An Export Strategy for Small and Medium Enterprises in Egypt

October 2005

Table of Contents

List of Abbreviations 4 List of Tables 7

Introduction 11 Chapter One: Literature Review on International Experiences 12 Canada’s Experience 14 China’s Experience 17 India’s Experience 19 United Kingdom’s Experience 23 Jordan’s Experience 27 South Africa’s Experience 31 Experiences from Other Countries 47 Lessons learned from other Countries Experiences 50 Chapter Two: Literature Review and Current Status of M/SMEs in Egypt

51

Exogenous Factors 54 Globalization & Free Trade 54 Macroeconomic Environment 55 Endogenous Factors 64 Conclusion 65

Chapter Three: M/SMEs in Egypt based on the Survey Analysis 65 Section One: Introduction: 65 Section Two: Field of Business And Foreign Trade 72

Section Three: the Success Criteria 76

Section Four: the Main Features of Exports 81

Section Five: Institutional Environment and Incentive Structures 82

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Section Six: Major Obstacles Facing Exportation and Recommended Policies 87

Summary and conclusion 92

Chapter Four: Legislative and Institutional Framework 99 First: Legislations related to Commercial Enterprises 99 Second: Legislations related to Industrial Enterprises 101 Third: Legislations related to touristic activities 102 Fourth: Legislations related to agriculture and reclamation activities 103 Fifth: Legislations related to food production 104 Sixth: Legislations related to "hazardous activities" 104 Seventh: Critical Problems: Procedural Complications 105

Chapter Five: Comparative Advantage of M/SMEs 106 Conclusion and Policy Implications 115 Chapter Six: Roadmap for Enhancing the Exports of Egyptian M/SMEs

115

References 124

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LIST OF ABBREVIATIONS

ACI Amman Chamber of Industry ACWF All China Women’s Federation ARI Agro and Rural Industries BL Business Link CBE Central Bank of Egypt CCG Caisse Centrale de Garantie CMPE Centre Marocain de Promotion des Exportations COTUNACE Compagnie Tunisienne pour I’ assurance du commerce exterieur CSBFA Canada Small Business Financing Act CVS Corporate Venturing Scheme DA Delegated Authority Program DTI Department of Trade and Industry ECGC Egyptian Credit Guarantee Company ECGP Export Credit Guarantee Program EDBE Export Development Bank of Egypt EDC Export Development Corporation EJADA The Euro-Jordanian Action for the Development of Enterprise EMIA Export Marketing Assistance Services EPs Export Promoters ETCs Economic and Trade Commissions ETO Electronic Trading Opportunity Service GBPM Groupment Professionnel des Banques du Maroc GLIEX Small Business Export Credit Guarantee GOE Government of Egypt ICBC Industrial and Commercial Bank of China IDC Industrial Development Corporation IMP Industrial Modernization ProgramIT Information Technology ITA International Trade Administration ITCs Innovation & Technology Counselors

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JBIC Japan Bank for International Cooperation JEDCO Jordan Export Development & Commercial Centers CorporationJLGC Jordan Loan Guarantee Corporation K-EXIM Export- Import Bank of Korea KEIC Korean Export Insurance Corporation KVIC Khadi and Village Industries Commission L/C Letter of Credit LEDU Local Economic Development Unit MAC Manufacturing Advisory Centers MDA Market Development Assistance Project MENA Middle East North Africa region MOF Ministry of Finance MOFT Ministry of Foreign Trade MOFTEC Ministry of Foreign Trade and Economic Cooperation MOFTI Ministry of Foreign Trade and Industry MOI Ministry of Investment M/M/SMEs Micro / Small and Medium Enterprises MTC Manufacturing Technology Centre NAFTA North American Free Trade Area NEXI Nippon Export and Investment Insurance NGOs Non Governmental organizations NSBC National Small Business Council OECD Organization for Economic Co-operation and Development PBOC People’s Bank of China PDIs previously disadvantaged individuals PLP Priority Lending Program PSBC Provincial Small Business Councils QAC Quality Assurance Centre RBI Reserve Bank of India RTOs Research & Technology Organizations RVCF Regional venture capital scheme SBS Small Business Service SET science, engineering and technology SFD Social Fund for Development

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SIDBI Small Industries Development Bank of India SIDO Small Industries Development Organization M/SMEs Small and Medium Enterprises SMEDP Small and Medium Enterprise Development Program SMIC Small and Medium Industries Centre SMMEs small, micro and medium enterprises SPC State Planning Commission SSI Small Scale Industries TIC Trade Information Center TISA Trade and Investment South Africa VSI Village and Small Industries WTO World Trade Organization

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List of Tables

Table 1: The Relative Importance of M/SMEs in Selected Countries 12

Table 2: Assessment of M/SMEs development and export-support policies in selected countries 35

Table 3: A Summary of the Assessment of M/SMEs development and export-support policies in selected countries 44

Table 4: Number of M/M/SMEs operating in Non-Agricultural economic activities 51

Table 5: Proposed Sample Design 65

Table 6: The geographical distribution of the sample 66

Table 7: The Legal Status of The Firms 66

Table 8: The firms’ distribution according to Ownership 67

Table 9: The M/SMEs distributed according to Gender of Owner/ Manager and Number of Workers 67

Table 10: The M/SMEs distributed according to Gender of Owner/ Manager and Value of Capital 68

Table 11: the Distribution of M/SMEs according to the Capital’s Value 68

Table 12: The Distribution of M/SMEs according to the present value of the fixed assets 69

Table 13: The distribution of M/SMEs according to the Number of Workers 69

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Table 14: the distribution of the M/SMEs according to Location 70

Table 15: the Distribution of the Manufacturing M/SMEs according to the Industries 71

Table 16: The Share of Exports to Total Production 72

Table 17: The Channels of Exporting 72

Table 18: The direction of change in Exports during the last 5 years 73

Table 19: Factors Determining Exports 74

Table 20: The Share of the Intermediate Inputs and Semi-Produced Products To Value of Total Production 75

Table 21: Assessment of the quality of the Egyptian products in the same Industry 76

Table 22: Self-Assessment of the quality of the M/SMEs Products 77

Table 23: Arrangements Pursued to Enhance Exports 77

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Table 24: The Logistic Regression Results 78

Table 25: The Areas of Needed Intervention by the Government to help Promote exportation 80

Table 26: The most important two agencies, which help exporting activities 81

Table 27: Evaluation of the Existing Structure of Support Organizations 82

Table 28: The Services Derived From the Support Organizations 85

Table 29: Factors Affecting exports negatively 85

Table 30: Severity or simplicity of export-related procedures 86

Table 31: Do you see any positive developments in the Drawback regulations over the last five years?

88

Table 32: Does Temporary Release Impact Your Exporting Capacity? 88

Table 33: Would the latest tariff changes impact your exporting capacity? 89

Table 34: As Small And Medium Enterprises, Do You Get Any Services From Any Domestic Or Foreign Institutions In The Following Areas?

89

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Table 35 : Main Obstacles by Sector 94

Table 36 :Main Obstacles by Capital 95

Table 37 : Main Obstacles by Industry 96

Table 38: Egyptian M/SMEs’ percentage of total non-oil exports, their competitive situations, revealed comparative advantage and industry concentration percentage, 2000

106

Table 39: Revealed Comparative Advantage for Egyptian Exports of Services 113

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Introduction: This strategy is the first of its kind in Egypt. Its evolution arose from the rising importance of exports and M/SMEs as two important pillars of growth. In fact, the Egyptian economy has faced low percentage of exports to GDP and a sluggish growth rate of non oil exports in absolute terms especially when compared to its comparators in the Middle East North Africa (MENA) region. This weak performance of Egyptian non oil exports has affected the Egyptian economy negatively and has hindered the initiatives to adopt sustainable economic growth. Due to such lax performance of Egyptian non oil exports, several initiatives have been undertaken by the Government of Egypt (GOE) in the last few years to accelerate the growth of Egyptian non oil exports including adoption of new laws and regulations, establishing a Ministry of Foreign Trade (MOFT) and then the Ministry of Foreign Trade and Industry (MFTI), and improving the business environment in many ways. Similarly, Small and Medium Enterprises (M/SMEs) are considered one of the main pillars of growth in Egypt, however they are not fully utilized due to several impediments which hinder them from contributing effectively to the Egyptian economy in general and exports in specific. This strategy aims at tackling the two problems simultaneously by providing an overview of how to promote M/SMEs Egyptian exports in a sustainable matter. The strategy starts in Chapter One by providing a review of the literature on the international experience of promoting exports of M/SMEs in several countries, including both developed and developing countries. The aim is to draw relevant lessons from the international experience in this regard. In Chapter Two the strategy provides an overview of the Egyptian M/SMEs with special focus on the problems that affect their exporting performance. In Chapter Three the results of a survey on 214 M/SMEs in Egypt designed specifically for this strategy (183 in manufacturing and 31 in services) and the problems they face in exporting are presented. Chapter Four presents the legislative and institutional framework that governs M/SMEs in Egypt including the different agencies and donors that deal with M/SMEs in Egypt. Chapter Five presents the results of data analysis trying to identify the comparative advantage of M/SMEs in Egypt. Chapter Six builds on all the information and conclusions arising from the different parts of the strategy and provides a roadmap for enhancing M/SMEs Egyptian exports. The strategy depends on different methodologies to arrive at its suggested recommendations. In the first instance, lessons learned from international experience are drawn, then after analyzing the Egyptian environment for M/SMEs depending on desk work and sample survey analysis, a review of the legislative framework governing M/SMEs is undertaken. This is complemented by undertaking data analysis to identify the comparative advantage of M/SMEs. In other words, several approaches are used to arrive at the required recommendations needed to be adopted to enhance M/SMEs’ exports in Egypt. The adoption of several approaches to arrive at the suggested roadmap enriches the strategy and ensures that policy recommendations are based on solid foundations arising from in-depth analysis.

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Chapter One: Literature Review on International Experiences: Introduction: The main argument for favoring M/SMEs in developing countries is that they are increasingly playing a strategic role in economic growth and development through their contribution to the creation of wealth, employment and income generation (see Table 1). There are advantages of M/SMEs, such as, having flexibility in adapting to different work environments and changing product designs, strong personal relations and, a limited amount of paper work. Such advantages enable M/SMEs to adapt easily to the changing environment than large enterprises. Table 1: The Relative Importance of M/SMEs in Selected Countries

Country Export as % of GDP 1999

M/SMEs as % of all

enterprises

% workforce employed by

M/SMEs

% of SME exports in total

exports

Egypt 4* 99.0** 40.0** 4*** USA 10.8 96.0 69.0 33.3 Japan 10.4 98.8 77.6 13.5

Canada 43.3 98.0 66.0 Na Korea 42.1 99.0 69.0 43.0 Taiwan 42.1 97.8 78.4 56.0

Indonesia 35.0 97.0 42.0 10.6 Thailand 57.0 95.8 18.1 10.0 Malaysia 121.7 84.0 40.0 15.0

Singapore 135.0 91.5 51.8 16.0 Philippines 51.3 99.5 66.2 Na

Na = not available Source: Charles Harvie and Boon- Chye Lee (2001) * Calculated from World Bank, World Development Indicators, 2003 ** El Mahdi, Alia. 2002. “The Labor Absorption Capacity of the Informal Sector in Egypt” in Assad, Ragui (ed.), The labor Market in the Era of Economic Reform, Cairo: ERF ***Ministry of Finance .2004. Enhancing Competitiveness for M/SMEs in Egypt :General Framework and Action Plan ,August M/SMEs are currently facing the challenge of increased competition as a result of new open markets . In such a context the ability to export is becoming a critical factor in the development and long term survival of many M/SMEs. M/SMEs have been traditionally considered as weak contributors to internationalization1 because of financial and

1 The literature on the internationalization process of M/SMEs has been reviewed in a number of studies (see for example, Anderson, 1993;Leonidoua and Katsikeas,1996). The term “internalization”

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management constraints (Oviatt and Mc Dougall,1994). Some studies have demonstrated that firm size and export intensity – as measured by the ratio of exports to sales- are not correlated ( Moen,1999; Zucchella,2001) . This implies that M/SMEs can play a significant role in the exporting process provided that they are placed in an enabling environment and provided with a proper incentives scheme.

Factors Inhibiting M/SMEs’ Exports:

Ramswami and Yang (1990) point out that there are four sources of export barriers that affect firms’ export performance: export knowledge, internal resource constraints, procedural barriers and, exogenous variables (such as those related to foreign markets conditions) ( Ortega,2003) .

First of all, export knowledge barriers refer to the lack of information and knowledge about aspects related to export activity. The lack of knowledge about foreign markets constitutes a barrier to increased commitment to international activity within the firm. Bilkey and Tesar (1977) found that firms starting export activity face difficulties in identifying opportunities in foreign markets. Another major source of perceived difficulty lies in the general lack of knowledge of potential foreign markets in the firm’s sector. Many M/SMEs do not know which countries or regions they should consider, how their products should be adapted to the specific requirements of those markets, and what are the efforts required to make the necessary changes.

Second, internal resource constraints refer to the need of a firm to possess a series of resources in order to be able to initiate export activity. This type of barriers is relevant, as it has been highlighted as one of the main reasons why many firms, particularly M/SMEs, prefer to cling on to a domestically oriented strategy (Bilkey, 1978). In particular, the following aspects have been underlined as internal resource barriers: Lack of financial resources regarding the difficulty of obtaining the necessary funds required to initiate or finance export operations, the need to use honoring letters of credit , lack of personnel to devote time to export activities and, lack of production capacity (Bauerschmidt et al., 1985). Furthermore, a firm requires a series of external support resources such as banks prepared to foster firms’ international activities (Groke and Kreidle, 1967 cited in Ortega, 2003) or local trading firms that enable indirect export operations of manufactures ( Bilkey,1978; Keng and Jiuan, 1989).

Third, any company interested in exporting is faced with a series of procedural barriers and obstacles pertaining to the activity itself and which could have their origins either in the firm’s domestic market or in foreign markets. Among procedural barriers highlighted are the following aspects of export activity: red tape and documentation , import tariffs, non-tariff barriers, such as the establishment of various quality control and safety standards which occasionally involve the need to adapt products to the requirements of the different foreign markets (Keng and Jiuan, 1989); transportation and distribution difficulties in foreign markets and; the difficulty of funding a trustworthy distributor in the target country (Bauerschmidt et al., 1985)

is used in the same context as that defined by Welch and Luostarinen (1988) as “ the process of increasing involvement in international markets”.

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The exogenous barriers have their origins in the uncertainty of international markets, largely due to the activities of other players in the market – such as competitors, foreign governments, supply and demand –meaning that this type of variables transcend the control of exporting companies.

In addition, the technical aspects of export payments are perceived to be a major difficulty by many M/SMEs. They perceived distance and the more impersonal nature of export contacts as factors that would increase the probability of collection difficulties and they were unable to accept the level of risk that this implied. Also, obtaining information on relevant legal aspects of international trade represents a major barrier to exportation of M/SMEs. We aim in this chapter to provide an overview of the international experiences by surveying the policies and rules and regulations adopted in a number of countries towards enhancement of M/SMEs in general and towards developing their export capabilities in specific. To undertake this mission we reviewed the experience of six countries in details in addition to another set of countries which have not been reviewed as detailed as the first six. The surveyed countries’ experiences include Canada, China, India, United Kingdom, Jordan, and South Africa. In each country experience we focus first on the definition of M/SMEs, and then move to discuss what specific rules and regulations are available in those countries that deal with M/SMEs. We provide an overview of the institutional environment for M/SMEs in each of the countries studied where the focus is based on how activities related to M/SMEs, whether undertaken by the government or non governmental agencies are coordinated. Finally we address the financial policies adopted to enhance M/SMEs and we focus on export policies designed specifically for M/SMEs. Canada’s Experience 1. Definition: For statistical purposes, small firms are defined as those employing less than 100 employees in the manufacturing sector and less than 50 employees in the services sector. The medium-sized firms employ 100 to 500 employees. It should be noted that assistance programs (governmental and non governmental) include additional restrictive criteria to identify their beneficiaries among the M/SMEs. Such criteria use the number of employees and/or financial revenues to identify the beneficiaries. Following this definition, M/SMEs in Canada were estimated to be around 2 million in year 2000 with 93% of these businesses having less than 20 employees, and 88% having less than 10 employees. Canada’s small enterprises were responsible for 55% of total employment and 43% of private sector GDP. (IDRC, 2001) 2. Rules and Regulations devoted to enhance the role of M/SMEs in general: In Canada there are several rules and regulations used to enhance M/SMEs in general. For example, there exists the Canada Small Business Financing Act, under whose auspices the Federal Government small business loan guarantee program has been initiated (see below in the section related to finance policies of M/SMEs).(CSBF-Industry Canada, 2005) 3. Institutional Environment for M/SMEs: There is no single organization in the Federal Government that is devoted to undertake policies related to M/SMEs. On the contrary, the institutional rules governing M/SMEs

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environment are decentralized among different governmental organizations which report to the Minister of Industry. However, there exists “Industry Canada” which is responsible for drawing a national strategy for the development of M/SMEs in Canada after undertaking the necessary research; however its role remains advisory. In addition, there are several governmental regional development agencies focusing on M/SMEs which undertake joint activities with provincial governments and community-based organizations. There exists a number of NGOs whose main mandate is to help and support M/SMEs. Their core functions are to provide financial and management support for viable small business development in their communities and to assist community economic development activity more generally. The Federal Government provides financial support to such NGOs. There are no direct subsidies provided by the Federal government to M/SMEs, but rather to NGOs that support the development of M/SMEs. ( Your Guide to Government of Canada Services and Support for Small Business -Industry Canada , 2005) 4. Finance Policies for M/SMEs in general: There are no preferential loans rates provided for M/SMEs, however there are specific banks and institutions which devote their efforts to help M/SMEs and meet their needs including the Business Development Bank of Canada. There is an intention to provide more services that address M/SMEs requirements. For example, in the area of debt financing focus has been on the expansion of the government loan guarantee programs to include leasing, improvement of micro-credit facilities, and improved access to credit in rural areas. Financial policies include the provision of small business owners with a tax relief where they receive a tax exemption on the first $500,000 of capital gains on the sale of their business, while, under certain conditions, investors can receive exemptions on capital gains from investments in public markets which are re-invested into qualifying M/SMEs. Tax measures are a significant component of the Federal Government’s assistance to M/SMEs. (IDRC, 2001) Moreover, the Canada Small Business Financing Act (CSBFA) is intended to be self-financing and provides guarantees to chartered banks, credit unions and many other qualified private sector financial institutions to assist them in making term loans to small businesses. The purpose of such loans is to finance up to 90% of the purchase or improvement of fixed assets, including real property, leasehold improvements, and new or used equipment. Loans of up to $250,000 are provided under the program with loan losses being shared so that lenders absorb 15 percent of the losses while the government absorbs the remaining 85 percent. Finally, the government has implemented a Special Small Business Accounts Receivable Insurance policy which includes easy application and reduced administration and which was used by over half of all short-term insurance customers in 2001. (Small Business Canada, 2005) 5. Export Policies for M/SMEs: There are no specific policies devoted to the enhancement of M/SMEs exports, nevertheless there are programs (e.g. Program for Export Market Development) which allow preferential tax treatment for the low income tax brackets which help M/SMEs due to the small size of their operations.

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In addition, the Export Development Corporation (EDC) which is wholly-owned by the government is devoted exclusively to providing trade finance services to support Canadian exporters and investors in international markets. It helps these businesses assess their long-term market potential and manage the increased complexity and risk. It has developed a number of programs, many in partnership with other financial institutions, to service the particular needs of M/SMEs and nearly 90 per cent of its clients are smaller companies. EDC has publicly committed itself to encouraging Canadian small firms to be actively engaged in exporting. However, there is no preferential treatment provided for M/SMEs, but rather special efforts are geared towards meeting their needs. EDC has established two teams to support small firms: (1) the Emerging Exporters Team delivers short-term insurance services through a specialized underwriting center which can grant buyer credit approvals immediately over the phone, fax or the Internet; and (2) the Small Business Financial Solutions Team which delivers medium- and long-term products and services, including buyer credit financing, contract bonding and pre-shipment financing. In addition, EDC has several “umbrella type” short-term credit insurance policies with selected banks and financial intermediaries that provide cover for receivables that are discounted by the bank or financial intermediary and which are extensively used by SME exporters. Two other EDC programs -- Export Ease and Export Ease Plus -- combine EDC insurance with private invoice and collection services. Moreover, Canada initiated Export Protect, which offers SME exporters on-line short-term cover for specific transactions up to CAD 250,000 for a risk-based fee, and Export Check, which provides M/SMEs with an on-line insurability opinion on foreign buyers. There are also export finance medium and long-term products specially designed for M/SMEs. It has a simplified buyer credit process, which is a simplified loan document for quick-turnaround for M/SMEs, and provides Pre-shipment Financing Guarantees for small firms. (EDC, 2005) There are several other organizations, institutions, and systems devoted for the enhancement of Canadian exports in general, nevertheless, none devote special or dedicated services for M/SMEs. This is not to say, that M/SMEs are not considered in the plans and activities for such organizations. On the contrary, M/SMEs are devoted special attention by putting more emphasis on the services that are mostly needed by M/SMEs to enhance their exports, however they are shared by M/SMEs and large corporations. For example, export facilities in terms of information access are given priority to lessen the transaction costs of accessing such information. Although the information will benefit both large and small firms, the cost of obtaining them for M/SMEs is definitely higher than for large corporations. Hence, efforts are devoted to make such services available. In summary, government policies and programs for small business development are undertaken in a commercial manner and whenever possible, in partnership with other public and private sector SME stakeholders, and NGOs. The line of thinking in enhancing exports of M/SMEs in Canada depends mainly on enacting a number of policies that serve both large and M/SMEs, however with the main focus that M/SMEs can benefit more from it.

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China’s Experience 1. Definition: China’s definition of M/SMEs is based on production capacity and original value of fixed assets reflected in the output of goods which are rather complicated criteria. Several attempts are undertaken to simplify the definition of M/SMEs adopting criteria based on sales revenue and total assets. In practice, M/SMEs are defined as all enterprises other than those identified as large enterprises by the state. In December 2000 it was reported that China had 39.8 million public and private sector M/SMEs, of which 21% were medium and small ones and 79% were micro businesses which had less than 8 employees. In the industrial sector, the 460,000 M/SMEs accounted for 98% of all enterprises, and represented 69.8% of the sector’s employment, 48% of total assets, 57% of turnover, and 43% of tax revenue. It was also reported that M/SMEs provide 75% of the total jobs in China. (IDRC, 2001) 2. Rules and Regulations devoted to enhance the role of M/SMEs in general: Notwithstanding the recent liberalization of the business environment for M/SMEs, the lack of broadly-based legislative, regulatory, program and service measures to support enterprise creation and development is a particularly critical issue, given the importance of the private and mixed enterprise sector, and particularly micro-businesses and M/SMEs, as providing the receptor capacity for much of the surplus labor in China. Two key recent pieces of legislation for M/SMEs have been the Amendments to the Constitution of the People's Republic of China passed in March 1999, which clarify that the private sector is an important component of the socialism market economy, and the issuance by the State Council in August 2000 of the Policies on Encouraging the Promoting M/SMEs' Development which leads to the development of detailed policies and program approaches to support SME development. Local governments are also going through institutional restructuring guided by the principle of separating government administration from enterprise management. This resulted in more equitable treatment of M/SMEs regardless of their ownership, business types and location, increased transparency of the formulation and implementation of policies, laws and regulations, and reduced cost for access to government information and public services. Moreover, several key issues that hinder the development of M/SMEs including property rights and clear rule of law have been addressed in the new Small Business Law. Finally, the draft bill on the Comprehensive SME Promotion Law includes several legal benchmarks needed for the development of M/SMEs. It includes a clear definition for M/SMEs, and addresses a number of other key issues including: establishing a comprehensive SME administrative organization under the State Council; the government's financial support to M/SMEs; establishing a government policy bank to lead SME financing initiatives; defining SME financing allocations at other state-owned banks; developing the SME credit guarantee system including counter guarantees; establishing community-based service systems with some cost recovery; clarifying the legal status of such community based SME development organizations; providing interest-free loans for technical innovation; ensuring the right of M/SMEs to participate in government procurement, and developing strategic partnerships between large enterprises and M/SMEs.

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3. Institutional environment for M/SMEs: Like the Canadian case, there is no special governmental organization responsible for M/SMEs. The Ministry of Commerce (MOFCOM), formerly known as The Ministry of Foreign Trade and Economic Cooperation (MOFTEC) sets strategic goals for national economic development; formulates and oversees the implementation of sectoral programs, regulations, and annual plans for industry, transportation, commerce and trade; provides coordinated solutions to major economic problems; fosters the development of markets; and helps balance domestic and international trade. Its State Enterprise Reform and SME Departments are responsible respectively for development of rules and regulations for the establishment of a modern state enterprise system, including pilot projects, and for the development of the SME sector in China. MOFCOM acts as the main coordinator for M/SMEs programs as it chairs the National Leading Group for SME Promotion and Development which includes several ministries related to M/SMEs. Policy oriented research related to M/SMEs is undertaken by the State Planning Commission (SPC) which is the lead organization responsible for China’s economic and social development. The Ministry of Finance is an active partner of MOFCOM in developing policy frameworks for SME financing. In addition, the People’s Bank of China (PBOC) works closely with MOFCOM on financial institution support for enterprise development. There are a number of NGOs as All China Women’s Federation (ACWF) (see below in the finance policies section) which provide services to M/SMEs. Moreover, a number of international donor organizations are active in promoting M/SMEs development in China. There are several regional activities devoted to the development of M/SMEs coordinated by provincial and municipal Economic and Trade Commissions (ETCs). Moreover, community-based SME support systems have been developed in selected demonstration cities with the objective of establishing a nation-wide community-based SME support system. The regulations for community-based systems are developed by the local government and designed to respond to local needs and conditions. In addition to being community-based, it is intended that these initiatives will be led by the private sector and will rely heavily on mutual assistance between enterprises in accordance with the market rules. 4. Finance Policies for M/SMEs in general: In general, and after the opening up of the Chinese economy, several attempts to upgrade the financial system have been undertaken, however no special programs or activities designed by banks have been set to meet the needs of M/SMEs, nevertheless several initiatives are taking place. For example, the PBOC now requires the commercial banks to establish special departments to lend to small businesses. Despite their general caution with respect to SME financing, there are some encouraging signs that, with the support of the authorities, the banks are slowly starting to focus on M/SMEs as a viable market segment. Some state commercial banks are actually becoming quite active in the field. For example, the Industrial and Commercial Bank of China (ICBC) at Changchun has implemented a specific strategy to gain significant SME market share particularly among fast-growing M/SMEs which are commonly referred to as “small giants” in China. The strategy involves organizational restructuring, new procedures to enhance the products and services and speed up loan authorizations for M/SMEs, and heavy marketing expenditures. As part of this strategy the ICBC is acting as the bank of choice for the local credit guarantee fund and

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provides the required office accommodation and some staff for the fund. Moreover, the SME Policy Bank proposed under the SME Promotion Law is expected to play a key role in providing leadership to the financial community in developing and providing much needed financial products and services for China’s M/SMEs. Regarding pilot credit guarantee schemes, there are several pilot projects. The goals of the pilot credit guarantee initiatives are to test varying approaches to providing improved access to capital, and raising the credibility and reducing the borrowing difficulties of M/SMEs in urban centers across China. The pilot SME credit guarantee program has been operating since early 1999 and pilots have been established in more than 100 cities in 31 provinces, autonomous regions and municipalities. The government provides the major funding for the SME credit guarantee organizations, and shares the risks with financial institutions such as state commercial banks and private sector investors. On the other hand, there are several NGOs that play an important role in improving the finance conditions for M/SMEs. For example, the All China Women’s Federation (ACWF) is originally a “mass organization” providing the communist party with a means to reach and mobilize women. Many of the provincial and local branches of the ACWF have created innovative and pro-active programs to deal with gender issues, including microfinance for women entrepreneurs, technical training, and job placement. (ACWF, 2005) 5. Export Policies for M/SMEs: There are no special export policies devoted for the promotion of M/SMEs. However, a special exports credit package is provided for exporting firms comprising many of China’s rural M/SMEs. In addition, China is working to boost high-tech exports and hence the government is providing high-tech enterprises with export credit guarantees and export insurance, and launches annual high tech fairs. M/SMEs, which comprise the great majority of China’s hi-tech businesses, are major beneficiaries of these initiatives. To summarize, Chinese M/SMEs are facing several obstacles which are currently addressed by specific rules and regulations. Policies devoted to promote M/SMEs exports remain humble and in probably on pilot basis. It is rather safe to argue that there is no comprehensive strategy devoted for M/SMEs export promotion.

India’s Experience 1. Definition: In India there are no specific definitions for M/SMEs. Enterprise definitions focus on the concept of small scale industrial enterprises. The primary definitions used by the Ministry of Small Scale Industries and Agro and Rural Industries (SSI and ARI) are as follows: For Small Scale Industrial Undertakings, and Ancillary Industrial Undertakings supplying not less than 50 per cent of their production or services to industrial undertakings, the investment ceiling should not exceed 10 million rupees. For Small Scale (Industry-related) Service and Business Enterprises rendering industry-related service/business the investment ceiling is 500,000 rupees in fixed assets, excluding land and building. For Export-Oriented Units, which export at least 30 per cent of their annual production within three years of production start, the fixed assets investment ceiling is 30 million rupees.

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The term Small Scale Industry has different meanings for different agencies. For example, the government’s Planning Commission views the entire Village and Small Industries (VSI) sector as a part of the SSI sector. The National Sample Survey Organization, which is part of the government’s Central Statistical Organization, defines the entire industry sector in terms of organized and unorganized segments, as well as in terms of industrial enterprises run by households and non-households. The Central Excise Department, on the other hand, distinguishes SSIs on the basis of the annual turnover of the units (up to a maximum limit of 30 million rupees). The number of small-scale industries exceeds 3 million units, supplying more than 40% of the total manufacturing sector output. (Updates on Indian Taxation & Corporate Laws, 2005) 2. Rules and Regulations devoted to enhance the role of M/SMEs in general: There are no specific rules and regulations devoted to help M/SMEs in India. However, there are intentions from the central government to develop unified comprehensive legislation for M/SMEs to establish a clear and level playing field for it with other sizes of enterprises in the economy. To protect the interests of M/SMEs and to improve their viability, more than 800 items are currently reserved for exclusive manufacture in the M/SMEs sector. (However, there is no regulation or restriction on marketing the reserved items by large industries.) The reservation of products for exclusive manufacture by M/SMEs, is reviewed regularly. Moreover, under the Government Stores Purchase Program the M/SMEs which have got necessary capabilities in terms of finance as well as technology for providing goods to various Government Agencies are registered. (IDRC, 2001) 3. Institutional environment for M/SMEs: In India there exists a special ministry for M/SMEs. The Ministry of Small Scale Industries and Agro and Rural Industries (SSI & ARI).. The Ministry is responsible for policy formulation, promotion, development and protection of small scale industries. It also monitors the implementation of these policies and ensures their effective implementation. SSI &ARI designs and implements the policies through its field organizations for promotion and growth of small and tiny enterprises, village and coir industries. The Ministry also performs policy advocacy on behalf of the Small Scale Industries (SSI) sector with other stakeholder Ministries/Departments such as Finance, Commerce, Law, Labor and Environment so as to ensure due consideration for M/SMEs in their respective policies. There is also the Small Industries Development Organization (SIDO) which assists the Ministry in the formulation and implementation of policies and programs for the promotion and development of the Small Scale Sector. It liaises with central and state government departments and agencies, financial institutions and other key small scale sector intermediaries, encourages capital and technology flows, and provides a comprehensive range of common facilities, technology and competitiveness support services, and marketing assistance through a network of more than 70 Small Industries Institutes, Extension Centers, Testing Centers, Production Centre and Field Testing Stations. In addition to having a special ministry devoted to undertake the responsibility of promoting M/SMEs, coordination between SSI & ARI takes place via different mechanisms. For example, the Small Scale Industries Board is an advisory body constituted by the Government to facilitate co-ordination and inter-institutional linkages for the development

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of the sector, and to provide advice on all issues pertaining to the SSI sector. The Minister of SSI & ARI, is the Chairman of the Board which comprises different related ministries, experts, and NGOs. India is characterized by having a web of institutions which are established to develop M/SMEs. Besides the SSI & ARI and SIDO, there exist several NGOs and governmental organizations whose main responsibility is helping M/SMEs whether in facilitating their financial needs, exports’ promotion, or training requirements. Associations which are more closely focused on small business issues include: the World Association for Small & Medium Enterprises; the Federation of Associations of Small Industries of India; the Consortium of Women Entrepreneurs of India; Laghu Udyog Bharati; and the Indian Council of Small Industries. There are a number of regional organizations. For example there is the Khadi and Village Industries Commission (KVIC) which is a statutory organization responsible for planning, promoting, organizing and assisting in the implementation of programs for the development of Khadi (handloom) and village industries, including those based on minerals, forestry, agricultural, polymers and chemicals, textiles, services, engineering and non-conventional energy. There are a number of training institutions spread regionally that help in upgrading the skills of M/SMEs. International donor organizations participate heavily with the government institutions to help upgrade the M/SMEs. (KVIC,2005) 4. Finance Policies for M/SMEs in general: India has several financial schemes that aim at serving the M/SMEs. The main financial institution is the Small Industries Development Bank of India (SIDBI) which serves as the principal financial institution for promotion, financing and development of Indian industry and services in the small scale sector where individual business investment in plant and machinery does not exceed Rs.10 million. SIDBI focuses on plugging gaps in the financial marketplace and offers a wide range of financial products either directly or indirectly through nearly 900 primary lending institutions including commercial banks and State-level financial institutions having over 65,000 outlets throughout India. Its financial products and services address micro financing, debt financing for purchases, lines of credit, refinancing, factoring, credit guarantees and venture capital. It also undertakes focused initiatives in partnership with the Government of India, NGOs, technical / management institutions, international agencies and industry associations. These have involved such initiatives as incubation partnerships, a Technology Bureau for Small Enterprises, and the establishment of a private sector commercial bank (IDBI Bank Ltd.). . In addition, the single window scheme of SIDBI is also being extended to all districts. There is also The Export-Import Bank of India: which is government-owned, and entered in partnership with the EU to promote joint ventures between Indian and European countries. A division for advisory and training services provides information and support to help improve prospects for securing business in projects funded by multilateral agencies, and promotes Indian consulting exports.

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The government plays a direct and important role in making finance available for M/SMEs. In this context the Ministry of SSI and ARI has established the following policy priorities: implementing an effective Credit Guarantee Scheme; earmarking the flow of bank credit to micro, tiny and small enterprises; establishing a scheme for the credit rating of small scale units; exploring possibilities for the securitization of guaranteed loans; assessing opportunities to strengthen viable State Financial Corporations; and promoting venture capital funds and factoring services, focused exclusively on the M/SMEs sector. Moreover, in the 1999-2000 Budget the government announced a new Credit Insurance Scheme for providing adequate comfort to the banks to improve the flow of investment credit to M/SMEs, particularly tiny units, and exporters. In order to ensure that credit is made available to all segments of the M/SMEs sector, the Reserve Bank of India (RBI) has issued instructions that, out of the funds normally available for the M/SMEs sector, 40 per cent be given to units with investment in plant and machinery up to Rs. 5 lakhs, 20 per cent to units with investment between Rs. 5 lakhs and Rs. 25 lakhs and the remaining 40 per cent for other units. Banks have also been asked to operationalize more specialized M/SMEs branches. SIDBI operates the National Equity Fund Scheme under which equity support is provided for projects up to Rs 15 lakh and 25% of total project capitalization. The equity support takes the form of “soft loans” and assists small entrepreneurs in setting up new projects in tiny/small scale sector and the rehabilitation of potentially viable sick SSI units irrespective of the location (except for units in Metropolitan areas). The Margin Money Scheme operated by KVIC and delivered through selected national commercial banks and regional rural banks, provides a minimum of 25% of the project cost for financing viable village industry projects with special concessions for such groups as ex-service people, minorities, women, the handicapped, and particular geographic areas. (KVIC, 2005). 5. Export Policies for M/SMEs: The government provides export assistance by organizing exhibitions, trade fairs and buyer-seller meetings in foreign countries, assisting small scale units to get samples from foreign buyers to develop counter samples, and provides pre-shipment and post-shipment credit facilities. The government has also established a Software Technology Park Complex under the Software Technology Park of India to provide infrastructure facilities for small scale software exporting businesses. The Software Technology Park helps the startup and development of small scale businesses focused on exporting 100% of their software products. (IDRC, 2001) To coordinate ongoing developments with regard to the World Trade Organization (WTO) requirements, the Office of DC (SSI) has established a cell to disseminate information to M/SMEs regarding recent WTO developments. This cell also organizes WTO Sensitization and Seminars, Workshops.

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United Kingdom’s Experience 1. Definition: There is no single definition for small businesses in the UK, but in the Small Business Service (SBS) they are defined according to the number of employees they have. Micro businesses are those with 0-9 employees, small businesses have 10-49 employees, medium-sized businesses have 50-249 employees, and large businesses 250+ employees. Across government, it is most usual to measure size according to numbers of full-time employees or their equivalent. However in determining company size, the Companies Act of 1985 provides a range of three primary criteria (turnover, balance sheet total, and employees), and requires at least two of the criteria to be met. As in many of the case studies mentioned above, in practice, schemes which are nominally targeted at small firms adopt a variety of working definitions depending on their particular objectives. The M/SMEs represent 99.8 per cent of the business population. There are 25,000 medium sized businesses accounting for over half the UK’s economic activity, 56 per cent of private sector jobs, and 52 per cent of business turnover (excluding financial services). The approximately 3.66 million businesses with less than 50 employees provided 44% of the UK non-government employment and 37% of turnover. (IDRC, 2001) 2. Rules and Regulations devoted to enhance the role of M/SMEs in general: There are no specific policies for small business in the area of general government procurement. However, Small Business Services (SBS) (see below for what is SBS) assists small businesses by providing information, guidance and facilitation in identifying and bidding on government procurement opportunities. (Small Business Service, 2005) 3. Institutional environment for M/SMEs: There is no specific ministry responsible for M/SMEs like the case of India. However, M/SMEs fall within the responsibility of the Department of Trade and Industry (DTI) and SBS (which is an agency that was established in 2000, and reports through DTI). It is charged with championing the development of small businesses, and has a mandate to operate across all central government departments. It has a comprehensive span of responsibilities including financing, business and information support services, research and communications, regulatory burden, and local delivery networks. Its role is advisory. The SBS consults with a broad range of associations which represent the interests of small businesses including the Chamber of Commerce, the Confederation of British Industry, the Forum for Private Business, and the Federation of Small Businesses. Moreover, there is the Small Business Council (SBC) which is an advisory private sector body with twenty members. The SBC provides an independent source of advice for the Chief Executive of the SBS on the needs of M/SMEs and also reports to the Secretary of State for Trade and Industry on the effects of government policy on small business. The SBS manages a national network of Business Link services throughout England which are run by 45 local providers. Business Link is the SBS service delivery system across the country and provides independent and impartial business advice, information and a range of services to help small firms and those trying to start up new businesses. Each of the Business Link local providers has a dedicated team of Business Advisors whose role is to provide long term business support to its clients. All of these services are available throughout the UK.

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While the service in England is branded as Business Link, equivalent services are provided by Small Business Gateways in lowland Scotland, the Business Information Source in highland Scotland, the Business Connect offices in Wales, and LEDU - the Local Economic Development Unit - for Northern Ireland. There are a number of institutions involved in the training and upgrading of skills of M/SMEs’ employees. In addition, there are a number of new initiatives that have been designed to provide training for M/SMEs which include: Small Firms Training Initiatives; Skills for Small and; Small Firms Training Challenge . Moreover, there are special services tailored for specific M/SMEs which include: Services for technology-based M/SMEs: The Smart Scheme –re-introduced April 1997- provides grants to M/SMEs for pre-competitive feasibility studies into innovative technology and for development up to pre-production prototype stage of new products and processes. It combines previous SMART SPUR schemes and the innovation element of regional enterprises. Grants award are made on a competitive basis. Innovation & Technology Counselors (ITCs) – As part of the business links service, networks of local advisors coordinate the use of local sources of innovation support by business links’ clients. Approximately 70 ITCs were in place in 1997. The impact is difficult to assess from the information available, but will depend largely on the quality of the innovation support available from the local Research & Technology Organization (RTOs) or other services to which they refer their clients. Focus Technical – A £6 million program launched in 1995, initially for 3 years, is an attempt to address this last problem. The program aims to assist RTOs to extend their technological products and services to better meet needs of M/SMEs, and to improve RTOs networking capabilities with other business support organizations so as to direct innovation and technology services to M/SMEs. Business Incubators – are special estates to create a nurturing, instructive and supportive environment for “fast track” small companies, providing access to a range of business skills, training and finance. Incubator directors are directly involved in selecting companies and assessing these companies’ success in growing and graduating from the incubator. The Enterprise Panel, a treasury-established working party, reported a positive potential for developing more incubators as a means of promoting development of high-tech and innovative M/SMEs, at least 50 incubator-type projects exist in the UK. (UK Business Incubation ,2005) 4. Finance Policies for M/SMEs in general: The UK government considers favorable tax treatment for M/SMEs. Small businesses in the UK benefit from preferential corporate taxes in the following manner. The starting rate for businesses with net income up to £10,000 is 10%, the small companies' rate for net income between £50,000 and £300,000 is 20%, and there is progressive marginal relief between the two categories. This compares to the main corporate tax rate of 30%. The government also seeks to influence the enterprise environment, which entails capital markets, advisory services and the science, engineering and technology (SET) base. Some

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general support for M/SMEs is found in recent attempts to modify and simplify various statutory and financial systems. Business rates, income tax, national insurance and VAT systems have been adjusted, as have regulations governing audits and accounts. The government has also sought to reduce the obligations of M/SMEs in respect of labor rights. In general however, the delivery of significant fiscal concessions subsidies to M/SMEs in the UK has been felt to conflict with wider economic policy objectives. As a result, public support to M/SMEs aimed at reducing barriers in areas such as access to capital markets, business advisory services and technological developments. The Business Link (BL) program has been established since 1992. This is intended to provide single points of easy access for M/SMEs to an integrated range of business support services. Government support to BL is worth £ 120 million. The national BL network currently has over 200 outlets and achieves significant coverage. In any quarter, around 35 percent of firms between 50-200 employees are using BL services, although the proportion is less for the more numerous smaller firms. Client firms get personal business advisors, access to counselors specializing in export development, design and innovation and technology, and other services such as loan guarantees. In addition to the aforementioned activities, there exist special schemes designed for M/SMEs finance which include the following: Small Firms Loan Guarantee Scheme: This scheme guarantees loans from the banks and other financial institutions for small firms that have viable business proposals but who have tried and failed to get a conventional loan because of a lack of security. Loans are available for periods between 2 and 10 years on sums from £5,000 to £100,000.. SBS guarantees 70% of the loan (85% if a business has been trading for more than 2 years). In return for the guarantee the borrower pays SBS a premium of 1.5% per year on the outstanding amount of the loan. The premium is reduced to 0.5% if the loan is taken at a fixed rate of interest. The commercial aspects of the loan are established between the borrower and the lender. The scheme is available to UK companies with an annual turnover no more than £1.5m, or £5m if they are a manufacturer. Many business activities are eligible but there are a number of exclusions. Loans are available for most business purposes although there are some restrictions. (DTI, 2005) The Corporate Venturing Scheme (CVS): The CVS provides tax relief to encourage corporate investment in minority shareholdings in small higher-risk trading companies. The intention is both to increase the supply of venture capital to such companies and to encourage the establishment of wider corporate venturing relationships. The tax relief available to the investing company includes relief against corporation tax at 20 per cent of the amount subscribed for new full-risk ordinary shares of unquoted small higher risk trading companies, provided that those shares are held for a minimum of three years; deferral of corporation tax on any chargeable gains on disposal of corporate venturing investments reinvested in a new shareholding qualifying for investment relief; and relief against income for any capital losses on disposal of corporate venturing investments, net of any investment relief retained after the disposal. Regional venture capital schemes (RVCFs): RVCFs are being set up to address the lack of provision of equity funding for investment in the "equity gap" range for M/SMEs. There

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will be at least one RVCF in each English region specializing in the provision of small-scale equity (<£500,000) to businesses with growth potential. 5. Export Policies for M/SMEs: In the UK, it is estimated that there are over 100,000 active exporters and of these approximately 10 percent are extremely small firms. Businesses having less than 500 employees are eligible for grants of up to 50% to cover export development expenditures. There are also Export Promoters (EPs) who are business executives seconded to Trade and Investment Partners UK. (this is the main export promotion agency in the U.K.). They help M/SMEs and larger companies to win business around the world. They are available for free consultations and can offer practical exporting advice, information on specific opportunities in markets and sectors. There is a special Exports Credit package for M/SMEs targeting export markets outside Western Europe and North America. This includes improved and streamlined versions of guidelines on existing products as well as new features designed with the smaller exporter in mind. There are several other export promotion schemes; however none of them is confined specifically to M/SMEs. Rather, they benefit the whole community of exporters with an indirect positive impact on M/SMEs. Among the most important programs is the Export Explorer. The Export Explorer component is an integrated package of help and advice that enables M/SMEs to experience new and accessible export markets at minimal cost. Participating in Export Explorer costs £99 and includes hands-on help and support provided by Trade and Investment Partners UK, plus briefings, information and administration. Travel and accommodation are extra. Export Explorer comes in three tailor-made packages. The first package targets first time exporters or those with minimal experience. It offers an opportunity for general export training and export counseling before the visit, a visit to specific European countries to experience working in a potential export market, and follow-up advice on the next steps. The second package is aimed at those companies that are more experienced in the exporting field, are looking to develop further into more difficult markets and have little or no experience of the country to be visited. The package offers counseling before the visit including a focused session that tackles issues of direct relevance to the market being targeted, a visit to one area within France, Germany or Spain with a view to developing contacts that Trade Partners UK staff overseas have identified, and follow-up counseling to discuss next steps. The third package enables first time exporters with minimal experience to visit a key trade fair in Western Europe as part of a group. They are briefed on the trade fair prior to the visit. During the visit they can assess the market in relation to the competition without the cost of having to exhibit. On return they are offered advice on the next steps. The component for Support for Exhibitions and Seminars Abroad capitalizes on overseas trade fairs being one of the most effective ways for firms to test markets, attract customers, appoint agents or distributors, meet wholesalers, carry out research and make sales. The

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support which is provided is designed to help firms gain initial exposure in new markets and is not intended as a continuing subsidy. (IDRC, 2001) Jordan’s Experience:

1. Definition: At present in Jordan there is no unique and official definition of M/SMEs. Regarding specific policies designed and implemented to support the SME sector, usually each institution uses its own definition, mainly based on the number of employees:

1. JEDCO (Jordan Export Development & Commercial Centers Corporation) defines M/SMEs as follows:

Small Enterprise: 1-10 workers; Medium Enterprise: 10-24 workers.

2. The Jordanian Department of Statistics adopts the following classification: Small Enterprise: 1-4 workers; Medium Enterprise: 5-19 workers; Large Enterprise: > 20 workers.

3. For the Amman Chamber of Industry the definition is the following: Small Enterprise: 1-9 workers Medium Enterprise: 10-99 employees.

According to the latest published data of the Jordanian Department of Statistics, the percentage of establishments employing four workers and less stood at 91.8 percent. Adding medium-scale establishments that employ 5-19 workers, the percentage of M/SMEs in Jordan rises to 98.5 percent employing around 64.2 percent of the workforce. (Di Tommaso et al., 2001)

1. Institutional environment for M/SMEs: In Jordan there are no institutions with the specific and unique aim of assisting M/SMEs. The only exception is the newly-established Department for SME development within the Ministry of Industry and Trade. It is at the very beginning of its activity. a) The Ministry of Industry and Trade It is the main body responsible for company registration and industrial licensing. Recently the activity of the Ministry in support of SME development is increasing. Apart from the new above-mentioned SME department, the Industrial Directorate of the Ministry is the counterpart of a 4-year USAID program (US $15 million) to improve the growth and survival rate of industrial M/SMEs and to increase the rate of start-ups. The program consists of providing technical assistance to M/SMEs in design, quality control, marketing, management, information, environment management systems. The program includes the establishment of the following centers:

Small and Medium Industries Centre (SMIC): assistance in product design and development and technology improvement; provision of practical technical and managerial training; assistance in developing new markets;

Manufacturing Technology Centre (MTC): help M/SMEs to upgrade the technology through business partnerships with US companies, identification of technology needs, assistance in technology adaptation and provision of specialized training and computer databases;

Quality Assurance Centre (QAC): promotion of the awareness of M/SMEs on the crucial role of quality for competitiveness.

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b) The Amman Chamber of Industry(ACI) It has the main aim to act as a forum for the views and opinions of Jordan’s industrial sector, with the objective of promoting economic development in the country. Regarding the specific policy of ACI in support of SME development, in 1998 it established a department for M/SMEs with the aim to give support to M/SMEs in marketing, export, advice and guidance, financial and legal matters, industrial management and technical consultancy. c) Jordan Export Development & Commercial Centers Corporation (JEDCO) It was established in 1972 as Jordan Commercial Centers Corporation (JCCC) and it became JEDCO in 1992. It is supervised by a Board of Directors chaired by the Minister of Industry and Trade, Secretary General of Ministries, and members of the private sectors’ organizations. It is led by a general manager appointed by the Board of Directors. Its objective is to develop, increase and promote exports of Jordanian goods and services worldwide. It also provides technical assistance to export-oriented M/SMEs. JEDCO’s main activity is export and marketing promotion. M/SMEs are not really benefiting from this promotion activity, since most of them are not exporters, but JEDCO can be included in the group of institutions supporting SME development because it is also implementing some programs specifically devoted to M/SMEs. For example during 1992-1993 a pilot project was executed – called Market Development Assistance Project (MDA) – in order to assist Jordanian firms to upgrade their capabilities. Within the MDA Project a component was related to the provision of cash grants to export-oriented M/SMEs in order to help them to develop their export potential. 124 firms benefited from this component. Another component of MDA was aimed at providing cash grants to finance the developmental and promotional activities of the private sector organizations concerned with the development of export-oriented M/SMEs (11 organizations benefited from it). In 1994-1996 a second phase started, building on the success of the first one, to continue to support M/SMEs and to develop new sectors with high potential for growth. In this phase especially, technical assistance was provided in order to enable Jordanian firms to acquire the ISO 9000 certificate that helps them to penetrate export markets. In addition, in 1994 JEDCO established an information centre and it is now in the process to establish a design centre to provide direct services and consultancy to M/SMEs in product design. The centre will also provide training courses to upgrade the technical skills of workers. Finally JEDCO will also establish a packaging centre in cooperation with international bodies to provide services and consultancy to the Jordanian packaging sector. (Di Tommaso et al., 2001)

2. Finance Policies for M/SMEs in general: The source of starting capital for M/SMEs is often the owner's savings, personal credit cards, home equity loans and funds from friends and family. As a general trend, M/SMEs struggle to access bank credits, as commercial banks are reluctant to provide loans to small firms. This situation has led to the development of an SME culture that is unfamiliar with the financial sector, whereby M/SMEs are afraid of the banking environment and trust between both parties is absent. Hence, the prevalent situation limits and impedes the ability of Jordanian businesses to grow and expand. However, some new initiatives have started to take place to help overcome this problem. Jordan Loan Guarantee Corporation (JLGC): In light of the above stated obstacles, the Jordan Loan Guarantee Corporation (JLGC) tries to moderate the negative ramifications of what is

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considered the largest impediment faced by M/SMEs when accessing finance: the high perceived risk on the part of banks from lending to such firms thereby leading to high collateral requirements. In line with its aim of supporting the activities of M/SMEs and export sectors, JLGC guarantees loans for M/SMEs, as a partial coverage of the loan risks, thereby enabling them to increase their participation in the economic and social development of the Kingdom. The guarantees given by JLGC can also be used to cover the risks involved in export credit. JLGC’s primary objective is to provide guarantees to Jordanian financial institutions that extend working capital and fixed asset loans to Jordanian companies. Its current focus is to provide guarantees in order to encourage financial institutions to extend loans to finance projects undertaken by M/SMEs. JLGC extends its guarantee to cover 75% of the outstanding balance of loans granted by the bank plus accrued interest. Loans eligible for the guarantee cover include loans to industrial, agricultural, and industrial service projects; loans to service projects undertaken by doctors, lawyers, engineers, and consultants; and loans to small and medium-scale projects whose number of employees does not exceed 50. Loans not eligible for coverage include consumer purchasing and sales transactions, loans granted to the trade sector that depends on imports, and loans granted to existing credit portfolios of financial institutions. The maximum amount of a loan eligible for 75% cover is JD 40,000. The level of guarantee is reduced to 50% for eligible loans between JD 40,000 and JD 100,000. Eligible loans may be extended for up to 6 years. JLGC and the banks negotiate a guarantee ceiling, which reflects the level of guarantees the bank estimates it will require during a particular time period. The bank pays a fee to JLGC equal to 1.5% of its ceiling amount. Guarantee fees are one of two sources of revenue, the other being revenue generated from capital invested. Another program- The Euro-Jordanian Action for the Development of Enterprise (EJADA)- was launched on July 3, 2001 through a Memorandum of Understanding signed between the Jordanian Government and the European Union, in which JLGC became responsible for the financial component of the Program. The Program is intended to help modernize Jordanian industries so as to enable them to become more competitive locally & internationally in anticipation of Jordan's accession to the WTO, NAFTA, & Euro-Med. Partnership. A six million Euros guarantee fund was set up at JLGC to increase the accessibility of commercial bank finance to M/SMEs. According to the guarantee contract between JLGC and participating banks, JLGC guarantees 70% of loans of up to JD 430,000 & the commercial bank retains 30%. Maturity period ranges between three and eight years including a maximum grace period of two years. The participating bank is charged a guarantee fee of up to 1.5% on the guaranteed portion of the loan. Enterprise owner's equity must not be less than 25 % of the value of the investment. JLGC tries to accommodate and cater for both the demand and the varying needs of the business community in Jordan, which are identified through the development of the tools and means required for the successful integration of the JLGC work with the local community. In this regard, JLGC introduced and improvised a wide range of new services and program to cater for market requirements and bankers’ needs, such as the Personal Computer Guarantee Program, the Housing Loan Guarantee Program, and Land Purchase Loan Guarantee Program. (JLGC, 2003).

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3. Export Policies for M/SMEs: JLGC remains the main actor in the field of export promotion and support. Despite the fact that JLGC has no focused attention on helping M/SMEs, it has developed a number of programs as identified above to help them. In the field of export policies, it has been the main player as shown below; however, none of its programs are specifically devoted to help M/SMEs in their exporting activity. JLGC has developed 2 Export Credit Guarantee Program which are: (1) Insurance Product One: Pre-shipment Loan Guarantee In 1997, the JLGC launched one part of the Export Credit Guarantee Program (ECGP), the Pre-shipment Loan Guarantee. This product was intended to facilitate the expansion of Jordanian exports by encouraging banks to lend to small and medium-sized businesses that have export opportunities but insufficient funds to buy or produce the goods for export. The Pre-shipment Loan Guarantee provides an indemnification to a lender of up to 75% of the unpaid outstanding loan balance on a single guaranteed loan up to a maximum of JD 100,000. It is possible for a single borrower to have aggregate guaranteed loans outstanding of up to JD 250,000 but the guaranteed amount cannot exceed JD 75,000. It also covers up to 75% of the unpaid accrued interest outstanding up to 180 days. The price of the guarantee is 1.5% per annum of the amount of the loan principal guaranteed. The loan maturity and hence the guarantee, should normally be for a year or less. The loan must be in local currency, meet the lending bank’s general credit criteria for such loans, and carry the bank’s then applicable interest rate. Since incremental export sales often put pressure on a company’s working capital requirements just when credit lines are fully extended and all available collateral is already pledged. The JLGC pre-shipment guarantee is intended to make up for this shortfall, reduce the risk to the lender, and allow the transaction to go forward. It increases the lender’s ability to serve a growing portfolio of export loan transactions. These transactions typically offer banks added incremental fee income and opportunities for exchange profits as well. Other advantages accrue where export transactions are financed. Access to the Central Bank of Jordan’s rediscount program is such an advantage. Under this regulation, export orders evidenced by export letters of credit, allow the bank to fund up to 75% of the face amount of the credit at 1% below the current discount rate, and then on-lend the funds at a 2.5% spread. Two other advantages that must be included in the pricing of these loans are the exclusion of JLGC guaranteed loans from the statutory 2% bad debt reserve requirement and the reduction of the applicable risk-based capital-to-asset ratio from 100% to 20%. Recent experience with the Pre-shipment Loan Guarantee has shown that the average loan guaranteed was around JD 80,000 for an average period of 60 days. In addition, the loan default rate has been near .2% of all loans covered. Recently a total of 20 loans were covered for a total of JD 1.6 million. (2) Insurance Product Two: Post-shipment Loan Guarantee In 1997 also, the JLGC launched its Post-shipment Export Credit Guarantee Program. Like its Pre-shipment program, this product is intended to facilitate the expansion of Jordanian exports by encouraging banks to lend to businesses that have export opportunities. Its purpose is also to provide the exporter the opportunity to extend competitive trade terms to his clients in new markets. The guarantee is available for all exporters regardless of size and covers the risk of non-payment by the foreign buyer because of commercial risks.

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The Post-shipment Loan Guarantee is a “whole turnover” arrangement. That is, the guarantee covers all eligible export receivables. It provides indemnification against non-payment to the guaranteed party of up to 85% of the net invoice value of each shipment and up to a maximum credit limit determined per buyer. It also covers the refusal of the buyer to accept the goods so long as the exporter fulfills the prearranged sales agreement. The guarantee expiration date matches the trade terms and can be for no more than 180 days. In January 1998, the JLGC entered into a reinsurance agreement with a French Export Credit Agency to reinsure 80% of the amount of the Post-shipment contract. This arrangement enabled JLGC to insure much larger contracts then it could on its own given its limited capitalization. It also provided JLGC with underwriting, buyer credit history reporting, and collection services which it did not possess at the time. Under the terms of the agreement, the risk and fee income would be split on a 80/20 basis and in return for the contract, the French ECA would provide JLGC 32% of its share of the fee income as a commission. The French ECG would also provide JLGC with buyer credit limits (usually between JD 500,000 and JD 2,000,000) and fee levels (usually between .5% and 2%). Currently JLGC covers 1% of exports from Jordan at an average fee of 1% of the contract. With the addition of political risk coverage, JLGC hopes to increase its coverage to 5% of the national exports if reinsured only through the French ECA, and 10% of the national exports if reinsured through the government. Previous experience has proven that the buyer default rates due to commercial reasons is about 1%, and between 10% to 30% of the claims are normally recovered. There is no adequate prediction method for political risk claims. Advantages that accrue to banks under the Pre-shipment Loan Guarantee Program also accrue to those guaranteed by the Post-shipment guarantee. Thus, access to the Central Bank rediscount program is even more beneficial to the bank. Current regulations allow for export orders (evidenced by promissory notes and trade acceptances) to permit bank funding of up to 90% of the export credit. As with other JLGC guaranteed loans, the rediscount rate is at 1% below the current discount rate, lending at a 2.5% spread. (JLGC, 2003) South Africa’s Experience 1. Definition: The National Small Business Act of 1996 identified four different categories of SMME (small, medium and micro enterprises) classes i.e. micro, very small, small and medium. These are differentiated by sector, and then by the number of full-time employees, the value of annual turnover, and total gross asset value (excluding fixed property). While turnover and gross asset criteria vary significantly by sector, there is a great deal of commonality with respect to the employment criteria. Employment criteria for the manufacturing, construction and utility sectors are as follows: micro (5); very small (20); small (50); and medium (200). In the service industries, these employment criteria are: micro (5); very small (10); small (50); and medium (100). Given South Africa’s history of previously disadvantaged individuals (PDIs), a differentiation is also made between emerging and established SMMEs. The former term refers to firms which are owned and managed by PDI entrepreneurs while the latter refers to white-owned and –managed firms. Most emerging SMMEs are assumed to be informal and most established ones formal, although these categories do overlap. (IDRC, 2001).

31

2. Rules and Regulations devoted to enhance the role of M/SMEs in general: There are no special laws and regulations devoted for M/SMEs in South Africa. A number of specific policies and regulations are now being considered. For example, the government has established an affirmative or targeted procurement strategy designed to assist SMMEs owned by PDIs. This was developed by the Ministries of Finance and Public Works. 3. Institutional environment for M/SMEs: There is no specific ministry responsible for M/SMEs. However, M/SMEs fall within the mandate of the Department of Trade and Industry (DTI). Within the national government the DTI is the coordinating body for all policies related to the small business sector and for all SMME support programs directly or indirectly assisted by the government. It is also responsible for the coordination of small business strategies pursued by the provincial governments within the national policy framework. DTI directly administers some specific programs targeted to smaller businesses such as the SMME development program which provides investment grants to qualifying businesses and a wide variety of technology and export assistance services. However it relies primarily on the Ntsika Enterprise Promotion Agency and Khula Finance Limited which act as intermediaries to address SMME needs for improved access to business development and financial support services respectively. The DTI Centre for Small Business Promotion is responsible for the implementation of the National Small Business Promotion Strategy which was published in 1995 and has resulted in the creation of a National Institutional Framework to provide an enabling environment for small, micro and medium enterprises (SMMEs) in South Africa. Ntsika reports through DTI but has a private sector-led Board with some public sector members. Its mandate is to promote the development of SMMEs, work with all stakeholders to ensure an enabling environment for SMMEs, assist the development of effective SMME services and a related delivery network, achieve a coordinated approach to implementation of the National Small Business Strategy, and promote an entrepreneurial culture. To fulfill this mandate Ntsika engages in SMME management and entrepreneurship training, provides extensive developmental and support services to SMME service providers, assists the development of a national network of SMME service providers, undertakes research, identifies priorities, and designs interventions in partnership with relevant stakeholders, and provides access to technology, and appropriate skills transfers and support services to SMMEs. Manufacturing Advisory Centers (MAC) is a program intended to provide high quality advisory and information services to new and existing SMMEs, to assist in improving their quality, competitiveness and productivity. A National Program Coordinating Office (NAMAC) has been established as a Trust to coordinate, facilitate, monitor and evaluate the activities of the pilot MACs. On behalf of DTI, it also manages the BRAIN program - a national business information service for all individuals and small businesses. NGOs and other organizations as the chambers of commerce take in consideration the representation of SMMEs. The National Small Business Act of 1996 provided for the establishment of a National Small Business Council (NSBC) and the establishment of a Provincial Small Business Councils (PSBC) for each province. The councils are intended to provide assistance to DTI in the development of the national small business-support

32

framework and an effective sounding board for small business interests and concerns. The councils are autonomous of government and consultative in nature, but operate in close interaction with relevant central and provincial government departments. Membership is structured to include representatives of business, NGOs active in the SMMEs sphere, and, for the national council, provincial government representatives. Moreover, international organizations are active players in the area of helping SMMEs. (South African Chamber of Business, 1999) 4. Finance Policies for M/SMEs in general: In general, existing evidence indicates that the majority of SMMEs finance their initial capital requirements through private savings from individuals and family as well as retained earnings. A smaller proportion of SMMEs rely on formal credit such as bank loans. However, there are continuous efforts undertaken by the government to increase the availability of finance for M/SMEs. For example there exists the Khula Enterprise Finance Limited (Khula) where the government focus is on developing financial support programs for SMMEs. In addition, Khula provides assistance such as startup capital, working capital and loan guarantees to retail financial intermediaries, other financial intermediaries and NGOs to enable them to improve their financing services for SMMEs. It also provides direct financing services to SMMEs in areas such as equity loans. It undertakes joint activities with other organizations. For example there exists the Sizanani Scheme which is an activity of the Banking Council, with the assistance of Khula and the Kellog Foundation, has initiated the Sizani scheme which provides guaranteed loans of R10,000 to R50,000 to start-ups, and existing manufacturing, retail and service SMMEs. The program is designed to respond to the fact that commercial banks find that loans below R50 000 are very costly to administer. Moreover there is the Danida Business to Business Program which is a program delivered by Khula, supported by Denmark, and is intended to develop and strengthen business opportunities and create jobs for eligible entrepreneurs from previously disadvantaged communities. The program addresses expenses connected with the transfer of management, business skills and technology from Danish to South African companies and it provides access to financing for the SA company. A 100% Khula Guarantee to an RFI can be considered for loans aimed exclusively at the procurement of shares, purchasing of machinery and capital equipment essential for the business to succeed. There exists also the Khula Equity Fund which is an equity program designed to provide funding to SMMEs that need to expand their activities, enter into joint ventures, re-capitalize the company, and those who want to buy out the existing shareholders. It is accessible to viable companies with a net asset value of not less than R500,000 which can demonstrate an adequate rate of return from the investment. Moreover there is the Industrial Development Corporation (IDC) which is a self-financing state-owned development finance institution which provides finance for different manufacturing organizations that benefit M/SMEs and they represent 88% of its clients. Finally, there is the Small and Medium Enterprise Development Program (SMEDP) which is an incentive program delivered by DTI and designed to assist business start-up and expansion. The Establishment Grant component of the program provides an investment grant for two years on approved qualifying assets with the possibility of further assistance in the third year depending on the ratio of payroll to total manufacturing cost. The grant is

33

calculated as a percentage of the investment made, with the percentage declining from a maximum of 10% for the first R5 million of the investment to 1% over R75 million. This incentive is also tax exempt. There are no specific tax treatments for M/SMEs in South Africa. (IDRC, 2001) 5. Export Policies for M/SMEs: A number of SMMEs in South Africa are engaged in exporting. The available data show that 14% of SMMEs are exporters. While export assistance for all sizes of business is led by DTI’s Trade and Investment South Africa (TISA) division, there is a broad stakeholder partnership which is addressing the development of SMMEs’ trade capacity in a holistic manner. Moreover, TISA has a special program devoted to help M/SMEs in exporting. There are no specific policies adopted to enhance exports of M/SMEs, however most of the existing organizations try to address the needs of M/SMEs. For example, the Export Marketing Assistance Services (EMIA) assists businesses with advice on regulatory issues, dealing with the bureaucratic approval process, export readiness and referrals, capacity-building through product development, and the provision of an electronic trade documentation system. It also assists with logistics by helping shipper-supplier relationship-building, focused infrastructure development, streamlining supply chains and encouraging collaboration. It has a call centre or help desk which is the first point of contact for exporters and prospective exporters to assist with registration, general information on export markets, access to research services, referrals to other support services, advice on how to prepare for trade missions, etc. EMIA also provides financial assistance to exporters through its Export Marketing and Investment Assistance Schemes to offset a portion of their costs in developing new export markets through primary export market research, trade missions and exhibitions. The activities of EMIA should help M/SMEs as they are the ones that are in need of such type of assistance. There exists only one specific activity specially designed to address the needs of M/SMEs who are exporters at the same time. This is the Trade and Investment Development Program (TIDP) which is funded by the European Union and delivered by Ntsika and is designed to help small businesses in South Africa to develop their ability to compete in the international marketplace. The program is divided into three tracks: Track One provides training courses and seminars to help businesses which need advice and training pertaining to competing in the international market place; Track Two provides technical assistance to selected businesses on product and market development issues to enable the firm to maximize its export opportunities; Track Three is an international partnership program which utilizes networking events to facilitate partnerships and business opportunities between South African SMME's and their European Union counterparts. Tables 2 and 3 provide a summary of the main policies adopted in the countries reviewed.

34

35

Table 2: Assessment of M/SMEs development and export-support policies in selected countries

M/SMEs characteristics Canada China India UK Jordan South Africa

Definition

Those employing less than 100 employees in the

manufacturing sector and less than 50 employees in the services sector. The

medium-sized firms employ more than 100 up

to 500 employees

Based on production capacity and original value

of fixed assets reflected in the

output of goods .In practice, all

enterprises other than those

identified as large enterprises by the

state.

No specific definitions since it

has different meanings for

different agencies

• No single definition for

small businesses.

• The Small Business Service

(SBS) define M/SMEs

according to the number of employees:

1. Micro

businesses: 0-9 employees.

2. Small

businesses: 1 0-49 employees.

3. Medium-sized

businesses: 50-249

employees.

4. Large businesses: 250+

employees.

there is no unique and official definition of

M/SMEs since it has different meanings for

different agencies

Differentiated by sector, the

number of full-time employees,

the value of annual turnover, and total gross

asset value.

Employment criteria for the manufacturing,

construction and utility sectors are:

1. Micro (5). 2. Very small

(20). 3. Small (50).

4. Medium (200).

In the service industries, these

employment criteria are:

1. Micro (5). 2. Very small

(10). 3. Small (50).

4. Medium (100).

M/SMEs characteristics Canada China India UK Jordan South Africa

M/SMEs-support institutions

• No single organization devoted to

undertake policies related to M/SMEs.

• .There exists a

number of NGOs who help and

support M/SMEs by providing financial and management

support for viable small business development

• No special governmental organization

responsible for M/SMEs.

• The National

Reform Development Commission,

Enterprise Reform and

SME Departments

are responsible for the

development of the SME sector

in China.

• There are a number of

NGOs as All China

Women’s Federation (ACWF)

• There are

several regional activities

devoted to the

• There exists a special

ministry for M/SMEs. The

Ministry of Small Scale

Industries and Agro and Rural Industries (SSI

& ARI).

• There is also the Small Industries

Development Organization (SIDO) which

assists the Ministry in the

formulation and

implementation of policies and programs for the promotion

and development of the Small Scale

Sector.

• India is characterized by having a

• There is no specific ministry

devoted for M/SMEs However,

M/SMEs fall within the

responsibility of the Department

of Trade and Industry (DTI)

where the Small Business Services

(SBS) was established with a

comprehensive span of

responsibilities including financing,

business and information

support services, research and

communications, regulatory

burden, and local delivery

networks. However, its role

is advisory

• there are

• There are no institutions

with the specific and

unique aim of assisting

M/SMEs. The only exception is the newly-established

Department for SME

development within the

Ministry of Industry and

Trade

• Manufacturing

Advisory Centers (MAC) is a

program intended to provide high quality advisory and information services to new

and existing SMMEs, to assist

in improving their quality,

competitiveness and productivity.

• NGOs and

other organizatio

ns as the chambers

of commerce

take in considerati

on the representati

on of M/SMEs.

36

M/SMEs characteristics Canada China India UK Jordan South Africa

development of M/SMEs

coordinated by provincial and

municipal affiliates of MOFCOM.

web of institutions which are

established to develop

M/SMEs.

• There are number of regional

organizations for M/SMEs

support

• There are a number of

training institutions

spread regionally that

help in upgrading the

skills of M/SMEs.

• International

donor organizations

participate heavily with

the government institutions to help upgrade

special services tailored for

specific M/SMEs

which include:

o The Smart Scheme

o Innovation &

Technology Counselors

(ITCs)

o Focus Technical program

o Business

Incubators

37

M/SMEs characteristics Canada China India UK Jordan South Africa

the M/SMEs

Direct Policies Financing

• There are no preferential rate

loans provided for M/SMEs.

• There are specific

banks and institutions which devote their efforts

to support M/SMEs.

• There are several

tax exemption schemes for M/SMEs.

• Canada Small Business Financing

Act (CSBFA) provides

guarantees to chartered banks, credit unions and

many other qualified private sector financial

institutions to assist M/SMEs in making term loans to small

• No special programs or

activities designed by banks have been set to meet the needs of M/SMEs.

• There are

several pilot credit guarantee programs.

• There are several

financial schemes

that aim at serving the M/SMEs. The main financial

institution is the Small Industries

Development Bank of

India (SIDBI) which

serves as the

principal financial

institution for

promotion, financing

and development of Indian

industry and

• The UK government considers

favorable tax treatment for

M/SMEs.

• Small businesses in the UK benefit from preferential corporate taxes • The Business

Link (BL) program is intended to

provide single points of easy

access for M/SMEs to an

integrated range of business

support services

• No special programs or

activities designed by banks have been set to

meet the needs of M/SMEs

• There are no specific tax

treatment for M/SMEs in

South Africa

• The majority of SMMEs finance

their initial capital

requirements through private savings from

individuals and family as well as retained earnings.

A smaller proportion of

SMMEs rely on formal credit such as bank

loans.

• The Small and Medium

Enterprise Development

Program (SMEDP) which is an incentive

38

M/SMEs characteristics Canada China India UK Jordan South Africa

businesses. services inthe small

scale sector where

individual business

investment in plant and machinery does not exceed Rs.10

million.

program delivered by DTI and designed to assist business

start-up and expansion.

M/SMEs’

Export Policies

• There are no specific policies

devoted to the

enhancement of

M/SMEs exports

• There are no special

export policies

devoted for the

promotion of

M/SMEs.

• The government

has established a Software Technology

Park Complex to

provide infrastructure facilities for small

scale software exporting

businesses. This helps the startup

and

• Trade Partners UK is the main

export promotion

agency in the U.K.

• There is a special Exports Credit package for M/SMEs

targeting export markets

outside Western

Europe and North America.

There are no special export

policies devoted for the promotion

of M/SMEs.

• There are no

specific policies

adopted to enhance

exports of M/SMEs, however

most of the existing

organizations try to address the needs of M/SMEs.

• There exists only one specific activity

39

M/SMEs characteristics Canada China India UK Jordan South Africa

development of small

scale businesses focused on exporting 100% of

their software products.

specially designed to address the

needs of M/SMEs who are

exporters at the same

time. This is the Trade

and Investment

Development Program (TIDP) which is

funded by the European

Union and delivered by Ntsika and is designed to help small

businesses in South Africa to develop their ability to compete

in the international marketplace.

40

M/SMEs characteristics Canada China India UK Jordan South Africa

Indirect Policies

Financing

Financial policies include the provision of small

business owners with a tax relief where they receive a tax exemption on the first $500,000 of capital gains

on the sale of their business.

• the People’s Bank of China

(PBOC) requires the commercial

banks to establish special

departments to lend to

small businesses

• There are

several NGOs that

play an important

role in improving the finance conditions

for M/SMEs.

• The Margin Money Scheme

operated by Khadi and

Village Industries

Commission (KVIC) and

delivered through selected national

commercial banks and

regional rural banks, provides a minimum of

25% of the project cost for

financing viable village

industry projects

• there exist special schemes designed

for M/SMEs finance which

include: o Small Firms

Loan Guarantee Scheme

o The Corporate Venturing

Scheme (CVS) o Regional venture

capital scheme (RVCF)

• The Jordan Loan

Guarantee Corporation’s (JLGC)

objective is to provide guarantees

to Jordanian financial

institutions that extend

working capital and fixed asset

loans to Jordanian companies

mainly M/SMEs.

• JLGC

extends its guarantee to cover

75% of the outstanding balance of

loans granted by the bank

plus accrued interest.

The Industrial Development

Corporation (IDC) which is a self-financing state-

owned development

finance institution provides finance

for different manufacturing organizations which benefit

M/SMEs which represent 88% of

its clients.

41

M/SMEs characteristics Canada China India UK Jordan South Africa

42

M/SMEs’ Export Policies

• There are

several organizations, institutions, and systems

devoted for the enhancement of Canadian exports in general,

nevertheless, none devote

special or dedicated

services for M/SMEs.

• The Export

Development Corporation (EDC)

which is wholly-owned by the government is

devoted exclusively to

providing trade finance services to support Canadian

exporters and investors in international

markets.

• Special exports credit

package is provided

for exporting

firms comprising

many of China’s

rural M/SMEs.

• the

government is providing

high-tech M/SMEs

enterprises with export

credit guarantees and export insurance

• The government provides export assistance by organizing

Exhibitions, Trade Fairs and Buyer-

Seller meetings in foreign countries,

assisting small scale units to get

samples from foreign buyers to develop counter

samples, and provides pre-

shipment and post-shipment credit

facilities • To coordinate ongoing

developments with regard to the WTO, the Office of DC

(SSI) has established a

cell to disseminate

information to M/SMEs regarding

recent WTO developments. This cell also

organizes WTO Sensitization and Seminars, Workshops.

• Businesses having less than 500

employees are eligible for grants of up to 50% to

cover export development expenditures

• There are

Export Promoters

(EPs) who are business

executives who help

M/SMEs and larger

companies to win business around the

world. • The Export

Explorer component is an integrated package of help and

advice that enables

M/SMEs to experience new and

accessible export

markets at minimal cost

• JLGC remains the main actor in the field of export

promotion and support

• JLGC has developed 2

Export Credit Guarantee Program

which are: • Insurance Product One: Pre-shipment

Loan Guarantee Insurance Product

• Two: Post-shipment Loan

Guarantee

• the Export Marketing

Assistance Services (EMIA) assists businesses with

advice on regulatory issues, dealing with the

bureaucratic approval process, export readiness

and referrals along with other services

M/SMEs characteristics Canada China India UK Jordan South Africa

Rules and Regulations There are several rules and

regulations used to enhance M/SMEs in

general

There is a lack of broadly-based

legislative, regulatory,

program and service measures to support enterprise

creation and development. nevertheless,

several laws are being passed

aiming to develop M/SMEs (e.g.

SME Promotion Law)

There are no specific rules and

regulations devoted to help M/SMEs in

India

There do not appear to be any set-aside or

quota polices for small business in the

area of general government

procurement. However, Small

Business Services (SBS) does assist

small businesses by providing

information, guidance and facilitation in

identifying and bidding on government procurement opportunities.

There are no specific rules and

regulations devoted to help M/SMEs in

Jordan

There are no special laws and

regulations devoted for M/SMEs in South Africa.

43

44

Table 3: A Summary of the Assessment of M/SMEs development and export-support policies in selected countries

M/SMEs characteristics Canada China India UK Jordan South Africa

Does it have a specific definition?

Does it have a special M/SMEs-support institution(s)?

45

M/SMEs characteristics Canada China India UK Jordan South Africa

Direct Policies

Are there any export-

enhancement policies or

programs for M/SMEs ?

(for small scale

software exporting businesses

only)

Indirect Policies

Are there any preferential financing policies or programs regarding M/SMEs?

46

M/SMEs characteristics Canada China India UK Jordan South Africa

Are there any rules and regulations devoted to enhance M/SMEs?

Experiences from Other Countries: Other countries enhance exports of M/SMEs using different mechanisms. For example, in Korea, the Korean Export Insurance Corporation (KEIC) has a special interest in encouraging SME export activities through an article of special treatment for small firms contained in the Korean Export-Insurance Act (De Silva,2003) The Export- Import Bank of Korea (K-EXIM) established the SME Export Credit Group in 2002. K-EXIM introduced generous provisions for export-related loans for smaller firms in 2000. The minimum lending and transaction amount limits were eased or lifted for direct loans supporting the export transactions of M/SMEs while the scope of items eligible was extended (OECD, 2004). Similarly, in the United States, support for M/SMEs stems from the legislative mandate of the Export-Import Bank (Eximbank). Short-term (up to 180 days) insurance is available from the US Eximbank, which assumes 95% of the commercial risk and 100% of the political risk involved in extending credit to the exporter’s overseas customers. This is available to companies with an average annual export credit sales volume of less than USD 3 million for the two years prior to application and typically supports spare parts, raw materials and consumer goods (OECD, 2004). The US Eximbank leverages its resources by partnering with city and state organizations, trade associations, lenders and others with knowledge of the local exporting community, which help the Eximbank to reach many small businesses unaware of the services available to them. Under the Priority Lending Program (PLP), lenders who have made at least two transactions under the Working Capital Guarantee Program may submit a complete write-up of the exporter and transaction and be given a 10-day turnaround on their application (APEC,2003). The Delegated Authority Program (DA) allows qualified lenders to commit an Eximbank guarantee without further analysis (OECD, 2004). In addition, foreign market entry costs insurance is available for domestic manufacturing, services and trading companies in operation for not less than three years with annual net income from sales not exceeding the equivalent of USD 50 million ( OECD,2003) The mandate of the US Eximbank requires that 10% of its budget must be devoted to supporting SME export credits. The International Trade Administration (ITA) has programs to reach and assist the SME exporter. Some of its programs include: (1) Informational Services, it gives free information and advice on international trade from the Trade Information Center (TIC). (2) Counseling at domestic trade shows and in the TIC. (3) Seminars and workshops on specific industries, markets, regions and on the variety of tools such as creative export financing. (4) Export Finance Matchmaker, an interactive database that matches exporters with potential sources of financing. (5) Statistics for SME Exporters. (6) Websites and 301 Alert service e-mails early warnings to M/SMEs that register to help them react to potential increases in U.S. import duties in response to unfair trade practices (ITA, 2004). Moreover, US. Business Information Offices also helps U.S. SME exporters through Market Development Cooperator Program, which is a matching awards program that builds public-private partnerships to encourage SME exports; and Export Trade Certificate of Review, which is a safe harbor for M/SMEs to collaborate and gain the same advantages available to large-sized firms without fear of U.S. antitrust laws; and Buy USA. com, which is a way for M/SMEs to attract new export business (ITA, 2004).

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In Japan, the Japan Bank for International Cooperation (JBIC) has set up an Advisory and Consulting Office for M/SMEs which offers advisory and consulting services to support small firms (OECD, 2004). Nippon Export and Investment Insurance (NEXI) of Japan provides information on export credits to small firms in the context of international investment seminars targeted to smaller enterprises. JBIC of Japan offers advisory and consulting services and organizes lectures, seminars, study meetings and various forums to support M/SMEs (OECD, 2003). In Mexico, Mexico Bancomext provides M/SMEs with trade-related information, matchmaking services, training and valuation services. Mexico allocated USD 3.5 million for SME export credits in 2001 (MOFT, 2004). Mexico has recently introduced the Small Business Export Credit Guarantee (GLIEX) (OECD, 2004). In Turkey, the Turk EXIM bank: is a state-owned bank which provides M/SMEs with short term working capital finance and is studying a new credit program exclusively for M/SMEs (MOFT, 2004). It plans in future to emphasize long-term schemes (especially non-funding facilities i.e. guarantee and insurance) leaving short-term finance for commercial banks. In addition there exists the Sectoral Foreign Trade Companies Credit Program which assists small export trading companies in their export financing needs, including subsidized interest rates. Turkey's Pre-Shipment Export Credit Program specifies that intermediary commercial banks must disburse at least 30% of their credit limit to exporters with up to 200 employees (OECD, 2000). The main Bancomext trade financing instruments that are relevant to M/SMEs are (a) ‘Equipment Financing’ up-to US$250,000, and (b) ‘Short term Financing for Small Exporters’ up-to US$50,000 -can be secured by export receivables. Bancomext also offers international project financing, syndicated credits, evaluation services, and other various types of financing instruments (MOFT, 2004). In Italy, Italy SACE (Export Guarantees) is a public agency that provides Italian M/SMEs with export guarantees and insurance, either directly or through intermediary banks. It covers risks related to supplier credits, buyer credits, production, and payments. It insures companies for repayment of bonds (bid bonds on tenders) as well as a variety of other political risks associated with operations in a foreign country (MOFT, 2004). In Tunisia , there exists the export credit insurance scheme which was set up in 1984 as part of the government’s export promotion strategy. The scheme is intended to guarantee the successful outcome of export or export-related transactions by assuming responsibility for losses arising from commercial or political risk, disasters or any other risk inherent in such transactions. The main schemes administered by the Compagnie Tunisienne pour I’assurance du commerce exterieur, COTUNACE, which offers services and products tailored to the needs of exporters seeking to strengthen their position in traditional markets, capture new markets or facilitate export-related transactions. The first task of COTUNACE is, however, to prevent the SME exporter from even starting to do business with a dubious client. To do this, it uses a risk selection process based on a credit check of the exporter’s clients using a database on export counterparts that is constantly enhanced and updated. The insurance coverage for non-payment by the foreign buyer is designed to reassure the exporter that commercial transactions will not end in failure. If non –payment is due to one of the risks covered, COTUNACE assumes the ensuing financial responsibility and compensates the exporter for 85 per cent of the commercial risk and 95 per cent of the non-

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commercial risk for small exporters (UNCTAD, 2001). The scheme also covers, for example, losses arising from non-performance of an export contract, the loss of company equipment being used to perform a service contract abroad, and losses arising from a security company being called in. COTUNACE has a wide range of guarantees that can be of benefit to banks that are financing M/SMEs during the different phases of their export process. The products are: Short term coverage which includes “pre-shipment credit insurance and financing”, “insurance against non-performance of a contract” and “export pre-financing loans guarantee”. Long term coverage which includes “bond insurance” and “post-shipment credit insurance and financing”. COTUNACE aims to offer these products to M/SMEs at lower cost to lessen the strain on their budgets so as to allow them to be competitive in the international market.

In Morocco, recently, and for the first time, political and economic actors are working together in order to formulate a coherent and unique set of policies in favor of the SME sector. The objectives of the new set of policies are: to stimulate the creation of new enterprises; to help the development of the existing ones and; to reduce the mortality rate of M/SMEs.

The objective for year 2010 is to create 120.000 new M/SMEs that should correspond to 2.4 million new jobs generated. The new strategy in favor of the SME sector is structured around four main axes: a) general favorable environment; b) performing support system; c) flexible and suitable financing system; and d) reinforcement of the competitiveness elements.

Three main instruments have been identified to implement this set of policies , namely:

A National Agency for the Promotion of M/SMEs, in charge of mobilizing, coordinating and evaluating all the actions involved. The agency has representatives from the government, the business community, financial institutions and, the related NGOs; The National Agency Council provides advice on all issues related to M/SMEs and evaluates the general policy framework. The associations working for the promotion and support of M/SMEs are reinforced and provided with adequate means and juridical status, in order to constitute a partner for the government in the promotion of the sector. The institutional framework supporting the role of M/SMEs in export is characterized by a multiplicity of actors and interventions such as : The “Caisse Centrale de Garantie”. (CCG).

It is a public entity, created in 1949, but more recently reformed under law. N. 47 – 59. It is administered by a Board of Directors, in which the private sector is represented by the GBPM (Groupment Professionnel des Banques du Maroc) and the Federation of Chambers of Commerce. A cooperation agreement has been signed between the CCG and the Moroccan banks in 1997. The CCG's main mission is a guarantee scheme for exporters, with the objective of helping Moroccan enterprises to develop their export performance. In this case the CCG does not foresee a different procedure and treatment for M/SMEs and large firms.

The following conditions are applied to the guarantee scheme:

1) Up to 50% of the guarantee is covered by the CCG, while the remainder is covered by the banks.

2) A fixed commission is charged to all enterprises for the examination of the project.

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3) A 0.6% commission is charged yearly to all enterprises. 4) 15 working days are fixed as the deadline for the CCG to process the request

for export guarantee.

(2) Centre Marocain de Promotion des Exportations (CMPE) It is a public institution created in 1980 by the Ministry of Industry, Commerce and

Handicrafts, with the specific mandate of promoting Moroccan exports and identifying potential new markets. A special attention is given in this sense to the SME sector, that often lacks information and skills to penetrate foreign markets and needs support to gain visibility at the international level.

The CMPE is based in Casablanca and has no regional or international antennae; it is organized into specific departments.

The activities of the CMPE have been organized into four main axes of intervention, after the 1990-91 reform of the institution.

The role of CMPE includes the following activities: 1) Dissemination of information on international markets and on the Moroccan

production system, including trade regulations and opportunities. 2) Preparation of monographs on targeted markets, sectoral studies and product

tests on foreign markets. 3) Organization of business missions to international and specialized exhibitions,

site visits for foreign buyers and manufacturers and specific training programs for Moroccan entrepreneurs.

4) Provision of assistance for the identification of foreign markets, for the establishment of business contacts between Moroccan exporters and foreign buyers and the adaptation of products of international standards.

The CMPE established the Trade Point Casablanca in December 1996, under the direction of the Ministry of Industry, as an additional tool to serve local and foreign traders .

The basic aims of the Trade Point are to raise trade efficiency, to lower business costs, to connect enterprises to the global trade information system and to expand the participation of M/SMEs to international trade, Its services include:

• ETO (Electronic Trading Opportunity Service). • Business information research and development. • Online marketing. • Electronic Catalogue. • Internet Service. • Free site for companies in the Web site. • Co-operation with global trade Point Network.

Lessons learned from other Countries Experiences: The experience of different countries in dealing with the promotion of exports of M/SMEs is widely diversified. There is no blue print that is adopted in all countries. Moreover, despite the fact that in many of the countries studied M/SMEs showed great success, the methods, policies, and regulations were never common among those countries.

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Some countries believed firmly in providing direct support for M/SMEs where other had general institutions which benefited M/SMEs indirectly. Some countries adopted non distortionary free market policies to enhance M/SMEs while others intentionally adopted distortionary policies as subsidized loans and interest rates. In most of the cases there was no special ministry devoted for M/SMEs (with the exception of India), however the coordination of efforts was in all the cases led by a department that followed one of the ministries. The main conclusion of the international review is that success of M/SMEs in the countries studied was a result of a mixture of policies, programs and regulations that helped to enhance the role of M/SMEs in general with no specific focus for export policies designed for M/SMEs. Whenever special efforts or activities were devoted for M/SMEs, they were mainly concentrated in two main areas: 1) Provision of finance which took different forms starting from guaranteed schemes for exports to subsidized interest rates and specific loans schemes designed specifically for M/SMEs, and 2) Making information available whether on business opportunities abroad or on the required steps of how to export. In the majority of the cases studied, the export policies adopted were rather general and M/SMEs benefited from such general policies (with the exception of the UK and some other few countries which designed special initiatives to enhance exports of M/SMEs as South Korea, Turkey, and Morocco). Finally, it is worth noting that the success of M/SMEs in the exporting activities cannot be solely confined to adopting a certain export strategy that focus on exporting per se. Rather for the success of exporting activities of M/SMEs a web of successful well designed policies and regulations that deal with different aspects of M/SMEs development including finance and institutional setup should be put in place. The finance of M/SMEs has been the major issue where the different countries concentrated upon to enhance their role in general and in exporting in specific. Finally, it should be noted that a common theme that has been identified in all countries is the coordination between the government and the community participants and NGOs to enhance the role of M/SMEs. This trend is increasing in all countries and decentralization efforts are taking place to handle the responsibility of enhancing M/SMEs to non governmental organizations and community based efforts. Chapter Two: Literature Review and Current Status of M/SMEs in Egypt Introduction After reviewing the international experience of export promotion of M/SMEs, we devote this chapter to discussing the characteristics of the Egyptian M/SMEs and undertaking a literature review confined to the Egyptian case. The intention in the beginning was to devote separate chapters, one for the literature review and one for the current status of M/SMEs in Egypt. However, due to the relatively new focused attention on M/SMEs in Egypt, the literature and data available have been scarce. Hence, we merged the two chapters in this one which combines the two dimensions, literature review and description of the current status. In many cases, we observe a large number of similarities between the status of M/SMEs in Egypt when compared to other countries. We divide this chapter into several sections dealing with the main features of M/SMEs in Egypt (contribution to the economy,

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size, etc.), exogenous factors affecting the performance of M/SMEs and endogenous factors. We pinpoint the major policies adopted by the Government of Egypt (GOE) and other institutions in dealing with M/SMEs and identify the major problems facing M/SMEs

Main Features of M/SMEs in Egypt with Special Focus on Exports Related ProblemsContribution to the Economy: The number of enterprises in Egypt classified as M/SMEs is huge. According to the latest available establishment census which was undertaken in the mid 1990s, M/SMEs account for about 99% of the nonagricultural private enterprises, where the bulk of enterprises is concentrated in the micro class (see table 4.). In terms of contribution to value added, M/SMEs provide 80% of the total value added generated by the private sector. The contribution of M/SMEs to employment reaches 66% of the total labor force and 75% of the total non agricultural labor force. Despite the large size of M/SMEs in terms of number of enterprises and contribution to employment, their contribution to GDP and exports is minimal reaching less than 1% of GDP and less than 0.5% of manufactured exports (Lerches, 2001; George and Pinel, 2001). Structural Features: 1. The Missing Middle: Egypt is one of the countries characterized by the missing middle syndrome, at least in terms of mid-size enterprises employment. Egyptian manufacturing enterprises employing 10 – 499 employees have a significantly low share of employment. 75% of employment generated by enterprises with either less than 10 workers (95.4% of establishments) or more than 500 (0.1% of establishments), with only 25% contributed by the small (4.4% percent of establishments accounting for 15% of employment) and middle range (0.3% of establishments employing 10%) (see Table 4.) (CAPMAS, 1996). Table 4: Number of M/M/SMEs operating in Non-Agricultural economic activities

Item Total Number of M/SMEs Percent of Private

Sector

Micro (1-4 employees) 92.6 Small (5-14 employees) 6.12

Medium (15-49 employees) 0.91 Large (more than 50 employees) 0.38

Total 100.00 Source: CAPMAS’1996 Establishments Census Size N 2. Skewed Size Structure: the size structure of enterprises (in terms of number of enterprises) in Egypt is markedly skewed towards micro enterprises as shown in Table 4. 3. Predominant low capitalization levels: The skewed pattern towards smallness is reflected in the capitalization patterns of the industrial sector in Egypt. 87% of the total investments made are below L.E. 2 million in value. This points to the predominance of low capitalization levels (and hence low technologies) in Egyptian industry. M/SMEs generally utilize a minimum of capital. A 1999 study showed the average enterprise had a capital of around

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L.E. 60,000. A more recent study of non-metropolitan Egyptian M/SMEs further revealed the average total capital (initial capital plus additional capital investments) to be L.E. 45,000 in urban non-metropolitan areas, with rural establishments having one-third of that amount. (MOF, 2004). 4. Low Contribution to Exports: M/SMEs are generally underperforming when it comes to exporting. The vast majority of M/SMEs did not even attempt to export. Most of the M/SMEs are family businesses that were successfully able to expand. Most of the firms are focusing on the national market, either because of anti export bias or due to the lack of means and knowledge on exporting (Dijk, M. P. Van, 2001). According to a recent report of the Industry and Energy Committee of the People's Assembly, Egyptian industry exports only 6% of its production. The share of M/SMEs in manufactured exports does not exceed 0.5%. (MOFT, 2004). This implies that contribution of M/M/SMEs in Egyptian exports does not exceed 4%. 5. High Geographical Concentration: M/SMEs are not evenly distributed among Egypt and have different characteristics. Rural enterprises are generally smaller and have a lower average value of physical assets than do urban enterprises. There is a relatively high concentration of M/SMEs in the North. Cairo, Damietta and Sharkia regions have the greatest formation rates of M/SMEs in Egypt. The high formation ratios in such governorates stems from the availability of well developed infrastructure (Cairo), and the prevalence of a historical conducive environment for the growth of a particular industry (Damietta and Sharkia). On the other hand, governorates like Suez and South Sinai have the lowest formation rates. Such low formation rates either have to do with the presence of large establishments (Suez) which absorb a lot of workers, or the dependence on specific service activity where the room for undertaking manufacturing activities is either not available or not encouraging (South Sinai). Constraints Facing M/SMEs that affect their Performance: The performance of the M/SME sector is weak due to a large number of constraints which affect negatively their competitiveness. Surveys and studies of private sector perceptions about the business environment in Egypt reveal that there are a number of constraints which limit the ability of private sector to grow, and adversely affect their efficiency and competitiveness, in spite of the significant steps taken to improve the business environment in recent years (Kheir-El-Din, 2003) (People' Assembly, 2003). According to the Egyptian Center of Economic Studies (ECES) survey2, institutional constraints are more problematic than economic obstacles to private sector development in Egypt. Small firms are affected more severely than large enterprises by the institutional constraints. (Fawzy, 1998). A World Bank study (1992) identified three sets of constraints facing the export sector. The three sets were classified into those related to penetrating the foreign markets, those related to the regulatory framework and finally those dealing with supporting services. Regarding the first set of constraints, dealing with the penetration of foreign markets, they included difficulties in accessing markets, keeping track of consumer trends, achieving the needed high standards for products and packaging and identifying business opportunities

2 The survey included 154 private firms.

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abroad. The second set of constraints, related to the regulatory framework, identified problems related to administration of the duty drawback system, sales tax refund system, costs of freight insurance and insurance services in general, customs procedures investigating the sanitary and phyto-sanitary measures of exports and finally the non tariff barriers affecting the importing of inputs. The third set of constraints dealt mainly with services that exporters heavily depend on as transportation, port and maritime services (World Bank, 1994) Fawzy’s study integrated difficulties in exporting as a constraint in its overall evaluation of constraints affecting the business community in Egypt. The constraints to exports ranked as follows, (1) Marketing and distribution companies. (2) Tariffs on imported inputs. (3) Drawback and temporary admission system. (4) Export procedures. (5) Absence of export credit. (6) Insurance services. (Fawzy, 1998). Ghoneim’s study divided the constraints facing Egyptian exports into two main groups. The first group was impediments facing export promotion agencies, these impediments ranked as follows: (1) Bureaucracy, (2) Absence of technical staff, (3) Ability to reflect business needs, (4) Coordination with other agencies in the same field, (5) Funding, (6) Definition of their role. The second was government policies concerning exports which included: (1) Unofficial payments to customs officials, (2) Customs procedures related to imported inputs, (3) Tariff levels on the imported inputs, (4) Laws and regulations concerning imports, (5) Drawback mechanism , (6) Laws and regulations concerning exports, (7) Customs procedures related to exports (Ghoneim, 2000). With increased economic liberalization, it was expected that M/SMEs were be unable to stand the competition against the imported products in the local market. Based on the review of the Egyptian M/SMEs available literature, we can classify the constraints that affect M/SMEs performance negatively into external factors that are outside of the enterprise’s control (exogenous factors) including globalization and free trade, macroeconomic factors, the institutional environment and the government policies and regulations, and factors that are highly subject to the enterprise control (endogenous factors). The latter include all related aspects of production, technology, finance and management that directly affect the functioning and the decision making process of the firm. We will limit our review to the factors influencing competitiveness and the export potential of M/ SMEs in Egypt. The factors mentioned are in line with the constraints hindering M/SMEs’ competitiveness in Egypt as pointed out by MOF in its "Enhancing Competitiveness for SMEs: General Framework & Action Plan" published in 2004. First: Exogenous Factors: 1- Globalization & Free Trade

The internationalization of markets for sales and purchasing influences every business. In the globalization arena, the world became a nexus of production and supply chains characterized by increased specialization and efficiency. International production undertaken by Transnational Corporations now amounts to more than global trade in goods and services. Moreover, the world witnessed a growth in trade of unprecedented levels; faster than world production, and came to account for a steadily increasing part of income to many industries and countries. Meanwhile, the speed of technological progress and

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improvements in communications allowed technologies to mature faster and to be transmitted more quickly across countries (OECD, 2000a).

Michael Porter argues that the four most important exogenous forces that affect the

performance of any enterprise can be divided into four categories: (1) Regulations; (2) Macroeconomic environment; (3) Consumer preferences and; (4) Technology. Globalization affects all the four forces in varying degrees, which influences the world trading environment, which in turn have had great impact on M/SMEs (Bhardwaj, 2003). Therefore, with increased globalization, accelerated technical change and the growing demand for higher quality modern products, many traditional M/SMEs, in developing countries face serious problems of upgrading their capabilities. It is a fact that the continuous liberalization of markets and their consequent globalization imply that firms from all types, face more and stiffer competition, both at the local and at the international level. Even modern M/SMEs in developed countries face very difficult competitive challenges in the emerging setting (Galdo and Pettersson, 2002). Egyptian M/SMEs face such “new” threats of globalization. Their problems are exacerbated by the lack of knowledge, and low capitalization. 2- Macroeconomic EnvironmentA- Scattered, uncoordinated efforts of M/SMEs

In spite of the government’s repeated emphasis on the importance of the M/SMEs (MOF, 2004), all policy efforts so far have been scattered, isolated and are often conflicting with a minimal impact on the M/SMEs as well as on the economic growth of the country (UNDP, 2003). This served to minimize the benefits that accrued to the Egyptian economy and its M/SMEs, allowed for market distortions, and contributed to the M/SMEs' loss of faith in similar development initiatives. One of the main factors contributing to this situation is the absence of a coherent vision and a general policy framework for M/M/SMEs development in Egypt that is officially adopted by the government and endorsed by the various actors (MOFT, 2004), an issue that has been recently dealt with by the issuing of the Small Enterprises Law in 2004 (Law no 141/2004). In fact the uncoordinated efforts were dealt with before by allocating a certain percentage of government procurement to M/SMEs (10%)3. This represents a step toward building such comprehensive vision which still

3 In August of 2002, the Government of Egypt decided to allocate 10% of its total budget to purchase goods and services produced by M/SMEs (Prime Ministerial Decree). Together with this significant achievement, a joint committee of Ministry of Finance and Ministry of Foreign Trade representatives was appointed in early 2003 upon a decree by the Minister of Foreign Trade (#482 for 2003) with a view towards ensuring execution of the Prime Ministerial decree, reviewing the tender law governing public procurement, and mechanisms to incorporate procurement opportunities for M/SMEs. After holding several meetings, the committee decided at the time that discussions would not be fruitful without determining the definition for M/M/SMEs. The committee froze its activities until the issuance of the then draft Small and Micro Enterprise Law. Recently, after the developments within the Egyptian Government and most significantly, the issuance of the Small and Micro Enterprise Law 141/2004 where one of the main articles called for the allocation of at least 10% of government procurement to this sector. The committee has since been reactivated with a decree from the Minister of Finance (#1431 for 2004) whereby the committee has expanded to comprise the Ministry of Finance, Social Fund for Development, Ministry of Foreign Trade & Industry and the Ministry of Investment. Together, members of this committee meet on a monthly basis in order to discuss, debate and propose measures of reform within the framework governing public procurement in Egypt in order to ensure access of M/SMEs to public

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remains incomplete due to the absence of other supporting measures and policies needed to enhance M/SMEs.

Moreover, donor programs focusing on M/SMEs activities have been described to be numerous and not well coordinated. There is no mapping of prevailing programs in order to avoid duplication of donor efforts. In addition, some donors allow lending of their funds at terms and conditions below market level thereby contributing to both the distortion of market mechanisms as well as fostering bank’s biasness against lending M/SMEs as they have a better alternative. Final borrowers and NGOs entertaining such subsidized programs continue to depend on donor funds thereby providing the donors no opportunity to exit (UNDP, 2003). The lack of coordination was overcome in 2002 by establishing a special committee for coordinating donors’ efforts regarding M/SMEs. The Donor Sub-Group comprises donor agencies who work on programs related to M/SME development in Egypt. A sub-group of the Donor Assistance Group (DAG), The M/SME Donor Sub-Group’s main objectives are to share information and coordinate between donors in order to optimize benefits for M/M/SMEs. Since its inception in June 2002, the Sub-Group has been working on gradually crystallizing its mandate, objectives and activities. The Sub-Group is focusing on improving communication, coordination and collaboration in order to further develop its functions and activities. Currently, the Sub-Group is chaired by CIDA and co-chaired by the UNDP. The group's objectives are to:

Mobilize synergy between donors to streamline objectives, avoid duplication of efforts and optimize benefits for M/M/SMEs

Information sharing Policy dialogue and a forum for coordination Optimization of bilateral cooperation

B- Government policies, regulations and administrative systems4. While regulatory constraints are common for all private businesses in Egypt, they weigh more heavily against M/SMEs. This is primarily due to the latter’s lack of adequate human capacity, sufficient institutional mass, as well as its limited ability to tap into the legal and other pertinent consulting services that large firms can easily access. Although legal and regulatory constraints vary according to the size and activity, it is a well- known fact that M/SMEs face significant and numerous problems concerning establishment and licensing, operation, taxes, registration, export and import permits, and compliance with the different directives of various governmental entities. The complexity of the regulatory system is further exacerbated by several other problems. These include the overlapping jurisdictions across the institutions of government and local government codes, the lack of coordination among government entities, the inconvenient location of some of these entities, the low quality of the information available to the officials, and inadequate filing and record- bookkeeping.

procurement contracts and that the legislative framework is adequately adhered to and reflective of the significance of M/SMEs in the Egyptian economy. 4 On the institutional constraints see chapter related to the legal review.

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M/SMEs have to deal with many governmental authorities, starting from obtaining the various licenses and approvals required for establishing the enterprise from the competent ministries according to the type of activity; obtaining the required capital; and then obtaining the operation permission from the local administrative units, and securing funding (see chapter four more elaboration on the steps required for M/SMEs to start their activities). In addition, licensing and registration is regulated by more than 100 Presidential, Prime Ministerial, or Ministerial decrees, let alone those decrees issued by governors on the local level. It should be noted that this convoluted regulatory setup is managed by some twenty- four government entities (see chapter four). One alarming indicator regarding the cost of licensing alone is the average key money cost of a licensed shop (payment usually made for existing tenants to leave), which was estimated by a number of international organizations in 1995 to be 30% higher than in the case of an unlicensed shop. This 30% is in effect the market value of the costs associated with just the workshop licensing process. Another empirical study estimated the cost of entry to the legal system of business -according to current regulations and laws- is around LE 8.300, and the time needed is 372 days involved 127 steps (ECES and ILD, 2004). Such inefficient rules and regulations are sufficient to drive M/SMEs in the informal sector. The new cabinet which took charge of the government in 2004 has been trying to streamline the procedures and lessen the bureaucratic burden on M/SMEs, however it is still a long way to go. Representatives from several ministries and governmental entities with often overlapping domains are responsible for monitoring adherence to standards and identifying violations. For example, ensuring compliance with health and safety laws, regulations and decrees falls under the supervision of the ministries of Labor, Supply and Internal Trade, Justice, Culture, Industry, Health, Insurance and Social Affairs, and Religious Trusts. Such interruptions to the production process results in the waste of management time at the firm level and constitutes a significant burden to the firm. ILD and ECES estimated the cost of operation under the legal system to around LE 7.750, and the time needed is 1000 hours involved 24 steps (ECES and ILD, 2004).

Moreover, M/SMEs face difficulties in gaining access to adequate inputs and export markets. M/SMEs are particularly affected by over- regulation. All the previous regulation and administration problems still exist even after the issuing the new Micro and Small Enterprise Law 141/2004 (though a large number of such regulations are currently discussed by the related governmental bodies to be relaxed). In a nutshell, the regulation and administration systems in Egypt are complicated, inconsistent, and costly and prevent the drawing of a clear-cut M/SMEs development strategy and the creation of a conducive environment for the M/SMEs to sustainable growth, development and export. C- Taxes & Inefficient Tax Administration High tax rate even for low-income categories, the tax rate is 40% for industry and

32% for services (the draft of new tax law proposed to reduce the tax rate in Egypt to 20% for both industry and services). Corporate tax rate in 1990s in Egypt was 40%, this rate was relatively high compared with 26.6% in Argentina, 25.6% in Brazil, 32.5% I China, 36.3% in Israel, 37.5% in Morocco and 35.5% in Turkey (Lee, Young, Gordon, Roger H. 2004).

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Inefficient system of tax collection leads to tax accumulation for as long as five years. Thus the amounts accumulated are so high that the small enterprise is unable to pay them, eventually declares bankruptcy and shuts down. Almost all entrepreneurs agreed that the tax authority usually arbitrarily estimates taxes, regardless of whether or not they keep regular books, thus resulting in overestimated taxes. The tax inspectors, in order to avoid being accused of bribery, provide an estimate that is dramatically higher than the entrepreneur actually deserves to pay. The sales tax is another major source of complaints, since it has repercussion on the pricing of their inputs, as well as their products (MOFT, 2004)5.

D- Weak linkage between large enterprises and M/SMEs: Networking between M/SMEs and large enterprises is virtually non – existent or takes place on an extremely limited level, thus depriving the M/SMEs of utilizing the technical expertise that can be provided - and the market that can be opened up - by large enterprises. At the same time, it deprives the national economy of using the existing M/SMEs as feeding industries for large enterprises, or as industries that are capable of replacing and increasing number of imports. One of the characteristics of the Egyptian manufacturing sector is low level of linkages existing between enterprises6. The data show that only 2% of private industrial production is done in cooperation with other firms (MOFT, 2004). According to the empirical literature, countries that have a solid base of M/SMEs and active linkages with large enterprises have achieved high export growth rates. Conversely, countries that have not been able to develop such a strong base with active linkage relations have generally suffered from low export growth rates (El-Gamal et al, 2002). In short, the absence of a competitive M/SMEs sector results in weak competitiveness of the economy in general. The absence of a strong M/SMEs sector is a major structural constraint when it comes to industrial competitiveness for several reasons. First, without a strong M/SMEs supplier base, large manufacturing becomes inflexible and slow to respond to market trends. Given the weakness of small and medium enterprises, large enterprises are structurally forced to one or both of the following options, (1) Integrate operations in their plants, thus preventing themselves from focusing their financial, technical and human resources on their core competences. (2) Have an unduly high import content (currently standing at an estimate of 40 to %60).

In addition, the absence of a strong M/SMEs sector reduces the competitive pressure on larger enterprises, allowing them to remain inefficient. This, in conjunction with decades of protectionism and import substitution policies resulted in promoting this inefficiency and lack of competitiveness. 5 Sales tax apply for wholesalers that have annual total sales more than LE 150.000, it not applies for wholesalers and retailers that have annual total sales less than LE 150.000. In terms of sales tax collections, there are some privileges for small and micro retailers that have annual total sales less than LE 150.000, because it has been collected by the wholesaler the have annual sales more than LE 150.000. In terms of sales tax exemptions, all items exempted from sales tax not convenient to M/SMEs. 6 M /SMEs have weak or none linkage with the larger enterprises due to one or more of the following reasons: (1) the lack of information on how to reach those larger firms. (2) Deteriorating market conditions to the extent that even larger firms are barely producing to cover themselves, with no extra demand to distribute to smaller firms. (3) Vertical Integration, there is a conception that larger firms are vertically integrated with no need for input from M/SMEs.

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E- Marketing M/SMEs encounter many marketing related difficulties (NDP, 2003, MOFT, SME, 2002, MOE, 1998), such as: - Inefficiency of local marketing channels and networks, marketing channels for small businesses are very limited. Most M/SMEs are confined to markets that are within their immediate geographical location. Overall, it is nearly estimated that 56% of all M/SMEs production are done on an order by order basis with the remaining 44% done on a continuous basis. M/SMEs suffer from the absence of a competitive network of wholesalers and trading companies that could introduce their products into domestic and foreign market, and provide them with pertinent market information. The available marketing and distribution channels are either government owned or cater to larger businesses. - In addition, there is a legal prohibition on the operation of foreign owned international trading houses. The lack of sufficient competition in the current wholesaling and trading sectors keeps the major actors contended with their current client base mainly composed of large businesses. - Another big missed channel for M/SMEs is e-commerce, and the opportunity to use the power of the Internet to reach the international markets. - Lack of information about local and foreign markets. - Insufficiency of resources to employ marketing specialists. - Poor interrelations between M/SME on one hand and large and foreign enterprises on the other hand. - Difficult access to governmental procurement. This issue has been recently tackled under the new Small Enterprises Law (see previous efforts as discussed in footnote 2); the law no 141/2004 states that “Ministries, attached organs, public authorities, and local administrative units shall register and keep records of small and micro enterprises willing to deal with them and shall entitle them to a fair share of at least 10% of total procurement value of goods and services supplied to them including the execution of construction works (article xii). Moreover, a joint policy committee comprised of representatives from Ministry of Finance (MOF), Ministry of Foreign Trade and Industry (MOFTI), Social Fund for Development (SFD) and Ministry of Investment (MOI) has been formed under the leadership of MOF, the main task of this committee is to review government procurement policies for M/SMEs and to agree on actions to be taken by organizations represented on the committee in order to streamline government procurement for M/SMEs. - Inability to invest in the field of marketing research and financing marketing promotion. - Inaccessibility of export channels. A lot of Egyptian M/SMEs do not have a specialized export agency or house that would be responsible for deciding where, how and when to market their products abroad. The Ministry of Foreign Trade has tried to overcome such difficulties by including M/SMEs interests in the mandate of its different organizations as shown in box 1. In addition, the M/SMEs policy unit in the Ministry is concerned with drawing the strategic vision for M/SMEs promotion in Egypt.

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Box 1. Role of different affiliates of Ministry of Foreign Trade in Enhancing M/SMEs. 1- International Trade Points The MOFT is developing International Trade Points systems to provide more services to small export-oriented investors in all governorates. These services include information availability, helping in preparation of feasibility study, increasing awareness of e-commerce among small investors, as well as promoting and marketing their exports. 2- The General Authority for International Exhibitions and Fairs - The MOFT’s work in this field integrates small investors into the Authority’s plan.

They can participate in the exhibitions it organizes or in which it takes part, locally or abroad, and access information through the Ministry’s quarterly newsletter and its Web site.

- M/SMEs also enjoy preferential treatment with regard to display facilities at local and international fairs, and benefit from discounts reaching 50%. In this way, the Authority is helping them market their products locally and abroad.

- The authority encourages SMEs to participate in exhibitions without rent through entities like SFD and the Ministry of Local Development.

3- Commercial Representation The Commercial Representation in the Ministry has provided the following services to small investors: - Cooperation protocols between Egypt and other countries have led to the exchange

of experience in SME support and development. - Consultation between the Social Fund for Development (SFD) and commercial

representation offices on the establishment of trading houses that will serve as permanent fairs for small investors’ products. SFD loans will encourage them to export and increase their marketing efforts on international markets.

- The MOFT organizes regular study tours for stakeholders concerned with SME development, such as the SFD and the Ministries of Finance and Industry. These tours are an opportunity to learn from SME development elsewhere, and have covered such countries as Greece, Portugal, and Canada.

- Commercial representation missions prepare reports on the local application of international SME development experience.

- Commercial representation offices also work to include small local investors in promotion missions, conferences, seminars, and workshops held at home and overseas.

- Commercial representation offices in 13 countries are also conducting research into international SME success stories, and working to adapt such experience to our economic and social conditions.

- Increasing M/SMEs participation in the international exhibitions by affording free spaces in these exhibitions.

- Commercial Representation helps the training of the small investors, through the last three years it afford 250 training opportunities outside.

- The MOFT also promotes SME representation on joint business councils (the Egyptian-American and Egyptian-British Presidential Councils).

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4- The Foreign Trade Policy Sector: The Foreign Trade Policy Sector performs the following duties: - Representing small business owners on Commodity Councils to recognize the

problems facing this sector and work to solve them. - It also helps formulate the SME Export Promotion Strategy, studying marketing

opportunities and providing information on markets. 5- The General Authority for Export and Import Control: This Authority helps M/SMEs in the following ways: - Technical guidance to small exporters on export advantages and packaging

techniques. - Information on procedures to obtain export or import registers for the import of

production requirements. - Guidance on the roles of different monitoring entities and the examination of

exported goods. - A special unit within the Authority offers information and rapid solutions to

problems facing small exporters. - A cooperation protocol between the Authority and the SFD will train small

exporters, upgrade information systems and develop laboratories to upgrade performance further.

F- Un-competitively priced inputs: High quality production inputs are not easily available to M/SMEs. In order to obtain these inputs, M/SMEs have to compete with export markets (in case these inputs or portions of them are exported), as well as with larger firms (for the remaining-or portions of these inputs). Moreover, tariffs imposed on high quality imported inputs, as well as the lengthy sophisticated import procedures place M/SMEs in a less competitive position (MOFT, 2002). M/SMEs in some sectors cannot export or compete internationally because of the relatively higher prices of their production inputs which render them uncompetitive vis-à-vis their competitors. G-Finance Financial services constitute a major component in M/SMEs development efforts. Most of M/SMEs suffer from insufficient access to reasonable financing services in order to cover their needs of operating, fixed capitals and exporting on continuous bases, M/SMEs that have received funds from banks represent only 5% of total Egyptian M/SMEs. The restricted M/SMEs’ access to banks produced an absurd financial intermediary structure within the Egyptian economy, 1.2%of the private enterprises enjoy access to banks, whereas 98.8%of the private sector enterprises –accounting for 66%of total private sector employment –are excluded from the formal banking sector and may obtain loans from small NGOs or other informal sources or have no access at all (UNDP, 2003). There is an estimated M/SMEs’ credit gap of 1,475,000 M/SMEs’ borrowers requiring US$371 million in micro financing. The majority of the financial sector institutions are not well equipped to serve the M/SMEs needs and nature. The limited scope of finance efforts and programs in the banking sector, coupled with M/SMEs reliance on donor and external funding, make the

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formal banking sector insufficient to meet the needs of M/SMEs whether in the short-term or in the long-term (MOFT, 2002, NDP, 2003, MOF, 2004). In the context of competitiveness, other sources of finance like long-term and medium term credit, venture capital and leasing, gain particular importance. These stem from the fact that such forms of finance allow the entrepreneur to upgrade his/her equipment and expand the enterprise operations. Nearly all entrepreneurs lack awareness of non-credit financial services and mechanisms that can assist them in expanding their businesses. Apart from the fact that venture capital is virtually absent from Egypt, we can breakdown M/SMEs financial problems to two main categories (1) General financial constraints. (2) Export Financial Constraints General financial constraints First of all, it must be clear, there was no shortage of funds within commercial banks, but that banks felt the credit risks were much higher (due to absence of collateral) if dealing with M/SMEs. But due partly to the new recent governmental interest for M/SMEs development, some banks have become ‘politically’ motivated to search the possibility and potential of expanding their markets through the provision of credit to medium and small enterprises (UNDP, 2003). The main financial constraints facing M/SMEs are: 1- One of the main problems for commercial banks is in having the institutional capacity to be able to investigate or to reach this target group. The majority of banks, especially commercial banks conduct their business through a number of branches that are usually located in the major cities only and do not have the sufficient trained staff or systems required to track the different sized loans, which would emerge from a shift in policy (UNDP, 2003). 2- M/SMEs business loans are not yet a key bank function, therefore not promoted because current operational and administrative costs for case-by-case SME loans exceed any profit potential – no systems or models have yet been pursued whereby SME lending can be profitable MOFT, 2002a). 3- The banking sector is still reluctant to lend M/SMEs, because of the high risk associated with lending them (due to the absence of collateral) and the relatively high costs of keeping accounts for them at least from the banks perspective (El Gamal, M. et.al, 2000). 4- Subsidized M/SMEs funding programs7 with interest rates below market levels create unrealistic and unsustainable dependencies whereby funds quickly deplete and M/SMEs are sheltered from realistic market forces. 5- Banks, non-bank credit institutions and to a limited extent also leasing companies would usually be the suitable lending organizations within the formal financial sector to satisfy SMEs' finance needs. Non-bank credit institutions are prohibited from collecting savings but otherwise would have an institutional set up similar to banks and operate along comparable prudential regulations. 6- Non-bank credit institutions are not permitted in Egypt. Moreover, saving collection would be denied to any corporation, which is not a licensed bank, yet as a consequence of above calamity .Central Bank of Egypt (CBE) tightened its approval policy. Since then only

7 Several M/SME lending programs sponsored by national and international entities offer loans below market interest rates – though initially attractive to M/SME’s,

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leasing companies were licensed in 1997 by a special leasing law facilitated by the World Bank (UNDP, 2003). Export Financial Constraints Beside all finance constraints that face M/SMEs in general, there are specific constraints facing M/SMEs’ exports in Egypt. M/SMEs export finance encounters various problems; many firms had opportunities to export but could not produce on a larger scale, due to lack of finance. According to the MOFT survey8 in 20049; financial constraints facing M/SMEs’ export can be classified as follows: Some banks have a minimum size credit policy (especially the joint venture banks). Some banks are willing to provide pre-shipment short-term financing to first-time exporters and only if they were existing producers. Same with post-shipment finance instruments like discounting.

Most banks require an export Letter of Credit (L/C) as a condition for providing short- term pre-shipment finance, meanwhile, some banks might require additional mortgage of fixed assets by some clients.

Exporters sometimes find difficulty obtaining L/Cs because the foreign importers want to avoid incurring the costs of opening an L/C, and in particular, they are reluctant to open it.

Upfront before the exporter starts manufacturing the goods i.e. would rather postpone incurring the L/C costs until the goods are ready for shipment.

High cost of finance. (EDBE) Export Development Bank of Egypt’s volume of business has significantly increased, but its export finance portfolio appears to be falling in absolute terms not only as a percentage of a total portfolio.

The resources of the Egyptian Credit Guarantee Company of Egypt (ECGC) are limited, it cannot guarantee transactions in certain countries unless it has a government backup guarantee, its procedures are to be difficult to understand, and its insurance coverage mostly relate to post-shipment stage.

Egypt is not making adequate use of the services of regional trade programs and the bank utilization of the services of domestic and regional programs10 was very weak, due to inadequate export business in general, inadequate bank and exporter awareness of their services, and unacceptable bank guarantees and/or country risk.

Credit for market development and product development is provided in other countries but not in Egypt support is provided by MOFT for exhibitions expenses (but this is unsustainable and cannot cover all exporters’ needs)

Counter trade is not applicable to M/SMEs. Buyback agreements are not possible through M/SMEs, as they lack the necessary negotiation skills.

8 The sample was eight banks, including four public banks, two specialized development banks and joint venture banks. 9 MOFT (2004), SME Access to Export Finance in Egypt 10 Such as Islamic development Bank, Inter-Arab Investment Guarantee Corporation and Islamic Corporation for investment Insurance and Export Credit 10 Such as: International Trade Point, EXPOLINK, and Export Promotion Center, etc..

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Consignment exports are too risky11. Most banks do not use the factoring and forfeiting instruments, which are highly limited in Egypt.

M/SMEs do not benefit from duty draw back system as they act as indirect importers due to small volume of operations they undertake.

The financial leasing law is not yet implemented/ no authority in charge/ system not yet established/ inadequate number of leasing firms/ costs too high.

Industry-specific constraints: banks avoid financing the information technology (IT) sector because of its intangible nature –the bulk of working capital needs are for payment of wages, which banks avoid financing.

Many of the M/SMEs lack the necessary awareness of export business and the export finance products and instruments.

Lack of financing for the marketing activities e.g. exhibitions, catalogs, etc Many of the M/SMEs do not know about the export credit insurance mechanism or about ECGE altogether and most M/SMEs heard of ECGE’s exhibition coverage insurance policy. Moreover, they were not familiar with the new export law.

Second: Endogenous Factors Competitiveness of the M/SMEs sector is limited due to some factories related to these enterprises themselves: - Lack of skilled labor: Labor constraints include inter alia the lack of skills in basic technical skills, business management, accounting, book keeping and the lack of accessible consulting and support services. In addition, with a relatively low level of educational attainment (only 9% of small and micro entrepreneurs have university degrees). M/SMEs are not likely to appreciate the value of these skills (MOFT, SME, 2002). - Lack of market information: Nearly two-thirds of small businesses consider the lack of market information to be a very severe constraint. M/SMEs lack the capacity, and their owners lack the education (only 9% are believed to have attained a university degree) to tap sources of relevant information (new products, consumer trends, technological developments, etc.) (MOFT, 2002; MOFT, 2004). - Lack of modern equipment and technology: Given their poor access to equipment, M/SMEs lack any quality control and product standardization. These position M/SMEs’ products to be less competitive in the national and international markets (MOFT, 2002). Where there is an apparent lag in technological upgrading of machinery as well as production processes. The latest technology in the vast majority of cases investigated dated back to the 1970s or earlier. This seems to be in line with the general condition of current general technological capacity of the Egyptian industry (Djeflat, 2002, p. 15). There is also an extremely low level of utilization of computers in general. (MOF, 2004).

11 Consignment is an arrangement where goods are shipped to an importer without the exporter giving up ownership. The importer acts as agent for the exporter in arranging sale to third parties. Upon sale of goods, the importer deducts the selling commission and remits the balance of sale proceeds to the exporter. Consignment is useful when the importer lacks -or is not willing to place at risk- the funds to purchase the goods outright, but is still able to provide the exporter with a valuable distribution channel. They were available at half of the interviewed banks, but some would not provide it to first-time exporters. They said it is too risky and needs strong collateral.

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- Inferior Quality: The main determinant in the decision to export or not is quality, the quality of Egyptian M/SMEs is not acceptable to foreign markets; SME-products lack quality competitiveness in foreign markets. - Lack of Awareness. M/SMEs are not aware of the specification and/or modifications needed in the product to be marketed internationally. - Many of M/SMEs are not familiar with regional trade programs and the organizations that provide export services. Conclusion M/SMEs in Egypt are facing many challenges in the rapid economic changes in the world economy and international trade under the globalization process. These challenges are not only the competition in the foreign markets but also the surviving and competition in the local market. To succeed in the new world economic changes, there are commitments and collective efforts that need to be addressed by the different stakeholders in the society to revive the role of M/SMEs and increase their ability to export. The government has started recently to pay increased attention to the important role played by M/SMEs in the economy, however it still lacks a comprehensive vision. There are several pillars required for the success of M/SMEs both in the internal and external markets, which have multi-dimensions. Some of such pillars have already been tackled in previous studies as MOF, 2004. Our aim in the action plan is to provide this comprehensive view on how to enhance the role of M/SMEs in the Egyptian economy in general and in the exporting activity in specific.

Chapter Three: M/SMEs in Egypt based on the Survey Analysis Section One: Introduction: Methodology In an attempt to understand the way M/SMEs function and take the decision to export, and the kind of obstacles they have to deal with and the type of support they get, we had to implement a survey of SMEs working in the manufacturing and service sectors. The choice of location was based primarily on cluster areas where exporting M/SMEs could be detected. Initially the sample was to include 200 enterprises, 100 of non-exporting enterprises and the other half were to be export enterprises. The research team decided to split the sample into 175 manufacturing enterprises and the rest would be service enterprises. However, we encountered several problems during the listing and sampling operations. We ended up having 183 manufacturing enterprises (73 exporting and 110 non-exporting enterprises) and 31 service enterprises (9 exporting and 22 non-exporting). Sample Design: The sample was designed to include 200 small and medium enterprise units, covering 100 exporting units and 100 non-exporting units: Manufacturing units with (5 to 99 workers): 170 units. IT: 30 units. The enterprises were selected from industrial clusters in 8 governorates representing urban governorates, Lower Egypt and Upper Egypt. The geographic distribution of the enterprises was as follows:

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Table 5: Proposed Sample Design Governorate Place Number of units

Giza 6 October City 40 Kalubia Shobra El-Khimah 20 Sharkia 10 Ramadan 40

Alex Borg El-Arab 25 Damietta Qism Rabea’ 25 Fayoum Kom Aoshim 10 Menia El-Menia El-Gedidah 10 Cairo 30 Total 200

The sample was designed in this way to achieve the objectives of the study. These objectives are to:

Detect exporting obstacles. Detect the factors which may help the enterprises to be able to export their

output. A random sample of units was selected from lists of exporting and non-exporting enterprises in each cluster. Field Work: The field work lasted for two weeks in November 2004. Final Sample: Although the sample was designed to interview 100 exporting units, the field work team succeeded in interviewing only 82 exporting units. The number of completed interviews was 214 distributed as follows: 183 manufacturing units with 73 of them exporting units, and 31 services units with 9 of them exporting units. In the following parts we will try to describe firstly the characteristics of the sample; secondly, we will discuss the economic activities undertaken by the enterprises and the export content; thirdly, we will discuss the determinants of success within the enterprises; fourthly, we will identify the main features of the exports and the determinants of exports growth; fifthly, the institutional environment and incentive structures in the Egyptian market will be presented; and finally, the last section will deal with the major obstacles facing exports and the policy recommendations from the small entrepreneurs perspectives. All through the following presentation we will be referring mostly to the manufacturing enterprise data, unless the service sample proves otherwise. Section one: The legal status and firm description: Location: Before we start describing the main features of the sample, it is important to explain the 183 manufacturing enterprises were selected from 9 governorates as the following table shows:

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Table 6: The geographical distribution of the sample Governorate Frequency Percent

Cairo 23 12.57 Alex. 19 10.38

Damietta 25 13.66 Sharkia 40 21.86 Kalubia 18 9.84

Giza 36 19.67 Beni Sweif 5 2.73 Al Fayoum 10 5.46 Al Menia 7 3.83

Total 183 100 As can be seen, there is a relatively large percentage of firms that are situated in Sharkia and Giza governorates, which is due to the industrial cities of 10th of Ramadan and 6th October which are located there. The highest percentage of exporting small firms are concentrated in theses two cities. On the other hand, the service SMEs are basically concentrated in Cairo (67%) Alexandria (20%) and El Giza (13%). The Legal Status: Due to the small scale nature of the SMEs in the sample, more than 50% of the enterprises are “person’s enterprises” as can be shown from the following table. However, there are still 22% of the companies that acquired the simple liability partnership status and the same percentages of firms are Joined Stock Companies. The last two types of enterprises are relatively larger (medium-size enterprises).

Table 7: The Legal Status Of The Firms Frequency Percent

Sole Proprietorship 46 25.14 Partnership 49 26.78

Simple Liability Partnership 41 22.4 Public Enterprise 1 0.55

Joint Stock 41 22.4 Simple Liability By Shares 1 0.55

Limited Liability 4 2.19 Total 183 100

As to the sector to which the enterprises belong, data show that the overwhelming majority of SMEs (90%) are private domestic companies that are owned by the Egyptians. The share of foreign-owned enterprises is quite limited (4.4%). The joined Egyptian-Foreign companies do not exceed 5% of the total number of the manufacturing enterprises in the sample. If we look at the service enterprises we notice that all of them are Egyptian-owned private sector enterprises. With regards to the SMEs that contain foreign partnership, data indicate that the share of foreign equity is in the range of 25% to 49% of total capital.

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Table 8: The firms’ distribution according to Ownership

Frequency Percent

Public 1 0.55

Private Domestic 165 90.16

Private Foreign 8 4.37

Private Joint- Domestic- Foreign 9 4.92

Total 183 100 The role of foreign partners is not limited to providing finance; in fact in 55% of the cases the foreign partner plays a major role in the management of the firm and in the provision of technical assistance. Gender and entrepreneurship: Previous empirical research indicates that female ownership or management of manufacturing or service activities is quite limited to 2.3%, 12% respectively of all MSEs. The overwhelming majority of the female owned SMEs (93%) are in the size category less than 3 workers. Accordingly, it was rather difficult to find M/SMEs owned or run by females, not to mention ones that are export oriented. In this study, only 9 female entrepreneurs were found, and 4 of them were exporters. The following tables will summarize two basic features of the comparisons between male and female owned enterprises, namely, the size of the enterprise, measured according to the number of workers and the value of capital: Table 9: The M/SMEs distributed according to Gender of Owner/ Manager and Number of Workers

Number of workers Male Female

1-9 ٥٥,٦ ٢٦,٤

10-24 ٢٤,١ -

25-49 ٢٢,٢ ٢١,٣

50-74 ١١,١ ١٤,٤

١١,١ ١٣,٨ + ٧٥

Total ١٠٠ ١٠٠

Number ٩ ١٧٤

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Table 10: The M/SMEs distributed according to Gender of Owner/ Manager and Value of Capital

Value of capital (1000) Male Female

1 – 49 ١١,١ ١٤,٩

50-99 ٢٢,٣ ١٢,٧

100-199 ٣٣,٣ ١٦,١

200-499 ١١,١ ١٠,٣

500-999 ٧,٥ -

1000-4999 ٢١,٣ -

5000-9999 ٦,٣ -

10000-19999 ٢٢,٢ ٩,٢

20000- ١,٧ -

Total ١٠٠ ١٠٠

Number ٩ ١٧٤ The two previous tables indicate that the female owned M/SMEs are relatively smaller, especially in terms of number of workers. There is no special concentration of female owned enterprises in certain economic activities, as the nine enterprises are almost distributed along the different activities. Size of the enterprise according to capital and labor: Since our sample include small-and medium-size enterprises, the size of the firms varies tremendously where capital and labor are concerned. The following table will summarize the size distribution of the manufacturing SMEs according to capital. Table 11: the Distribution of M/SMEs according to the Capital’s Value

Size of Capital in LE (1000)

Goods Services

Frequency Percent Frequency Percent Less than 50 27 14.8 3 9.7

50 - >100 24 13.1 4 12.9 100- >200 31 16.9 2 6.5 200->500 19 10.4 3 9.7

500 ->1,000 13 7.1 3 9.7 1,000 ->5,000 37 20.2 11 35.5 5,000 ->10,000 11 6.0 4 12.9 10,000 ->20,000 18 9.8 1 3.2

NA 3 1.6 Total 183 100 31 100

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By looking at the previous table one realizes that the highest frequency of SMEs is concentrated in the capital size category of LE 1 million.-to less than LE 5 million. The same could be said about the service enterprises where 35% of them are concentrated in this category. There are no apparent differences between the size structure of the manufacturing and service SMEs. As to the present value of the fixed capital of the firms (excluding land and buildings) data indicate that around 40% of SMEs have fixed assets with the value of LE 1 million and above, while this percentage goes down to 26% in case of the service enterprises. Table 12: The Distribution of M/SMEs according to the present value of the fixed assets PV of Fixed Assets LE (1000) Goods Services

Frequency Percent Frequency Percent

Less than 50 40 21.9 7 22.6

50 - >100 15 8.2 8 25.8

100- >200 17 9.3 4 12.9

200->500 14 7.7 2 6.5

500 ->1,000 26 14.2 2 6.5

1,000 ->5,000 44 24.0 8 25.8

5,000 ->10,000 5 2.7

10,000 ->20,000 15 8.2

NA 7 3.8

Total 183 100 31 100 The difference in the present value of fixed assets between manufacturing and service enterprises could be explained by the fact that manufacturing enterprises tend to use more machinery and equipments compared to service enterprises. The same difference in the size structure between the two types of activities could be witnessed when we look at the distribution of enterprises according to the number of workers. The following table shows the main features of SMEs in both sectors: Table 13: The distribution of M/SMEs according to the Number of Workers

Number of workers Goods Services

Frequency Percent Frequency Percent

Lo – 9 51 27.9 16 51.6

10- 24 42 23.0 11 35.5

25- 49 39 21.3 4 12.9

50- 74 26 14.2

75+ 25 13.7

Total 183 100 31 100

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Whereas the majority of workers in the service SMEs are concentrated in the 1-9 workers category, the highest frequency of manufacturing enterprises is concentrated in the 10-24 workers category and above. The degree of permanence of workers in the firm does not vary between the manufacturing and service activities, since permanent workers represent 67% of workers in the first and 69% in the second group of enterprises. The temporary and seasonal workers’ share in total workers are similar in the two groups as well12. The percentage of permanent workers in the sample is higher than their share in the M/SMEs in Egypt, where permanent workers do not exceed 54% of the total workers population. The difference could be due to the larger-scale nature of the sample. Though the overall shares of workers do not differ between the two groups, the differences exist within each group, according to industry. Whereas, the furniture, medical appliances, and leather enterprises include the highest percentage of permanent workers, the chemical, construction and sponge producing enterprises hire around 50 % of their workers on a temporary or seasonal basis. In the field of service activities one can notice that the enterprises working in businessmen service provision, and educational and cultural services hire all their employees on a permanent basis. As to the structure of workers according to their functions (Upper Management, management, services, production or technical workers), there is a distinct difference between the two groups. The manufacturing enterprises include a higher percentage of technical and production workers (45%), the service enterprises include more upper management and management employees (54%).13

Date of Establishment and Enterprise Location:It was revealed that despite the existence of a small percentage of enterprises that were established before 1950, the great majority of enterprises were established since the beginning of the 1990s especially in the manufacturing sector. One of the main objectives of this survey was to understand whether the locations of the SME within certain vicinity affect its ability to produce, exchange knowledge and export or not. Thus, it was important to look at the distribution of enterprises according to their location. We distinguish between cluster communities, industrial zones and all cities. Table 14: the distribution of the M/SMEs according to Location

Location Goods services

Frequency Percent Frequency Percent

Cluster 51 27.87 21 67.7

12 See Statistical Appendix. 13 See Statistical Appendix.

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Location Goods services

Frequency Percent Frequency Percent

Industrial Zone 112 61.2 2 6.5

Old cities 20 10.93 8 25.8

Total 183 100 31 100

Data in the previous table indicates that the highest frequencies of manufacturing enterprises are located in industrial zones, whereas the highest frequency of service SMEs are located in cluster communities. Section Two: Field of Business And Foreign Trade: This section will deal with two main issues: (a) the economic activities pursued by the SMEs and the export content; and (b) direction of exports in the present and plans for the future. 1-The Economic Activities pursued by the SMEs and the Export Content: The samples of SMEs that operate in manufacturing activities are distributed among different industries as can be shown in the following table. The food, furniture, textiles, and metal and mechanical industries, respectively are considered the main sectors of economic activities. Table 15: the Distribution of the Manufacturing M/SMEs according to the Industries

Industry Frequency Percent

Food Ind. 37 20.22

Wood & Metal 30 16.39

Plastics 14 7.65

Paper Production 10 5.46

Textiles 30 16.39

Electrical & Engineering 9 4.92

Mechanical and Metal 29 15.85

Building Materials 4 2.19

Chemical & Pharmaceutical 13 7.1

Medical tools 1 0.55

Leather Products 1 0.55

Others 5 2.73

Total 183 100

Where services are concerned, tourism represents the highest concentration of service activities (68%) followed in importance by IT companies (13%).

