J.8_AMEG,_Enterprise_Competitiveness_Technical_Guide.pdf

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JOBS SERIES #1: ENTERPRISE

COMPETITIVENESS

TECHNICAL GUIDE

Task Order No. AID-OAA-12-00008

Cover Contract Implemented by: Chemonics International Inc.

The author’s views in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

CONTENTS

Acronyms ............................................................................................................................. i

Executive Summary

Introduction

Technical Guide

A. Importance and Role of Enterprise Competitiveness

A1. An Introduction to Enterprise Competitiveness A2. Theory of Change, Market Failures, and Results Frameworks

A3. Benefits to MENA and Programmatic Advantage A4. Relationship to other Types of USAID Programming

Handout: 5 Common Myths about Enterprise Competitiveness Programs

B. Launching an Enterprise Competitiveness Program

B1. Planning: RFP Design and the Procurement Process B2. Project Launch

C. Implementing an Enterprise Competitiveness Program

C1. Identifying and Selecting Firms for Project Support C2. Designing and Delivering Project Support C3. Management Structure and Strategy

D. Monitoring Impact and Creating Incentives for Optimal Performance

E. Replicating and Adapting the ECP Model

Annex A: Model Scope of Work

Annex B: Diagnostic Questionnaire

Annex C: Client Review Checklist

Annex D: References

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE i

ACRONYMS

AMEG USAID Asia Middle East Economic Growth program BRCP Tunisia Business Reform and Competitiveness Program

ECP Enterprise competitiveness program ESC economic service center

FTE Full time equivalent GDP Gross domestic product M&E monitoring and evaluation

MENA Middle East and North Africa PRA Poverty Reduction and Alleviation program in Peru

SME small- and medium-size enterprise SOW scope of work USAID U.S. Agency for International Development

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 1

EXECUTIVE SUMMARY

The Arab Spring, sparked in 2011 by frustration and impatience with limited economic opportunities, has yet to deliver the jobs and improved livelihoods so many had hoped for. Less than one-half of the working-age population in the Middle East and North Africa (MENA) is employed or in school. Although MENA’s youth is relatively well educated, the region has the highest youth unemployment rate in the world (28 percent), and the share of women in the workforce is lower than any other region. Demographic trends compound labor market challenges: since 2003, the region’s labor force has grown at a rate faster than in any other region. MENA’s emerging countries experienced only 1.2 percent GDP growth in 2014, which is insufficient to reduce unemployment rates or inequality significantly. Violent extremist groups are proactively trying to undermine this already tenuous situation.

The existence of a jobs crisis in MENA is well documented. The question is can USAID improve employment outcomes in the region and, if so, what is the most cost-effective method of doing so? MENA countries possess complex, dynamic economies where firms face a variety of constraints to enterprise growth, increased competitiveness, and job creation. While improvements to the business environment can support these objectives, the political environment is not always conducive to meaningful change and it can take years to fully implement significant policy reforms. In addition, more often than not, enterprises’ most significant growth constraints are firm-specific and, as such, they require tailored solutions to take advantage of existing markets and reach new ones. Yet donors shy away from firm-level enterprise competitiveness assistance — often due to a perception that the cost and effort required to tailor solutions to individual firms is not a cost effective use of resources.

Objective of this research. To help address the jobs crisis and support USAID’s increased emphasis on evidence-based decision making, the Asia and Middle

East Economic Growth Best Practices program (AMEG) researched the most cost-effective approaches to job creation and developed this Enterprise

Competitiveness Technical Guide to synthesize features of the most successful and impactful programs.

AMEG’s research indicates that Enterprise Competitiveness Programs (ECPs), when implemented using the best practices in this guide, can have a direct and cost-effective impact on job creation. In Tunisia, the USAID Business Reform and Competitiveness Program (BRCP) helped create 3,694 jobs in its first year at a cost per job of $1,207. While the research team found BRCP’s impact impressive, USAID has used similar approaches successfully in at least 15 countries; these countries span many different regions, cultures, and stages of economic development. In addition, AMEG was unable to find another type of economic growth program that (1)

Cost Effectiveness and an ECP

AMEG’s research indicates that cost effectiveness, i.e., cost per job, tends to increase 1) the longer the ECP’s lifespan, 2) when the ECP business advisors work close to their clients and build trust with them through frequent interaction, and 3) when a large percentage of clients are agriculture-related (a labor-intensive industry).

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 2

demonstrated similar cost-effectiveness in creating jobs and (2) could show the jobs it created were attributable directly to program activities.1

Distinguishing features of the ECP design. What makes some ECPs so successful? As with any development program, it is a combination of program design and execution. A well-designed

ECP focuses on results more than on inputs and activities and recognizes the heterogeneity of firms’ most significant growth constraints; the best ECPs do not come with pre-packaged solutions in search of problems, but rather they attempt to find out what each client’s principal problem is, and then find creative solutions to attack it. In doing so, the programs tailor themselves to real market opportunities and attack specific constraints preventing firms from meeting the needs of buyers. By helping remove those constraints, ECPs have a direct impact on investment, enterprise growth (sales), and job creation.

