Feed the Future
This project is part of the U.S. Government's global hunger and food security initiative.

1.3.2. Business Enabling Environment--Overview

What is the Business Enabling Environment?

The business enabling environment (BEE) includes norms and customs, laws, regulations, policies, international trade agreements and public infrastructure that either facilitate or hinder the movement of a product or service along its value chain. At one end of the spectrum, conventions, treaties, agreements and market standards shape the global business enabling environment. Trade agreements, such as the Lomé Convention or AGOA, can open opportunities for firms; simultaneously, complying with international standards such as GLOBALGAP and USDA’s APHIS program can be expensive for small firms, precluding them from being competitive. The business enabling environment at the national and local level encompasses policies, administrative procedures, enacted regulations and the state of public infrastructure. Analysis of the BEE at these levels may need to be further broken down in terms of firm size since there may be constraints and opportunities distinctly facing micro- and small enterprises (MSEs).

In addition to these more formal factors, social norms, business culture and local expectations can be powerful aspects of the business enabling environment. Understanding these unwritten rules of society is essential if practitioners are to understand why value chain actors behave the way they do, and reasonably predict how they will behave in response to value chain interventions.

The informal rules or regulations found in any business environment do not arise arbitrarily. They have historical roots, and are strongly determined by the social institutions of that community—including gender, race, ethnicity, class and religion.

For more on informal rules and social regulation in the BEE, click here.

Why Does the Business Enabling Environment Matter?

Every day an entrepreneur spends filling out paperwork or in line at a government office is a day not making sales or finding new customers. Burdensome and unpredictable regulation is costly both in terms of the time and money required for compliance as well as in opportunity cost. In many countries, these costs are substantial. In Brazil, for example, not only is the tax rate nearly 70 percent, but the procedures are so complicated that the average amount of time required to prepare, file and pay taxes is estimated to be 325 days.[1]

A growth-oriented small businessperson faces a choice: comply with regulations and incur costs so high that they jeopardize the business’s viability or try to survive in the informal sector without bank credit or enforceable contracts and at constant risk of harassment from authorities. Approximately 60 percent of urban businesses in Africa, 40-60 percent in Asia and 58 percent in Latin America remain outside the formal sector.[2] They are limited in their ability to grow, attract investment and hire more workers. The workers they do employ have no legal protections. Without informal enterprises’ tax contributions, government is limited in its ability to provide services and the tax burden on registered businesses is greater than it should be.

Reform of the BEE can result in substantial benefits for an economy including faster growth, less unemployment, more gains from trade, greater formalization, reduced poverty, less corruption and lower budget deficits.

BEE and the Value Chain Project Cycle

Image:Project Cycle Small.jpg

Improving the business environment by lifting constraints and filling gaps in the regulatory and administrative support mechanisms is central to any comprehensive competitiveness strategy for a targeted value chain. Consideration of the enabling environment should inform each stage of a value chain development project.

Value Chain Selection

BEE opportunities for specific value chains to become more competitive or achieve significant impact may influence the selection of value chains targeted for development. Conversely, if specific value chains face BEE constraints that can not be addressed by a project, implementers may decide to select alternative value chains. Click here for special considerations in post-conflict situations.

Value Chain Analysis

An analysis of policy constraints and opportunities, which is integral to value chain analysis, can be used during the development of a competitiveness strategy to identify where and how to compete in target markets. While benchmarking reports and diagnostic tools can facilitate an economy-wide view of business environment constraints or opportunities, most of them do not include sector- or industry-specific indicators; this may limit their utility in identifying value chain-specific constraints. Additionally, by relying solely on broadly-focused reports or diagnostics, program designers may waste time considering reforms that are not relevant to their targeted value chains. Some more specific tools can help focus analysis of the enabling environment:

  • USAID's Competitiveness Impacts of Business Environment Reforms (CIBER) tool aims to engage value chain actors in a participatory assessment process to identify high-priority reforms and develop a plan of action.
  • The Climate, Legal, and Institutional Reform (CLIR) tools offer a data-rich assessment of a country's business environment to help governments and donors gain a comprehensive understanding of the barriers to private-sector growth.
  • International ranking and benchmarking reports are often a good starting point for obtaining a snapshot or overview of a country's business climate.
  • The International Finance Corporation BEE Toolkits provide step-by-step guides to both diagnosing and facilitating business environment reforms.

