Value Chain Analysis ...
 
In Bangladesh, historically microfinance and micro-enterprise development have been used as the major tools of poverty alleviation. However, despite the long and focused attention devoted to the development of micro-enterprises, the achievements have been marginal. Additionally, it has been ascertained that micro enterprises everywhere face similar problems, and while most of them have access to credit, their difficulties relate to their size, and access to markets. Individual micro enterprises have difficulty achieving economies of scale in the purchase of equipment, raw materials, and financing. They are unable to take advantage of market opportunities that require large production quantities, homogenous standards, and regular supplies. Narrow profit margins prevent them from introducing technological innovations, streamlining their production processes, or improving their products.

A growing body of evidence suggests that unless micro-enterprises are active participants in the formal economy and integral links within a commercial supply-chain, opportunities to build wealth and break the cycle of poverty will remain elusive. This fact is not lost on micro-enterprises, as “lack of market access” is frequently identified as one of most important constraints to growth. However, with limited access to credit or working capital, market knowledge, and production skills, micro-enterprises are faced with the decision to enter new markets blindly, or produce what is already known locally. Micro-enterprises are not in a position to accept the high risks of entering a new market without reasonable assurances of making money. At the same time, not taking the risk forces them into a cycle of production that eliminates opportunities for specialization, innovation, and achieving economies of scale – i.e., adding value that generates increased income. The situation is even more dramatic for micro-enterprises active in rural areas where higher transaction costs and even more limited market information flows create daunting barriers for market entry.

The recent results of the national private-sector survey of enterprises in Bangladesh indicate that there are close to six-million medium, small, and micro enterprises (MSMEs) in Bangladesh. These enterprises employ about 31 million people (10% of total population). 90% of all enterprises have 10 or fewer workers. Enterprises with just 1 or 2 workers represent 60% of all enterprises. Over three-quarters of the enterprises are located in rural areas and the overwhelming majority of employment generated by the MSMEs is also in rural areas. Considering all proprietors and types of employees, women represent about nine percent of the workforce within MSMEs. Results from the survey show that MSMEs contributed BDT 741 billion to GDP or 25% of GDP in 2003. However, various market failures work to the detriment of small and micro enterprises, which mostly have limited access to resources and limited bargaining power. They cannot afford the degree of internal specialization that would allow them to carry out functions like market research, technology adaptation or trade fair representation on their own. At the same time, many of them do not command the resources required to buy specialized support services from commercial providers at prevailing market rates. Moreover, in poorer, often rural regions where micro enterprises are struggling for survival and modest growth, the required business development services are often not available at all or delivered by providers with limited capacities and competence. The two most pressing problems encounters by the MSMEs are “lack of money” and “not enough customers”.

As a result, access to financial services alone is not sufficient to help the MSMEs transform their businesses into more profitable economic activities. With increasing globalization, the poor need access to markets, information, technical know-how and other services for their economic growth. The vast majority of micro-enterprises –the informal businesses that are the predominant source of income and employment are isolated from wider market, information and business and finance support. Without these basics, these enterprises struggle to stay viable. This is particularly the case in rural areas.

MSMEs require some of the relevant and appropriate business development services, including the field of business management and appropriate skills training; entrepreneurship development; marketing supports and linkages; technology development, market info, improvements of productivity and competitiveness; strengthening of existing business associations; and financial supports.

Various research have identified some basic common constraints for ME development as shown in the box.
 

• Supporting governments and other stakeholders to improve the regulatory environment at local level for initiatives taken by and on behalf of micro entrepreneurs;     • Promoting affordable and effective business development services by strengthening the capacity of both public and private providers to develop the entrepreneurial, managerial and technical skills of micro entrepreneurs, thus enhancing their competitiveness and facilitating their technology absorption capacities and access to finance;     • Building the capacities of micro entrepreneurs as well as civil society organizations to strengthen their policy advocacy roles and collective self-help initiatives.

The full potential of this sector – in both poverty reduction and economic growth – cannot be realized as long as micro-enterprises are confined to using underdeveloped markets and producing simple products with rudimentary technologies for sale to equally poor consumers. Neither can the sector contribute to the growth and dynamism of the economy until their principle constraints are removed. One very promising avenue to boost the income and create the employment of micro-enterprises in Bangladesh is to break their economic isolation – by linking them to higher-value markets, better technologies, business development services, and essential information and knowledge.