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As has been mentioned before, within the manufacturing activities only 40% of the SMEs were exporting firms, while this percentage was reduced to 29% in the service SMEs. The question was to what extent were exports a major component in total sales/product. The following table reflects the distribution of export companies according to the share of exports to the value of products. Table 16: The Share of Exports to Total Production

% of exports Frequency Percent Lo -9 9 12.5 10-24 17 23.6 25-49 16 22.2 50-74 22 30.6 75+ 8 11.1

Total 72 100 It is evident that within the exporting SMEs, the highest percentage of them (31%) was exporting 50%-75% of their production. It can also be seen that a small percentage (11%) of the SMEs were exporting more than 75% of their production. Similar results have been witnessed in service enterprises. When we cross-tabulate the different exporting enterprises according to the shares of exports to the total production and the economic activity they are engaged in, it becomes evident that certain enterprises (22 enterprises) export more than 50% of their products. These enterprises are primarily operating in the furniture, textile and food industries.14 As to the service activities, tourism and hotels seem to rank highest where exports are concerned. The share of exports of SMEs operating in the areas of communication and IT and education is in the range of 10% to 25% of the value of their production. As to the mechanism of exporting, it was important to understand how the export process was conducted. Did the small enterprise deal directly with its clients abroad or did they resort to agent companies that would act as a link between the domestic company and the foreign clients? The following table shows how the process of exportation was conducted. Table 17: The Channels of Exporting

Item Goods Services

Frequency Percent Frequency Percent

Direct Contact to Importer

57 78.08 5 55.6

Agent /Local Co. 14 19.18 1 11.1

14 See statistical appendix tables 1 and 2.

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Item Goods Services

Frequency Percent Frequency Percent

Foreign broker/ foreign Co

2 2.74 1 11.1

Exhibitions 1 11.1

Internet 1 11.1

Total 73 100 31 100

As can be seen, the majority of manufacturing SMEs have direct connections with the foreign clients; whereas 22% of manufacturing SMEs used intermediaries in theirs export operations. The majority of intermediaries were basically domestic companies working in the field of marketing exports. In the case of service enterprises it was different, because 11% (one company) of enterprises resorted to e-commerce and another company made use of international exhibitions in their marketing tactics, while 22% (two companies) used national or international marketing companies and the rest of service-exporting SMEs relied on direct contact with the clients. In the cases where companies relied on marketing intermediaries the evaluation of their services showed that they were highly appreciative, and the entrepreneurs stated that they had almost no problems with the intermediaries. In this context the idea of establishing Trading Houses in Egypt was raised to the entrepreneurs to check whether it would be an acceptable intermediary that could help boosting their exports. 75% of the exporting SMEs expressed their conviction with such an idea and commented that a trading house would be useful to them for several reasons:

Promoting, marketing and exporting their products; Signing contracts with the importing companies; Importing production inputs; Acting as intermediaries with financial institutions to acquire the necessary loans;

2) Direction of exports in the present and plans for the future: One of the major objectives of economic reform is to encourage the private firms to become more internationally competitive by exploring new market territories and expanding their market scope. Since the share of M/SMEs in total manufacturing exports is quite limited, one of our main concerns when this research was undertaken was to understand

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what made the small firm export, how their performance changed over the past few years, and what were their future export strategies and plans. Table 18: The direction of change in Exports during the last 5 years

Status Goods Services

Frequency Percent Frequency Percent

Change 31 42.47 6 66.7

Increase 19 26.03 2 22.2

decrease 12 16.43 4 44.4

No Change 42 57.53 3 33.3

Total 73 100 9 100

Data show that 43% of the M/M/SMEs (67% of Service M/SMEs) experienced

changes in their exports during the last five years. Whereas the majority of change was in the direction of growth in the case of the M/M/SMEs, the opposite happened in the service producing M/SMEs. Among the manufacturing enterprises 19 companies succeeded in increasing their exports during the last five years. These enterprises were primarily concentrated in food production, furniture, plastics, paper products, building materials and electrical appliances industries. Whereas, in the service activities only two enterprises, in the fields of IT and communications, managed to increase their exports during the last five years. However, it has to be mentioned that twelve of the manufacturing SMEs and four of the service SMEs experienced a drop in the value of their exports during the last five years.

The data collectors reported that the entrepreneurs revealed that the overvalued

exchange rate of the Egyptian Pound made the prices of their products higher, and they assumed that the current devaluation will help them recover. As to the exporters who enjoyed increase in their products it was mentioned that the quality of the products mattered a lot in determining their ability to compete and export (See the following table).

However, where export plans are concerned all exporting M/SMEs indicated that they plan to expand their export territories and venture into new export countries. The Arab and African countries are primary targets for the M/SMEs in the sample. The manufacturing entrepreneurs stated that the most crucial factor that affected their ability to export was the product’s quality, while the service exporters indicated that the price of the service was a more significant factor in determining the value of exports. As to the way prices were set, the most common method was “cost +” approach.

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Table 19: Factors Determining Exports

Factors Goods Services

Frequency Percent Frequency Percent

Price 14 19.18 4 44.4

Quality 47 64.38 3 33.3

Packaging 3 4.11

Convenient Choices 7 9.59

Marketing Strategy 2 2.74 2 22.2

Total 73 100 9 100

One of the features of the M/SMEs in the sample was the difference between the firms with respect to the share of intermediate inputs domestic and imported to the value of production, since the manufacturing M/SMEs depend more heavily on them in the production process. This dependence on intermediate and especially imported production inputs explains the complaints and suggestions of the entrepreneurs where imports are related. Table 20: The Share of the Intermediate Inputs and Semi-Produced Products to Value of Total Production

Goods Services %

Frequency Percent Frequency Percent

Lo -9 61 33.3 27 87.1

10-24 34 18.6 3 9.7

25-49 31 16.9 1 3.2

50-74 32 17.5

75+ 25 13.7

Total 183 100 31 100

Section Three: the Success Criteria: One of the main issues that were of interest and concern to us as a research team, was to understand the extent to which exporting and non-exporting SMEs comply to international standards of quality, develop their products and are capable to market their products. In order to assess these three important components, several questions were posed to give us an idea about: a) Quality control issues and how they are dealt with; b) Marketing strategies and arrangements to raise exports; c) Research and Development and their purposes;

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In the following part we will try to shed light on the previous issues and following that, we will try to see whether having quality control, R&D, and marketing departments, among other things, matter to the SMEs capability to export or not. Firstly, Quality Control: Data reveal that whereas 54% of the manufacturing SMEs have quality control departments, this percentage does not exceed 29% in the service departments. The number of persons working in the department does not usually exceed ten workers. Quality control and monitoring are crucial to most of M/SMEs. Whenever, the M/SMEs encounter complaints with regards the quality of their goods and services, they are checked by the manager personally or by the concerned employees. However, there is only limited reliance on international companies to certify the SMEs products, as it does not happen in more than 9% of the enterprises in the sample. Again, the exporting entrepreneurs stated that the quality of the product and its improvement to meet international standards is their first objective. Improving the packaging quality and design of their products is the second most important factor that is considered when they take the decision to export. Beside those two factors affecting the ability to export, there are other factors that are considered, such as the quality of inputs, the innovation and punctuality in delivery. In addition, exporting enterprises stated that having a R&D department in the enterprise helps in expanding the lines of production, improving the products quality and introducing new products. They also stress the importance of cooperation with the Egyptian General Organization for Standards and Quality Control, understanding the specification of the client’s demand, and the improvement and modernization of the production technology. A number of enterprises (30% for manufacturing enterprises and 52% in case of service enterprises) indicated that cooperating with the Egyptian Federation of Industries, the Chamber of Commerce, the Egyptian Exporters Associations, the IMP, is helpful in simplifying the procedures of exporting and importing. Despite the efforts paid by the different above mentioned organizations when the entrepreneurs were asked about their opinion of the Egyptian products in the same industry they work in, only 25% of them were convinced that the quality of the products were of excellent standards. The following table summarizes the opinion of the entrepreneurs with regards the products. Table 21: Assessment of the quality of the Egyptian products in the same Industry

Quality Goods Services

Frequency Percent Frequency Percent

Excellent 47 25.68 8 12.9

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Quality Goods Services

Frequency Percent Frequency Percent

Good 98 53.55 17 45.2

Fair 16 8.74 4 29.0

Should be improved 22 12.02 2 12.9

Total 183 100 31 100

However, when they were asked to assess the quality of their own products, they indicated differently. Whereas 50% of the manufacturers believed that they produced top quality products, this percentage did not exceed 26% for the service providers. Table 22: Self-Assessment of the quality of the M/SMEs Products

Quality Goods Services

Frequency Percent Frequency Percent

Excellent 89 48.63 8 25.8

Good 82 44.81 17 54.8

Fair 8 4.37 4 12.9

Should be improved 4 2.19 2 6.5

Total 183 100 31 100

Secondly, Marketing Strategies: The majority of SMEs (61%) do not have marketing departments. The factors behind the lack of such departments could be the small scale of operations and the limited finance. This result confirms the fact that was previously mentioned with regards the need to have Trading Houses as a means of increasing their capacities to market their products. When the entrepreneurs were asked to reveal the kind of marketing strategies they resort to increase their exports, their answers were as follows: The highest frequency of entrepreneurs relied on product catalogues, participating in exhibitions (domestic and international) and websites on the internet to promote their products. In addition, getting in touch with international agencies, having meetings with foreign businessmen, participating

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in official delegations and in businessmen associations were among the policies that were adopted by the entrepreneurs to market their goods. The entrepreneurs varied in the arrangements they follow to increase their exports. The following table summarizes the most important arrangements taken by the exporters to increase their exports. Table 23: Arrangements Pursued to Enhance Exports

Item Frequency Percent Increasing the number of marketing personnel 10 4.69

More out-reach activities (Trade fairs/ Business delegations) 26 12.21 Improving the quality of our products 32 15.02

Changing the designs of our products to fit consumers’ taste. 17 7.98 Reducing the export prices 13 6.10 Venturing into new markets 2 0.94 Private Marketing Agencies 1 0.47 Sending products samples 1 0.47

Studying the foreign market 1 0.47 N.A 110 51.64

Total 213 100 It is clear to us that raising the quality of product is a top factor, followed in importance by international activities (such as exhibitions and businessmen delegations), reducing the export prices and increasing the number of personnel working in the marketing departments. Only 11% of the companies resort to independent marketing agencies to do the advertising and promote products. Thirdly, Research and Development:Where Research and Development is concerned, only a limited number of SMEs (22% of manufacturing enterprises) had R&D department. Despite the fact that 64 of the enterprises acknowledged the importance of having such a department, as they help in developing the existing and new products as well as adding new production lines, the role of such departments is still limited and the number of personnel working in it- not to mention their qualifications- is rather modest. To sum up, the small and medium size enterprises still need a real boost to develop their capacities to export. More work has to be done in the areas of quality control, marketing and research and development. The room of improvement is extensive. Providing support services in these areas could have a substantial impact on SMEs. In an attempt to evaluate the factors that play a major role in distinguishing exporting and non-exporting SMEs, several variables were used and a logistic regression model was implemented. Ln [ P (Yi=1) / 1-P (Yi=1)] = B0 +B1X1+B2X2+……BpXp B1= Getting business services from national and international organizations. B2= Having quality Control Department B3= Having a Marketing Department.

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Where, Ln= the natural logarithm to the base e (e=2.7182) P= the probability to export B0= the constant B1-Bp= the regression coefficient of all the independent variables X1-Xp= Independent variables Yi= the dependent variable (export/non-exporting firm) =1 if the firm is exporting, =0 if the firm is non-exporting 1/1+eZ= the probability to export Z= the linear regression equation The equation has been implemented on all M/SMEs in the sample. The results of the equation are reflected in the following table: Table 24: The Logistic Regression Results

Variables Regression Coefficient

Standard Error

Odds Ratio Probability

Marketing Dept.

0.6443* 0.3645 1.9046 0.656

Business Services

0.3878*

0.1885 1.4738 0.596

Quality Control Dept.

0.6329* 0.3615 1.8832 0.653

Constant 0.1221** 0.2677

* *Significant at 99% confidence level * Significant at 95% confidence level. As can be seen, there are three variables that significantly matter in the distinction between exporting and non-exporting enterprises. Having a Quality Control Department is a variable that matters in ascertaining that the exported products meet international standards. Having a marketing department has proved to be a significant factor in promoting exports. The Business Service Index, which includes getting: technology, marketing, financial, training, and match-making services, has proven to be one of the contributing factors of success in exporting. Due to the strong correlation between some of the independent variables that were to be included in the Logistic Regression Model, some of the independent variables were excluded. The excluded variables-each on its own-had a significant impact on the firm’s ability to export. The two main variables were having a Research and Development Department and having strong communications infrastructure. According to the previous analysis, the existence of the three major departments (QCD, Marketing Dept. and R&DD) as well as the provision of the different business services and

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the availability of modern communication services matter a lot in the export promotion process of SMEs. Section Four: the Main Features of Exports When we discussed the main elements that describe the exports of the small and medium sized enterprises in the sample, several issues were raised. As we already know that from a sample of 183 enterprises, only 73 enterprises (40%) did export. Although it was intended at the beginning of the survey planning, that we would have two groups of enterprises (exporting and non-exporting) the reality defied the intention. It was quite a difficult task to find exporting M/SMEs. Within the group of exporting firms only 22 M/SMEs succeeded in adding new products to their range of exported goods during the last five years. The main factors behind this group of entrepreneurs’ drive to venture with new products were: (a) the need to expand the market scope (50%) and (b) identifying growing demand on new products in the foreign markets (45%). The decision to export is usually based on taking into consideration certain factors the most relevant of which were: (a) developing the designs of the products to meet international standards and the tastes of consumers abroad, and (b) using modern technologies in production and packaging. The majority of the exporting entrepreneurs believed that introducing new products, opening up new markets and keeping eye on the quality of exported products were the key elements to competitiveness in the international markets. When the whole group of entrepreneurs was asked to list the most important hindrances to the development of new export products, they enumerated a number of factors such as: The modest technology that is used by the small firms does not help them produce quality standardized products. New technology is rather costly and unaffordable. The shortage in innovative experienced engineers and technicians is another important reason; The limited investments in research and development, which is linked to the modest finance, lack of fiscal incentives, inaccessibility to technical support services, is an additional hindering factor; The shortage in skillful labor that is well trained is an additional inhibiting factor; Beside the previous factors a list of other less relevant reasons was mentioned such as: the customs tariff rates, the company’s policy that is more domestic market oriented the limited production capacity, bureaucracy, the business environment, etc. Table 25: The Areas of Needed Intervention by the Government to help Promote exportation. Frequency Percent

Credit/ funding 28 23.73 Technology 19 16.10

Approaching foreign customers 20 16.95 Technical assistance 3 2.54

Training opportunities 4 3.39 Data and information 24 20.34

81

Frequency Percent Ease of procedures 5 4.24

New markets 2 1.69 Limited Taxes 1 0.85

N.A 12 10.17 Total 118 100

Among the group of M/SMEs in the sample 49% stated that they were satisfied with the government’s services to exporters, while the rest of them declared their dissatisfaction. The reasoning of the second dissatisfied group was based on the following facts: (a) the prevalence of red tape and bureaucracy in all formal government offices, where the permits were issued (32%); (b) the non-existence of any government support services (27%); (c) the excessive tax rates (21%); (d) the expensive customs clearance costs and its slow process (13.5%); (e) beside the previous factors a number of other factors were cited: such as the lack of knowledge of the foreign markets’ needs, the difficulty of traveling abroad to market their products, lack of finance, and lack of executive trained personnel, etc. Another aspect of possible support was resorting to universities and institutes for technical assistance and securing expertise. However, this venue of technical assistance proved to be of negligible importance to M/SMEs. Only 2.7% of the enterprises in the sample made use of these facilities. Faculties of engineering in Cairo and Alexandria universities, the institute of professional training, were among the most important sources of providing support. The main kind of requested assistance by the M/SMEs were scientific support in the areas of adding production lines or developing existing or new products. One of the enterprises asked for research on certain technical issues or scientific bulletins, another sought training of some of its workers on certain production techniques. Section Five: Institutional Environment and Incentive Structures: Literature on M/SMEs tends to stress upon the role of the institutional set-up in the creation, development and expansion of capabilities of the M/SMEs. The complex, inefficient, discouraging, bureaucratic and costly institutional framework were usually cited as the reasons behind informality of the majority of M/SMEs, their tendencies to remain small and invisible, their inability to develop their products, and thus their reluctance to venture into new wider markets. Since understanding the environment in which M/SMEs operate, is of great impact on their performance, several questions were posed in the questionnaire form, which help in describing how the entrepreneurs feel with regards their surroundings. The first question concentrated on the main incentives required by the government to promote exports. The answers revealed several suggestions, which are ranked according to their importance (in descending order of the percentage of M/SMEs):

the need of tax deductions that are proportionate to the increases in exports proceeds/ value (43%);

the provision of more detailed information of the international market’s needs on the different goods (39%);

Lowering the customs tariff rates on imported production imports (32%); Lowering the loan’s interest rates to M/SMEs (26%);

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Subsidizing research and development activities (15%); Offering specialized export credit guarantees (14%); Besides the previous suggestions some additional propositions were stated: Simplification of export procedures. Lowering the prices of raw materials; Providing access to high quality raw materials and intermediate products; Easier access to industrial land in new cities;

When the entrepreneurs were asked to list the most important ministries and public agencies in supporting exports, they ranked them as follows: Table 26: The most important two agencies, which help exporting activities

Frequency Percent Ministry of Foreign Trade 22 22.22

Investment Authority 16 16.16 Ministry of Industry 14 14.14

Egyptian Company for Guaranteeing Exports 5 5.05 Ministry of Finance 4 4.04

Ministry of Supplies & Trade 4 4.04 Ministry of Health 4 4.04

Egyptian Bank for Exports Development-EBED 3 3.03 Commercial offices 2 2.02

Banks Sector 1 1.01 N.A 24 24.24

Total 99 100 It is obvious that three main players in supporting export promotion were the ministries of Foreign Trade and Industry as well as the General Organization for Investment. It is clear that a substantial part of the entrepreneurs acknowledged the role of some public agencies, but still 13% of enterprises expressed negative opinions, and revealed that no export support was made available to them through of these agencies and ministries. In an attempt to assess the impact of the existing structure of organizations and agencies working in the area of promoting exports, the entrepreneurs were to determine whether they used those agencies or not; and in case they did, how do they evaluate these services.

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Table 27: Evaluation of the Existing Structure of Support Organizations

If you benefited from its assistance:

b. How do you find its assistance? Which of the following agencies

benefited you, and how did you find their assistance? a.

bene

fited

from

it

1-N

o h

elp

at

all

2-C

ould

imp

rove

3-R

easo

nab

le

4-U

sefu

l

5-V

ery

use

ful

Tot

al

(

1+2)

Neg

. rol

e

(4+

5) P

os. r

ole

Center for Export

Development 12.3 - - 77.8 11.1 11.1 100 0 22.2

Egyptian Exporters’ Association

5.5 - - 50 50 - 100 0 50

Egyptian Bank for Export

Development-EBED

12.3 11.1 - 55.6 11.1 22.2 100 11.1 33.3

Banking sector (commercial

banks) 42.5 - 16.1 29 32.3 22.6 100 16.1 54.9

Egyptian Company for Guaranteeing

Exports- ECGE

5.5 - - - 100 - 100 0 100

Commercial attachés

17.8 - - 38.5 53.8 7.7 100 0 61.5

International Trade Points-

ITPs 19.2 - 7.1 42.9 42.9 7.1 100 7.1 50

General Authority for International

Exhibitions & Markets

35.6 3.8 3.8 19.2 42.4 30.8 100 7.6 73.2

International Executive Services

Company-IESC

1.4 - - - 100 - 100 0 100

Center for Quality

Assurance 9.6 14.3 28.6 57.1 - 100 14.3 57.1

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If you benefited from its assistance:

b. How do you find its assistance? Which of the following agencies

benefited you, and how did you find their assistance? a.

bene

fited

from

it

1-N

o h

elp

at

all

2-C

ould

imp

rove

3-R

easo

nab

le

4-U

sefu

l

5-V

ery

use

ful

Tot

al

(

1+2)

Neg

. rol

e

(4+

5) P

os. r

ole

Federation of Chambers of Commerce

63 23.9 8.7 32.6 28.3 6.5 100 32.6 34.8

Federation of Egyptians Ind.

37 7.4 3.7 40.8 37 11.1 100 11.1 48.1

General Authority for Free-Zones &

Investment (GAFI)

28.8 4.8 - 19 61.9 14.3 100 4.8 76.2

Social Fund for Development-

SFD 1.4 - - 100 - - 100 0 0

Credit Guarantees

Company- CGC 1.4 - - - 100 - 100 0 100

Egyptian General

Organization for Standards and Quality

Control

28.8 4.8 - 9.5 47.6 38.1 100 4.8 85.7

GOEIC 43.8 3.1 3.1 18.8 50 25 100 6.2 75

Industry Modernization Program-IMP

12.3 11.2 22.2 22.2 22.2 22.2 100 33.4 44.4

Organization of Intellectual

Property Rights Protection-IPR

5.5 - - 25 50 25 100 0 75

The list of agencies includes a large number of active organizations. However, the degree of utilization of their services by the entrepreneurs in the sample varies. Data reveal that the Federation of Chamber of Commerce is by far the most widely used agency. The main factor behind the importance of this agency is that the registration of the establishment is obtained from it.

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The General organization for Export and Import control, the banking sector, the Egyptian Federation of Industries, the General Organization for Exhibitions, and International Markets are considered the most widely used by exporters. Nevertheless, when it comes to evaluating the services, the ranking changes. The leading position has been given to the Egyptian Company for Guaranteeing Exports, the International Service Executive Corporation, the Credit Guarantee Company, and the Egyptian General Organization for Standards and Quality Control. A number of other entities were also recognized as helpful, such as the Export Promotion Center and Expo-Link. However, when it comes to the entities with more negative evaluation the Industry Modernization Program and the Egyptian Federation of Industries are on top of the list. They are followed by the banking sector and the Quality Assurance Center. Box 2: A brief look on the Role of IMP The IMP is a national initiative jointly funded by the Government of Egypt and the European Union to help develop international competitiveness in the private manufacturing sector, so that it can benefit from new opportunities arising from exposure to global markets, and the progressive introduction of free trade with the markets of the European Union. Its overall strategic vision is to help industrial enterprises to modernize their companies so that they become internationally competitive on a sustainable basis. The IMP is actively involved in working with companies, including M/SMEs, to raise their global competitiveness, focusing on developing their export orientation. This is achieved through integration and cooperation with beneficiaries and partners (such as Technology Centers, Business Associations, R&D Institutions, Governmental Institutions, etc…). The IMP through its delivery of interrelated business support activities, can help companies to upgrade their operations and improve their ability to compete effectively and efficiently both in local and foreign markets. As a key part of this process, companies can be helped to develop their export potential and meet international challenges. Beneficiaries:

• Private Manufacturing Sector/ SMEs • Business Representative Organizations, Service and Support Institutions. • Governmental Institutions especially the Ministry of Foreign Trade and Industry

and the Federation of the Egyptian Industries. Eligibility for Small and Medium Enterprises (M/SMEs)

• Be an enterprise of more than ten full-time employees. • Operate in the industry or industry related service sectors. • Be privately owned or with majority private share. • Be commercially registered in Egypt. • Show potential for growth.

Cost Share SME ‘s cost share 15% to 30% of the total service cost. As to the most important services accrued from these organizations, the entrepreneurs mentioned that participating in exhibitions, offering market domestic and international information, helping in securing finance and match making between small and large firms, and domestic and international companies.

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Table 28: The Services Derived From the Support Organizations

Service Frequency Percent Market information 20 19.61

Exhibitions 29 28.43 Matchmaking with foreign customers 13 12.75

Credit & finance 16 15.69 Seminars 5 4.90

Ease of Export procedures 7 6.86 Origin Certif. 1 0.98

Ease of Draw Back 2 1.96 N.A 9 8.82 Total 102 100

Nevertheless these agencies suffer from some drawbacks which limit their efficiency and their outreach capacities. The widespread bureaucracy has been cited as the most negative factor that characterizes them. Other reasons were enumerated such as the lack of coordination amongst the service providers, leads to duplication, negligence of new aspects of assistance, and concentration on similar easier targets. Furthermore, the limited access to finance and the inability to respond to the businessmen needs have been also considered some of the main constraints of the support agencies. Table 29: Factors Affecting exports negatively

Constraints Frequency Percent Lack of qualified labor 14 9.52

Lack of coordination with other institutions with similar goals 33 22.45 Bureaucracy 43 29.25

Inability to respond to business requirements 19 12.93 Lack of funding 25 17.01

Others 3 2.04 N.A 10 6.80

Total 147 100 Section Six: Major Obstacles Facing Exportation and Recommended Policies In the last part, we attempted to seek the opinion of the exporters with regards, several export related issues:

- The export procedures and process - The recent developments in foreign trade policies - The services provided by the domestic and international service providers and an

evaluation of the most useful agencies to the M/SMEs. - Suggestions to increase exports

Firstly, the export procedures and process To ensure in-depth knowledge of the procedures that really affect the process either positively or negatively, a list of the major steps taken by the exporter was presented, and the entrepreneurs were asked to state whether such steps represented obstacles or were easily (time and cost) implemented.

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The following table summarizes the evaluation of the respondents of the different export procedures: Table 30: Severity or simplicity of export-related procedures

Export Obstacles and their degree of severity/simplicity

No

obst

acle

s

Exis

ting

obst

acle

s do

n’t i

nflu

ence

co

mpe

titiv

enes

s

Som

e O

bsta

cles

on

co

mpe

titiv

enes

s

Obs

tacl

es d

o in

fluen

ce

com

petit

iven

ess

Too

muc

h ob

stac

les

that

forc

e us

to g

ive

up e

xpor

ting

tota

lly

Tota

l

Pos.

perf

orm

ance

Neg

. per

form

ance

*

Bureaucratic impediments for exports 24.7 9.6 12.3 31.5 21.9 100 34.3 53.4

Current exchange rates 28.8 4.1 15.1 35.6 16.4 100 32.9 52

Sales tax on components of exportable goods 35.6 2.7 13.7 24.7 23.3 100 38.3 48

Costs of air cargo 45.3 4.1 16.4 20.5 13.7 100 49.4 34.2

Export credits 47.9 6.8 13.7 23.4 8.2 100 54.7 31.6

Costs of land transportation 47.9 6.8 15.1 19.2 11 100 54.7 30.2

Costs of marital cargo 41.1 8.2 21.9 19.2 9.6 100 49.3 28.8

Administrative costs 41.2 17.8 12.3 21.9 6.8 100 59 28.7

Pricing estimates of imported goods 50.7 13.7 17.8 11 6.8 100 64.4 17.8

Quality and costs of domestic transportation 58.9 5.5 20.5 13.7 1.4 100 64.4 15.1

Too many examination procedures 42.5 19.2 26 5.5 6.8 100 61.7 12.3

Reimbursement of customs- DRAWBACK 82.2 4.1 4.1 5.5 4.1 100 86.3 9.6

Environmental standards 72.5 19.2 5.5 1.4 1.4 100 91.7 2.8

88

Export Obstacles and their degree of severity/simplicity

No

obst

acle

s

Exis

ting

obst

acle

s do

n’t i

nflu

ence

co

mpe

titiv

enes

s

Som

e O

bsta

cles

on

co

mpe

titiv

enes

s

Obs

tacl

es d

o in

fluen

ce

com

petit

iven

ess

Too

muc

h ob

stac

les

that

forc

e us

to g

ive

up e

xpor

ting

tota

lly

Tota

l

Pos.

perf

orm

ance

Neg

. per

form

ance

*

Trade marks 76.8 16.4 6.8 - - 100 93.2 0

Average Total 49.7 9.9 14.4 16.7 9.4 100 59.6 26.0

*The negative performance has been ranked following a descending order to show the severity of export related constraints Looking at the previous table reveals several points:

1. The majority of enterprises (60%) were in general satisfied with the export procedures.

2. The trade mark registration and environmental standards were among the easiest steps.

3. The drawback system, the evaluation of the value of imported goods, and the costs of domestic transportation are also considered as relatively unproblematic procedures.