Design and Implementation

Activities leading to policy reform are often a key component during implementation. Two popular and complementary types of approaches for reforming the business environment are referred to as "top-down"--national-level and/or public sector-driven--and "bottom-up"--local-level and/or private-sector driven. However, it is difficult sometimes to draw a clear line to distinguish a "top-down" approach from a "bottom-up" one. Oftentimes, elements of both types of approaches are combined to form an effective reform strategy. Click here for more on the different approaches to policy reform. Regardless of the approach, the engagement of both public and private sector actors through appropriate dialogue and strategic communications is imperative to the success of any business environment reform initiative.

Monitoring and Evaluation

Monitoring of progress in the area of reform may lead to a reassessment of the choice of value chain should BEE constraints be so binding as to prohibit or severely limit the return on investment. Monitoring and evaluation is complex in any private-sector development project, but BEE reforms present special challenges that should be considered[3]:

  • What is success? Desired outcomes of business environment reform projects vary. For example, the number of administrative procedures required of a firm may be less relevant than the time or cost needed to complete these procedures. In some cases, the time required to complete a procedure may be reduced as a result of a project initiative, but only at the expense of cost. Futher, the results of reforms may affect firms differently based on their size and location.
  • What is the most appropriate timing for evaluation? BEE reform activities often set in motion changes in attitudes and roles in organizations that may not be fully realized until several years after a project ends. An evaluation conducted as a project closes may not capture the full benefits of the activities.
  • Can success or failure reasonably be attributed to the project? External factors affect the results of a program in both positive and negative ways making it difficult to isolate the impact of reforms. These factors include trade reform, fiscal and monetary policy, prices of input factors, improvements to the educational system, civil service reform and political reform.

Care must be taken in selecting indicators. Doing Business[4] indicators are most useful at the beginning of a reform process to select reform priorities and generate interest in undertaking reforms. They are rarely appropriate for monitoring and evaluation. For guidance on conducting monitoring and evaluation, see Monitoring and Evaluation

What is Successful Reform?

Reform is a political process that encompasses much more than a series if inputs leading to discrete legal outputs. Successful reform incorporates relationships and shapes incentives that drive both business and government behavior. Successful reform builds trust, promotes transparency and ensures that benefits accrue to those taking risk. The most significant policy reform may not be the creation of a new law or policy, but rather changing or improving the implementation of an existing law or policy. Successful policy reform requires changing three things:

  • how laws are implemented
  • the burdens that are placed on businesses and the relationships in which businesses can engage
  • the incentives that drive business decisions

If a reform cannot be expected to change how businesses make decisions, it may be preferable to focus resources elsewhere. Private-sector entities within a value chain can inform the process: they know whether or not a law is important, and whether reform is likely to change how they behave.

Lessons Learned in BEE Reform

There is no standard process for reform, and there can be no “how to” manual. Different reforms involve different stakeholders and different mixes of technical, political and institutional issues. Reform is also shaped by a country’s politics and capacity. Nevertheless there are common insights and lessons that emerge, and these lessons provide something of a checklist for reformers:[5]

  1. Use the wide and growing array of new tools to benchmark and diagnose constraints and identify reform priorities.
  2. Foster competition through trade and product market reforms to create pressure for other investment climate reforms.
  3. Generate and leverage new information on specific policy reforms and proven good practices to expose the costs of the status quo, build support and overcome opposition.
  4. Seize crisis or political change to push through bold reforms. AC
  5. Use pilots and sector-specific interventions as learning and demonstration tools when reforms face great uncertainty or strong opposition.
  6. Leverage and empower supporters to help mitigate opposition using a mix of strategies and techniques, while maintaining dialogue with the private sector and other key stakeholder groups.
  7. Do not wait for long-term public sector reform to create the right incentives and capacity for implementation. Bring in new leadership and skills from the outside, set performance targets and incentives, leverage new information technology solutions, and outsource implementation to the private sector.
  8. Build on dedicated, empowered and competent teams to lead and sustain the reform process while ensuring transparency and accountability.
  9. Monitor progress closely against realistic and agreed upon targets and set up systems early in the process to measure results on the ground.
  10. Pay as much attention to getting the reform process right as to the technical content of reform to achieve desirable and sustainable policies and outcomes.

 

Resources

Footnotes

  1. World Bank, Doing Business 2008
  2. K. Floodman Becker, The Informal Economy: Fact Finding Study, SIDA, 2004
  3. The Monitoring and Evaluation Handbook for Business Environment Reform, by the IFC, GTZ and DFID
  4. World Bank's Doing Business Series
  5. Source: Sunita Kikeri, Thomas Kenyon, Vincent Palmade, ‘’Reforming the Investment Climate: Lessons for Practitioners’’, 2006