Key traits of the most effective ECPs. While a well-designed ECP can put it on track for success, good management is essential. Common traits of the best ECPs include:

Assistance that meets the needs of specific buyers. The best ECPs are truly “demand-driven.” They help client firms increase production only after verifying that somebody is able and willing to buy that production. They then help clients produce specifically to the buyer’s requirements. In other words, they start with the buyer and work backwards, not the other way around.

Disciplined selection of client firms. The best ECPs adhere to a disciplined selection approach to ensure assistance is cost-effective. BRCP works only with client firms that they expect to create jobs at a direct (that is, not counting fixed costs and overhead) cost to the program of no more than $500 USD per job. Other programs have adhered to the so-called 5 to 1 rule, that is, they support client enterprises only when they expect client sales to increase by at least five times the direct cost of the program’s assistance.

Personnel and management structure designed to build trust. Ultimately, the success of any ECP hinges on its ability to build trust with client enterprises. That in turn depends on the ECP hiring good business advisors and then making it clear it expects those advisors to spend lots of face time with their clients.

Robust M&E systems integrated into all aspects of program implementation. ECPs attach a high premium to sound monitoring and evaluation (M&E). This allows USAID to hold implementing partners accountable for results and chiefs of party to hold their teams accountable. The best ECPs monitor for results: their veracity (does the job actually exist?), their causality (is the job a direct result of ECP activities?), and their additionality (would the job have been created in the absence of the ECP?).

Gender, youth, and environmental concerns integrated to achieve real impact. The best

ECPs take concern for gender equality seriously, mainstreaming it into operations both through the business advisors they hire and by setting targets for the number of women-owned firms that receive assistance and the number of women who obtain jobs. Although

1 If such programs exist, particularly in MENA, AMEG would like to hear about them.

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 3

most ECPs do not set targets for youth employment, it is youth who take advantage of the bulk of jobs created. In the same vein, good ECPs not only mitigate potentially negative environmental impacts but look actively for environmentally friendly businesses to support.

Market failures and the development logic of ECPs. While conducting our research, skeptics often asked, “what is preventing firms from addressing their binding constraints and generating new sales on their own?” There are several common types of market failure that impede high-potential businesses from creating jobs without USAID assistance. For example, distrust between suppliers and buyers, especially in countries with weak rule of law and contract enforcement mechanisms, often prevents firms from investing in new commercial relationships and expanding their operations. In these cases, ECPs can serve as a neutral third party that builds trust and facilitates profit-driven, sustainable business relationships along value chains. Another example of a common market failure: family-run firms with limited commercial exposure tend to be suspicious of “outsiders” and are reluctant to entertain offers of external assistance, even if that assistance is needed to address binding constraints, increase sales, and create new jobs.

ECPs complement other types of USAID assistance. While ECPs offer many attractive features, it would be a mistake to ignore all other interventions, such as education, workforce development, and policy reform (see box). ECPs can help amplify the impact of these approaches, particularly when they are integrated into a single program. For example, ECPs can leverage their one-on-one, trusting relationships with business owners to facilitate more effective communication between higher education institutions and employers and to improve the market-relevancy of curricula. ECPs can also address a historic culture of distrust in MENA between job seekers and private-sector employers, while helping youth better understand private-sector opportunities and demands and helping businesses to upgrade their human resources to train and retain new hires.

Conclusions. AMEG’s research suggests that USAID can have a direct and cost-effective impact on private-sector job creation in MENA; ECPs in MENA and across the globe have proven that we know how to help firms increase sales and create jobs in a variety of contexts. However, the success of BRCP and many other ECPs did not come easily or without hiccups; these results required hard work, creative thinking, and discipline at every stage of design and implementation. The best practices in this guide present an ECP approach that maximizes cost-effectiveness by promoting accountability, aligning incentives for optimal performance, and, ultimately, helping create jobs that are directly attributable to USAID assistance. Examples of companies creating jobs as a result of BRCP support (see the next page) show how this model can help address the jobs crisis plaguing MENA today and create new employment opportunities that make a meaningful difference in people’s lives.

ECPs’ Critical Feedback Loop

By working with large numbers of private-sector companies, ECPs are able to collect valuable business intelligence about all of the impediments (including policy and institutional impediments) preventing them from increasing sales and creating jobs.

This information is a valuable ingredient for policy and institutional reform programs, and can be used to point policy makers and advocates to the issues that are of most importance to the business community.

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 4

EXAMPLES OF THE BUYER-LED APPROACH IN ACTION

USAID Business Reform and Competitiveness Program in Tunisia

Client name GECOTRAP IBL MAG-TEX MSPE Plast-Tech

Location Tunis Bizerte Gafsa Moknine Zaghouan

Type of business

Agribusiness, specializing in food flavorings & additives

Electronics for automobiles

Textile & garment manufacturing & finishing

Manufacturing of wiring harnesses for automobiles

Technical plastics manufacturing

Binding constraint

Carrefour & other foreign buyers would buy from GECOTRAP, but only if it improved its food quality standards & obtained food quality & safety certifications.

