The vast majority of SMEs interviewed think of conflict primarily in terms of direct physical threats to personnel and assets. The underlying causes of fragility and the legacies of (in many cases recurrent) conflict appear to be institutionalised and to shape an environment of general uncertainty. As such, they are generally perceived as regular circumstances, rather than a state of emergency clearly distinguishable from non-fragile settings.
However, when asked about their daily challenges, entrepreneurs offer a wealth of anecdotes that contain elements generally associated with fragility, including the role of mistrust and social relations and the interaction with competing systems of power.
The type and relative significance of business constraints identified in the OnFrontiers and RVO surveys largely coincide with the SME barriers acknowledged in conventional business environment reports such as the World Bank’s Doing Business reports. The main bottlenecks are insecurity, deficient transport infrastructure and lack of energy supply.
Qualitative (anecdotal) evidence confirms the argument in recent literature that business behaviour is largely shaped by non-formal institutions, including social networks and non-state governance structures. Public authorities tend to collude with these informal structures.
A significant share of surveyed businesses (notably in Afghanistan, Pakistan and South Sudan) has developed strategies of resilience rather than growth in order to keep operating despite insecurity and unpredictability. Only in less insecure and more predictable settings (Sierra Leone and Kinshasa in the DRC) did some interviewed businesses describe clear growth strategies.
Many entrepreneurs rely on (clan- or ethnicity-based) social networks to cope with and overcome issues of insecurity and access. Having a friend in the right place determines whether, and at what price and pace, an entrepreneur obtains permits, receives capital, or accesses raw material. Conversely, a businessman’s loyalty to these networks is expressed through the provision of employment opportunities, access to basic services such as health care, and charity.
Most interviewees engage with non-state actors and governance structures to be able to continue operations. This often involves more or less voluntary informal payments to both state and non-state actors in exchange for protection, safe passage, or access to resources or services such as electricity. Other forms of loyalty towards public authorities include offering company shares to local authorities.
How do SMEs perceive the conflict-affected environment in which they operate and to what extent do they feel affected by and (un)able to influence this environment? By answering these questions on the basis of two sets of data, the objective is to fill a twofold gap. First, the subsequent analysis primarily draws directly on the perceptions of small firms, interviewed for this purpose in the context of their business operations and with a particular focus on qualitative information. Perceptions of local entrepreneurs matter because, whether accurate or not, they are critical in understanding the interaction between the entrepreneurs and the broader context.
Second, what further distinguishes the following information from other business surveys is the focus on the social and political structures that are likely to drive the more technical and commonly identified constraints. The analysis is driven by the hypothesis that understanding these structural underlying causes is critical for the development of realistic support strategies that start from where the entrepreneur actually stands.
The chapter will offer some qualitative insights into how SMEs and local experts perceive conflict and fragility dynamics (3.1), what they see as the major constraints on doing business in such conflict-affected or fragile contexts (3.2) and, finally, which strategies they adopt or see as most suitable in order to handle those constraints (3.3). The two fragility determinants introduced in the previous chapter – social fragmentation and hybrid governance – will be used as analytical tools to explore the underlying causes and connections.
Although the regions covered in this study differ greatly in type, intensity and legacy of conflict, the evidence reveals some patterns in SMEs’ perceptions of conflict and fragility and in the business interaction with acute or latent conflict dynamics.
Generally, when asked about conflict and fragility, SMEs think of overt violent confrontation and armed fighting. In fact, the concept of fragility currently so much in vogue with policy makers does not resonate with most entrepreneurs. What policy makers commonly agree to be fragile or conflict-affected for most entrepreneurs is just the given reality, in which they happen to operate and, in some cases, have been operating for many years. In that sense, their replies suggest that underlying factors of conflict have been institutionalised, both in formal and informal arrangements that constitute normal circumstances, rather than a state of emergency clearly distinguishable from non-fragile settings.
This becomes clear in the attempt of various respondents to localise and thus limit the conflict to a particular (remote) locality (e.g. eastern DRC) or to the distant past (e.g. the invasion of Iraq in 2003). For example, an entrepreneur in animal husbandry with plans to establish a joint venture in Kinshasa argues: “The distance between Goma, the main city in eastern DRC, and the capital Kinshasa is the same as between The Netherlands and Romania. Would you be afraid to do business in The Netherlands when there is trouble in Romania? Certainly not.” This response illustrates that, aside from the physical distance between the centre and the periphery, the perceived – and to a certain extent de facto – absence of Kinshasa in eastern DRC attests to a lack of statehood or state legitimacy, which is one of the inherent challenges faced by entrepreneurs in that region.
