Doing business in a place of insecurity and socio-political complexity takes more than a capable entrepreneur with a sound business plan. Managing competing political interests, prevailing mistrust and persistent unpredictability requires a great deal of sensitivity, adaptability and compromise. For many local entrepreneurs the decision to start or continue operating in such circumstances is a matter of necessity rather than choice. Both foreign and domestic business owners have to cope with high risks without the risk insurance services that entrepreneurs routinely enjoy in non-fragile places. A thorough understanding of the nature and underlying causes of fragility and risk will therefore help entrepreneurs and respective support programmes to anticipate, mitigate or manage multiple uncertainties more effectively.
Successful business strategies that allow a small Afghan logistics company in the Eastern province of the country, a restaurant owner in Juba or a domestic livestock farmer in the Democratic Republic of Congo (DRC) to sustain operations despite daunting insecurity may seem inefficient from a purely economic stance. Only when placing the firm in its broader institutional and societal context does it become clear why certain ostensibly less efficient or even growth-adverse measures are in fact the prerequisites of survival and growth.
Looking beyond the economic factors and taking account of the political and social embeddedness of small and medium-sized enterprises (SMEs) is therefore critical for the success of interventions aimed at supporting foreign and domestic firms, particularly in fragile environments, where formal rules are weak and markets distorted. Yet, thus far, surprisingly little is known about the ways in which SMEs do business and have to interact with their broader socio-political context if they are to pursue operations.
This research project seeks to raise awareness of the embeddedness of SMEs in socially and politically complex environments. It reveals how smaller businesses struggle with the multiple effects of insecurity, social and governance fragility, and which strategies they deploy to cope with those challenges. The ambition of the research project was to go beyond the commonly adopted focus on technical constraints and to better understand these more readily measurable obstacles by placing them in a broader socio-political and economic context in order to unravel the underpinning, though less readily measurable, drivers and incentives.
The study draws on desk research and on two sets of primary data. It further applies both quantitative and qualitative research methods, with a strong emphasis on qualitative data and analysis. One set of evidence draws on a close collaboration with the Netherlands enterprise agency, Rijksdienst voor Ondernemend Nederland, referred to in the report as ‘RVO’. This agency is part of the Netherlands Ministry of Economic Affairs and provides financial and technical support to incentivise (Dutch and non-Dutch) entrepreneurs to undertake sustainable and innovative business worldwide. RVO was in charge of implementing a Private Sector Investment programme (PSI plus) that was specifically designed for investments in fragile states and aimed at achieving transfers of technology and knowledge, and positive spin-off effects for local economies. As such the programme has generated solid experience with regard to the challenges and opportunities small firms face in those environments. For the purpose of this study it offered relevant insights from approximately 125 SMEs in 10 fragile states, including Mali, Burundi, DRC, Sierra Leone, South Sudan, Afghanistan, Pakistan, Palestine and Yemen.
In order to tap into the experience of the PSI+ programme, country fund managers who have been selecting and accompanying eligible entrepreneurs and their partners over the past five years were consulted. Besides sharing their own perceptions and anecdotes on the links between conflict, fragility and SMEs in a workshop organised at the Clingendael Institute on 10 April 2014, RVO’s ‘fragile states’ managers also conducted interviews with some of their clients and respective local partner businesses, whose views are reflected in the analysis. In addition, RVO provided the research team with a random selection of written security risk assessments extracted from the regular application forms submitted by PSI+ applicants.
To complement and triangulate this source of information, the consultancy firm OnFrontiers, which specialises in collecting investment-relevant data in conflict-affected countries, was hired to conduct a survey of SMEs in five countries, covering a total of 50 SMEs and 10 locally-based experts. The findings of this survey constitute the second set of primary data.
It is important to stress that the findings of this research project lean primarily on the responses and opinions of entrepreneurs, and that the views and opinions of interviewed advisers and RVO officers were used to better understand the contexts in which entrepreneurs were found to operate. We therefore refrained from applying an ex ante chosen definition of fragility and conflict, and combined multiple-choice questions with open questions.
The focus on entrepreneurs’ own perspectives and the combination of quantitative and qualitative data through semi-structured interviews distinguishes the supporting evidence of this report from most conventional surveys, notably the World Bank’s Doing Business reports, which essentially rely on the assessment of local experts well acquainted with the formal rules and regulations, but less familiar with the daily struggles of SMEs that either circumvent of suffer from the inefficient enforcement of those regulations.
Chapter 1 of this report summarises the current discussion on the role SMEs are commonly perceived to play in post-conflict and fragile societies and sheds some light on the institutional complexity that entrepreneurs typically face in fragile contexts. Chapter 2 presents the major findings of the two SME surveys conducted by RVO country managers and OnFrontiers from June to September 2014. It also includes a qualitative analysis of business constraints as well as business strategies. Chapter 3 considers the empirical findings in the light of earlier reflections on the role of SMEs in complex institutional settings. Chapter 4 analyses the implications for policy, practice and research, and offers practical considerations for future SME support in fragile contexts.