Protocol for a Systematic Review: The Impacts of Business Support Services for Small and Medium Enterprises on Firm Performance in Low‐and Middle‐Income Countries: A Systematic Review

Small and medium enterprises (SMEs), defined in this review as businesses with up to 250 employees, are believed to be both an important tool in the fight against poverty and an important contributor to economic growth in developing countries. SMEs are responsible for the majority of employment generation in developed as well as in developing countries (Ayyagari et al., 2007). Given that SMEs play an important role in the formal labour force, the health of the sector has implications for employment generation policies and growth. Ayyagari et al. (2007) show that formal SMEs are responsible for most of the private sector employment in developed countries - for example, SMEs are responsible for around 60-70 per cent of employment generation in Germany, Finland, Belgium and Canada. However, in African countries SMEs are responsible for a smaller share of formal employment generation, providing only about 20 per cent of employment in Nigeria, Cote d'Ivoire and Cameroon. Ayyagari et al. also note that the SME sector's contribution to employment shows a strong positive correlation with GDP per capita. Thus, the evidence suggests that increasing this sector's contribution to employment might generate growth (Ayyagari et al., 2007; Beck et al., 2005), and therefore that effective business support services may positively affect GDP per capita. African economies have a lower percentage of formal workers in SMEs due to the fact that these economies have a larger (not computed) and less productive informal sector. Thus, in the path towards a more formalised labour market, employment generation by the SME sector plays a very important role. SMEs can further be linked to economic growth through their ability to link knowledge, product commercialisation and total factor productivity (Acs et al., 2009; Solow, 2007). A seminal study using a cross-section of countries to analyse SMEs and growth was provided by Beck et al. (2005), who found a positive but not causal relationship between SMEs and growth. An exploration of other available empirical evidence however, shows that while studies that focus on developed nations suggest a positive impact of SMEs and entrepreneurship on economic growth, studies examining developing countries suggest a negative impact (for example, Audretsch and Keilbach, 2004; Mueller, 2007; Cravo 2010; Cravo et al., 2012; Cravo et al., 2014).1 Acs et al. (2008) have attributed these differences in empirical results to different entrepreneurship responses to institutional arrangements. Moreover, heterogeneity in institutional arrangements is likely to provide different incentives to rent-seeking activities (Baumol, 1990). Thus, the role of SMEs in a given economy can be expected to vary depending on the institutional settings and level of development. Development agencies provide a considerable amount of targeted assistance to SMEs in low-and middle-income country economies (Beck et al., 2006). For instance, the World Bank devoted US$9.8 billion to SME projects during the period 2006–12 (IEG, 2013). For the same period, the support of the International Finance Corporation (IFC) of the World Bank Group directed to SMEs amounted to US $25 billion. However, there is limited evidence on the impact of SME support in the literature, due either to an insufficient number of studies employing convincing identification strategies to isolate the causal impact of the intervention under consideration, or to limited information regarding the mechanism underlying such interventions. This systematic review will draw on economic theory and qualitative studies to uncover the channels through which a particular intervention can affect the outcomes of interest. This research will therefore separate the outcomes into two categories, intermediate and final, wherever possible in order to uncover the theory of change of each intervention. In developing countries, programmes that support SMEs are based on the view that there are institutional constraints that impede SMEs from reaching their full potential to generate jobs and profits. Thus, the large amount of financial resources allocated to the development of the SME sector by governments and development organisations is designed to address institutional failures, and allow SMEs to operate more efficiently, thus leading to productivity growth (Beck et al., 2005).2 Various approaches are used to provide support services to SMEs. These mainly aim to improve the institutional setting and to remove those institutional constraints that prevent these firms from reaching their full potential and thus contributing effectively to economic growth and poverty alleviation. Based on a preliminary review of the literature, we have identified the main approaches to SME support as programs related to formalisation and the business environment, access to external markets, value chains and clusters, training and technical assistance, SME financing and innovation policy. This literature can be divided into two distinct themes. The first considers indirect support that addresses the constraints that prevent SMEs from getting access to credit, whereas the second addresses the impact of direct business support to SMEs. In the first strand, many studies look at the impact of an indirect type of public support aimed at SMEs, such as tax simplification, which intend to provide incentives for informal SMEs to formalise. The underlying assumption is that formal firms are less credit-constrained than their informal counterparts and therefore formalisation would be an effective way of helping entrepreneurs. Formalised firms are expected to have higher economies of scale and consequently be more productive, demand a more skilled labour force, and have higher profits. If informal firms are prevented from growing due to credit constraints, reducing the cost of formalisation should, indirectly, give firms the opportunity to escape from the low-scale-low-productivity trap. This intervention is an indirect form of public support because it is targeted to all firms with annual revenues below some threshold. All informal firms are incentivised to formalise through tax simplification. Those that decide to formalise are not directly offered any other