4. As to the factors that were considered of negative impact by around 50 % of the exporters they included on top of the list: the slow tedious paperwork bureaucracy15. The complaint of the long time needed to complete export procedures is still dominant constraint. In addition, the current exchange rate policy is affecting negatively the exports due to the unavailability of foreign currencies in some instances, and the difficulties in predicting the price of the Egyptian Pound. Both factors affect negatively the investment and export plans. Furthermore, the imposition of Value-added taxes on imported raw materials which are used as components in the export goods is considered as one of the main obstacles that affect the export prices and make Egyptian products less competitive in the international market.

5. In addition to the previously mentioned obstacles there are a number of other sources of constraints such as the high costs of the air, land and sea freight. and the limited export credit to M/SMEs.

6. The impact of cumbersome procedures was not uniform; there were significant differences according to size and to economic activities. The classification of problems according to the size of enterprises reveals one important fact, namely, that the burden of procedures is less felt by the larger enterprises compared to smaller ones. Table 36 confirms this trend, as on the average smaller firms have more complaints of the different export-related procedures..

7. As to the weight of problems according to the different industries, table 37 shows that the furniture industry suffers most from the export procedures especially, the bureaucracy, the administrative costs, the transportation cost(air, maritime, or land

15 This includes all related customs clearance procedures and duty drawback mechanism

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freight), export credit insufficiency. Other industries have similar complaints, though less intense.

8. In addition, contrary to the expected, foreign enterprises suffer less than joint companies or totally national owned enterprises.16

Secondly, the recent developments in foreign trade policies

In this part we try to find out whether the positive developments in the Drawback system, the temporary release of imported inputs, and the recent tariff reductions have affected the export process of the M/SMEs positively or not. (a) the drawback system: i.e. the reimbursement of the customs on imported goods that go as components in the exported products has been appreciated by 4% of the exporters, while the rest of them did not feel the same way. (b) The few respondents that felt the positive change of the system stated that the time required to reimburse has decreased. (c) As to the remaining group (96%), it felt that drawback system was still inefficient, and the reimbursement process is lengthy, requires a lot of paper work and permits from the customs authority, the tax authority, and the Industrial Control agency. In some instances they resort to filing law suits to retrieve their deposited money back. Table 31: Do you see any positive developments in the Drawback regulations over the last five years?

Frequency Percent Yes 3 4.11 No 70 95.89

Total 73 100 As to the temporary release system, the majority of respondents (88%) either expressed that it was ineffective (59%) or of little impact (29%). Table 32: Does Temporary Release Impact Your Exporting Capacity?

Frequency Percent Has a great impact 9 12.33

Limited impact 21 28.77 No impact 43 58.9

Total 73 100 And finally the recent changes in the customs tariff rates that led to substantial tax cuts were to be investigated. The next table summarizes the answers to one basic question: Did the new customs tariff reductions affect your exports? Table 33: Would the latest tariff changes impact your exporting capacity?

Frequency Percent Has a great impact 14 19.18

Limited impact 23 31.51

No impact 36 49.32 Total 73 100

16 See Table 35.

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While half of the exporters stated that it did not affect their exports, around one fifth of them felt quite differently, as they believed it affected positively and substantially their exports. However, when they were asked about the future impact of such tariff reductions on their enterprises, they listed several positive outcome such as: 1-lower production costs, which could lead to opening up of new markets; 2-lower raw materials’ costs, which will reduce the consumer prices eventually; 3-lower costs will lead to achieving more profitability. The same group of the exporters (20%) also indicated that the present changes are quite sufficient to encourage exports. Nevertheless, the rest of entrepreneurs indicated that a lot of policy changes are required to help support exports, and they include: a comprehensive tax reform that reduces the tax rates on M/SMEs, abolishment of bureaucracy, drastic reform of the customs authority, as well as making information available to the exporters. Thirdly, The services provided by the domestic and international service providers and an evaluation of the most useful agencies to the M/SMEs. The present organizations that operate in the area of supporting M/SMEs are supposed to be offering them various services. Thus the question was whether they received such services or not.

Table 34: As Small And Medium Enterprises, Do You Get Any Services From Any Domestic Or Foreign Institutions In The Following Areas?

Yes No Total

Frequency 18 165 183 Technology provision

Percent 9.84 90.16 100

Frequency 11 172 183 Marketing

Percent 6.01 93.99 100

Frequency 27 156 183 Finance (loans, credits)

Percent 14.75 85.25 100

Frequency 21 162 183 Training

Percent 11.48 88.52 100

Frequency 23 160 183 Matchmaking with customers Percent 12.57 87.43 100

It is obvious that only a limited number of the M/SMEs received financial and non-financial business support services. Financial and match-making services are ranked on top of the ladder of assistance offered to M/SMEs, while training and technical assistance follow them in the degree of outreach. Marketing services need to be more strengthened and expanded.

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The most useful organizations to M/SMEs proved again to be the Egyptian Federation of Chambers of Commerce, the Egyptian Federation of Industries and the Banking sector, and followed in importance by the Ministry of Industry and GAFI, the SFD and the General authority for Export and Import Control respectively. As to the service, M/SMEs answers revealed that the Ministry of Tourism, the Ministry of Communications were the most helpful entities to their activities. Fourthly, Suggestions to increase exports At the end the entrepreneurs were asked to express their opinions with regards the kind of change they deem necessary to help increase exports. The responses varied but we will try to classify them into four main categories according to their importance (in descending order):

Reducing tax rates, customs tariffs, sales taxes and export fees and in some cases the respondents suggested total tax and customs exemptions.

Restructuring the customs authority -especially in the ports- and simplification of the administrative procedures in those offices.

Reducing the costs of raw materials and granting better access to better quality production inputs. Such changes would ensure producing higher quality goods that are competitive in the international markets.

Getting rid of the bureaucracy, by simplifying the procedures, making the rules and conditions of transactions more transparent, and by reducing the value judgment power of the government employees.

Making information on international markets, their needs and tastes available to M/SMEs at reasonable costs.

Commercial banks have to be motivated to become more involved in M/SMEs lending. And loans should be offered with encouraging terms of lending.

Linking M/SMEs with research institutions, in a way that helps improve the product’s quality and venturing into new manufacturing territories.

Technical progress in the Egyptian manufacturing sector in general could have positive influence on M/SMEs, as more technically advanced machinery will be offered in the market at low costs.

Summary and conclusion At the end it has to be mentioned that despite the obstacles and difficulties the M/SMEs have to deal with on a daily basis, there is great potential for improvement. Data revealed that around 40% of the M/SMEs in the sample were export enterprises. One third of this segment, are M/SMEs that export more than half of their production. There is apparent potential in certain industries such as furniture, textiles, and food industries. The potential is measured in terms of their ability to increase their exports during the last five years, the percentage of exports to total production, and their future export plans and expansion prospects. The Arab and African markets are the main targeted export markets. Statistical analysis also revealed that the SME becomes more competent in the exports markets when it has a Quality Control department, Marketing Department and when they receive real and substantial business services. At the end it maybe useful to state in the end the main findings based on the suggestions of the entrepreneurs, which are in line with other previous studies as MOF, 2004.

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What kind of changes are needed by the M/SMEs to increase their export potential?

Fiscal Policies are required to act as conducive tools to M/SMEs. Several changes are requested in this respect such as reducing tax rates, customs tariffs, sales taxes and export fees. Though the customs tax reductions which were initiated in July 2004 and amended in December 2004 were acting in the suggested direction, the respondents were asking for more reductions especially for the imported raw materials and semi-finished inputs. There is also a general consensus among the entrepreneurs that the GST is rather high and prohibitive. It affects their ability to increase sales internally and thus increase the scale of their production and reduce the marginal costs and prices of their products. There is need to look into the level of the GST and to reduce it. Another request is the restructuring of the customs authority -especially in the ports- and the simplification of the administrative procedures in those offices. The bureaucracy and bribes are still widespread among the employees of these crucial authorities and hinder the fast flow of exports and imports. Getting rid of the bureaucracy, by simplifying the procedures, making the rules and conditions of transactions more transparent and by reducing the value judgment power of the government employees are imperative for the export-import growth. Accessibility to Information: is one of the most pressing requests of M/SMEs. Export promotion can not be accomplished without having information both on domestic producers and international markets. As to the domestic producers, meetings with the entrepreneurs indicated that the lack of knowledge about the large and major domestic producers of raw materials and production inputs leads to the acquisition of lower grades production inputs sometimes and affects the quality of the final products. Thus establishing stronger Information-Pathways and Linkages within the domestic market is essential to M/SMEs. The same applies to the international markets, as the shortage in information works in two ways: Information on the producers markets in the international markets. The producers markets include the specialized machinery and equipments producers, and the raw materials and semi-finished products produced abroad. The lack of necessary information limits the possibilities of acquiring best production inputs at lowest prices to M/SMEs. Information on the international consumers/ producers needs of the different products: Gaining such information could be helpful in directing M/SMEs to expand their production and exports in the directions indicated by the international profile of needs and tastes. Information could be strengthened by several means : 1-Creating more vigorous links between M/SMEs business associations and the counterpart import associations and the macro-importers in the main markets;

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2-Establishing Trading Houses whose role would be to bridge the existing gap between the domestic producers and the international markets; and act as exporters of the domestic products on one hand, and importers of raw materials on the other hand. 3-Establishing Information Stores/ Offices in cluster communities, where the spread of knowledge and information could be easier done. These IF could act as a liaison between the producers in a certain industry and the Trading Houses on one hand, and the international specialized markets on the other hand. 4-Helping the M/SMEs have their own web-sites on the internet, where they could start directly exporting through more reliance on E-commerce. Technical Assistance: Until now the technical guidance to M/SMEs is the most ineffective business service. Regardless of the existence of such programs, empirical results reveal that their ability to reach out and interfere in a helpful and effective way is quite limited. The IMP has proved to be one of the least supportive, despite its nature as a program intended to help the M/SMEs upgrade their production capabilities and raise their technological efficiency and support them to become more competitive in face of the globalization wave. In addition, the Business Support Service Centers or providers were not even mentioned by any of the entrepreneurs. Linking M/SMEs with research institutions, in a way that helps improve the product’s quality and venturing into new manufacturing territories is also done on a very limited scale by very few M/SMEs. Strengthening the link between universities and research institutes on one hand and the M/SMEs on the other hand is needed. Establishing specialized technical business centers that could connect specialized research / university departments with certain industries is a basic requirement to improve the productive efficiency of the M/SMEs and introduce them to new innovative production ideas. However, this link has not to be restricted to M/SMEs, but should also encompass larger enterprises. Technical progress in the Egyptian manufacturing sector in general could have positive influence on M/SMEs, as more technically advanced machinery will be offered in the market at low costs. Access to finance: is still another major impediment especially where the smaller sized enterprises are concerned. Data indicate that as the firm size increases the complaint of this constraint becomes less excessive, though it does not disappear altogether. More efforts have to be paid to directing more credit to export companies, especially with ongoing excess deposits in the banking sector.

94

95

Table 35 : Main Obstacles by Sector

Sector Main Obstacles

Public Private Domestic

Private Foreign

Joint domestic -foreign Comp.

Too many examination procedures - 56.5 71.4 66.7

Pricing estimates of imported goods - 50 42.9 66.7

Bureaucratic impediments for exports - 75.8 71.4 100

Export credits 100 54.8 - 100

Costs of air cargo - 59.7 28.6 33.3

Costs of marital cargo - 62.9 28.6 66.7

Costs of land transportation - 56.5 28.6 33.3

Trade marks - 27.4 - -

Environmental standards - 30.6 14.3 -

Administrative costs - 61.3 57.1 33.3

Quality and costs of domestic transportation - 48.4 - -

Sales tax on components of exportable goods - 67.7 57.1 33.3

Current exchange rates 100 69.4 71.4 100

Reimbursement of customs- DRAWBACK - 12.9 57.1 33.3

Average Total 51.5 33.67142857 45.23571429

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Table 36 :Main Obstacles by Capital Capital in LE '1000

Main Obstacles <50 50-99 100-199

200-499

500-999

1000-4999

5000-9999

10000-200000

Too many examination procedures 60 100 71.4 50 20 56.3 37.5 36.4

Pricing estimates of imported goods 60 80 57.1 25 20 43.8 25 54.5

Bureaucratic impediments for exports

80 100 64.3 50 100 62.5 87.5 72.7

Export credits 60 100 42.9 50 60 37.5 37.5 45.5

Costs of air cargo 40 90 78.6 50 60 37.5 37.5 36.4

Costs of marital cargo 40 90 50 50 80 56.3 75 36.4

Costs of land transportation 60 100 42.9 50 60 37.5 37.5 45.5

Trade marks 40 60 28.6 25 - 6.3 12.5 18.2

Environmental standards 40 60 35.7 25 20 12.5 25 9.1

Administrative costs 60 100 57.1 50 60 50 75 27.3

Quality and costs of domestic transportation

40 100 50 50 40 18.8 12.5 27.3

Sales tax on components of exportable goods

60 100 78.6 50 60 56.3 50 45.5

Current exchange rates 60 100 71.4 50 80 68.8 62.5 63.6

Reimbursement of customs- DRAWBACK

- 10 14.3 - - 31.3 25 27.3

Average Total 50 85 53 41 47 41 43 39

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Table 37 : Main Obstacles by Industry

Main Obstacles Food

Ind.

Wood & Furniture

Ind. Plastics

Textiles &RMC

Electrical & Engineering

Ind.

Metallic & Mechanical

Ind.

Construction

Ind.

Chemicals & Pharmaceutical

Ind.

Leather

Ind. Sponge

Ind.

Too many examination procedures

66.7 87.5 40 77.8 - 28.6 33.3 25 100 -

Pricing estimates of

imported goods 38.1 75 40 55.6 50 57.1 66.7 - 100 -

Bureaucratic impediments

for exports 76.2 100 100 33.3 50 85.7 66.7 50 100 100

Export credits 38.1 100 60 33.3 50 57.1 66.7 - - -

Costs of air cargo

28.6 100 60 66.7 50 42.9 - 25 100 100

Costs of marital cargo

57.1 93.8 60 33.3 75 42.9 33.3 25 - 100

Costs of land transportation

47.6 100 40 11.1 75 42.9 33.3 - - 100

Trade marks 19 62.5 20 11.1 - 14.3 - - - -

Environmental standards

28.6 56.3 20 22.2 - 14.3 33.3 - - -

Administrative costs

61.9 100 40 44.4 50 28.6 33.3 - 100 100

Quality and costs of

domestic transportation

38.1 87.5 20 22.2 25 14.3 33.3 - - 100

Sales tax on components of

52.4 93.8 80 66.7 50 57.1 66.7 25 - 100

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Main Obstacles Food

Ind.

Wood & Furniture

Ind. Plastics

Textiles &RMC

Electrical & Engineering

Ind.

Metallic & Mechanical

Ind.

Construction

Ind.

Chemicals & Pharmaceutical

Ind.

Leather

Ind. Sponge

Ind.

exportable goods

Current exchange rates

57.1 100 80 66.7 75 71.4 66.7 25 100 100

Reimbursement of customs-

DRAWBACK 28.6 - 20 11.1 25 28.6 - 25 100 -

Average Total 46 83 49 40 41 42 38 14 50 57

Chapter Four: Legislative and Institutional Framework: The institutional setup that governs the M/SMEs is complex. There are several laws and regulations that govern M/SMEs. Law141/2004 has consolidated a large number of steps that M/SMEs had to consider before when practicing their activities. Moreover, the new law has assigned the Social Fund for Development (SFD) with the responsibility of overseeing M/SMEs and coordinating all the activities of other governmental and non governmental organizations in dealing with M/SMEs. Below is an overview of the laws and regulations that govern M/SMEs in different fields. The following section describes and counts the documents required for establishing a firm. We then provide a review of the different agencies that deal with M/SMEs.

Law 141/2004 on Development of Small Enterprises

This law consists of 18 articles, and is divided into 4 parts. The first part includes the definitions mentioned in the law, while the second tackles the legal steps of establishing small enterprise and how to deal with local or foreign institutions. The third part is about the procedures of financing small and micro enterprises, and finally the fourth part is discussing benefits or advantages allocated for small enterprises according to this law.

The executive decree of Law 141/2004 was issued by the Prime Minister (Decree number 1241/2004). It consists of 22 articles. The executive decree largely recognizes the core role of the SFD, and its exclusive responsibility to endorse the law and guarantee that it brings its expected benefits to small enterprises in more details. It also lays down the procedures of establishing these enterprises and how to become eligible to obtain funds from the SFD.

One of the most important features of the law is that it encourages the SFD to re-lend small enterprises loans at a lower than the market (subsidized) rate, and allows the state budget to compensate the SFD with the difference. This aims to help enterprises while starting up their activities.

Procedures Of Licensing, Monitoring And Inspection First: Legislations related to Commercial Enterprises 1- Licensing Procedures/ steps

Governing Law/ legislation Licensing Procedures/ steps

Article 48 of decree no. 1 for the year 1883 on the commercial law

Registration Holding companies or limited companies register at second degree court where their enterprises are located

Article 21,22 of law no. 114 for the year 1946 on organizing the procedures of registrar Registering in the registrar

Article 3 of law no. 34 for the year 1976 on commercial file

Getting permission from the Chamber of Commerce to register in the registrar

Article 2 of law no. 34 for the year 1976 on commercial file

Registering in the Commercial Registrar

99

Governing Law/ legislation Licensing Procedures/ steps Article 5, 15, 96 of law no. 157 for the year 1981 on tax law Issuing tax file and deciding taxing status

Article 1, 6 of law no. 106 for the year 1976 on building law

Getting location license from the district. This step should be followed either to establish a new location or to change the old one. The request should be presented to the concerned department according to the legal procedures

Preparing the location according to licensing conditions: Electricity company, water and water waste, telecommunication, and natural gas.

Unified labor law Decrees of the Minister of Man Power

Medical examination for the labors/ workers before their employment by the General Authority of Health Insurance according to fees mentioned in a ministerial decree of the Minister of Man power

Unified labor law Sending copies of the contracts of the employers to the concerned civil insurance bureau

Article 128, 151 of law no. 79 for the year 1975 on civil insurance law

Informing the National Authority of Civil Insurance with the data of the employers and their wages according to its applications

Article 57 of law no. 157 for the year 1981 on income taxation law

Informing Tax Department of employers' salaries

Article 4 of the Minister of Finance no. 82/164 on issuing the executive regulations of income taxation law

Presenting sample no. 9 of the unified taxation in its right time

2- Follow up and inspection

Governing Law/ legislation Inspection Article 192 of law no. 157 for the year 1981 on income taxation law. The employers of the department are inspecting to what extent the procedures of the law is applied

Tax Department

According to the unified law, police officers are concerned with inspecting work locations

Labor Bureau

Article 152 of law no. 79 for the year 1975 on civil insurance law. The concerned employers of Insurance Authority have the power to inspect to what extent the law is applied

Insurance Bureau

100

Second: Legislations related to Industrial Enterprises 1- Licensing Procedures/ steps Licensing Procedures/ steps Governing Law/ legislation Issuing license from the Minister of Industry after the agreement of the concerned committee

Article 1 of law no. 21 for the year 1958 on reconstructing industry

Registering in the industrial file as a condition to deal with governmental bodies

Article 2, 4 of law no. 24 for the year 1977 on the industrial file (according to the procedures of the executive regulations, article 1 of the decree of the minister of industry no. 437 for the year 1992 on amending the executive regulation of the industrial file law)

Issuing a statement of a bank registered in the Egyptian Central Bank saying that it deposited 20% of the capital in cash for joint companies or limited companies as a condition to the license

Article 5 of the executive regulations of the law on investment issued by the decree of the prime minister no. 2108 for the year 1997

Issuing a license from General Authority of Investment and Free Zones according to the legal procedures

Article 8 of the executive regulations of the law on investment

Submitting the papers of the license with the needed data prepared by the Egyptian Environmental Affairs Agency (EEAA) in cooperation with the concerned management authority

Article 12 of the decree of the prime minister no. 338 for the year 1995 on issuing the executive regulation of the environmental law

Submitting location tax for factories and labs according to the legal procedures

Article 10 of law no. 56 for the year 1954 on location/ building taxes

Submitting a request to the Egyptian Authority for standardization to decide the standards of the industrial products

Article 1 of law no. 2 for the year 1957 on standardization

Registering the trade mark of the product according to the procedures of the industrial register

The second book of intellectual property rights law no. 82 for the year 2002

Submitting a written request to the authority of the concerned free zone when there is a need to enter goods, chemicals, parts and local or foreign goods into the free zone till using it in the productive process and returning it again without any need to follow the rules of importing

Article 45 the executive regulation of the law on investment

Submitting a request to the department supervising the General Authority for Roads and Bridges or local management units according to the specializations of each

Article 6 of law no. 84 for the year 1968 on public roads

101

Licensing Procedures/ steps Governing Law/ legislation Keeping a private file for environmental affairs to be followed up by EEAA

Article 22 of law no. 4 for the year 1994. Article 17,18 of the executive regulation of the same law

2- Follow up and inspection

Inspection Governing Law/ legislation

License department of the concerned district Article 22 of law no. 453 for the year 1954 on industrial and trade shops

Industry General Authority Article 12 of law no. 21 for the year 1958 on reconstructing and encouraging industry and

its amendment

Tax Authority Article 192 of law no. 157 for the year 1981 on income tax

Labor Bureau The unified labor law

Insurance Bureau Article 152 of law no. 79 for the year 1975 on civil insurance law

EEAA Article 102 of law no. 4 for the year 1994 on environmental law

Third: Legislations related to tourism activities 1- Licensing Procedures/ steps a- For firms working in tourism sector

Licensing Procedures/ steps Governing Law/ legislation Presenting a request for a license from the ministry of tourism

Article 3 of law no. 38 for the year 1977 on restructuring touristic companies, amended by law no. 118 for the year 1983 & article no 1 of the decree of the minister of tourism no. 222 for the year 1983 dealing with the executive regulations of the law

Getting an agreement from the ministry of defense when dealing with military areas or borders

Article 3 of the law on restructuring touristic companies

b- For hotels and restaurants

Licensing Procedures/ steps Governing Law/ legislation Presenting a request for a license from the department of license of the hotels and restaurants, ministry of tourism

Article 4 of law no. 371 for the year 1956 on public shops Article no. 2 of law no. 1 for the year 1973 on hotels and restaurants. Article 1 of the decree of the ministry of tourism no. 74 /181 on the conditions and regulations of issuing licenses for hotels and restaurants

Paying annual fees on inspection Article 9 of the law on public shops Preparing files, according to the sample Article 28 of the law on public shops

102

Licensing Procedures/ steps Governing Law/ legislation signed by the ministry of interior, containing full data of the guests and the dates of their check in and out.

c- For Souvenir shops

Licensing Procedures/ steps Governing Law/ legislation Presenting a request for a license from the

ministry of tourism Article 1 of law no. 1 for the year 1992 on

Souvenir shops Put special mark on the shop according to

what the minister of tourism agree Article 3 of law no. 1 for the year 1992 on

Souvenir shops Preparing files, according to the sample

signed by the ministry of interior, containing full data of the guests and the dates of their

check in and out

Article 7 of law no. 1 for the year 1992 on Souvenir shops

2- Follow up and inspection

Inspection Governing Law/ legislation

License department of the concerned district Article 22 of law no. 453 for the year 1954 on industrial and trade shops

Industry General Authority Article 12 of law no. 21 for the year 1958 on reconstructing and encouraging industry and

its amendment

Tax Authority Article 192 of law no. 157 for the year 1981 on income tax

Labor Bureau The unified labor law

Insurance Bureau Article 152 of law no. 79 for the year 1975 on civil insurance law

EEAA Article 102 of law no. 4 for the year 1994 on environmental law

Department of regulations and licenses Article 41 of law no. 371 on public shops. Article 41 of law no. 372 for the year 1956

on parks.

Ministry of tourism

Article 30 of law no. 38 for the year 1997 on reconstructing touristic companies.

Article 5/7 of law no. 1 for the year 1992 on souvenir shops and touristic goods.

Fourth: Legislations related to agriculture and reclamation activities 1- Licensing Procedures/ steps

Licensing Procedures/ steps Governing Law/ legislation Following the instructions of the general authority for agricultural development

Article 10 of law no. 143 for the year 1981 on desert lands. Decree no 82/198 on the executive regulations of the law

Issuing a license from the ministry of irrigation for the workings of irrigation.

Article 9 of the law no. 12 for the year 1984 on irrigation

103

Licensing Procedures/ steps Governing Law/ legislation Issuing a license from the ministry of agriculture when dealing with fruit farms

Article 8 of the law no. 53 for the year 1966 on agriculture

Issuing a license from the General Authority of Investment and Free Zones according to the legal instructions

Article 8 of the executive regulations of the law on investment encouragement

Presenting a request for custom exemption for reclamation lands

Article 23 of the law on investment encouragement

2- Follow up and inspection

Inspection Governing Law/ legislation Ministry of Water Resources and Irrigation Article 5/d of law no. 12 for the year 1984

on irrigation Ministry of Agriculture Article 77 of law no. 53 for the year 1966 on

agriculture

Fifth: Legislations related to food production 1- Licensing Procedures/ steps

Licensing Procedures/ steps Governing Law/ legislation Issuing licenses for bakeries and rice

factories from the food supplies directorate Law no. 95 for the year 1945 on food

supplies

Following the listed legal regulations of the Ministry of Food Supply and Ministry of

Health on imported food

Attaching health certificate from the exporting country.

Article 13 of the law no. 10 for the year 1966 on food exporting oversight

Issuing health certificate from the directorate where the factory is located

Projects dealing with food trade are under the oversight of specialists of the ministries

of food supply, interior and health.

Article 4 of law no. 68 for the year 1949 on trade organization

For food exporting, the general authority for oversight on exports and imports should

examine and supervise the exported products.

Article 5 of law no. 155 for the year 2002 on exporting development

2- Follow up and inspection

Inspection Governing Law/ legislation Ministry of Food Supplies Article 4 of law no. 68 for the year 1949

Ministries of Health, Trade and Food Supplies Article 4 of law no. 68 for the year 1949

Sixth: Legislations related to "hazardous activities" 1- Licensing Procedures/ steps

Licensing Procedures/ steps Governing Law/ legislation These activities need the same procedures followed by other activities. Adding to this, it also needs an additional procedures

Article no. 2 of law no. 453 for the year 1954 on produce and trade shops and other hazardous activities

104

Licensing Procedures/ steps Governing Law/ legislation according to its Hazardous item as a license from the local assemblies and should be submitted to routine inspection As for animal food factories, it needs another license from the Ministry of Agriculture.

