What is Important for Building Market Systems Resilience?
This post was written by Benjamin Medam and Daniel Hudner, Mercy Corps was originally published on the Vikāra Institute's website.
A deep dive into the small business sector in Lebanon
The blog highlights excellent research that Mercy Corp is conducting in various countries, and focusing on what they are learning in Lebanon. While the blog provides important insights especially related to firm-level characteristics, it also uncovers a challenge in MSD and market systems resilience (MSR). Cooperation and competition are essential ideas in MSD and MSR, but there is still a lot to learn from these concepts. For example, the blog points out that cooperative firms, which they frame as firms that cooperate with other firms within their function, were less innovative, meaning that they were less able to innovate themselves out of a crisis. They also identified that firms that responded to competitive pressure by adapting internal operations to improve their performance, including developing innovative ways of managing risks. In both cases, they are not talking about cooperation and competition in general, but about how cooperation/competition manifests in ways that are positive.
It is also important to recognize that in many market systems firms respond to competitive pressures by wielding their power and connections (i.e., cooperation) to attack their competitors to hurt them or gain an unfair advantage somehow. Recent learning in MSR suggests that looking at the competitive landscape to gain insights into the incentives, influences, etc., that encourage firms to form patterns in terms of how they compete/cooperate, whether in good or bad ways, can be very helpful in determining intervention opportunities. But, as the blog points out, there is more to learn, especially around a more nuanced understanding of the interplay/interdependence of firm-level and system-level characteristics related to competition and cooperation.
Market Systems Development practitioners typically work with diverse market actors towards long-run, widespread inclusive growth. However, even dynamic markets can falter in the face of protracted crises and severe shocks, and achieving growth during a project does not make it permanent -. In spite of this fragility, populations experiencing shocks and stresses depend more on markets than aid to continue producing, consuming, and exchanging. USAID, Mercy Corps, and others recognized the need to make markets more reliable and consistent sources of support. At Mercy Corps, we started by adapting USAID’s framework for measuring market systems resilience (MSR) and testing it in program assessments in various contexts from Nigeria and Uganda to Iraq and Lebanon.
Each of these contexts faced its own set of challenges. Here we explore our experience in Lebanon, where years of economic deterioration marked by rising prices, and unemployment culminated in extended protests in October 2019. The situation was exacerbated by the 2020 Beirut Blast, which led to greater distrust in the government. Small businesses continue to suffer from political and economic instability. Yet, we know that small and medium enterprises are a bloodline across cities and communities, making up 95% of companies and 50% of the labor force in the country. They provide livelihoods for owners and employees, and offer essential goods and services even in chaotic and fragile settings.
In 2020, Mercy Corps teamed up with Agora Global and Economic Development Solutions to assess the extent of the impacts of these economic stresses on microenterprises in Lebanon and the functions, rules, and norms that support them. Simultaneously, we sought to understand microenterprises’ sources of resilience - the capacities, skills, and resources in their market systems - which donors and development actors can bolster to support future recovery and adaptability.
We started with an exploratory analysis of quantitative data collected by the World Bank from micro, small, and medium enterprises and followed with a primary quantitative and qualitative data collection with microenterprises: firms of four or fewer employees. Based on the preliminary findings we decided to focus on "thrivers" and "divers", taking lessons of the highest- and lowest-performing outliers.
What Led Micro-enterprises to Thrive or Drive?
Unsurprisingly, many predictors of success are innate characteristics of the firms and their owners. Education levels matter. Access to USD in Lebanon’s inflationary environment is important. Firms with high overheads and business volumes had higher risk exposure. Among micro-enterprises, bigger is not always better in the context of crises, an important consideration for MSD programs prioritizing scalability. We also found that younger firms performed better - thriving more often and diving less - suggesting they could adapt better than more established firms.
It’s simple to spot signs of adaptation after a crisis, but with an eye to programming, we wanted to understand the predictors of successfully adaptive firms. This was important for two reasons: understanding what helps firms adapt informs the types of market functions we and other organizations should be supporting through programming. It also helps us to think about our criteria for selecting partners in Lebanon and other crisis settings, where the risks of firm failure may be high. Here are some key things we learned about adaptive firms from our investigation
- Firms that constantly improved processes and products during more stable times were better equipped to do so as the economy deteriorated, and more likely to thrive.
- The mindset of the business, being competitive versus cooperative, mattered and a competitive spirit led to more innovation. Competitive firms distinguish themselves from peers by introducing new products and services to the market. In contrast, Cooperative firms replicate others’ business models rather than innovating. It is no surprise that 63% of thrivers were the more competitive “true” innovators, while 87% of divers were the slower replicators.
- The type of adaptations mattered as well. Thrivers make more radical changes to their processes and product offerings, while divers often take smaller cost-cutting measures that prove ineffective.
What Does This Mean for Programming?
Understanding firms’ decision-making, their perspective of the market, and their capacity to innovate should guide the type of business advisory services organizations offer micro-enterprises. These findings underscore the importance of market research in order to build robust networks that can provide goods, services, and jobs in the sectors where MSD programs operate.
Our research also shows that business networks also matter, but the type and focus of these networks determine whether they help or hinder resilience. A far higher proportion of thrivers were part of a formal business network – 42% versus 18% of divers. However, the quality of these business networks (Chambers of Commerce, guilds etc.) varies widely. These findings underscore the point that business management operations (BMO) interventions are challenging. If a network is too broad or poorly managed, like many Chambers of Commerce, there may not be enough common goals to provide value to micro-enterprises.
What About the (financial) Elephant in the Room?
Of course, access to finance, and access to USD, are critical to firms’ survival in Lebanon but we also explored other factors that help or hinder microenterprises and the systems that support them. We found that many lending vehicles in Lebanon are not currently fit for purpose. Microenterprises rarely use credit, and of those that did in the study, many that used only one source dived. Having diverse sources helped, and we saw that firms with multiple lines of credit were more likely to thrive. Similarly, firms with multiple sources of income such as remittances and other household salaries were more resilient. Access to finance is undeniably impacted by the strength of an individual or firm’s business and social networks, but these findings remind us that interventions that rely on formal financial services may not be as useful for informal businesses and those in fragile markets. More direct forms of financial support may provide better bridges in a crisis, and supporting embedded value/supply chain finance is more important than ever.
Through this study, we learned a lot about the determinants of resilience in market systems - firms' capacity to innovate even before the crisis, the competitive spirit of the business owner, how/if business networks affect microenterprise resilience and the role of formal financial services in supporting informal business in crisis settings. We are continuing to learn from our analysis, discovering more nuances in the findings that can inform donor strategies and program approaches. We look forward to sharing our research brief soon and learning from others’ studies on the topic of enterprise resilience.
About the Authors:
Benjamin Medam is the Program Performance & Quality Manager at Mercy Corps Lebanon. He has over 8 years of proven experience in program strategy, design and implementation as well as research and evaluation with humanitarian and development INGOs in West and Central Africa, Southeast Asia and the Middle East.
Dan Hudner is a Senior Researcher for Markets and Resilience at Mercy Corps. His research focuses on the intersection of market systems and resilience, especially in fragile and crisis-affected areas in the Middle East and Africa.