type of public support. The second group of studies addresses the impact of direct business support to SMEs. They generally estimate the impact of a support programme to SMEs within a specific sector in a specific country, with the intervention based on the assumption that SMEs face constraints such as a limited pool of skilled labour, limited innovation capability and coordination failures. In this view, SMEs need public support to break the vicious circle of low investment and low productivity. A successful intervention might even generate (spillover) effects on firms that do not belong to the target group of the programme – firms from other sectors and/or informal firms in the same sector. This kind of support comes in the form of training programs, support for innovation or value chain and association strategies (for example, clusters) to address coordination failures. Notice that, unlike the indirect public support programmes, the unit of intervention is the firm itself. Firms are directly targeted with programmes that aim to help them shift from a low equilibrium (small size and scale) to a high equilibrium (bigger scale and dynamism). Workers are offered training, and transportation costs, spillover effects and coordination failures are directly affected by the creation of productive agglomerates. Since this review will investigate the impact of a diverse array of interventions, it is challenging to come up with a general theory of change. Although we provide a general theory of change based on our preliminary search of the literature in this section, it is with the caveat that each type of intervention identified in the initial search of the literature is based on an institution's belief in a particular causal chain. Therefore our approach to building out this theory of change will involve taking a case-by-case perspective on the assumptions regarding the causal chain of each of the programs analysed. As mentioned in Section 1.2, in general, support to SMEs is related to productivity growth and employment generation. Overall, the theory of change behind SME support services is linked to the improvement or creation of institutions that allow SMEs to reach their full potential. Figure 1 below provides a more general illustration of the theory of change for the intervention models we aim to survey in this review, as detailed in Table 1. Theory of change Within this general theory of change are contained those which are specific to the particular interventions shown: Tax simplification initiatives can be seen as a type of indirect business support to SMEs. These interventions aim at improving firm performance through the channel of formalisation. Economic theory suggests that formal firms will be able to grow with access to credit markets and by taking advantage of economies of scale. A tax simplification program could affect outcomes such as employment and profit through two intermediate outcomes: 1) formalisation rate, and 2) access to credit. The causal chain could be simplified as following: The necessary conditions for a tax simplification program shifts the informal entrepreneurs trapped in one equilibrium, characterised by low productivity and profits, to another where they face less constraints to growth after formalisation. There are plenty of studies that concentrate only on final outcomes, however, and shed no light on the mechanisms. Consequently, policy makers interested in knowing how such an intervention worked are given no guidance. We note that sub-components within the business support interventions that this review analyses may overlap. We will develop a conceptual model of intervention types to ensure appropriate categorisation of interventions for the analysis. A review such as this has the potential for significant policy relevance, given the amount of attention governments, development agencies and organisations around the world have dedicated to sponsoring a range of assistance programs targeted to SMEs and aimed at spurring firms' performance regarding innovation, productivity, exports and employment generation. Broader impacts on the economy such as higher wages and poverty reduction are also seen as by-products of such interventions (Beck et al., 2006). However, in spite of their prevalence worldwide, too little is known about the impact of SME support interventions. In a recent survey on SME policies in African countries, McKenzie (2011) shows that African firms are in general small, with up to 10 employees, but very heterogeneous in terms of employment, sales and access to external market. He also shows that although SMEs have been supported in several ways in African countries, rigorous evaluation of such policies is scant. This is surprising given that the SME sector is one of the main targets of international and national aid agencies (Cravo et al., 2014). This research intends to fill part of this gap by summarising systematically the rigorous evaluations done in the field so far, and feeding back the results to policymakers working on this problem worldwide. The policy relevance of this review is increased by the fact that it aims to distill the evidence on what works in Africa, and should therefore be particularly useful to policymakers and donor organisations interested in supporting SMEs in Africa. Among the Africa-specific issues we aim to address with this review, are the question of SMEs' potentially limited contribution to employment in African countries relative to other regions, and, in contrast, the potentially greater contribution to poverty reduction these enterprises may make in the African region in comparison to larger ones. The initial literature search for impact evaluations of indirect business support services suggests the existence of a considerable number of studies for Asian and Latin American low- and middle-income economies. Fajnzylber et al. (2011) and Monteiro and Assunção (2012) use quasi-experimental techniques to analyse the effect of a tax simplification program in Brazil on formalisation and firms' performance. McKenzie and Sakho (2010) use instrumental variable (IV) estimations and provide evidence on how tax registration affects profitability in Bolivia. Mel et al. (2012) study the effect of formalisation on profit, sales, new workers and other outcomes in Sri Lanka using IV estimations and Rand and Torm (2012) use matching and difference-in-difference techniques