internet. Empirical findings from three districts in Tanzania (Kasulu, Magu and Sengerema) suggests that many villagers do not have any internet direct access (Nielinger, 2003). The author claims that 50 percent of villagers at least have heard of the internet and 20-30 percent know someone who uses it but only 3 percent or less actually use internet. These findings suggest lack of awareness of use of ICT, lack of ICT infrastructure in the country and lack of appropriate ICT policy. It has been revealed further that the reasons for poor usage of ICT in Tanzania is that, many ICT users access the internet through internet café; there are shortage of professionals of ICT; fewer students take computer studies - whose syllabuses are out of date anyway; websites are few and are in English while Swahili is the language mostly used in Tanzania and are not updated regularly; there is no local manufacturers of ICT equipment, all products are imported at high cost; only few local websites recently began offering e-business services due to lack of a natural payment system, local credit cards and legislative framework appropriate for e-business (URT, 2003). In view of these ICT environmental problems, there is limited use of ICT, especially in rural areas where there is 80% of population while most of ICT-related activities are concentrated in Dar-es salaam, the capital city of Tanzania. This supports the growing body of literature that claim the presence of digital divide in developing countries that create the gap between those able and unable to participate in knowledge economy within nations. Due to the lack of infrastructure to support ICT and low capacity of human capital, small businesses in Tanzania have marginal use of ICT in their daily operations. There is however little research that focus on ICT in Tanzania. Many researches are based on Information Technology, management issues, financial aspects and business attitudes towards use of ICT (Mbamba, 2004). There is limited research related to the role of ICT in 252

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entrepreneurial marketing that is related to small businesses. Moreover, many researches are related to the western setting, there are few researches that relates to developing countries that look at diffusion and application of ICTs as a catalyst for economic competitiveness and growth of small businesses (Matambalaya and Wolf, 2001). This research therefore, seeks to examine the role and impact of ICT on small business marketing in Tanzania. Methodology and Initial Findings The results were obtained by surveying 16 small firms from different sectors. 16 case studies were drawn from 3 main businessactive regions in Tanzania namely Dar es Salaam, Arusha and Mwanza. A database of businesses was obtained from The Tanzania Chamber of Commerce, Agriculture and Industries (TCCIA). Respondents were drawn randomly from a list of companies from these regions. The initial step was to gain access to these companies before sending out the questionnaires. Only respondents who were prepared to participate in the follow-up interviews were approached. This involved in-depth interviews with business owner-managers (2005-2007). This is an initial stage of the study. The sample will be expanded to include more regions in Tanzania. Characteristics of the sample Table 11.1 Structure of the Sample Region No. of businesses Size (based on employment)

Arusha 4 1 Small 3 Medium

Dar es Salaam 7 3 Small 4 Medium

Mwanza 5 4 Small 1 Medium

Amongst the surveyed businesses, 8 of them were small businesses (with less than 50 employees) while the other 8 were classified as medium with more than 50 employees.

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Size of Firms vs. marketing activities 50% of the respondents were small firms with little or no marketing knowledge. Even those with knowledge did not indicate if they had the ability to carry out marketing activities beyond their premises. Most firms have adopted the “small status”. They believe that marketing and ICT activities belong to large corporations. Some of the issues raised during the interviews indicate how far local businesses were prepared to play the “smallness cards”: “…your investigation suggests that we should use ICT to market our services…but we do not have the capacity. Here, I only make enough money to pay salaries to my employees and myself…[he has 11] and whatever is left is not enough to do anything else” (B7)

To this entrepreneur (B7) and many others who were interviewed, investing in ICT is like putting money in the drain. They are happy to keep the sizes of their businesses smaller rather than opting for growth and expansion strategies. “…my business is small and easy to manage! …ICT would be useful …but… this would complicate my businesses. I haven’t got much time to deal with machines and computers. May be I will think about it if the situation forces me to” (B9)

This suggests that local entrepreneurs are aware of the benefits of ICT and marketing. However, the structure of their businesses (mostly sole owners) makes it difficult for them to invest in ICT. There is a fear of growth. This is due to the fact that growth is often accompanied by many complexities such as paying taxes, employing skilled people and increasing transactions. A loss of ownership control could also be an issue. Risks associated with ICT Entrepreneurship is often associated with ones’ ability to take risks. However, it was noted that most of the respondents’ entrepreneurial capacity was limited to buying and selling of goods. They are not risk 254

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takers and they were not prepared to invest in anything without the guarantee of immediate returns. “…how long will it take that machine [meaning computer] to generate enough revenues for my business? I have always managed to pull customers. The machine needs much of my time and I am not sure if it can beat my 20 years experience in business….it is a good idea but I will have to wait and see…I am not rushing into anything” (B14).