New customers in Germany, France, & Switzerland would buy from IBL, but only if it complied with stringent requirements, including for enameled electric wire welding.

Benneton, a global fashion brand, committed to increasing orders by

55 percent. But MAG- TEX could not sell that much unless it improved production management & quality control.

Main customer would buy more from MSPE, but only if it reduced response time from 72 to 48 hours & improved delivery time performance from 90 to 98 percent.

PLAST-TECH could become regular supplier of new significant buyer only if it implemented world-class automotive quality standards.

Solution

BRCP helped

GECOTRAP

establish certified quality management system ISO-9001 &

ISO-22000.

BRCP helped IBL meet Integrated Printed Circuit global standards.

BRCP helped MAG-

TEX establish management information system & implement improved quality standards, work procedures, & dashboard system.

BRCP helped MSPE develop & use new Enterprise Resources

Planning module (Electronic Data Interchange).

BRCP helped

PLAST-TECH

implement ISO/TS 16949 v 2009 standards.

New jobs created 25 70 40 58 25

Take-away lessons

“Demand-driven” is not just a mantra. Specific demands – orders – drive sales growth.

As a rule, increases in sales drive increases in jobs.

One size does not fit all: clients’ binding constraints vary significantly by firm, even within a sector.

You don’t have to help a client improve everything: focus on the binding constraint(s).

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 5

INTRODUCTION

A. OBJECTIVE OF THIS TECHNICAL GUIDE

This Enterprise Competitiveness Technical Guide is the first in a series of technical guides researched and published by the USAID Asia and Middle East Economic Growth Best Practices program (AMEG). These technical guides focus on approaches to improving employment outcomes in the Middle East and North Africa (MENA) by creating jobs, offering vocational skills training, matching the unemployed with employers, and boosting household incomes. The guides have two primary objectives: (1) evaluate the cost effectiveness of the most successful approaches — i.e., those with the lowest cost per job — in MENA or in countries with comparable contexts and (2) provide practical guides to help USAID and its partners design, adapt, and implement the most impactful approaches to job creation across MENA. Ultimately, these guides aim to help USAID and the U.S. Government design programs that maximize impact on employment outcomes with as few resources as possible.

USAID has dozens of strategies and guidance documents, including many that are related to economic growth programming — the Youth in Development Strategy, the Economic Growth Strategy, etc. Many of these strategy documents overlap, to varying degrees, with the content and recommendations laid out in this technical guide. AMEG’s research is neither meant to align with nor contradict these strategy documents. Instead, this technical guide responds to the enormity and urgency of the jobs crisis in MENA by focusing on approaches that USAID can use to have a direct, measurable, and sustainable impact on employment outcomes over a relatively short time horizon.2 Unlike most USAID strategy documents, the Enterprise

Competitiveness Technical Guide goes beyond high- level guidance for USAID and presents practical resources for designing, planning, and implementing an ECP in the most cost-effective manner possible.

B. ABOUT AMEG

The AMEG project is designed to support USAID missions in developing effective and efficient economic growth programs that address technical and strategic challenges that are specific to countries in which USAID operates in Asia and the Middle East. Through AMEG, USAID is able to conduct rapid and strategic economic growth assessments, pilot innovative approaches in economic growth programming, and consolidate and disseminate best practices in economic growth projects learned from USAID implementation throughout the world.

2 Although AMEG only looked at programs that could generate jobs over a relatively short-term time horizon (three to five years), it is worth noting that the research team did not find approaches that are more successful over a longer time horizon.

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 6

C. ORGANIZATION OF REPORT

Section A of this technical guide begins with an overview of enterprise competitiveness programs, including some examples of USAID programs, a theory of change, an economic rationale for this approach, a discussion of the advantages of Enterprise Competitiveness Programs (ECPs), and a discussion of how ECPs can complement and bolster other types of

USAID assistance. The remaining sections provide practical advice for planning and implementing an ECP. Section B focuses on planning, procurement, and project launch. Section C focuses on the nuts and bolts of implementation. Section D reviews best practices for monitoring and evaluation (M&E) of ECPs. Finally, Section E presents important considerations for replicating and adapting ECPs in other MENA countries.

In Annex A, the reader can find a model scope of work to help USAID think through how they would design an ECP that reflects the recommendations outlined throughout this guide. Annex B is a diagnostic checklist that aims to help USAID determine whether their country is appropriate for an ECP and whether their team is committed to the philosophy of a demand-driven ECP.

Annex C includes a check-list for evaluating firms for potential ECP assistance and Annex D is a bibliography of sources consulted while preparing this technical guide.

