Which Factors Determine the Upgrading of Small and Medium-Sized Enterprises (SMEs)? The case of Egypt Markus Loewe Iman Al-Ayouty Annegret Altpeter Lisa Borbein Marc Chantelauze Maximilian Kern Elisabeth Niendorf Malak Reda In co-operation with the Egyptian Center for Economic Studies (ECES)
Which factors determine the upgrading of small and medium-sized enterprises (SMEs)?
The German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) is a multidisciplinary research, consultancy and training institute for Germany’s bilateral and for multilateral development cooperation. On the basis of independent research, it acts as consultant to public institutions in Germany and abroad on current issues of cooperation between developed and developing countries. Through its 9-months training course, the German Development Institute prepares German and European university graduates for a career in the field of development policy.
Markus Loewe, Department Competitiveness and Social Development, German Development Institute, Bonn E-Mail:
[email protected]
Studies Deutsches Institut für Entwicklungspolitik
76
Which factors determine the upgrading of small and medium-sized enterprises (SMEs)? The case of Egypt
Markus Loewe Iman Al-Ayouty Annegret Altpeter Lisa Borbein Marc Chantelauze Maximilian Kern Elisabeth Niendorf Malak Reda
in co-operation with the Egyptian Center for Economic Studies (ECES), Cairo
Bonn 2013
Studies / Deutsches Institut für Entwicklungspolitik ISSN 1860-0468
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Abstract Many low- and middle-income countries have many micro and small but only a very few medium-sized and large enterprises. Micro and small firms seem to have difficulties growing into medium-sized companies. This is problematic because it is medium-sized companies that tend to be the main creators of higher quality and better-paid employment, motors of innovation and economic diversification, and future exporters. Companies grow for various reasons that are beyond their control, such as an increase in demand or failures of competitors. However, the only strategy that an enterprise can control is growth through innovation, which we term ‘upgrading’. A large strand of literature discusses the factors that favour or hamper the upgrading of small and medium-sized enterprises (SMEs): entrepreneur characteristics (education, gender, behaviour, etc.), firm characteristics (sector, location, workforce characteristics, etc.), inter-firm linkages (integration into value chains, clusters or business networks) and the business environment (macroeconomic and political stability, regulation, availability of finance, etc.). However, only a few studies provide empirical evidence for determining the most significant factors for SME upgrading in low- and middle-income countries. This study is meant to fill this gap thereby referring to Egypt. It is based on enterprise panel data from 2004 and 2008, a survey conducted by the authors in early 2012 among 102 SMEs and interviews with experts on private-sector development. It draws five main conclusions: •
The scarcity of medium-sized enterprises in Egypt is not only due to the difficulty of SMEs to upgrade but also to their challenges in remaining medium-sized – or large.
•
In Egypt the main determinants for upgrading are the entrepreneur’s: (i) human capital (quality of education, work experience and international exposure), (ii) motivation and readiness to take risks, (iii) investment in human resources, (iv) market research, (v) access to finance and (vi) ability to deal with persistent deficits in the rule of law.
•
SMEs in Egypt are also constrained by the business environment, notably problems in state-business interactions such as licensing, taxa-
tion, inspections and competition control. But these problems are mainly due to deficits in law enforcement rather than what these procedures cost in time and money. •
While integration into value chains and clusters might help SMEs to upgrade, the great reluctance of Egyptian entrepreneurs to co-operate with each other means that they cannot benefit from the advantages of vertical or horizontal business linkages.
•
The success of an SME largely depends on the owner’s capabilities. All SME owners in Egypt are constrained by structural factors such as deficiencies regarding education, skilled workers, market information, access to finance and law enforcement. However, a few SMEs manage to circumvent these obstacles.
To enable more SMEs to upgrade, the government of Egypt should improve its educational and vocational training system, help entrepreneurs conduct human resource development and market research, ease SME owners’ access to finance and strengthen the rule of law.