Even though the literature above suggests that the technology is now available it will take time to convince local entrepreneurs that the future of business will rely on ICT. There are also cultural and psychological factors that limit people from investing in ICT. Unreliable power supply Majority of respondents cited unreliable power supply as one of the factors affecting their decision when it comes to investing in ICT. They commented that computers and faxes and many other electronic equipment use electric power. However, in recent years Tanzania’s energy sector has faced numerous problems. The electric supply has affected a number of business sectors. For small businesses over reliance on electronics to market and generate businesses could be costly. Most small businesses cannot afford emergency power supplies such as electric generators. Infrastructure, Connectivity and quality of ISP suppliers Connectivity services have improved in most areas. However, the cost of connecting to the internet and other services appear to be higher than in other countries. Not all small business can afford to pay the rates. For some of the respondents ICT was not treated as an opportunity for them, but rather an increase in their businesses’ operating costs. Transactions Credit card facilities have only just been introduced in Tanzania. There are cultural and infrastructural factors. For instance, despite the 255

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availability of this service, not all businesses can afford to have such facilities. In most cases the problem is not the facility, but it is the fact that only a few Tanzanians use credit cards. The culture of most businesses is that transactions are best carried out face to face. Customers have to trust businesses and vice versa. Businesses may have ICT facilities but customers may opt not to use them. For instance, there was a point raised by B4 that: “…I do have credit card facilities at my business…but…not many customers use them. I am not sure what the reasons behind are, but, I suspect it is all about trust. It is not that they do not trust me, it is because most customers are used to paying cash…and I assume they will continue to feel comfortable that for a long time to come” (B4).

Looking at the policy manuals, not much has been written with regard to how institutions could raise trust and encourage people to use ICT. Owing to a lack of support in this area, the infrastructure is only left to be used by large corporations and well-established firms. Conclusions Local economic growth initiatives could benefit from having wellestablished institutions and marketing support to small businesses. The Entrepreneurial Marketing (EM) concept appears to solve some of the problems associated with marketing within SMEs. With this view, most businesses will be able to transform from traditional marketing by adopting modern marketing strategies that are essential in a dynamic, competitive and complex business environment. Also with increased use of technology, Tanzanian firms are facing problems due to limited resources, poor entrepreneurial and marketing skills, unfavourable business infrastructure and ineffective business policies. All these factors, and many others, tend to limit firms’ ability to compete both locally or internationally. And, in particular, the competitive advantage of local firms and their participation in the international market is limited due to their inability to access and to participate in the global markets. For small businesses to survive and grow they must improve their competitive advantage. This could potentially be obtained by the 256

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adoption and effective use of technology. As globalisation and trade liberalisation intensifies, options are available to local firms. A growing number of SMEs are recognizing that the competitive edge is in being swiftness to market and innovation. As a result, they can innovate faster, not just in products but in internal operations, to take advantage of the new technology (Scarborough and Zimmer, 2006). ICT could increase efficiency to help smalls firm to overcome the problem of relying on owner manager-decisions. Not always at a large scale, but essentially, it requires a small capital to establish its customer base and marketing activities by use of the internet, which reduces information asymmetries. Information asymmetries are one of the major causes for high transaction costs, uncertainty and therefore market failure. A reduction of information asymmetries by ICT reduces the ability of the better informed to extract rents from the less informed, be they buyers or sellers of goods or services, hence creating new opportunities and therefore enhancing the efficiency of resource allocation. At a micro level, this would lead to faster growth and diversification of the economy (Matambalya and Wolf, 2001). Moreover ICT could enable small firms to be more innovative in the way business processes are operated and create value that may have an impact on the business environment. This can be related to Taylor et al, (2005) who asserts that entrepreneurship [and of course when combined with marketing concepts] is the proactive identification and exploration of opportunities of acquiring and retaining profitable customers through innovative approach to risk management, resource leveraging and value creation. From this assertion, we can argue that entrepreneurship is highly related to marketing as value creation is related to customers focus. In small firms with constrained resources, entrepreneurship can be best be done in an innovative way by using ICT that will improve internal efficiency significantly in order to become competitive in the global market. Several firms’ specific characteristics such as managerial skills, adoption of ICT, size and age of firms as well as location-specific factors may have significant implications on the firm-level technical efficiency. Hence efficiency gain could come from an improvement in managerial skills and organization learning, and the investment in ICT (Matambalya and Wolf, 2001). Although ICT adoptions by small firms appear to be an expensive strategy, it makes some significant contributions to business 257