D. ASSESSMENT TEAM AND ACKNOWLEDGEMENTS

AMEG developed the Enterprise Competitiveness Technical Guide under the leadership of Bill

Baldridge, USAID Middle East Bureau Economic Growth Director. Dr. Jim Riordan, senior competitiveness expert, and Isaiah Oliver, AMEG deputy chief of party, are the principal authors of the technical guide. The team would like to thank Jeffrey Levine and Denise Lamaute of

USAID’s Middle East Bureau, for their extensive guidance, support, and input into this research.

In addition, AMEG would like to thank Paul Davis, Amel Mankai, Iskander Ben Mustapha, and the entire USAID Tunisia Business Reform and Competitiveness Program (BRCP) team for their openness and transparency in AMEG’s field assessment.

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 7

TECHNICAL GUIDE

USAID, and its Middle East Bureau in particular, is interested in exploring approaches to sustainable job creation in high-unemployment countries. This Enterprise Competitiveness

Technical Guide is the first in a series researched and published by the USAID Asia and Middle East Economic Growth Best Practices program (AMEG). These technical guides focus on approaches to improving employment outcomes in the Middle East and North Africa (MENA) region by creating jobs, matching the unemployed with employers, and boosting household incomes. The guides have two primary objectives: (a) identify the most cost-effective approaches

— i.e., those with the lowest cost per job — in MENA or in countries with comparable contexts and (b) provide practical guides to help USAID and its partners design, adapt, and implement the most impactful and cost-effective approaches to job creation across MENA.

A. IMPORTANCE AND ROLE OF ENTERPRISE COMPETITIVENESS

A1. AN INTRODUCTION TO ENTERPRISE COMPETITIVENESS

ECPs provide direct assistance to private-sector companies to help them address binding constraints to growth and increase their competitiveness — leading to increased sales and new employment. The most successful ECPs tend to be those that focus on firm-specific opportunities to identify new buyers and address constraints preventing companies from consummating deals with those buyers. These ECPs maintain as much flexibility as possible to capitalize on opportunities that may arise and hold themselves accountable for measureable results directly attributable to program activities. Examples of highly successful ECPs that inform this guide include:

Tunisia Business Reform and Competitiveness Program (BRCP). BRCP is a three-year, USAID-funded program that provides problem-solving assistance — directly and through Tunisian subcontractors — to help client firms increase their competitiveness. In its first year, BRCP provided tailored assistance to 100 enterprises resulting in 3,694 jobs, spending

$1207 of program funds per job created.

Endeavor Jordan. Endeavor is a privately funded nonprofit organization based in New York with offices in 21 countries, including six in the MENA region, that identifies and supports small- and medium-size enterprises (SMEs), regardless of sector, that can scale into large companies with the right selection of resources.

More than a dozen buyer-led programs implemented in other parts of the world. In his book, We Do Know How: A Buyer-led Approach to Creating Jobs for the Poor (New Academia, 2011), Jim Riordan examines best practices and lessons learned in ECPs in approximately 15 countries across the world, including Azerbaijan, Kosovo, Nigeria, and

Peru. In We Do Know How, Dr. Riordan presents the “buyer-led approach” to enterprise

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 8

competitiveness, which has many similarities to Tunisia BRCP. The first program to use the full-blown buyer-led approach was the Poverty Reduction and Alleviation (PRA) program in

Peru. PRA established economic service centers (ESCs) in 11 economic corridors with high rates of poverty. Through the ESCs, PRA linked individual enterprises in various sectors with demand in intermediate cities and markets beyond. In total, PRA helped create more than 80,000 jobs, at a cost of $516 per job.

A2. THEORY OF CHANGE, MARKET FAILURES, AND RESULTS FRAMEWORKS

Theory of change. To reduce poverty and raise living standards permanently, jobs must increase.

For jobs to increase, business activity must expand. For business activity to expand, sales must grow. For businesses to increase sales, firms must address the binding constraints preventing them from selling to new buyers or expanding orders with existing buyers. Based on AMEG’s research, the most cost-effective ECPs customize their assistance to attack these firm-specific constraints, resulting in a direct impact on firms’ sales and employment generation. As firms grow, ECPs can leverage these successes to influence other enterprises and, where appropriate, sector associations/organizations. As more and more firms in a geographic corridor attack their binding constraints and sell more, the competitiveness of the whole corridor increases. Over time, increased productivity and reduced unemployment put upward pressure on wages and earnings. Exhibit 1 on the next page graphically depicts this causal logic.

Although many international development experts would like to focus on sector-wide problems, the binding constraints preventing sales and employment growth are more often than not unique to individual firms — even within the same sector in the same country. Heterogeneity, not uniformity, is the touchstone here. To attack the constraints that actually matter, development practitioners must zoom in on specifics.

Economic theory underlying the enterprise competitiveness approach. At this point, understandably, one might ask, “Why should the U.S. government address the binding constraints at the enterprise-level? If firms can increase sales, shouldn’t they be able to find private sector solutions to address those constraints?” It is a fair question. In reality, there are several market failures, shown below in Exhibit 2, that typically prevent firms from addressing their binding constraints and generating new sales on their own.