Foreword This report presents the findings of a research project on the determinants of the upgrading of small and medium-sized enterprises (SMEs) in Egypt. It was conducted between November 2011 and May 2012 by an eight-member team from the German Development Institute/ Deutsches Institut für Entwicklungspolitik (DIE) in Bonn and the Egyptian Center for Economic Studies (ECES) in Cairo. The team included Markus Loewe (DIE), the team-leader, and seven other researchers: Iman Al-Ayouty and Malak Reda from ECES, as well as Annegret Altpeter, Lisa Borbein, Marc Chantelauze, Maximilian Kern and Elisabeth Niendorf from DIE. The research project on Egypt was part of a larger cluster of DIE research projects on SME upgrading in low- and middle-income countries. Projects using similar research methodology were conducted in the Philippines and India, which will also be published by DIE in 2013. The findings of the case study on Egypt were presented at a workshop at ECES on 24 April 2012 in Cairo and during a conference held at the Arab Academy for Science, Technology and Maritime Transport on 26 June 2012 in Alexandria. The results received a lot of attention in the Egyptian media; for example, the front-page story of the June 2012 issue of Business Today Egypt was devoted to the DIE–ECES study (Aref 2012). The study was also presented for discussion, along with the two case studies on India and the Philippines, on 29 May 2012 at the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) in Eschborn, Germany and at an academic workshop at DIE on 28 November 2012 in Bonn. The DIE–ECES research project had two major objectives: (i) to provide empirical evidence for academic debate on the determinants of SME upgrading and (ii) to learn which factors policy-makers should focus on so as to facilitate the upgrading of SMEs in Egypt. This report addresses academics, journalists and policy-makers such as the government of Egypt, independent private-sector associations, non-governmental organisations and foreign donors that would like to contribute to the field of SME development. Of course, the special conditions of post-revolutionary Egypt have significantly affected both the conduct and the results of this research. Many in-
terlocutors cited the post-revolution downturn of the Egyptian economy as a major problem – not just for SMEs. Since this shock affected almost everyone in the country, it cannot be regarded as a factor that specifically constrains SMEs from upgrading. It was sometimes difficult to isolate the effects of this one-time general shock from the effects of more structural and long-term factors. All names of persons are spelled as the individuals wish. The names of towns and other geographical terms have been transliterated into English in the most common fashion. By agreement, the names of all SME representatives and their companies have been changed. We do not quote any of the interviewed SME owners by their name or by the name of their company. We have promised them beforehand to treat all information given by them confidentially.
Acknowledgements The joint DIE–ECES research team is grateful for the co-operation of all our interlocutors and the warm and pleasant atmosphere in which we were received – almost everywhere in Egypt. We particularly thank the following persons for their invaluable support in helping us meet other experts or SME owners: Mohamed Abbas (Ministry for Industry and Foreign Trade), Hisham Abd El Hady (Bishara Textile and Garment Manufacturing), Helmy Abouleish (Sekem), Mahmoud Mohammed Ahmed (German-Arab Chamber of Commerce), Tarek Abdel Aliem (Forum for Training and Education), Azmy Moustafa Aly (Social Fund for Development), Amany Asfour (Egyptian Business Women Association), Fatma Aziz (Egyptian Small Enterprise Development Foundation), Giovanna Ceglie (United Nations Industrial Development Organization), Ahmed El Bedawy (Endeavor), Khaled El Behairy (Egyptian Chamber of Textile Industries), Hanan El Hadary (Ministry for Industry and Foreign Trade), Amirah El-Haddad (Cairo University), Yomna El Sheridy (Business Women of Egypt 21), Alaa Fahmy (Agriculture and Agro-Industries Technology Center), Ahmed Geneidi (Friedrich Ebert Foundation), Heba Handoussa (Economic Research Forum), Ahmed Elshahat Hassan (Industrial Training Council), Lisa Heermann (Global Project Partners), Moshir Ismail (Enterprise TVET Partnership for Ready Made Garment), Khalil Nasrallah (Wadi Group), Eman Omran (Canadian International Development Agency), Florian Reil (Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ), Khalil Shaat (GIZ), Magdy Tolba (Cairo Cotton Center) and Nele Wasmuth (GIZ). We also express our deep gratitude to Jennifer Bremer (American University in Cairo), Peter Knorringa (International Institute of Social Studies, The Hague), Julia Kubny (KfW Development Bank, Frankfurt/Main), Valérie Peters (GIZ), Christina Rosendahl (GIZ) and Hubert Schmitz (Institute of Development Studies at the University of Sussex, Brighton), as well as our colleagues Tilman Altenburg (DIE), Aimée Hampel-Milagrosa (DIE), Omneia Helmy (ECES) and Caroline Reeg (DIE) for their invaluable comments on earlier drafts of this study! In addition, we deeply thank Mohamed Ali Abdel Fatah, research analyst at ECES, for his great support for the quantitative data analysis, as well as
