Abstract

Interest in small businesses in fragile states has grown and is now large: Small and medium-sized enterprises (SMEs) are not only recognised for their ability to provide jobs, incomes and much-needed products and services in places where large or foreign businesses are scarce. The present focus on SMEs as a means to bring about development goes beyond their positive economic contribution and stresses their role in building social cohesion, fostering state legitimacy and restoring community security. However, the assumptions underpinning this policy discourse lack solid empirical evidence. The aim of this study therefore is to help fill that gap. Drawing on the experience from the Netherlands Private Sector Investment Programme for fragile states and based on interviews with 50 entrepreneurs of small firms in Afghanistan, Pakistan, the Democratic  Republic of Congo, Sierra Leone and South Sudan this report presents firsthand evidence on how local entrepreneurs perceive, experience and deal with fragility.

A core finding of the study points to the fact that the success of many SMEs in fragile settings hinges on their ability to rely on personal and social networks as well as on arrangements with non-state governance actors (e.g. traditional leaders or insurgent groups) rather than on formal institutions. This inevitably affects the way these businesses foster or undermine social cohesion and state legitimacy. A second finding of this study is that, although equipped and eager to grow, many SMEs operating in places of insecurity and high risk deliberately deploy coping strategies rather than realising their growth potential.  A third finding combines elements of the two earlier conclusions: If the structural drivers of business constraints in fragile contexts are ignored and eventually reinforced by conventional donor interventions, the latter risk reproducing and solidifying the very same structures that cause long-term instability and preclude firms from shifting from a focus on short-term resilience to longer-term growth strategies.

Discussing these findings the study proposes critical elements for SME support strategies that strive to assist SMEs with running their businesses despite insecurity and risks while strengthening their broader stabilising effects.

Acknowledgement

This research project draws on two sets of data, collected by the Rijksdienst voor Ondernemend Nederland (RVO) and OnFrontiers. We are grateful for both partners’ flexibility and readiness to accommodate and handle qualitative research questions that fall outside the more commonly used SME surveys. RVO staff not only shared their own data and valuable information to broaden the research’s evidence base, they also dedicated time to reflect upon their experience with the implementation of the Netherlands funded Private Sector Investment programme in ten fragile states and discussed the findings of the present analysis with the aim to distil considerations for future SME support practices. Martijn Moonen, RVO’s fragile states coordinator, has been an invaluable guarantor of that cooperation. His firm conviction of the relevance of the research questions and his sedulous commitment to improve RVO’s work in the most challenging environments made him act as a tough sounding board throughout the process that led to this report.

The research further draws on primary data gathered by the consultancy firm OnFrontiers. With a well-established network of entrepreneurs and experts on the ground, their team proved very apt at translating the mostly qualitative research questions into the reality of local SMEs. We are indebted to both organisations and to all these entrepreneurs who made time available in support of the research that underpins this report. Clingendael colleagues Steven Schoofs, Grégory Chauzal and Rosan Smits provided helpful comments and quality assurance. Finally, thanks for copy-editing go to Frances Ellery and for typesetting to Textcetera. The contents of this study remain the responsibility of the authors.