Exhibit 2. Common Market Failures Addressed by ECPs

Market Constraints

Identifying buyers. Business owners often do not know where to find buyers, particularly in international markets, and how to communicate effectively with those buyers.

Understanding market demand. Without strong buyer-seller relationships, there is a weak feedback loop for business owners to know specifically what the market demands.

Lack of trust forward or backward in the value chain. Distrust of suppliers and buyers, especially in countries with weak rule of law and contract enforcement mechanisms, affects firms’ willingness to invest in new commercial relationships and expand.

Identify binding constraints preventing client from increasing orders or reaching new buyers

Customized assistance attacks binding constraints and strengthens buyer-seller relationships

Client firm enjoys increased sales to existing buyers or access to new markets

As sales increase, client firm and its suppliers must create jobs to increase production

New jobs provide income needed to reduce poverty

Strong buyer-seller relationship continues to increase sales/jobs

Exhibit 1. The Enterprise Competitiveness Program’s Causal Logic and Theory of Change

O ver tim e, reduced unemployment puts upward pressure on wages a nd ea rn in gs ri se

W or ki ng w ith m an y f rm s e xpands and deepens competitiveness of entire econom ic corridorGo th ro ugh sa me process with other clients in target economic corridor

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 9

Management Constraints

Understanding how to address the binding constraints to firm growth. When firms can identify opportunities, they often lack expertise needed to address the binding constraints preventing them from reaching new markets.

Lack of information about where to find assistance. Firms often lack information about where to find the assistance needed to address their binding constraints.

Aversion to acquiring outside assistance. Firms, especially family-run firms with limited commercial exposure, tend to be suspicious of “outsiders” and are reluctant to entertain offers of external assistance.

Financial Constraints

Lack of knowledge of how to access financial resources needed to expand sales. In MENA, as in many parts of the world, companies often say that a lack of financial resources is their primary constraint to growth. ECPs often find that financing is not the primary growth impediment but, in some instances, it is a major constraint to making necessary investments to expand business. In many instances, firms do not know how to look for and secure financial assistance.

ECPs can play a facilitative role in addressing these market failures — as an intermediary to build trust between supply chain participants; as a match-maker, linking companies with domestic and international buyers; and as a vehicle for “nudging” risk-averse business owners into taking actions they would not otherwise take.

Sustainability. ECPs focus on the sustainability of buyer-seller relationships, not whether support organizations last beyond the life of the program.

Sustainable buyer-seller relationships – evolving with the market. By facilitating relationships between client firms and their buyers, ECPs help build trust, as well as attitudes and skills to evolve with changing end-market demand/preferences.

Supply chain linkages with a sustainable profit incentive. For strong and sustainable relationships to develop between firms and their suppliers there must be an enduring profit incentive for the various parties to share information and know-how. The best ECPs start with a specific buyer and work through supply chains to strengthen supplier capacity. In many programs, large firms provide capacity building to SMEs down the supply chain.

Openness to outside assistance. By focusing on cost effectiveness, many ECPs use local consultants and consulting firms (less expensive than international alternatives) to help client firms remove the constraints that stand in the way of increasing sales and jobs. There is no guarantee that client firms will be willing to pay for those services in the future. But as firms become more exposed to outside assistance and the capacity of business development service providers grows, firms’ appreciation of the value of that assistance typically grows as well.

A3. BENEFITS TO MENA AND PROGRAMMATIC ADVANTAGE

At the end of the day, poor people need to see a tangible improvement in their lives. That is certainly true in the MENA region. ECPs focus on increasing sales and jobs to generate more

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 10

income. These are short-term, direct impacts. Specific reasons for USAID to use ECPs to address employment challenges in MENA are discussed below.

Cost effectiveness. In one year, using a conservative calculation, Tunisia BRCP helped create

3,694 jobs at a cost per job of $1,207. Not only is this cost effectiveness calculation impressive, the 3,694 jobs are jobs created — a better outcome than jobs placed3 — and are also directly attributable to BRCP activities. BRCP achieved this success in Year 1, during which multiple months were dedicated to program start-up and launch. Experience from other ECPs suggests that program cost effectiveness increases the longer a project runs and, therefore, BRCP can expect to see an increase in cost effectiveness as time goes on.

Programs in other countries have also yielded impressive results (see Exhibit 3, below).

Direct causal link with increased jobs. Unlike other approaches, ECPs provide assistance that addresses the binding constraints preventing individual firms from identifying new buyers and fulfilling new orders. By helping remove those constraints, ECPs have a direct impact on investment, enterprise growth (sales), and job creation.

Quick mobilization and focus of limited resources on assistance, not studies. ECPs can be designed and launched quickly, assisting firms within a few months of the beginning of a project.