Further illustrating the institutionalised character of fragility and conflict is the finding that corruption and insecurity are described by a majority of respondents as part of their interaction with the officials and formal state institutions that are meant to make society less fragile. More generally, an interviewee in Afghanistan explains conflict dynamics in his country as a result of an ongoing struggle for political power.
Eighty per cent of interviewees feel their business is (somehow or heavily) affected by operating in a conflict-affected country. First and foremost, almost every entrepreneur across the sample has experienced conflict as a direct physical threat. Illustrations range from–kidnappings, loss of assets and reprisals against communities hosting militias to terrorist attacks. Some business owners relate incidents of relocation and abandoned expansion plans due to immanent security threats to personnel and assets. Entrepreneurs in South Sudan, for instance, report that the withdrawal of international organisations and the evacuation of foreigners have robbed many businesses of their customer base and/or employees. Interestingly, in a way these businesses had at first been affected positively by conflict, as it generated an influx of foreigners with their own demand and purchasing power. Security threats to assets and staff are further reported to put a strain on transport of goods and staff movement. For instance, in the Palestinian Territories, entrepreneurs report having to struggle significantly because of movement restrictions, emphasising how the closedown of border crossings seriously obstructs the import and export of their goods.
Second, many entrepreneurs stress that the way they run their business is heavily influenced by political instability and the unpredictability of the future. Several SMEs in Pakistan and Afghanistan blame the absence of a stable political climate for the challenges their businesses have to cope with. Conversely, an entrepreneur from Sierra Leone confirms that the improved political climate in recent years is the main reason for a more positive business outlook for his firm. Some entrepreneurs and local advisers refer to the legacies of conflict they feel affect their business operations. A local expert in Sierra Leone stresses the large-scale displacement of people, the destruction of livelihoods and therefore limited purchasing power, and the lack of qualified and skilled people due to a disrupted education system. Along the same line, a local expert from the DRC links SMEs’ lack of access to finance to a general culture of mistrust, disrupted information networks and the absence of legal enforcement as a long-term consequence of conflict. The presence of the international aid community is also repeatedly mentioned by entrepreneurs and local advisers as a long-term characteristic of post-conflict markets, shaping both demand and prices in certain market segments served by local SMEs.
PSI+ managers confirm and complement the perceptions of SMEs. Comparing the conflict-affected business reality with the circumstances businesses face in non-fragile settings, these experts identify three features that differentiate fragile contexts from non-fragile ones:
The fact that personal connections matter more than formal permits;
A high level of political instability and uncertainty, associated with weak formal institutions;
Lack of security and/or quickly changing levels of security.
While the two latter features coincide with the ways entrepreneurs see their economic activities being affected by conflict, the first issue was not identified as a constraining factor caused or reinforced by conflict and fragility. Instead, as we will see in the final section of this chapter, the significance of personal connections features prominently in SMEs’ coping strategies, a finding that again underlines the extent to which fragility has become part of entrepreneurs’ day-to-day reality.
The link between business and the environment is not unilateral. Whether entrepreneurs act in reaction to the constraints and opportunities they perceive or whether they operate in anticipation (or ignorance) of the risks and possibilities that are likely to occur, their operations also have an impact on the broader economic, social and political environment. Any business strategy will therefore affect existing power balances and struggles.
To shed some light on the multiple ways in which SMEs affect their surroundings, the OnFrontiers and RVO surveys explore firms’ coping strategies and their priorities for potential external assistance.
In general, direct security threats and long-term uncertainty are two key factors shaping small firms’ behaviour in fragile settings. In response to direct security threats, SMEs across all countries confirmed significant investments in security measures, e.g. by equipping production sites and warehouses with surveillance cameras, alarms and security guards (Pakistan, South Sudan) or even using armoured vehicles (DRC). How long-term uncertainty shapes SMEs’ strategies depends on the degree of optimism about the general business outlook. Where the level of conflict is expected to deteriorate over the next three years (e.g. Afghanistan, Pakistan and, to a lesser extent, South Sudan), economic (long-term) efficiency takes a backseat and entrepreneurs’ coping mechanisms are aimed primarily at resilience. In places where there is more confidence in the future, entrepreneurs take a less risk-adverse, more adventurous stance.