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development and local economic growth. Policy implications These results show how these enterprises are struggling to adopt and use communication and information technologies to adapt their competitive capacity in the local and global markets. It is proposed here that among other solutions, one ways to improve Tanzania’s small businesses` competitive position should include strategies to use business policies to stimulate participation in the international market through communication and information technologies by offering an effective infrastructure, training and, by introducing the more affordable means of acquiring ICT equipment for small businesses. Currently, institutions are very weak and poorly positioned to offer such much-needed services to local firms. Future Research This initial study has elicited a number of ICT-Marketing related issues among local businesses. However, more should be done to study the roles of ICT on marketing using specific measures. This is due to the fact that: •

•

Not all SMEs need the use of ICT; therefore, there could be many other factors that can explain the poor marketing activities of small businesses. The business culture does not support the use of ICT in Marketing. A study into the cultural factors in relation to ICT usage could offer more insight on this.

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Carson, S and Coviello, N. (1996) Qualitative Research Issues at the Marketing/Entrepreneurship Interface; Marketing Intelligence & Planning, Vol.14 (6) 51 – 58. Chen, S (2004) Strategic Management of e-business, 2nd ed. British Library Cook, J (2005) Enhancing ICT Connectivity as a Strategic Instrument for Effective Rural Development ICT diagnosis report in Tanzania Covin., J.G. and Slevin, D.P.(1991) A Conceptual model of Entrepreneurship as a Firm Behavior, EntrepreneurshipTtheory and Practices Vol.16, pp 7-25 Colvin, J.G. and Slevin, D.P.(1998) Strategic Management of Small Firms in Hostile and Benign Envinronments, Strategic Management Journal, Vol.10 pp.75-87 Deshpande, R. and Zatman,G.(1982) Factors affecting the Use of Market Reseach Information: A Path Analysis, Journal of Marketing Research, Vol. 19, pp.14-31 Fillis, I., (2001) Small firm Internationalization; an Investigative survey and future Research Direction, Management Decision Vol. 39 (9) pg 767 – 783 Hills, J.D. Carson, Cromie, S. and McGowan, P. (1995) Marketing and Entrepreneurship in SME’s: An Innovative Approach. Prentice Hall. ITU (2002) world Telecommunication Development Report 2002 Jaworski, B. J.,, Kohli, A. K. (1993), ''Market Orientation: Antecedents and Consequences'', Journal of Marketing, Vol.57, July, 52-70. Jennings, P.L and G. Beaver (1995). The managerial Dimensions of Small Business Failure, Journal of Strategic Change, Vol. 4 (4) (July – August), 185 – 200. Kaliba, A.R (2003) Watersupply Projects as Entry Points for Building Information and Communication Technologies Centers in Rular Areas of Central Tanzania, Tanzanet Journal, Vol. 4 (1) pp 13-20 Kohli, A. and Jaworski, B. (1990). Market Orientation: the Construct, Research Proposition and Managerial Implications, Journal of Marketing, April, Vol. 54 (April), pp. 1 – 18. Kottler, P., Armstrong, G., Saunders, J. and Wong, V. (1999) Principle of marketing, 2nd edition, prentice Hall Europe Kyriazopolous, P., Carter, S., and Tzokas, N. (2001) Marketing and Entrepreneurial Orientation in Small Firms; Enterprise and Innovation Management Studies, Vol. 2 (1) pp 19 – 33 259

