Growing SMEs: Connecting with the Right Audience
This blog was authored by Anastasia de Santos, Natalie Shemwell, and Ron Ashkin.
Growing small and medium enterprises (SMEs) is an important goal of much donor assistance. However, development practitioners do not always articulate theoretical frameworks linking interventions to outcomes of sales or employment growth. In the newly published USAID report, Theories of Change: High-Growth Small and Medium Enterprises, we reviewed the latest research and interviewed SME development experts to articulate popular theories of change and to present available evidence around them, as summarized in the following table.
Regardless of the specific intervention, however, targeting is very important, and doing it right could make or break program effectiveness. Even if you implement learning from all the evidence in the world, it will not help if the study enterprises were too different from the target firms. For pragmatic reasons, many organizations use basic eligibility criteria such as a minimum firm age and registration status; beyond these, firms essentially self-select to participate in programs, as we will talk about shortly.
Other targeting methods that some of our colleagues have tested recently include having expert judges select applicants in business plan competitions; using demographic attributes such as gender, age, education or ability; machine learning; and psychometric testing. The expert judges and machine learning do not target very well; and while the demographics do have some predictive value for who could grow the most with a large cash grant (30-something males with a high Raven test score), that just suggests that entrepreneurs with different demographic attributes could benefit from other interventions. Psychometric testing does work in targeting potential SME borrowers who had a thin credit history, in that they were as likely as other borrowers to repay their loan; but it does not work well for SMEs with a strong credit history. Clearly, these findings are all very specific to certain firms and interventions, and we need much more research and evidence on the question.
The experience of USAID/Vietnam’s Linkages for Small and Medium Enterprises (USAID LinkSME) is that SME self-selection is important, as the "right ones" are the SMEs with alignment with the activity’s growth objectives in management mentality. Best practice is to avoid pre-selecting the portfolio at the beginning of the project - that is a failing strategy because markets are just too dynamic and the project needs to adapt to market changes. The answer lies in casting a wide net for project participant intake, so those who see the benefits of participating can opt-in. USAID LinkSME uses at least eight different channels to recruit SMEs into its database, which is accessible through an online form. Some practical tips include:
Think like a business without customers - analyze customer behavior, find out where SMEs in the target group prefer to get their information and mine those channels.
Sell the project’s benefits.
Use a variety of channels to introduce the project to stakeholders and make it easy for them to join, always making sure to target appropriately (i.e., do not use mass-market channels to reach a narrow audience).
Use the leverage that partner organizations offer - for example, work through business associations in the target sector(s) that already have a member database, instead of creating a new database or identifying SMEs one-by-one.
SME development is a field with much uncharted territory, where donors, implementers and researchers should collaborate to better understand effective targeting, as well as the impact of advanced business training, matching grants, private equity, financial technology applications, end-market linkages, and product and process innovation, among others. USAID/E3’s Office of Trade and Regulatory Reform will continue to share new evidence and experience as it emerges. In the meantime, for more details on different global studies and USAID/Vietnam’s specific experience with USAID LinkSME, check out the event page for our recent webinar, Growing Small and Medium Enterprises: What Works?