Gayle Tzemach Lemmon and Ashley E. Harden

Doing Business In Post-Conflict Zones: Why SMEs Are Key

Business must be part of putting lives together after war. And economies.

Reviving institutions and rebuilding economic ecosystems are among the first priorities after fighting ends and reconstruction begins. According to the U.S. Agency for International Development, negative economic shocks of just 5 percent can increase the risk of a civil war by as much as 50 percent in fragile states. Specifically, research from Iraq has found that labor-generating reconstruction programs can reduce violence during insurgencies, with a 10 percent increase in labor-related spending associated with a 10 percent decrease in violence.

Given all the benefits of private sector investment in postconflict zones, entrepreneurship is emerging as part of the next generation of solutions for many development issues. However, too often investments—particularly from aid organizations—create dependency and are unable to sustain long-term economic growth. Building local business capacity and supporting homegrown entrepreneurs can help curb this risk.

Programs working to support and train entrepreneurs for economic development frequently target aspiring entrepreneurs or owners of micro enterprises. But investment in micro development, while important, should not be done at the expense of supporting small- and medium-sized enterprises’ (SME) growth. Capital is pricey and limited in postconflict states, which makes SME lending risky and time consuming, especially in comparison with lending to larger, established multinational companies with revenues in the millions of dollars. SMEs are left, facing limited access to finance, markets, networks, and fundamental business skills—and these obstacles are felt even more acutely by women SME owners.

Currently, numerous innovative solutions are being explored to reduce SME financing gaps. The Entrepreneurial Finance Lab at Harvard’s Kennedy School of Government is developing psychometric screening tools that can judge for “entrepreneurial ability.” (Check out a NextBillion Post on EFL here). This tool, when combined with records of current or future cash flows, could encourage private banks to lend to qualified entrepreneurs. The U.S. government is also operating in the SME space through USAID’s Development Credit Authority. (Check out a NextBillion post on this effort here). Working with private sector actors in developing countries, USAID’s loan-guarantee programs cover up to 50 percent of the risk in lending to new sectors or borrowers. In addition, larger nonprofits, such as Oxfam and Kiva, are partnering with other NGOs or crowdsourcing loans to develop funds specifically reserved for SME lending.

Despite these promising developments, increasing access to capital for SMEs is not enough by itself. SME owners typically lack the formal skills needed to access loans and grow their enterprises. As the recently released Council on Foreign Relations report Entrepreneurship in Postconflict Zones recommends, economic development programs promoting SME growth should adopt comprehensive approaches, which work in concert to increase SME access to sustainable markets, networks, business skills, and capital. Long-term public-private partnerships among aid organizations, governments, and corporations are also important.

Comprehensive approaches to boosting entrepreneurship are expensive, often requiring capacity building and time- and labor-intensive investments. A few organizations are working to tackle this problem in post-conflict states, such as the International Finance Corporation, Business Council for Peace (or Bpeace), Goldman Sachs, and the Cherie Blair Foundation for Women.

These programs face a number of challenges. Fighting has often damaged vital sectors and state structures for economic growth, making business ecosystems capacity deficient. Not only do entrepreneurs lack basic business skills, but there is also an absence of knowledgeable mentors who can lead by example. Skills building programs, such as Goldman Sachs’ 10,000 Women and IFC’s Business Edge, find it difficult to identify mentors or trainers post-conflict and must build local ecosystems before working directly with SME owners. And, even once instructors are identified and direct engagement with entrepreneurs begins, it is hard for programs to adapt trainings to the varying skill levels of entrepreneurs.

Based on the lessons learned from these initiatives in conflict and post-conflict zones, business skills training should be tailored to the varied skills levels of entrepreneurs. Training programs should also be scalable and replicable, with rigorous monitoring and evaluation procedures established. Additionally, business skills development cannot take place in a vacuum, and trainings should be connected to financial and market access. Wrap-around services and the facilitation of alumnae/business networks for mentoring are also critical for supporting SME growth.

Entrepreneurship is not a panacea for economic growth. However, initiatives working to support entrepreneurial growth—especially SME growth—can promote stability and development in conflict-affected countries. Already a number of programs are boosting entrepreneurship in places there economic growth is critically needed. For those promoting peace and prosperity, supporting entrepreneurship and smart investments in SME growth, should be a vital component of any reconstruction strategy.