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Mbamba, U.O.L (2004) Electronic Commence in the Tanzania Context; Implications for Small and Medium Enterprise in Developing countries, in E.S Kaijage and L.J.Mwaipopo; Entrepreneurship Research and Development in Africa; Achievement Challenges and future prospects Mkuki na Nyota Publishers. Miles M.P and Arnold D. (1991) the relationship between Marketing Orientation and Entrepreneurial Orientation, Entrepreneurship Theory and Practice, Vol. 15 (4) summer pp 49 – 65 Mutambalya, F and Wolf, S (2001) the Role of ICT for the Performance of SMEs in East Africa Emperical Evidence from Kenya and Tanzania Discussion Papers on Development Policy Paper No. 42, ZEF Bonn Mwaipopo, L.J (2004) Business forecasting by SMEs in Tanzania Current practice and future Research Directions; In Entrepreneurship Research and Development in Africa Achievements, Challenges and future prospects; Mkuki and Nyota Publishers Ltd. Dar es salaam, Tanzania. Narver, J.C., and Slater, S.F., (1990) the effect of a market orientation on business profitability, Journal of marketing Vol. 54, 00 20 – 35 Nawe, J. (2000) Using Information and Communication Technologies in Tanzania; Responses of Information professionals, Information Development Vol. 16 (24) Ng, H.P.,Keli, H.,T,Nguyer, T.T.M. (2006) The effect of entrepreneurial orientation and marketing information on the performance of SME’s, Journal of Business venturing Niehinger, O (2003) Rural ICT Utilization in Tanzania: Empirical Findings from Kasulu, Magu and Sengerema, Institute of African Affairs OECD (2002) Measuring the Information Economy, Paris. Olomi D.R and Rutashobya, L. (1999) African entrepreneurship and Small Business development: A Conceptual framework; in D.R.Olomi and L.K. Rutashoya: African Entrepreneurship and Small business development, DUP, Dar-es salaam, Tanzania. Olomi, D.R. (2001) Olomi, D.R. (1999) “An Exploratory Study of a Typology of Owner-Managers in Tanzanian Food Processing Industry”, Business Management Review, 6.

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Root, F. (1994) Entry Strategy for International Markets, Lexington Books, New York Scarborough, N.M. and Zimmerer, T.W. (2008) Essentials of Entrepreneurship and Small Business Management, Pearson; PrenticeHall. Stoke. D (1995) Small Business Managements: An Active – Learning Approach, D.P Publication Ltd, London SMEs Policy (2003) Tanzania Small and Medium Enterprises Policy,URT. Taylor, N., Padamore, J. and Simpson, M. (2005) Marketing in SMEs. Discussion paper No.2005.08. Sheffield University Management School. UNDP (2001a) Human Development Report 2001, United National Development Program, New York. URT (2003) Ministry of Communication and Transport National Information and Communication Technologies Policies URT (2005) Information and Communication Technology Policy, URT. USAID (2005) Tanzania Economic Performance Assessment August 2005 Wangwe, S. (2001) Economic Reforms and Poverty Alleviation in Tanzania .Economic and Social Research Foundation (ESRF). Wolf, S (2001) Determinants and Impacts of ICT for Africa’s SMEs; Implications for Rural South Africa Centre for Development Research (ZEF Bonn) WSIS (2003) World Summit on the Information society (WSIS) Declaration Principle, Geneva (December, 2003)

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Chapter 12 Conclusions: Theories and Practices

Imani Silver Kyaruzi Introduction The aim of this chapter is to summarise the key issues that were identified in this volume. Most of the contributors have argued that a full scale economic growth, liberalization and institutionalization across the African economies, though inevitable, are unlikely to be achieved overnight. We still have a long way to go. The conclusions to this volume have noted the following key issues; reasons for failure of African institutions, the states` response to globalisation pressures and the relevance of local economic growth theories. Failure of institutions There are a number of reasons for the failure of businesses and institutional policies in Africa and other developing countries. According to the report of the Economic Commission for Africa (2000:2), most African policy makers have “…appropriated various theories (almost all of them formulated elsewhere) in the process of designing development policies in the past. In addition to all kinds of self inflicted problems … [and that].the weak economic performance of the region is therefore connected to the policies pursued during these periods which, in turn, were at least partially informed by these theories”.

