This report is part of a broader effort by the World Bank Group to understand the motives and challenges of small entrepreneurs in fragile and conflict-affected situations (FCS). The report’s key finding is that, compared to entrepreneurs elsewhere, entrepreneurs in FCS have different characteristics, face significantly different challenges, and thus may be subject to different incentives and have different motives.
FCS Firm Characteristics
The report summarises findings of recent World Bank Enterprise Surveys (ES) conducted across Sub-Saharan Africa (SSA), Asia, and the Eastern Europe and Central Asia (ECA) Region as well as Doing Business indicators and additional World Bank Group studies and field observations. The report finds that the majority of entrepreneurs in FCS countries are small, informal, and concentrated in the trade/services sectors.
After controlling for the level of development (GDP per capita), the average FCS firm in SSA and the ECA Region produces less output than non-FCS firms. The average FCS firm in ECA is by 20 percent less likely to innovate (that is, to introduce/upgrade new products and services) than its non-FCS counterpart. Additionally, FCS firms start smaller and grow significantly more slowly, or even shrink (in the number of employees) over time, compared to non-FCS firms in the regions analysed.
FCS Sector Characteristics
The report also highlights the differences in sector characteristics between FCS and non-FCS business environments. Entrepreneurs in FCS are concentrated in the trade/services sector (and not manufacturing). However, the average FCS country is less open to formal trade across all the three regions analysed and trades mainly with its neighbouring countries. Compared to the average non-FCS countries in the region, the average FCS country also is subject to severe and immediate sales (exports) and production factor disruptions with uneven recovery. Despite these obstacles, new entrepreneurial opportunities can arise even in the most difficult FCS environments, such as mobile telephony industry that has been thriving in Afghanistan, Guinea-Bissau, Iraq, and Somalia.
FCS Business Environment Characteristics
In the majority of the FCS environments, to start a business is very difficult. The regulatory systems (particularly regarding construction permits, property registration, investors’ protection, and contracts enforcement) are very weak. Furthermore, the key trust-based relationships for public-private dialogue (PPD) and commerce may have broken down or even dissipated owing to heavy and widespread rent-seeking, severe political instability, inefficient courts, and lack of state-provided security. Moreover, the general business environment is suffering from political instability and very poor access to formal finance (Asia and Sub-Saharan Africa), as well as burdensome tax rates (ECA).
In particular, formal financial services, such as the provision of loans or lines of credit, are very limited for FCS firms in ECA and SSA. Part of the reason is the high collateral requirements or complex loan application procedures. As a consequence, credit transactions are very limited. Last, serious basic infrastructure shortages (such as of power or water supply) elevate costs of doing business in FCS countries (especially in Kosovo, in which 97 percent of the respondent firms lack quality access to electricity). In addition, poor access to high-speed internet makes business facilitation slower and even more costly.
Implications of Findings and Recommendations
- Invest in data to be able to constantly evaluate FCS business environments. Enhance existing sources such as the ES in terms of data availability (make more frequent in all regions), and data consistency (inflate all the relevant questionnaires with questions focused on the uniqueness of the FCS business environment and questions related to innovative activity). Improve local capacity in data analysis.
- Encourage information sharing and flows. Encourage (public-private) dialogues, ensure information sharing through internet wherever possible, and improve local capacity in knowledge management.
- Address public-private coordination failures. Launch effective PPDs at the overall economy level and at the sector level. Formal PPDs can help improve coordination and lead to encouragement of competitive industries, development corridors or economic zones, as well as local economic development. Furthermore, specific to FCS, PPDs can be particularly useful in building trust in such low-trust fragile environments and can avoid policy capture by established businesses with close political ties.
- Encourage innovation and entrepreneurship. Support business development services (professional training, high quality standards, or sound market connectivity); provide key factor markets such as access to finance; and target key groups including women, youth, and ex-combatants.
- Resolve market failures in the provision of public goods. Enhance regulatory systems that support rather than obstruct markets, provide critical public goods (infrastructure, security), and ensure availability of serviced industrial land for purchase or lease.
- Provide a generally predictable business environment. Manage perceptions of political uncertainty, limit corruption, and ensure reliable judicial systems.
- Encourage demand and investment. Allow for trade preferences, encourage competitive industries, develop linkages with commodities and local sourcing of aid (construction, logistics, facilities management), and encourage and support remittance flows. In addition to the traditional foreign direct investment (FDI), allow for measures that can support diaspora-based and collective investment.
Program Design
A typical private sector development (PSD) program in FCS countries would involve interventions aimed at encouraging investment and getting markets to work better and more competitively. Typical interventions would:
