"The latest estimates on the microenterprise sector show that there are about 397,500 establishments with less than 10 employees, which involve 1.7 million people, or one-fourth of the national population.... According to estimates for the 1992-1995 period, this sector’s share of the GDP is about 25%.... Three types of microenterprises can be distinguished, which differ basically in terms of the types of people involved, their capital and their income-generating ability: subsistence, simple accumulation, and broad accumulation or ‘micro-top’....

"Subsistence microenterprises: Those whose productivity is so low that they only manage to generate enough income for immediate consumption; they work on the basis of "getting by". This is the largest segment of microenterprise, with about 70% of the total. They have monthly revenues below 5,000 colones and are largely made up of female heads of household engaged in retail trade or in personal services such as the sale of food. This is the segment in which the greatest social problems affecting microenterprise can be found, and it is also where the limits of home and work are most blurred.

"Simple accumulation microenterprises: Those which generate income sufficient to cover their activities, although without enough surplus to permit capital investments. Microenterprises in these segments are those which produce monthly revenues ranging from 5,000 to 25,000 colones. Here we find 26% of microenterprises. This segment is more fluid, and represents a transitional phase toward one of the other two types. It covers the moment in which a microenterprise begins evolving its production towards growth, when the entrepreneur can cover activity costs although still has no capacity for savings or investment. However, it can also be a step on the way to productive decline.

"Broad accumulation microenterprises, or ‘micro-top’: Those enterprises with sufficient productivity to accumulate a surplus and invest it in the growth of the business. "Micro-top" is the small segment (4% of the total) in which the appropriate combination of productive factors and commercial positioning allows the business to grow with ample profits; monthly revenues exceed 25,000 colones. These are usually located in manufacturing areas in which competition from other businesses forces them to improve their productivity and quality through improved technology. In these businesses, with a labor force that includes salaried employees and apprentices, it is possible to accumulate technological knowledge based on the relatively high skills levels of employers and workers. In this segment, technical support programs usually achieve the best cost-efficient results, since there is a clear idea of the usefulness of and ways of using credit, management, marketing, etc." [1]

Based on the overall analysis of microenterprises set forth in the "Microenterprise White Paper" quoted above, the principal characteristics of the MSME sector are:

• Concentration in a few areas of activity: Most employees in this sector are found in activities related to commerce and services. Relationships within the sector are sharply defined, since micro, small, and medium enterprises alike tend to have suppliers and clients who are part of the same sector. By the same token, most of the activities in this sector are oriented toward the domestic market, and so the goods and services generated in this sector are targeted toward local demand.

• High degree of diversity among productive units making up the sector: Medium-sized businesses coexist with subsistence activities undertaken by people who have lost their jobs or who cannot work in the formal sector of the economy. It is worth noting that women are the majority group in subsistence activities.

• Low skills levels: There is a serious problem of skills in the labor force in this sector, since there are high levels of illiteracy and low levels of schooling.

• Legal and organizational vulnerability: This sector has a hard time joining the formal economy because the legal requirements for registration are complicated and expensive. Furthermore, this sector is characterized by its weak management and lack of knowledge of administrative tools useful for guaranteeing business survival.

• Heavy competition: This sector is forced to operate in highly competitive market niches, in which large enterprises are also deployed.

• High cost and difficult access to credit: It is difficult to obtain credit from the formal financial sector, and thus MSMEs are forced to resort to informal sources of credit such as NGOs, high-interest individual lenders, and aid programs.

• High degree of adaptability: Given the lack of resources, this sector has shown great creativity in adapting its available resources to reality, particularly from the standpoint of technology.

The learning circle began to investigate the role of information and knowledge in the problems mentioned above, as well as possibilities of utilizing these tools to resolve its problems. To do so, it worked to identify those agents and institutions which make up the system in which MSMEs are located. One step was the definition of the following scheme, which emphasizes the role of support organizations and reflects the complexity of relationships in this sector.

Based on the above diagram, an analysis of information and knowledge problems affecting the different agents which intervene in the MSME environment leads to the identification of three major areas, or critical issues, which characterize the principal problems of MSMEs:

1. The lack of a shared, coordinated vision undermines linkages between the MSME sector and the rest of the Salvadoran economy.
2. There is no policy and regulatory framework to stimulate development in this sector.
3. There are management problems within the sector, at the level of both individual entrepreneurs and support programs.

Each one of these critical areas contains a set of information or knowledge problems which affect members of the system, with examples that follow:

The lack of a shared, coordinated vision undermines linkages between the MSME sector and the rest of the Salvadoran economy:

This problem is related to the lack of a strategic national vision regarding MSMEs, a deficiency noted at various levels. MSMEs have been incapable of projecting a clear statement of their importance in the national economy. This is due to three factors:

• Poor organization leads to weakened ability to communicate within the sector and externally, and makes it difficult to undertake efficient public relations campaigns or lobbying, for example.

Despite recent efforts, MSME support institutions and service centers do not have a tradition of cooperation, but instead there tends to be segmentation according to donor or user type. It is worth noting that a key coordination effort among support organizations was made to publish the "Microenterprise White Paper", an attempt to define a shared analysis of the sector’s problems, as well as a common strategy. It is also important to point out that joint initiatives have flourished, such as the risk center set up among MSME finance institutions. Nevertheless, information flows among the different actors in this sector are quite inadequate: for example, there is scarcely any coordination to define common technical criteria, nor is there any true concern for the systematic dissemination of the results of MSME support activities. There is no organization truly in charge of promoting and providing incentives for the creation of this type of information exchange which is essential for sector cohesion.

Weaknesses in information and knowledge flows in this system therefore translate into great difficulties in communications and information provision aimed at the nation. Thus, the country as a whole has little knowledge of the contribution MSMEs make to overall employment, or to the GDP, for example. This lack of information is particularly troubling in the case of decision-makers, who lack the basic information necessary to define laws and regulations affecting MSMEs.[2]

There is no policy and regulatory framework to stimulate development in this sector:

There is no system of incentives and specific provisions to strengthen the organizational and administrative capacities of MSMEs, or to simplify the legal framework within which they operate. The consequence of this failure is that most of these enterprises remain lodged in the informal sector, without any significant possibilities of developing, which thus increases their costs and excludes them from the principal instruments of support.

In terms of taxes, therefore, the informal sector pays no direct taxes, but neither does it recover the cost of the Value-Added Tax (VAT) it pays when purchasing inputs. MSMEs are excluded from access to formal benefits (retirement, Social Security, and others), formal credit channels, and in part from the national system of professional and vocational training. Finally, their informal status increases their vulnerability in contract relationships, vis-à-vis both clients and suppliers as well as contract labor.

The above is due to the lack of an appropriate legal and judicial framework which would allow MSMEs to legalize themselves at an affordable cost and within a reasonable time-frame. It also limits their ability to associate, which excludes them from setting up possible economies of scale, among other things.

Thus, a vicious cycle is perpetuated among the majority of MSMEs with regard to information and knowledge: the lack of legal and administrative instruments suitable to these enterprises produces a lack of demand for information, and the lack of demand for legal and administrative information tends to legitimate the lack of interest in producing them.

Furthermore, the weak institutional development of MSME support organizations leads to inadequate specialization and a poor strategic vision of how best to support this sector. There are many diverse support institutions, with varied approaches and work methods, and no framework within which to orient their offerings. Nor are there any systematic efforts to coordinate among support institutions, so that their sustainability is problematic and prevents specialization according to area of work or geographical region. This cycle is perpetuated by partial or total dependence on external subsidies.

The latter problem is particularly true for institutions which provide credit for MSMEs. Unfair competition among organizations which offer credit at cost, which offer subsidized credit and those who give away funds, prevents the consolidation of a system capable of addressing this sector’s financial problems.

Finally, MSMEs and their support institutions lack adequate information about the procedures necessary to obtain and channel funds, which is fundamentally due to dispersion among sources of resources, and scarce dissemination of information by donors about their institutional procedures.

There are management problems within the sector, at the level of both individual entrepreneurs and support programs:

There are not enough resources and mechanisms available for obtaining and processing information that would be useful to MSMEs in decision-making, such as information on prices, clients and suppliers, and new technologies for their productive units. This can be principally explained by the fact that activities such as market intelligence are relatively novel in El Salvador, particularly for this sector, which is why there are still no specialized intermediaries such as information brokers.

Limited information flows in this sector lead to insufficient knowledge and weaknesses in terms of business structure and management in productive units. The reasons for this problem are principally the following:

• MSMEs prefer to innovate in their productive processes more than in their administrative techniques. There is cultural resistance to changing management styles, and the family nature of many MSMEs tends to reinforce this resistance.

The lack of adequate information and knowledge flows among the different actors within the MSME system plays a large role in the problems analyzed above. In order to take corrective action, the learning circle has placed a priority on three types of information flows:

• Those which are directly related to MSME growth; in other words, those which arise during business development processes.
• Those which are principally aimed at sharing knowledge among businesses.
• Those which could allow economies of scale to emerge within the system, at the level of businesses or of support institutions.

A. Projects proposed by the learning circle:

Create a network of national franchises as a knowledge-sharing mechanism among small businesses

Objective: The low density of information flows among businesses – which can be explained as much by cultural issues, such as lack of trust, as by the weakness of business associations – prevents good practices or quality standards from being disseminated in any systematic fashion. Therefore, this project seeks to promote the sharing of innovative, successful business practices by setting up franchise mechanisms among Salvadoran MSMEs, thereby promoting stronger growth in the sector as well as the creation of incentives for growth among the more successful enterprises.

• Provide an additional instrument for growth for Salvadoran businesses, by introducing the concept of franchises for small and medium enterprises. MSME growth is limited by heavy competition and by the high cost of credit. The sale of know-how will allow the more successful MSMEs to expand at a lower cost, while at the same time improving the average quality of services offered by small businesses.
• Utilize the franchise system as a knowledge- and information-sharing mechanism among businesses: by their very nature, franchises are mechanisms to purchase and sell successful productive, administrative, and commercial knowledge.

Activities:

The project should be led by a committee made up of representatives of the small and medium business sector, along with support organizations and the businesses involved in the franchise networks. The committee will be in charge of implementing the following activities:  [see implementation proposal]

• Define an institutional framework useful for replicating and broadening the experience.

Electronic information resources to support the development of small and medium businesses, as well as of their support organizations

Objectives: As noted above, the information available to different actors in the MSME system is inadequate, which translates into an overall loss of efficiency in the system. The following proposal seeks to progressively reduce this gap by building a wide-ranging Website to meet MSME needs.

• Reduce transaction costs related to those information deficiencies which undermine MSME performance, by designing and building a targeted information system.
• Help improve the efficiency of the MSME support system by creating common electronic information tools useful to build economies of scale.
• Contribute to the success of the Infocenters initiative by developing relevant information resources for MSMEs.
• Promote cooperation among the different actors in the MSME system through joint design of relevant information resources.

Activities:  [see implementation proposal]

• Produce the information, based on the following tentative list of subjects: legal information, market information, available resources (training, credit, consultants for support services, etc.). On-line applications could be gradually developed to reduce paperwork in the sector.

C. Additional policy recommendations:

The above projects do not require external measures for their success. However, a series of institutional changes, incentives, coordination mechanisms and leadership roles would considerably improve knowledge and information flows within the MSME system, and thereby its development. Some of these changes could be the following:

1. Microenterprise White Paper (summary), San Salvador, January 1997.  [return]