In sum, there is a lack of long term self-sustaining growth initiatives. As Taylor and Bathelt (2002:93) suggest, self-sustaining growth is important and “…is built on the local social capital created by local co-operation and, it is this learning that in turn endows places with international competitiveness and constantly improving levels of productivity”. Self-sustained growth could only be achieved through 263

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mechanisms of promoting the formation of competitive businesses and inter-firm co-operation starting at a very local level and going upwards. It is recommended here that the initiation of such sustainable growth initiatives should be accompanied by effective local development policies that reflect the present situation, a task that most imported economic development models have failed to highlight. Based on the above account of African economic transition, institutionalisation and liberalisation, Africa cannot continue to rely on foreign models of local growth for its development. As indicated in Kofi (2004) previous models, especially models based on neoclassical paradigms, have failed because they do not recognize the “agrarian base” of most African economies and instead try to implement capitalist models of development. By adopting this conceptualisation, rather than being rushed, a careful consideration should be given to those people to whom the private sector is a new phenomenon. Rather than abandoning agriculture, the agricultural activities could also play a significant role in economic development through agribusiness industries. Institutions and policies should seek to create the environment for both sectors. The responses of African States in the globalisation era Many African states have responded differently. However, the effects of globalisation is seen in both countries – those who are exposed and those who are not. Some authors have questioned the role of the state in globalisation (Stiglitz, 2002). For instance, Porter’s stresses the importance of local governments (1990:19), particularly in developing countries. Porter (1990) claims that, “…competitive advantage is created and sustained through a highly localized process. Differences in national economic structures, values, cultures, institutions, and histories contribute profoundly to competitive success. The role of the home nation seems to be as strong as or stronger than ever. While globalization of competition might appear to make the nation less important, instead, it seems to make it more so” (p.19).

Behrman (2003:109) argues that, “globalisation has created a new 264

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economic order, extending beyond traditional modes of capitalism”. If applied to Africa, these new modes require re-alignment of establishments of the institutions of “civil society” to avoid lock ins and lock outs. The marginalisation of the Third World (Brown, 2003:322) and trade collusion in the western world (Williams, 2003:340) suggests that a global consensus on globalisation is still a long way off. Local institutions, however, do not seem to identify the obvious. For TNCs, although it is suggested that, there is “no single business case” due to variations in company types, exposure, sector, markets and location (Davies, 2003), there are some common elements that could be shared between TNCs, local firms and communities. Upgrading (rather than changing which is a long process) the moral ecology of both individuals and institutions could make what Dunning (2003:356) calls “globalisation good”. To improve the relationship between TNCs and local SMEs in Africa, we propose that, the government should initiate workshops where the two parties are brought together to explore the best way forward. One of the proposed ways of overcoming resentment from local firms is to develop working relationships i.e. subcontracting and outsourcing. In this way, local SMEs will not perish but rather benefit from the existence of TNCs i.e. knowledge transfer. In the case of business location, TNCs will continue to displace local businesses from urban areas where the infrastructure is well laid out for business development, unless there is government intervention to force some large businesses to locate in neighbouring regions. Earlier views by Cantwell and Piscitello (2005:2) suggest that, “The existing knowledge base of a region plays an important role in the decisions of the largest foreign owned firms as to where to locate their technological activities (Cantwell and Piscitello, 2005:2). Although such views apply to hi-tech firms and, European regions in particular, most TNCs across Africa continue to cluster and locate in the city where knowledge and other international networks and sources are concentrated. Institutions have been slower to allocate resources evenly across the nations. Local Economic growth theories Finally, theories presented in this volume appear to be in favour of local economic growth through an establishment of effective institutions. What appears to be missing is an interpretation of these 265