In doing so, these programs identify specific buyers (market potential) and address the challenges (binding constraints) they face in filling orders. Other private sector development approaches often require months of research and analysis before action is taken and, even then, 3 In the context of ECPs, a job created is the result of increased business activity. If an employee quits, the company will hire someone else for that position. This is more sustainable than job placements. A person placed in a job could quit shortly after being matched, eliminating all desired impact.

Exhibit 3. Comparing Cost Effectiveness of ECPs in Generating Employment

The AMEG research team compared BRCP’s impact with that of seven other ECPs analyzed in a 2011 research paper titled, “Determinants of the Cost-Effectiveness of Business Approaches to International Development in Generating Employment: A Cross-Country Analysis.”

Paraguay Vende: $224 per job

Nigeria MARKETS: $515 per job

Peru Poverty Reduction and Alleviation Project (PRA): $516 per job

Azerbaijan Business Assistance and Development (ABAD): $590 per job

Tunisia BRCP: $1,207 per job

Bolivia Rural Competitiveness Activity (RCA): $2,799 per job

Kosovo Cluster and Business Support Project (KCBS): $3,026 per job

Armenia Micro Enterprise Development Initiative (MEDI): $3,161 per job

Through this analysis, AMEG found that agriculture-focused ECPs tend to be more cost-effective in generating employment than programs that supported primarily non-agricultural pursuits. Otherwise, no clear correlation appears to exist between the cost effectiveness of an ECP and a country’s average wage rate, exports per GDP, or other likely variables.

ENTERPRISE COMPETITIVENESS TECHNICAL GUIDE 11

may wind up picking sectors with limited potential and activities that do good things but fail to attack the idiosyncratic, binding constraints to the growth of individual firms.

Accountability at many levels. ECPs attach a high premium to sound monitoring and evaluation

(M&E). That allows USAID to hold its implementing partners accountable for results and chiefs of party to hold their teams accountable for results.

Not a “one-size-fits-all” approach: Solutions are dictated by specific problems and market opportunities. The best ECPs do not come with pre-packaged solutions in search of problems.

Instead, they attempt to find out what each client’s principal problem is, and then find creative solutions to attack it. In doing so, the programs tailor themselves to real market opportunities and attack specific constraints preventing firms from meeting the needs of buyers. As a result, U.S.

government resources are used efficiently and impact is maximized.

A4. RELATIONSHIP TO OTHER TYPES OF USAID PROGRAMMING

The best ECPs work with individual firms to improve their performance and employment outcomes, but that does not mean that ECPs should work in isolation. Conversely, ECPs can leverage their relationships with a large number of companies to serve as a feedback mechanism for other activities or to enhance private-sector involvement in other USAID activities. Specific examples of how ECPs can complement other types of economic growth programming include :

Policy and institutional reform. The best ECPs address the binding constraints preventing growth. If the major constraint is policy, the program dedicates resources to solving the policy problem. In fact, the feedback mechanism provided by direct communication with firms can raise the impact of policy activities by focusing them on the policies that pose the most significant constraints to growth, rather than relying on such indices as the World Bank

Doing Business rankings. See more in the 5 Myths section below.

Workforce development. ECPs can also shape workforce development activities to reflect real market demand and opportunities. In Tunisia, BRCP has established feedback loops between its network of client businesses and the education system. For instance, BRCP is facilitating dialogue between firms and vocational training institutions to develop new curricula and bring existing curricula in line with labor market needs. The program is also working to increase private-sector involvement in newly created Career Development Centers. These interactions are important for improving the effectiveness of educational institutions, but also to help students understand private-sector needs and opportunities. This is particularly important in MENA, where there is a historical reluctance for youth to value jobs with private businesses (outside a limited number of prestigious professions).

Agriculture. Many ECPs support agriculture sector companies to increase sales and expand employment. By focusing initially on product markets (e.g. food processors), rather than input markets (e.g. seed suppliers), ECPs ensure that support for input suppliers does not assume demand, but rather translates itself into products that get sold. As a result, ECPs can facilitate profitable market transactions that are built for long-term sustainability.

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5 COMMON MYTHS ABOUT ENTERPRISE COMPETITIVENESS PROGRAMS

Myth #1. Enterprise competitiveness programs achieve piecemeal impact and would achieve greater impact by focusing on whole sectors or value chains (VCs). Many critics argue that ECPs should address only sector-wide constraints for pre-selected priority value chains. The argument is compelling on the surface: By focusing on VCs with “significant growth potential”, the program can strengthen several links in the VC to have a catalytic impact on many firms and maximize the cost effectiveness of USAID’s investment — the number of jobs created relative to the cost of program activities. Yet there can be drawbacks: For instance, the studies required to select value chains and identify priorities typically are expensive and time-intensive. As a practical matter, activities to support VCs often focus on building capacity of sector members and market demand becomes an afterthought. These capacity building activities frequently fail to get at the binding constraints preventing individual firms from meeting the needs of specific buyers.

