NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Multinational companies (MNCs) have a significant role to play in private sector strategies aimed at benefiting markets at the base of the pyramid (BOP). From a development perspective however, the role of local actors, especially indigenous small and medium-sized enterprises (SMEs), may be equally or perhaps even more important. There is now a growing body of research on the value of local enterprise networks or market-oriented ecosystems that – in addition to SMEs – include micro-entrepreneurs and NGOs; that often include local communities, cooperatives, and microfinance organizations; and that sometimes include donors, government actors, and large corporations. This local enterprise network approach holds the promise of delivering a broad range of sustainable outcomes that benefit the world’s poor.

Professor David Wheeler of York University analyzed this new approach in his piece Creating Sustainable Local Enterprise Networks, recently published by MIT’s Sloan Management Review. I spoke with Prof. Wheeler about the model, and will be posting his responses to my inquiries over the next two weeks.

A.H.: Much of the discussion about private sector approaches to development and to serving the BOP has focused on large multinational companies. Your work focuses on the role of smaller indigenous companies in developing countries, so-called small and medium enterprises, and suggests that they have an equal or even greater role to play. Could you describe the unique role of SMEs?and of local networks–in building economies and in poverty reduction?

D.W.: Let me start by addressing the question of large versus small companies. I should emphasize that we would not want to exclude the MNC or large domestic firm dimension in our approach to Private Sector Development–after all these are the players that exert most influence in global marketplaces that many SMEs in the South want to service or at least engage with. Approximately 20 per cent of the cases we looked at involved an MNC or a large domestic firm. However the starting point for our research was ?what works for the poor now? rather than ?what could work if various large and powerful actors did different things?, important though this is. Also, in our conversations with businesses and academics involved in the BOP discourse we noticed there was a striking omission in the analysis which was a local perspective that a) does not necessarily link to international markets at all; b) builds on indigenous rather than Western knowledge; and c) focuses on local value creation. Finally, we had become aware of some criticisms of the ?standard? BOP approach which seemed over-reliant on the message to MNCs or to large domestic firms and that was the gap we hoped to fill with our research.

On the question of the greater role for SMEs, this idea is actually not that unique globally. One hears the same basic arguments advanced for support of the SME sector in Canada and Europe. This is where the jobs get created and economies get grown. Add the human, social and ecological issues to the economic and livelihood ones and you have a clear case for exploring success factors in sustainable SME growth. The network factor is also not unique to the Global South; all the best businesses today build value through relationship-based resources whether the firm is micro-, small, medium or large. Perhaps it is just that we understand the importance of ?soft assets? like goodwill or social capital a little better today. And of course we know these assets can be sources of real competitive advantage. One could describe the entire Japanese and German post-war success stories as being based on this thinking. And indeed the entire digital industry phenomenon. It is essentially a stakeholder capitalism model applied to private sector development. But it is a model where I suspect we in the West have more to learn than to teach.