Overall, the following traits of business behaviour can be distilled from all the interviews.
“We need to plan for distribution routes which are less prone to conflict; open stores where the situation is likely to remain stable. However, all this increases costs.” (Interview with business owner in Pakistan)
Many respondents in Pakistan, Afghanistan and South Sudan report their operations to be on hold due to an uncertain future. Whether waiting for the outcome of contested elections or the impact of the withdrawal of international troops (Afghanistan), whether in expectation of some progress in the ongoing peace talks and, hence, a return of evacuated employees (South Sudan), or in anxiety about follow-up actions in response to recent insurgency (Pakistan), most entrepreneurs in these countries have adopted a “wait and see” attitude and kept a low-profile, reluctant to plan for the future before the political situation improves. Avoidance of further losses and unnecessary risk appears to be the guiding principle in order to keep operations running.
Resulting coping strategies include the reduction of inventory and in-bulk purchases in anticipation of theft, sudden drops in customer demand or arbitrary confiscations. Another element of resilient business behaviour is the choice to serve only local markets in the immediate vicinity rather than exploring potentially more lucrative markets further away, as the latter would bring additional risks arising from unsafe distribution routes and an uncertain customer base. A further common risk-averse strategy consists of favouring safe locations over strategically better-situated areas. Such preferences are reflected in the selection of warehouses, raw material providers, or points of sale. All of these measures were explicitly described as economically less efficient, and coming at the expense of economies of scale, increased transaction costs and missed opportunities in terms of un-served additional markets.
Given that most of the firms interviewed in these countries have directly or indirectly experienced interruptions to their business operations, their appetite for risk is generally low. The entrepreneurs interviewed seem to consciously choose a strategy of resilience rather than aspiring to growth.
By contrast, entrepreneurs in Sierra Leone and the DRC, where the general business outlook among interviewees was more optimistic, describe a coping strategy that aims at the highest possible degree of flexibility to be able to adjust to shifting markets. Examples include the purchase of raw materials in large quantities at minimum costs and the diversification of suppliers to avoid dependency on regions that might be hit by conflict.
“There is a general sense of belonging and people are more likely to go to businesses that are from the same locality as them.” (Interview with local adviser in Pakistan)
The significance of business-community relations and businesses’ reliance on family, clanship and ethnicity was testified throughout the interviews and seems to be of particular importance in contexts marked by social fragmentation and mistrust. Both features influence SMEs’ strategic choices with regard to employment, investment location, sourcing of inputs, business linkages and transport routes.
Illustrating the importance of family relations, an Afghan paint maker reports that he is only able to operate in a highly contested region because he can rely on the provision of chalk from a mine owned by his brother’s family-in-law. In the same vein, an interviewee in South Sudan concludes that the “most important thing locally is whether you have a relative who can give you capital (…) It’s all about connections, about having the right uncle in the right place.” Along the same lines, a logistics company says their main challenge is their lack of tribal ties to assure safe passage in many of the areas they need to cross. In Pakistan, SMEs often operate in clusters that are based along ethnic lines. Whereas in the past such clusters used to cut across ethnic lines, current ethnic conflict and local extortion were reported to have caused the breakdown of some clusters along ethnic lines, destroying its competitiveness.
Beyond ethnic networks, a positive relationship with the host community is also critical for SMEs to operate in highly fragmented markets. For example, in Pakistan an interviewee explains that there is a strong sense of belonging which prompts customers to prefer engaging with businesses owned by people from the same locality. This rule of thumb appears to affect SMEs particularly, and applies to a lesser extent to larger businesses. A businessman in Afghanistan confirms that business expansion into a new locality entails an extra investment in trust building with the community; adhering to local norms of behaviour may not suffice. Direct benefits in terms of employment for the local population (often requiring additional investment in training) and additional favours such as access to health facilities will be expected from a new business before community members consider becoming customers.