Contrary to common criticism, sector-agnostic ECPs are cost-effective for USAID by recognizing two truths: (1) there is significant heterogeneity in the binding constraints preventing enterprise growth, even within sectors; and (2) program activities must address client firms’ binding constraints to have a transformative impact on sales and jobs. In the most effective ECPs, USAID incentivizes the program implementer to create the most sales and jobs they can, and then provides the team flexibility to pursue the most attractive opportunities available. Rather than depending on studies, the best ECPs help firms identify specific buyers

— leaving no doubt whether assistance is “demand-driven” — and then help them address each of the constraints that prevent them from meeting the demands of buyers. By attacking these constraints directly, ECPs have a causal impact on employment outcomes, generate clearly defined social returns, and maximize the cost effectiveness of USAID programming.

Myth #2. Enterprise competitiveness programs ignore their clients’ value chains. Related to Myth #1, some critics think that sector- or value chain-agnostic ECPs ignore the value chains in which they operate and thus have less impact by ignoring capacity deficiencies at several

“links” along those chains. Again, the best ECPs attack binding constraints wherever they exist.

Those constraints do not necessarily appear on the factory floor, but instead can be for ward or backward along the value chain. For example, it could be that a company has a significant export opportunity, but is unable to grow because its suppliers are unable to provide the quantity and/or quality of inputs required to fill new orders. In such cases, ECPs can and should focus on strengthening the company’s suppliers.

Myth #3. Enterprise competitiveness programs help wealthy business owners. Another common criticism of ECPs is that they benefit big business owners, who have significant wealth and do not need help. However, the demand for SMEs’ goods and services is very often found in big firms (a basic example is a large food processor buying inputs from small farms) .

Therefore, if you take a truly demand-driven approach, you have no operational choice but to work with well endowed companies at times. An additional compelling reason good ECPs work with wealthier businesses is that they are typically the best channel to assist a development program’s target population. For an established, wealth ier business to make money, the inputs produced on the factory floor, or elsewhere, must meet certain standards. The most

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5 COMMON MYTHS ABOUT ENTERPRISE COMPETITIVENESS PROGRAMS

enlightened companies guarantee input quality by training workers or suppliers themselves.

In fact, why would a project not work with a large company that (1) is willing to train its workers and suppliers and (2) has a clear incentive to make sure the training is successful?

Myth #4. Enterprise competitiveness programs do not and cannot focus on policy reform. Private firms in the developing world often face a variety of constraints that prevent them from growing their businesses and creating jobs. Most often firms can attack those constraints transactionally as business problems. At times, though, the constraints include poorly designed and implemented policies. When that is the case, there is no reason ECPs should not try to attack them. In fact, ECPs are uniquely situated to identify what policies are binding and to mobilize firms to advocate for necessary changes. Why? Because the policies attacked by ECPs are rooted in intelligence from and commitment by the business community. Unfortunately, other USAID programs lack the feedback mechanisms to know which policies (if any) are actually a significant impediment to sales and job growth.

Myth #5. Enterprise competitiveness programs inflate the number of jobs they create in an effort to show how wonderful they are. The final myth comes from people who are skeptical of the impact of ECPs and suspect that employment numbers may be exaggerated.

On any program that seeks to create jobs, there will be an incentive for implementers to inflate the jobs they claim are being created. Without a rigorous M&E system in place with proper checks and balances, implementers may indeed inflate the jobs and sales they attribute to their project.

Yet ECPs are well suited for rigorous M&E systems, in part, because unlike most development programs, ECPs can link step by step and in causal fashion program activities with final results.

The best ECPs put in place serious M&E systems that, first, discourage activities that help firms do what they would have done anyway and, second, only count jobs actually facilitated by program assistance. Such M&E systems are invaluable management tools (which all development programs strive for, but often do not achieve) and include the following attributes:

Confirm the veracity, causality, and additionality of jobs. A strong M&E system confirms the veracity of jobs data (i.e., that a firm actually created jobs) to ensure the jobs are not fabricated or double-counted. In addition, a good M&E system verifies that jobs are directly linked to program activities (causality) and would not have been created in the absence of the program (additionality).

Establish “checks and balances”. The best ECPs make the M&E team independent from the business advisors charged with maximizing job creation. M&E staff must be accountable for data validity and empowered to question every job claimed.

Estimate program cost effectiveness. The best ECPs encourage program staff to maximize program resources by selecting activities that are cost effective. For example, some ECPs select activities only if they are expected to yield a 5-to-1 (or similar) increase in firm sales for every dollar of program funding invested. Using this approach, the M&E team independently reviews partnership agreements at the beginning, middle, and end of the program to ensure that a 5-to-1 return is realized and, if not, understand why not.