Ina Klemke, Renate Bugdoll and Nancy du Plessis for formatting and copyediting the text of this study! Our very special thanks go to our six excellent interpreters. They did a wonderful job by not just translating what was said during the interviews but also helping us better understand behaviours and avoid cultural faux pas: Huda Sayed Abdelwahab Abdelgany, Sarah Haitham Mustafa Eid, Eman Ahmed Mohamed El Hady, Sara Sameh Mohammed Hamed, Nariman Moustafa and Noha Shoeib Abdou Syam! Thank you very much for your support! Bonn, November 2012
Markus Loewe Iman Al-Ayouty Annegret Altpeter Lisa Borbein Marc Chantelauze Maximilian Kern Elisabeth Niendorf Malak Reda
Contents Abbreviations Executive summary
1
1
Introduction
13
2
SME upgrading and its factors: the conceptual framework
18
2.1
SME upgrading
18
2.2 2.2.1 2.2.2 2.2.3 2.2.4
Determinants of SME upgrading Entrepreneur characteristics Firm characteristics Inter-firm linkages Business environment
21 23 27 30 33
3
The ‘missing middle’ in the context of Egypt’s development conditions
41
3.1
Economic development conditions
42
3.2
The neo-patrimonial rule under Mubarak
42
3.3
Economic problems
48
3.4
Responding to Egypt’s economic problems by filling the ‘missing middle’
50
3.5 3.5.1 3.5.2
The SME sector Definition of SMEs Characteristics of the SME sector
51 52 53
4
Research methodology
56
4.1
Research hypotheses
57
4.2 4.2.1 4.2.2 4.2.3 4.3 4.3.1
Sector selection The food-processing sector The textiles and garments sector The information and communications technology (ICT) sector
59 60 62 64
4.3.2 4.3.3
Research design Analysis of panel data from the Egypt Investment Climate Surveys 2004 and 2008 SME survey Interviews with SME experts
65 67 72 89
5
Factors in SME upgrading in Egypt: the findings
90
5.1
Identification of the main determinants
102
5.2 5.2.1 5.2.2 5.2.3 5.2.4
Detailed findings for all factors Entrepreneur characteristics Firm characteristics Inter-firm linkages Business environment
119 119 131 148 154
6
Policy recommendations
175
6.1
Human capital
177
6.2
Human resource development (HRD)
178
6.3
Market research
179
6.4
Access to finance
180
6.5
Law enforcement
182
Bibliography
185
List of interviewed experts
207
Annexes Annex A:
Results of interviews with SMEs
217
Annex B:
Questionnaire used for interviews with SMEs
261
Annex C:
Results of the logit estimations with the EICS panel data
279
Boxes Box 1:
The political economy framework: a historical breakdown and the effects of Egypt’s revolution
44
Figure 1:
SME upgrading
19
Figure 2:
The four layers of factors that determine SMEs upgrading
22
Figure 3:
Inter-firm linkages
31
Figure 4:
Distribution by size of formal-sector firms in foodprocessing and textiles and garments sectors in Egypt
55
Figure 5:
Selection methods for SME survey
73
Figure 6:
Location of SMEs in Greater Cairo
78
Figure 7:
Location of SMEs in Greater Cairo and elsewhere
79
Figure 8:
Distribution of companies interviewed – by economic sector
80
Distribution of companies interviewed – by owner’s educational level
80
Figure 10:
Types of company innovations
81
Figure 11:
SME classifications
85
Figure 12:
Growth and contraction of companies in sample
91
Figure 13:
Upgrading factors: complements and substitutes
101
Figure 14:
Main obstacles to SME growth (open question)
104
Figure 15:
Main obstacles to SME growth (closed question)
105
Figures
Figure 9:
Figure 16: Figure 17: Figure 18: Figure 19: Figure 20:
Main reasons for differences in SME upgrading ease in Egypt (open question)
107
Main reasons for differences in SME upgrading ease in Egypt (closed question)
108
Characteristics of ‘gazelle upgraders’ and ‘non-upgraders’
109
Regression results for SME growth based on SME age and owner education
113
Initial and immediate factors in SME upgrading
115
Tables in Text Table 1:
Distribution of formal private-sector enterprises and share of nation-wide employment
54
Timeline of research mission to Egypt (February–April 2012)
67
Description of variables in analysis of EICS panel data (logit estimation)
70
Table 4:
Representativeness of sample
77
Table 5:
Indicators used to verify upgrading
84
Table 6:
Identification of cut-off points (exemplified)
88
Table 7:
Main determinants of SME upgrading in Egypt
93
Table 8:
Classification of factors based on importance for SME upgrading
95
Main obstacles to SME upgrading in Egypt, India and the Philippines
98
Main success factors for SME upgrading in Egypt, India and the Philippines
99
Statistical significance of divergence of means for gazelles/non-gazelles and upgraders/non-upgraders (by t-tests)
110
Table 2: Table 3:
Table 9: Table 10: Table 11:
Tables in Annex Table A1:
Sampling method
219
Table A2:
Location of companies – by geographical region
220
Table A3:
Location of companies – by governorate, town and urban district
221
Table A4:
Economic sector of companies
223
Table A5:
Owner’s gender
224
Table A6:
Company size
224
Table A7:
Number of growing and contracting companies
225
Table A8:
Some averages
227
Table A9:
Number of companies that introduced tangible innovation(s) during the previous five years
228
Initial number of company employees
230
Table A10:
Table A11a: Main obstacles to upgrading (open question)
231
Table A11b: Main obstacles for companies with