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theories to match the local economic context. The local economic growth observed in Western countries came as a result of an adoption of the private sector as a driving economic force, thus allowing for full integration in the market-led economy. In contrast, Tanzania’s system is still in transition and policies still embrace, in part, a failed socialist ideology. However, the benefits and outcomes of firms in Africa, as in other developing countries, are not clear. Also, evidences from empirical data suggest that business support institutions in Africa are underfunded, thus failing to achieve their objectives. The financing of local institutions is not well defined. A preferred alternative may be for the private sector organisations to establish the sources of incubation sponsorship, for example, the public funding from the government, private and non-profit sectors, local and regional governments, universities, chambers of commerce, science parks or foreign donors. Theories of local economic growth and entrepreneurship should be focusing on areas that are not targeting the majority of the African population (for example those based in rural areas). In this case agribusiness support institutions and SME-university research links are necessary to address the missing link between theories and practice (the difference between what for and what is required). To address some of the weaknesses of the existing theories, when translated into the African context, appropriate theories should always focus on local resources, human capital and the countries’ specific needs. Finally, the frameworks and recommendations developed in this volume not only pointed towards reshaping the African institutions, but they have also introduced some of the models that appeal to policy makers and academics. We do not seek to claim to have all definitive solutions, but since this is an ongoing search for the best ways of stimulating African local growth, we are going to leave the door open for more debates.

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References Barthelt & Taylor M. (2002) ‘Clusters, Power and Place: Inequality and local Growth in Time-Space’, Geografiska Annaler, vol. 84, no. 2, pp. 93-109. Cantwell, J. A. and Piscitello, L. (2005) “Recent location of foreignowned R&D activities by large multinational corporations in the European regions: the role of Spillovers and externalities", Regional Studies, Vol. 39, No. 1, pp. 1-16. Davis, J C (2005). Addressing poverty through local economic and enterprise development: A review of conceptual approaches and practice. Natural Resource Institute. Working Paper 3. February 2005 Dunning, J.H. (ed)(2003) Making Globalization Good: The Moral Challenges of Global Capitalism, Oxford, Oxford University Press. Kofi, T (2003). An Alternative Strategy for Africa’s Sustainable Economic Development: The Case for a Non-NEPAD Approach. May 14,2003 Stigliz, J.E (2003) Globalization and growth in emerging markets and the New Economy. Journal of Policy Modelling 25 (2003) 505–524

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Index 217, 222, 223, 227, 228, 230, 239, 240, 241 Dar es Salaam, xiv, 13, 14, 29, 39, 42, 50, 52, 53, 55, 56, 106, 107, 120, 189, 199, 253 Dar es Salaam Merchant Chamber, 53 Development Policy-SIDP, 22

A Accelerated Growth Strategy, 78 African Development Bank, 4, 47, 92, 242 African Development Fund, 94, 97, 101 Agence d’Amenagement et de Promotion des Sites Industriels, 94 Agence de Promotion de l’Investissement et des Grands Travaux, 94 Arusha, xiv, 52, 107, 113, 116, 117, 192, 199, 205, 206, 207, 253 as UNIDO, 4, 18

E Economic Commission for Africa, 134, 143, 162, 165, 170, 171, 263 Economic Community of West African States, 75 Economic Partnership Agreements, 94, 98 embezzlement, 47 Entrepreneurial Marketing, v, xiv, xvii, 245, 256 entrepreneurship, v, vi, viii, ix, x, xi, xiii, 1, 2, 4, 5, 8, 12, 13, 17, 18, 19, 21, 22, 30, 42, 43, 48, 52, 54, 55, 56, 71, 87, 89, 131, 132, 149, 159, 174, 219, 231, 235, 245, 246, 249, 250, 257, 260, 266 Entrepreneurship Marketing, 247 exogenous barriers, 64

B Burkina Faso, 75, 162 Business Registration and Licensing Authority, 103 C Cape Verde, 162 Central Bank of Nigeria, 68, 125, 137, 145 Christian, 81, 172 Code of Civil Commercial and Administrative Obligation, 90 Convention on the Elimination of All Forms of Discrimination Against Women, 90 copycat entrepreneurism, 52

F Female Genital Mutilations, 91 FINIDA, 50 Foreign Direct Investments, xii, xvii, 1, 191, 213 France, 62, 86 G

D

General Agreement on Trade in Services, 179 Ghana, 89, 145, 171, 212, 238, 241

Dakar, v, xiii, xvii, 75, 81, 82, 84, 87, 88, 91, 93, 95, 96, 97, 99, 100, 101,

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N

gross domestic product, 57, 107 Gross Domestic Product, 194 Guinea–Bissau, 162

National Credit Guarantee Fund, 134 National Micro-Finance Policy, 45 National Reproductive Programme, 91 National Sustainable Industry Policy, 45 New African Initiative, 78 New African Leadership Group, 79 New Millennium for Africa Recovery Programme, 78 New Partnership for Africa Development, 78, 79 NGOs, xii, 79, 93, 151, 165, 166, 167, 174, 226, 227 Ngowi, Honest Prosper, iv, v, x, xii, 102, 120, 191, 206, 213 Nigeria, iv, vi, xi, xvi, 68, 78, 89, 97, 123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 137, 138, 139, 141, 142, 143, 144, 145, 146, 151, 166, 169, 172, 173, 174, 241 Non-Formal Education, 83 NORAD, 50