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B. LAUNCHING AN ENTERPRISE COMPETITIVENESS PROGRAM

B1. PLANNING: RFP DESIGN AND THE PROCUREMENT PROCESS

The success of the best ECPs starts at the planning stages. The best ECPs search for the bottlenecks their client firms face and then design customized solutions to attack those binding constraints; they do not try to apply pre-packaged solutions, such as financial management training, unless those solutions meet the specific constraints preventing a firm from reaching new markets, increasing sales, and creating jobs. When developing an RFP and conducting a procurement, USAID must not encourage offerors to deviate from the approach outlined in this document. More specifically, USAID would be wise to:

1. Encourage offerors to work with those firms that present the greatest potential for job growth. The most effective ECPs are those that select firms based on market opportunities and the cost-effectiveness of possible activities — i.e., by how much can they increase sales and jobs, and at what cost? At the RFP stage, USAID should avoid restricting client firms by size (see box) or sector. Instead, USAID should emphasize the importance of selecting firms based only on growth potential, taking into account the desirability of working with many firms in each sector to avoid perceptions of favoritism or monopoly creation.

2. Discourage too much specificity in offerors’ technical approaches. At the proposal stage, potential USAID implementers often feel pressure to declare confidently whom they are going to help and how they are going to do it, with as much detail as possible. As argued throughout this document, the bottlenecks preventing job growth are more often than not firm-specific and cannot be determined at the proposal stage. To acknowledge this fact, USAID should discourage offerors from proposing specific activities that will box them in during implementation. A better way to gauge the quality of their technical approaches is to ask them to react to one or more illustrative cases. A sample scope of work is in Annex A.

3. Limit the number of pages allotted to the technical approach. The longer the technical approach, the more pressure offerors will feel to add counter-productive specificity to their proposed approaches and activities. As such, USAID should limit the number of pages allotted to the technical approach section to no more than 10 pages. This page limit should not prevent offerors from demonstrating their understanding of the enterprise competitiveness approach and how it can be applied successfully in the relevant country (by responding to a case study, as discussed in the previous paragraph).

To SME or not to SME?

Many countries possess economies dominated (in number) by SMEs. Does this mean that USAID should support only SMEs? No. The primary source of demand for SMEs, particularly those in rural areas, is typically found in large firms. As such, it makes no sense to restrict the ECP’s ability to engage and support medium and large businesses.

See Myth #3 above for more detail.

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4. Ensure results frameworks, logical frameworks, or causal models do not reward offerors that bring pre-identified solutions. Results frameworks are a valuable tool for illustrating the development hypotheses and causal linkages underlying a program. However, when too specific, they can encourage offerors to make assumptions prematurely about the binding constraints facing future clients. Exhibit 4 below outlines tips for ECP results frameworks.

The same guidance applies to logical frameworks and causal models.

5. Create incentives for optimal performance. Unlike most other development programs, ECPs can be structured so that (1) the ECP is able to track jobs created as a consequence of program activities and (2) the ECP program leadership team can hold its business advisors accountable for the performance of their “portfolios” of client firms. This allows USAID and the program leadership to hold people accountable for results without dictating the best method for achieving results — a perfect way to foster innovation in development. To maximize impact, USAID’s contracting officers should allow offerors to propose and disburse incentive bonuses to high performing business advisors. Under such a scheme, the business advisors receive bonuses as a function of the degree to which the client sales and jobs generated as a result of their work exceed targets established at the beginning of each year. A modest performance bonus is often a tiny fraction of the overall ECP budget, but can result in a substantial difference in program impact.

6. Include two components in the RFP design: (1) transactional firm-level assistance and (2) assistance to address systemic issues, such as policy and institutional reform. To maximize results, ECPs should start by focusing solely on firm-specific, transactional issues preventing increased sales and jobs. Over time, the implementer will likely identify systemic barriers (policy or institutional) to sales and employment growth. By including these two

Exhibit 4. Tips for RFPs and Results Frameworks

Allow as much flexibility as possible. Programs are often designed too rigidly during the proposal/start-up phase, before the program team knows what the demand actually is for their partner firms’ goods and services and what the key constraints to meeting that demand actually are. Our research suggests it would behoove USAID and its implementing partners to fight the inclination to define firm-level growth constraints, proposed activities, and target sectors/value chains in detail before they have actually developed working relationships with client firms.

Keep results frameworks streamlined. The more detailed a results framework becomes, the more likely program activities will be written in stone prematurely. For example, if a results framework includes “Access to Finance Increased” as a PIR, the implementer will focus on access to finance regardless of whether financial management is the top problem of client firms and such activities meet the 5-to-1 cost effectiveness rule (see Section B2). It is best to identify problems before defining solutions. As such, the more flexibility built into RFPs and results frameworks, the better.

Elevate the importance of results and accountability. The lack of specificity in the results framework may make some people uncomfortable. Rather than dictate specific activities and approaches, however, it is better to focus on jobs, ensure they are measured in a way that is clearly defined and transparent , and then hold implementers accountable for bringing those results about. This will incentivize ECPs to find the specific problems facing each firm and then design customized solutions to remove those constraints and generate jobs.

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components, USAID gives the implementer the flexibility to “search” for the best solutions to binding problems and to focus resources on the most cost-effective activities.