Article 115 of the law no. 53 for the year 1966 on agriculture.

2- Follow up and inspection

Inspection Governing Law/ legislation

Department of licensing of the concerned district

Article 22 of law no. 453 for the year 1949 on industry and trade shops

General Authority of Industry Article 12 of law no. 21 for the year 1958

Ministry of Agriculture Article 116 of law no. 53 for the year 1966

Seventh: Critical Problems: Procedural Complications

Check list of procedures, documents, and steps need to be followed

Procedures/ Steps Authority

No. of Procedure/

Steps LE Duration/ day

Registering the date of the

rental contract in the registrar

Registrar Bureau 4 4.80 2

Phase I: Registering the contract of the

enterprise

Commercial registrar

1 - 1

Phase II: Registration in

the Commercial Unit of the

court

Commercial Unit of the

Primary court 6

152 if the capital is 100.000,

adding to the fees of

publishing it in the official

newspaper in a cost of LE 100-

200

2

Steps of issuing Tax File

Tax department 6 - 15

Registering in Commercial

The Commercial 2 0.003% of the

capital per year 2

105

Procedures/ Steps Authority

No. of Procedure/

Steps LE Duration/ day

Chamber

Chamber

Issuing commercial file

Commercial Registrar

4

44 for individual activity

56 for enterprise if the capital is between 1000-

10.000

2

Issuing Social Insurance

Folder

Social Insurance department

3-4

15 for job owner and for

the labor 7

Issuing license from the district

Shop license of the district 9 See the Annex 120

Linking the law and the executive regulation The law empowered the Prime Minister to issue the executive decree and further elaborate on its principles and objectives. The executive decree has added some key responsibilities and liabilities to the SFD. This is revealed as follows: The law assigns the SFD to undertake specific assignments, including identifying and informing small enterprises about investment opportunities, preparation of feasibility studies to help small entrepreneurs, advising on markets and prices of equipment and machineries, providing manuals on how to deal with accounts and auditors, explaining risks facing small enterprises, helping small enterprises to get access to local and external exhibitions, and, assisting them in getting the know how in production and marketing. The executive decree includes as well the fact that the SFD shall put together an annual plan to raise the awareness of the public on small enterprises, reviews and consults on bills affecting them, and supports the creation of competent marketing agencies to help small enterprises emerge and develop.

One point that might be raised about the interface between the law and the executive decree is that the latter empowers the SFD to request banks and funding agencies to report to it on their activities in the area of small enterprises, in order to have better coordination in this area. However, neither the law nor the executive decree entails legal actions against those who fail short to abide by the law. Yet, it provides a precautionary act in such cases, i.e. via the intervention of the Central Bank. Chapter Five: Comparative Advantage of M/SMEs:To identify the potential of M/SMEs in exports we undertook an exercise that followed a number of concrete steps. First, we tried to identify the sectors that have the highest

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M/SMEs concentration. This was mainly based on a report undertaken by ERF for MOFT in 2002 which included a table that had the percentages of workers and enterprises of different sizes classified by sectors. We were not able to use CAPMAS data as we found out that there were some discrepancies in the data provided. The sectors with the highest M/SMEs concentration (using enterprises which included between 1-50 workers) were identified and included wood products including furniture, textiles and ready made garments, leather products, and processed food and beverages. We then calculated the percentage of such sectors in total non-oil-exports where we found that it reached around 30% in the year 2000. The highest contributing sectors to total non-oil-exports were textiles and ready made garments, and processed food and beverages, whereas wood industry and leather products had very minor contribution (See Table 32). Table 38: Egyptian M/SMEs’ percentage of total non-oil exports, their competitive situations, revealed comparative advantage and industry concentration percentage, 2000

ComCod ComNam

Concentration % (according to

number of M/SMEs

enterprises)

% from Total

Egyptian non-oil Exports

RCA Competitive Situations

Wood MFG 99.9 %

635 Wood

manufactures, n.e.s.

0.05% 0.046592 No Rising stars

634

Veneers, plywood,

reconstituted wood, etc.

0.02% 0.105308 No Retreats

Total 0.07%

Textiles and Clothing

Clothing 99.7%

Textiles 97.9%

Average Concentration

98.8%

651 Textile yarn 5.66% 5.668012 Yes Retreats

658 Made-up articles, wholly or chiefly

of textile mat. 3.52% 7.041981

Yes Rising stars

107

ComCod ComNam

Concentration % (according to

number of M/SMEs

enterprises)

% from Total

Egyptian non-oil Exports

RCA Competitive Situations

659 Floor coverings, etc. 3.30% 12.72319

Yes Declining

stars

652 Cotton fabrics, woven 1.26% 2.329907

Yes Retreats

653 Fabrics, woven, of man-made

fibers 0.83% 1.133881

Yes Declining

stars

657 Special textile

fabrics and related products

0.11% 0.218408 No

Declining stars

655 Knitted or crocheted fabrics 0.09% 0.253808

No Rising stars

656

Tulles, lace, embroidery,

ribbons, trimmings, etc.

0.05% 0.368137 No

Declining stars

654

Textile fabrics, woven, not

cotton or man-made fiber

0.01% 0.060621 No

Declining stars

Total 14.84%

Leather MFG. 99.5%

611 Leather 0.98% 2.420615 Yes

Declining stars

612 Manufactures of leather, parts of footwear, etc.

0.03% 0.196914 No Retreats

Total 1.01%

Food

Processing and Beverages

99.3%

054 Vegetables, fresh, chilled, frozen or simply preserved

4.06% 5.45452 Yes

Declining stars

108

ComCod ComNam

Concentration % (according to

number of M/SMEs

enterprises)

% from Total

Egyptian non-oil Exports

RCA Competitive Situations

057 Fruit and nuts (not oil nuts) fresh or dried

2.40% 2.599338 Yes

Declining stars

098 Edible products and preparations,

n.e.s. 1.48% 3.170357

Yes Rising stars

042 Rice 1.03% 6.311271 Yes

Declining stars

061 Sugar and honey 0.84% 2.900235 Yes

Declining stars

056

Vegetables, roots and tubers, prepared or preserved

0.70% 3.804047 Yes

Declining stars

081 Feeding stuff for

animals (excl. unmilled cereals)

0.61% 1.001046 Yes

Declining stars

058 Fruit, preserved

and fruit preparations

0.37% 0.914763 No

Declining stars

075 Spices 0.34% 4.360064 Yes Retreats

062

Sugar confectionery

(except chocolate), other

sugar prep.

0.10% 0.879308 No Rising stars

111 Non-alcoholic beverages n.e.s. 0.09% 0.669835

No Rising stars

024 Cheese and curd 0.09% 0.301535 No Retreats

071 Coffee and coffee substitutes 0.08% 0.212953

No Declining

stars

048

Cereal preparations and preparations of

flour, starch

0.07% 0.139995 No

Missed opportunities

109

ComCod ComNam

Concentration % (according to

number of M/SMEs

enterprises)

% from Total

Egyptian non-oil Exports

RCA Competitive Situations

036

Crustaceans and molluses,

whether in shell or not

0.06% 0.107455 No

Declining stars

074 Tea and mat# 0.06% 0.886569 No

Declining stars

073

Chocolate, other food preparations containing cocoa,

n.e.s.

0.05% 0.272036 No Retreats

034 Fish, fresh (live or dead), chilled, dried or frozen

0.05% 0.061525 No Retreats

011 Meat and edible

meat offals, fresh, chilled or frozen

0.04% 0.033254 No Retreats

035 Fish, dried, salted

or in brine; smoked fish

0.02% 0.277894 No

Declining stars

044 Maize (corn), unmilled 0.02% 0.066478

No Declining

stars

001 Live animals chiefly for food 0.02% 0.071442

No Retreats

023 Butter 0.01% 0.140885 No Retreats

112 Alcoholic beverages 0.01% 0.007835

No Retreats

037

Fish, crustaceans and molluses, prepared or

preserved, n.e.s.

0.01% 0.018973 No

Declining stars

022 Milk and cream 0.01% 0.014307 No

Declining stars

091 Margarine and shortening 0.00% 0.091842

No Rising stars

045 Cereals, unmilled

(other than wheat, rice,

0.00% 0.069923 No Retreats

110

ComCod ComNam

Concentration % (according to

number of M/SMEs

enterprises)

% from Total

Egyptian non-oil Exports

RCA Competitive Situations

barley, maize

014

Meat and edible meat offals, prepared or

preserved, n.e.s.

0.00% 0.011011 No Retreats

041 Wheat (including spelt) and meslin,

unmilled 0.00% 0.002651

No Retreats

046 Meal and flour of wheat and flour

of meslin 0.00% 0.030782

No Declining

stars

072 Cocoa 0.00% 0.002456 No

Declining stars

047 0.00% 0.031003 No Retreats Other cereal

meals and flours

12.72% Total

Source: TradeCAN database, 2002. The next step was going much deeper in analysis by identifying the sub sectors or products that enjoy a comparative advantage. We depended on the conventional measure of measuring comparative advantage which is the revealed comparative advantage indicator(RCA)

17. Hence, in the wood industry, we had two sub sectors at the 3 SITC (Standard International Trade Classification) digit level and both did not enjoy a comparative advantage. In textiles and ready made garments sector we had 9 sub sectors where 5 enjoyed an RCA greater than 1, implying that they have comparative advantage, and 4 did not. In the leather industry, we had two sub sectors with 1 enjoying an RCA and the other not. Finally in the processed food and beverages sector we had 23 sub sectors with non enjoying RCA larger than 1. The processed food and beverages industry included some pure agricultural products that did not pass by any processing activity but due to the inability to

17 The RCA measures the export of a specific product divided by total country’s exports divided further by total world exports of those specific products and then divided by total all world exports. If the RCA is greater than 1, then this implies that the country enjoys a comparative advantage in that product. If RCA is less than 1 then this implies that the country does not enjoy an RCA. A higher value of RCA does not imply a better comparative advantage.

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separate it from its sub sector they were included (e.g. vegetables fresh and frozen where the fresh are non-processed and the frozen are processed). In many cases, analysis of where the exports’ potential of a certain country lies depend mainly on this indicator, which although provides an insight on the potential export capabilities of a certain country, it does not necessarily reveal all such potential, for a simple reason which is that it does not take into consideration the import demand on that product. Besides, the RCA is subject to other limitations including ignoring the influence of dominant export product (although we have counted for this issue by excluding the oil from our calculations) and the impact of government policies (including subsidies and taxes) on affecting the RCA. For example, a country can have no comparative advantage in a particular product but because the government is providing subsidies for that specific product, its exports increased and acquired an RCA (e.g. the case of wheat produced in Saudi Arabia which is produced at a very high cost). The same applies where taxes and red tape measures may affect negatively the exportation of a certain product to the extent that the country loses that RCA it used to acquire. Hence we depended on a complementary criterion which identify whether there is a growing import demand on the product or declining demand. The database we relied on divides exports into four categories namely; Rising Stars: which enjoy an increasing share in total non-oil-exports as well as increasing import demand; Declining Stars: which enjoy an increasing share in total non-oil-exports but rather a declining import demand; Missed Opportunities which enjoy an increasing import demand but a declining share in total non-oil-exports, and Retreats which suffer from declining share in total non-oil-exports and decreasing import demand. We calculated our figures for the period 1995 to 2000 having 1995 as our base year. Using criterion, the RCA and the aforementioned classification (Rising Stars, Declining Stars, Missed Opportunities, and Retreats), we can identify the sub sectors or products where the M/SMEs, based on their high concentration of their enterprises can excel. The best situation for M/SMEs is in the products that enjoy both an RCA and being a rising star, where the products that do not enjoy an RCA and suffer from being declining stars or retreats should be avoided. The products that are classified as rising stars or missed opportunities represent niches for M/SMEs where they can export more although Egypt does not enjoy an overall RCA in that product. Such products simply means that with increased efforts from the government to increase production and exports and by providing the right incentives for M/SMEs as well as large enterprises, Egypt can acquire RCA in the future. Hence, such type of products or sub sectors should not be neglected or not devoted the attention needed to promote them. On the contrary, there should be more attention devoted to such products to reach the same level of other products acting as rising stars and/or enjoying RCAs greater than 1. Based on both criterion, in the wood industry we find that although there is no product that has RCA there is wood manufactures (SITC 635) that acts as a rising star and hence there is great potential for M/SMEs in this sector which should be complemented by additional efforts from the government to enhance exports in that field. On the contrary, veneers, plywood, reconstituted wood (SITC 634) are classified as retreats and hence the M/SMEs should avoid concentrating on such products as there is no increasing import demand on

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them. In the leather products we find that leather (SITC 611) enjoys a RCA, however it is classified as declining star which means that the room for further exporting is not promising as the import demand is not growing. Leather manufactures and parts of footwear (SITC 612) are declining stars and do not enjoy RCA, which implies that M/SMEs should divert away from them. In textiles and ready made garments sector we find that made-up articles, wholly or chiefly of textile (SITC 658) enjoys the advantages of being both a rising star and RCA. Moreover, knitted or crocheted fabrics (SITC 655) has a good opportunity to expand since there is growing import demand despite the fact that it does not enjoy an RCA. Other sub sectors or products of textiles and ready made garments do not have an optimistic future in exports, even though some of them might be enjoying RCA because there is no growing import demand on them. In the food processing and beverages sector, edible products and preparations (SITC 098) is among the products that enjoy both an RCA and the status of rising stars. Other sectors as sugar confectionery (except chocolate), other sugar prep (SITC 062, non-alcoholic beverages (111) and margarine (091) are among the sectors that have great prospects for exports although they do not enjoy RCA. Finally, cereal preparations and preparations of flour, starch (SITC 048) is among the sub sectors that have not been given the required attention as there is growing import demand for it but it suffers from a decreasing share in total non oil exports. Those are the sectors that M/SMEs should focus their efforts on, with support of the government and other organizations (whether civil society or international donors) to focus upon. It is worth noting that such conclusions reached on where the M/SMEs can have a potential for export expansion have some limitations which can alter the results we reached. Among such limitations, is the fact that this exercise is undertaken on a global basis and not on a regional basis. Hence, in many cases declining stars on a global basis might be negatively affected by protectionist attitude of importing countries which can bias the results if they constitute the highest shares in imports. For example, in the case of processed food and beverages, and textiles and ready made garments some products might appear as declining stars due to the protectionist attitude of the EU and US which are the largest trading partners for Egypt. This protectionist attitude affects negatively the import demand of the EU and/or the US in general (and not confined to Egypt). This can result in a negative impact on exporters who reduce their exports, if they are focused on those markets which result in a product appearing as a declining star on global basis and loses its RCA if it used to acquire one (this is even confirmed by the appearance of only 2 products among 32 products classified as rising stars among the processed food and beverages sector and non enjoying a RCA despite the fact that this sector constitutes a high share of total non oil Egyptian exports). However, it should be noted that a product might be a declining star or a retreat in the EU and/or US but a rising star in Japan and/or African and/or Arab countries. However, due to the limited amount of products exported to such markets, the indicators identified above might lead to us o a wrong conclusion. To get out of this dilemma, a regional analysis has to be repeated for each of the products identified above which is one of the recommendations that come out of this strategy.

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The market intelligence or monitoring the demand in different importing markets is an issue that requires more efforts from the capable institutions of doing this job in Egypt (whether governmental or non governmental). Another limitation that should be taken in consideration is the level of disaggregation where we used a SITC 3 digit level which can change completely if we applied a more disaggregated level using SITC 4 digit level where the number of products jump from 47 items to 140 items and hence the analysis can change completely. A final limitation is the time dimension and the sensitivity of our analysis to this important factor. We confined our analysis to the period 1995 as our base year and 2000 as the final year. It should be noted that we are dealing with dynamic and not static variables and hence the RCA which reflects the comparative advantage and the classification we used can change by time. To conclude, it should be noted that the analysis we provided should be undertaken on a frequent and more detailed basis to arrive at an updated picture of the where the Egyptian exports should be promoted and the niches in which M/SMEs can participate can be identified. There is no equivalent database that allows us to undertake the same analysis for services, and hence we were not able to identify the comparative advantage of M/SMEs in services, but we were able to identify the comparative advantage of Egypt in services in general as shown in Table 39. The conclusion of the survey undertaken and presented in Section Three where Egypt enjoys comparative advantage in tourism (shown in table under travel) and used to enjoy comparative advantage in other business services which includes a number of services dealt with in the survey. The promotion of M/SMEs in such sectors should help to promote the Egyptian exports in such fields. Table 39: Revealed Comparative Advantage for Egyptian Exports of Services

1995 1996 1998 1999 2000 2001 1997

Transport 1.57 1.28 1.20 1.43 1.31 1.24 1.36

Travel 0.97 1.07 1.27 1.03 1.33 1.46 1.49

Communications 1.30 1.15 0.97 1.26 1.18 1.53 1.26

Construction 0.00 0.05 0.28 0.22 0.50 0.52 0.79 Computer and information services

0.01 0.01 0.04 0.06 0.04 0.11 0.10

Insurance 0.07 0.18 0.21 0.25 0.49 0.17 0.06

Financial services 0.22 0.16 0.10 0.15 0.17 0.09 0.14 Royalties and license fees 0.12 0.13 0.12 0.14 0.10 0.12 0.09

Other business services 1.01 1.27 1.06 1.27 1.01 0.97 0.87

Personal, cultural and recreational 0.03 0.09 0.12 0.12 0.16 0.11 0.15

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1995 1996 1998 1999 2000 2001 1997

services

Government services n.i.e. 0.98 0.88 1.13 0.76 0.43 0.96 0.56

Source: UNCTAD Handbook of Statistics, on-line, 2002

Conclusion and Policy Implications: Based on the statistical analysis undertaken, we recommend that sectors that enjoy a high concentration level of M/SMEs should be focused upon as priority areas for government and non-government institutions in order to enhance exports of M/SMEs. The sectors differed in terms of acquiring a comparative advantage but as mentioned above the concept of comparative advantage is dynamic and changes rapidly. Moreover, the level of aggregation used might hide potential sub sectors that enjoy a comparative advantage. In a nutshell, the statistical analysis confirmed the survey analysis in terms of the sectors that should be focused upon as they have high concentration of M/SMEs. The statistical analysis provided more details on the prospects of the exports of such sectors, which as revealed differed substantially and can still differ again if analysis is undertaken on a more disaggregated level and if current adopted policies are altered. Industrial data in general are scarce and not highly detailed if compared with trade data, hence there is a great need for establishing a market intelligence unit. Such a unit could help in developing a M/SMEs industrial map and in the same time enhance the matchmaking process of M/SMEs with both larger domestic producers (here as M/SMEs in fact can act as indirect exporters) and foreign importers. The intelligence unit should adopt a sectoral approach in analyzing the different industries and suggesting sector specific recommendations. As has been demonstrated by the survey analysis different sectors have different problems and therefore policy actions need to be sector tailored rather than one “straight jacket fits all” type of policy.

Chapter Six: Roadmap for Enhancing the Exports of Egyptian M/SMEs Introduction/Background: As is clear from the title, this chapter is meant to give a logical overview of the steps and approaches to be adopted for achieving the target of enhancing the exports of Egyptian M/SMEs over one year. Based upon the survey conducted, and intensive literature review (international and national) and analyses described in previous chapters of the study, one way of categorizing recommendations for the enhancement of the exports of M/SMEs is relating them to the inhibiting factors for exports of these enterprises. This is the method chosen for providing the policy recommendations in this chapter.

115

Based on the results obtained we can classify the factors inhibiting M/SMEs exports as shown in the following figure:

Factors Inhibiting M/SMEs’ Exports

Access to information Access to Finance Technical assistance Fiscal policies Procedural barriers

We build our strategy for export promotion of Egyptian M/SMEs on such classification where we tackle the different issues related to each of the aforementioned constraints in a more elaborative way and we provide a detailed action plan for each activity. The following policy actions include short (less than one year) and medium (one to three years) term programs to enhance M/SMEs’ export promotion.

116

Policy Issue 1: Ensuring Sustainability and Continuity for the Development of A Comprehensive SME Export Enhancement Strategy and its Continuous Updating In order to ensure the sustainability and development of the role of M/SMEs in exports, to ensure the continuous flow of information (tackling the inhibiting factor related to access to information), and lessen the burden of the cumbersome bureaucratic procedures (inhibiting factor related to procedural barriers) an appropriate institutional setup has to be established. The notion in this respect is that a joint steering committee involving the important governmental and non-governmental stakeholders would be created. The main objectives of this committee are to set the general policies for export promotion of M/SMEs in Egypt. In support of such steering committee an executive secretariat is to be established to undertake the following mandate:

1) Monitoring the implementation of the different suggested policies 2) Developing performance criteria to assess the impact of policies adopted on

M/SMEs 3) Preparing a publicity campaign to attract new M/SMEs that have a potential

to export Action Plan: Activity Responsible

Implementing Body

Q1 Q2 Q3 Q4 Q 5 Q 6 Q 7 Q8 Q 9 Q10 Q 11 Q12

Establishing a steering committee to activate the strategy and monitor its development (compromised of different stakeholders)

Cabinet of Ministers, SDF, MOF, MFTI, representatives of major M/SMEs and export related NGOs

Establishing a secretariat devoted for following-up and the implementation of the strategy

SDF in coordination with M/SMEs policy units in MOF and MFTI

Benchmarking and setting moving and flexible targets for the short and medium terms M/SMEs exports promotion and developing strategies for other years

Secretariat under the supervision of the steering committee

Secretariat in cooperation with MOF, media and Ministry of Information

Increasing awareness and publicity of the strategy

117

Activity Responsible Implementing Body

Q1 Q2 Q3 Q4 Q 5 Q 6 Q 7 Q8 Q 9 Q10 Q 11 Q12

Measuring the results obtained after adoption of the strategy and modifying it according to the advantages and disadvantages revealed during the first year of implementation

Secretariat

118

Policy Issue 2: Improving the Business Environment for M/SMEs (coordination of efforts of different contributors to M/SMEs development, governmental procedures and regulations, taxes and its administration) The main aim of this component is to improve the business environment for M/SMEs, which this study as well as other studies (e.g. MOF, 2004) has shown it to be among the most constraining factors for M/SMEs engaged in export activities or for M/SMEs with potentials to export. This will help to overcome the inhibiting factors related to: procedural barriers, the access to finance, problems associated with fiscal policies, and access to information. The improvement of business climate entails taking several measures:

1) The One-stop-shops should be spread across all governorates with branches at the district levels

2) The procedures of tax and customs’ administration should be drastically simplified to reduce both the cost and time of operations

3) Access to information seems to be one of the major constraints confronting M/SMEs. The lack of information is witnessed both on the domestic and international levels. The establishment of a central market intelligence unit with branches on governorate levels is essential to provide M/SMEs and especially exporting units with the necessary information regarding inputs and markets

Action Plan: Activity Responsible

Implementing Body

Q1 Q 2 Q3 Q4 Q 5 Q6 Q 7 Q 8 Q9 Q10 Q11 Q12

Establishing effective one stop shops in all governorates

SDF in coordination with General Authority of Investment, other related governmental organizations, and municipalities

Restructuring taxes and customs authorities (currently undergoing under MOF)

MOF

Improving the availability of business opportunities in general and export specific opportunities in specific

Market intelligence Unit under the auspices of MFTI in coordination with Federation of Egyptian Industries and business associations

119

Policy Issue 3 Enhancing the technical capabilities of exporting M/SMEs in order to be able to promote their products worldwide. with special focus on promising sectors (e.g. furniture, ready made garments, leather, food and beverages) The study has revealed in its literature review for Egyptian M/SMEs that they lack the necessary capabilities that enable them to be competitively engaged in exporting (see Chapter 2). Several actions are recommended in this respect:

1. Establishing local export oriented Trading Houses with the main objective of identifying M/SMEs with potential export capabilities, suggesting modifications on the quality or range of products to meet international demand requirements. Such export oriented Trading Houses should be in continuous contact and coordination with the Commercial Representation Offices abroad. Moreover, such Trading Houses should undertake the role of identifying the best business opportunities that arise following the conclusion of new regional trade agreements and should undertake a review of all the existing regional trade agreements to maximize the benefits of M/SMEs from utilizing such trade agreements based on the analysis provided in this study (Chapters 3 and 5).

2. Strengthening the role of Business Resource Centers in linking M/SMEs with Technological Centers and highly specialized University research centers.

Action Plan: Activity Responsible

Implementing Body

Q1 Q2 Q3 Q4 Q 5 Q6 Q 7 Q8 Q 9 Q 10 Q 11 Q12

Providing technical assistance to meet exports requirements

New established local export oriented trading houses under the auspices of MFTI in collaboration with SFD and Chamber of Commerce

Providing technical assistance to upgrade the quality of existing products and introduce new products’ ideas

Business Resource Centers

120

Activity Responsible Implementing Body

Q1 Q2 Q3 Q4 Q 5 Q6 Q 7 Q8 Q 9 Q 10 Q 11 Q12

Enhancing linkages between M/SMEs and Technology Centers affiliated to MFTI and SFD

Business Resource Centers

Enhancing linkages between M/SMEs and Research Centers and Universities

Business Resource Centers

121

Policy Issue 4

• Improved access to export finance Until now the access of M/SMEs to finance in general and export finance in specific has been quite minimal as the study has identified in chapters 2 and 3 and in order to overcome the inhibiting factor related to access to finance. Several constraints that exist in the banking sector especially the excessive need for collaterals, limit the possibilities of M/SMEs benefiting from different sources of finance. A complete restructuring and strengthening of the role of the financial institutions in providing finance to M/SMEs at commercial rate is a necessity, without which export promotion would be hindered. It is therefore suggested that the experiences of both Banque du Caire and National Bank of Egypt be studied thoroughly to be replicated in other banks. Action Plan: Activity Responsible

Implementing Body

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q 8 Q 9 Q 10 Q 11 Q12

Evaluating the National Bank of Egypt and Bank du Caire experience in M/SMEs finance

Secretariat

Designing a new program focused on export finance for M/SMEs

Export Development bank in cooperation with SFD

Establishing specialized units for M/SMEs export finance in 3-4 banks

Central Bank and SFD

Increasing the outreach of the banks to M/SMEs

Targeted commercial banks and Post Offices using the facilities of Business Resource Centers, NGOs and SFD offices

122

123

Policy Issue 5 Promoting SME Cluster Communities in Promising Sectors (e.g. furniture, ready made garments, leather, food and beverages) The survey data as shown in Chapter 3 revealed that M/SMEs operating in cluster communities have a high potential to export and some of them are regarded as promising enterprises. Since the number of industrial M/SMEs is quite large to be included in one program it is therefore suggested that the targeting policy should start by focusing on specific cluster communities where the revealed comparative advantage of M/SMEs is highly visible (e.g. furniture, ready made garments, leather, food and beverages). Such a policy could have positive spill-over effects on M/SMEs in surrounding geographical areas. Action Plan: Activity Responsible

Implementing Body

Q1 Q 2 Q3 Q4 Q5 Q6 Q 7 Q 8 Q 9 Q 10 Q11 Q12

Identifying existing clusters and evaluating their performance

Research Centers in collaboration with Business Resource Centers

Specifying the clusters that need to be promoted based on enhancing exports as an ultimate goal

Business Resource Centers and Local export oriented trading houses

Increasing the linkages between such clusters and large enterprises

Local export oriented trading houses in collaboration with business associations

124

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