H Hales, Ahoefa Chantal, iv, v, x, xiii, 71, 217 I ICT, xiv, xvii, 39, 50, 78, 79, 178, 180, 181, 182, 183, 185, 245, 247, 248, 249, 250, 251, 252, 254, 255, 256, 257, 258, 259, 260, 261 Innovation-Related models, 61 International Financial Institutions, 77 International Monetary Fund, 73, 100, 125, 135 internationalisation process, ix, 59, 64 L Latin America, x, 6, 13, 142, 160, 172, 174 Less Developed Countries, 11, 57 M

O

market economy, 17, 89, 110, 114, 206, 207 market liberalization, 22, 179 Mauritania, 162 micro-financial institutions, 103, 115 millennium objective goals, 80 Mobile System of Communication, 133 Multinational Companies, 57 Muslim, 81, 85 Mutual Saving and Credit Association, 229 Mwanza, xiv, 107, 199, 253

Obokoh, Lawrence Ogechukwu, iv, vi, ix, xi, 57, 123 Organization of Economic Cooperation Development, 245 Oribabor, Patrick Ehi, iv, vi, ix, 57 Osarenkhoe, Aihie, iv, v, xi, 149, 150, 151, 153, 154, 155, 157, 158, 159, 161, 165, 167, 173 P Pilli, Charles Bekoni Russel, iv, v, xiv, 245 Poverty Reduction Strategy, 73, 76, 77, 81, 99

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S

Tanzania., v, ix, xiii, xiv, 12, 14, 18, 20, 27, 39, 43, 44, 55, 56, 102, 106, 107, 112, 113, 115, 117, 120, 177, 178, 180, 187, 188, 189, 192, 199, 202, 205, 206, 207, 208, 210, 213, 242, 247, 252, 253, 255, 260 Tanzanian Chamber of Commerce, Industries and Agriculture, 46 Tax Identification Number, 103 Telecommunication Regulatory Authority, 251 the collectivization, 21 Transparency International’s Corruption Perceptions Index, 95

Salawu, Rafiu Oyesola, iv, vi, ix, 57 Senegal, v, x, xiii, xvi, xvii, 71, 72, 73, 74, 75, 76, 77, 78, 80, 81, 82, 84, 85, 87, 88, 89, 90, 93, 94, 95, 97, 98, 99, 100, 101, 217, 222, 223, 224, 226, 227, 231, 238, 239, 240, 241, 242, 243 Shinyanga, 199 SIDA, 50 SMEs, v, ix, xi, 3, 9, 10, 17, 18, 19, 22, 23, 30, 36, 37, 38, 39, 41, 42, 43, 44, 46, 47, 51, 52, 55, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 71, 89, 93, 123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 144, 145, 185, 186, 218, 220, 226, 238, 240, 246, 247, 248, 249, 256, 257, 258, 260, 261, 265 Smith, Adam, 201 socialist model of economic development, 20 South Africa, 38, 78, 172, 178, 213, 261 Southern Africa Development Coordination Conference, 4 Structural Adjustment Programmes, 1, 8 Switzerland, 62, 145, 171

U Ujaama, 46 U-model, 61 United Nations Economic Commission for Europe, 57, 68 United States, 62 Uppsala model, 61 USAID, 81, 250, 261 W West Africa, v, x, 71, 92, 99, 144, 162, 227 World Bank, 11, 12, 73, 74, 75, 76, 77, 81, 92, 98, 99, 100, 107, 120, 125, 135, 139, 162, 166, 169, 173 World Employment Programme, 159

T Tanzania Investment Centre, 209 Tanzania Private Sector Foundation, 48 Tanzania Revenue Authority, 103, 117, 210

Z Zanzibar, 192, 206, 207

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