In response, entrepreneurs in the Palestinian Territories and Afghanistan stress that hiring locals has proved a successful risk mitigation strategy, even though it generally requires additional investment in training. As well as creating employment opportunities for the local population, SMEs report undertaking special efforts to gain a social licence to operate in a given locality. Examples include giving discounts to customers “to make them loyal” (DRC) and distributing material benefits and charity (Afghanistan). In a broader sense, business strategies (notably in marketing) that fail to comply with religious and cultural values and norms in ethnically or religiously biased societies will trigger suspicion and ultimately rejection, a fact that can become a constraint or a source of innovation.
Finally, anecdotes from the Gaza Strip reveal how good personal connections with suppliers or customers in Israel can significantly mitigate burdensome restrictions on movement across the border with Israel. This example illustrates that personal connections and informal arrangements rather than institutional reforms are seen by entrepreneurs as a means to overcome a discouraging business environment.
“To operate, businesses have grown immune to organised crime and corruption and treat it as a cost associated with operation. The cost of loss of assets or cost of extortion money is included in the cost of business.” (Comment by data collector in Pakistan)
Whereas a significant proportion of respondents in South Sudan and the DRC does not list corruption as an obstacle to doing business, entrepreneurs and advisers in both countries readily admit to “paying bribes” and stress the need to “establish good connections with public officials” as a prerequisite for doing business. Rather than being seen as a problem, corruptive practices are primarily perceived and presented by entrepreneurs as a solution, a means to overcome security threats and obtain services that dysfunctional formal institutions are unable or unwilling to provide. Only businesses that cater mainly for the international community (e.g. a logistics company working primarily for the International Security Assistance Force in Afghanistan) are thought to be in a position to refrain from working with a corrupt government given their financial interest “to keep a clean image vis-à-vis international donors”. The reality of most SMEs demands greater readiness to compromise, as they simply lack the political clout to oppose such common practice. Many entrepreneurs across all countries report that they commonly experience extortion by both state officials and criminals, to the point that average extortion fees are factored into production costs. In the case of business expansion, an entrepreneur argues that only by inviting the governor of the ‘new’ province to become a minor shareholder had the business secured his support. At odds with this common reality, and mindful of the formal request for adherence to certain performance standards, most applicants for the PSI+ grant assert that they have a zero-tolerance approach to corruptive practices.
SMEs’ readiness to bribe public officials also applies to competing non-state authorities such as the Taliban in Afghanistan and Pakistan and traditional chiefs in South Sudan. For instance, in order to start operations, a chalk ore company in Afghanistan explains that it has to follow three separate procedures involving a permit from Kabul, a social licence to operate from the local community (e.g. in the form of employment guarantees, free access to medical care) and a deal with the local Taliban commander. Although they are a heavy bureaucratic and financial burden for the business, such multi-layered arrangements enable the entrepreneur to operate in the here and now. However, they leave the business in a vulnerable position in the medium to long term. A shift in power can close the area down and nullify the agreements, leaving the entrepreneur with obsolete hardware.
In many cases it is the immediate need for security of assets or personnel that prompts SMEs to seek protection arrangements. This often means that they end up supporting patronage networks – either by directly paying informal security taxes to state officials or competing non-state authorities, or by paying extortion fees to local gangs/insurgents who are likely to be linked either to government or to a contesting entity. In doing so, SMEs obtain security provision in the short term, while reinforcing structures of long-term uncertainty.
When asked about the kind of support SMEs would welcome as most useful, access to finance and training of employees are mentioned most often. Strikingly, these two areas of support do not rank highest among the business bottlenecks identified by interviewees. But they do match quite closely with what donors and their development implementers usually have on offer. Another explanation for the mismatch between constraints and expected support lies in the common assumption that governance and infrastructure concerns would need to be addressed by the respective government, not by a donor or NGO.
Source: Aggragated data, OnFrontiers SME survey data results
Perhaps more importantly, it is striking that the investment plans that interviewees draw in the hypothetical anticipation of funding clearly do not quite align with their present coping strategies. While the large majority, certainly in Afghanistan, Pakistan and South Sudan, primarily pursue risk-averse consolidation strategies aimed at resilience and survival, the hypothetical prospect of funding prompts them to design strategies of growth and expansion. This triggers two questions: first, to what extent is this discrepancy between SMEs’ resilience strategies and suggested growth ambitions the result of commonly pre-designed donor support packages? Second, are there any risks (with regard to stability and peace) when encouraging SMEs in fragile contexts to switch from resilience to growth in order to receive support? The next section will discuss these questions in greater detail.