to assess how formalisation affects profit, access to credit and investment in Vietnam. For the African context, the available evidence is likely to be more limited. However, a detailed, comprehensive search and synthesis of the literature is necessary, with a particular focus on its applicability to the African context. As with the indirect interventions, the initial search of the literature for impact evaluations of direct support services indicates that there is limited evidence for Africa. In one of the few studies available, Mano et al. (2012) conduct a randomised experiment in Ghana to analyse the effect of SME training programs on sales, added value and profit. In the context of low-and-middle income countries as a whole, a considerable amount of evidence is available for Latin America. Benavente and Crespi (2003) analyse the effect of an association strategy on productivity in Chile, using difference-in-difference and matching methods. In another study of the Chilean case, Arraiz et al. (2012) analyse the effect of value chain support on sales, employment and exports using propensity score matching and difference-in-difference estimators. The literature also presents evidence on support for innovation in low- and middle-income countries. Castillo et al. (2011) provide evidence of the impact of process and innovation support on exporting, employment, wages and survival in Argentina, by combining propensity score matching and a difference-in-difference approach. Other studies analyse different types of support. Tan (2009) provides evidence for Chile for different SME programs of technical assistance, cluster programs, technology programs and credit programs on sales, output, employment, wage, productivity and exports. In addition, Ibarraran et al. (2009) study how training programs, access to credit, product innovation and ISO certification affect productivity using instrumental variables and matching methods in Latin American countries. Though most of the papers cited above indicate a positive effect of SME support programs on selected outcomes, there is a need to systematically review and synthesise the evidence to provide an unbiased account of the impact of these programs on firm performance. As the evidence appears to be predominantly from Latin America, its applicability to African countries, or any other context, is not straightforward due to lack of external validity that mark these studies. A comprehensive understanding of the mechanisms underlying the causal chain of an SME intervention is therefore crucial if one is interested in designing SME interventions in different contexts. Therefore, one of the aims of this review is to shed light on the impact of various programs, as well as on the mechanisms that could help us understand why similar programs succeed in some countries or contexts but fail in others. This review has some similarities with another Campbell-registered review, by Grimm and Paffhausen (2013). This other review, however, focuses on employment creation and business creation and will not systematically review evidence on firm performance such as productivity, revenues, profits, innovation, formalisation and access to credit – all of which are the main outcomes of interest of this review. To answer these questions, the research will cover both intermediate outcomes, such as access to credit, training, and formalisation, and final outcomes, such as higher profits, employment generation, productivity and access to external market, and will look for context-specific variables that can help us understand the causal chain of the intervention. We recognise that this is a very challenging exercise to be fully addressed by this systematic review. In fact, the main objective is to shed some light on the potential moderator variables linked to the institutional setting and level of development of each country. Assessing applicability of the results to specific local African context is not an easy task and goes beyond the scope of the systematic review, however, in order to allow the reader to relate the review findings to a specific context, the document will present relevant contextual and implementation information. This review will focus only on studies that evaluate policies aimed at supporting SMEs in low-and middle-income countries (as defined by the World Bank's classification), with an emphasis on African countries wherever possible. The focus on LMICs is justified firstly because private firms in these countries tend to be more labour intensive and less innovative, and consequently are the main employer of a large proportion of the labour force. Secondly, restricting the scope to LMICs helps to identify the binding constraints that SMEs might face in similar institutional contexts, such as in some African countries. The term SME covers a wide range of definitions and measures, varying from country to country and between the sources reporting SME statistics. Some of the commonly used criteria are the number of employees, total net assets, sales and investment level (Ayyagari et al., 2007). The most common criterion used to classify SMEs is based on employment information, due to data availability, and the cut-off used to define SMEs is usually 250 employees4. This review will use this cut-off of 250 employees. Consequently, other types of interventions aimed only at supporting entrepreneurship and the creation of microenterprises, such as microfinance5, will not be part of this research. This is because self-employed and micro-entrepreneurs have a different nature in comparison to SMEs6. The former, especially in LMICs, are comprised of less productive or informal enterprises of few employees in the fringe of the markets. Furthermore, these enterprises are not eligible to most of the public interventions to be covered in this review. Thus, the definition of SME based on number of employees fits well our purpose of covering a broad set of interventions and of considering relevance for African countries7. Since our prior assumption is that there will be only a few studies examining public interventions in African countries, a proper contextualisation of the interventions, a comprehensive understanding of the designs, the target groups, and the moderator variables ranging from those related to firms themselves (size, sector, number of years in operation) to those related to the country where the intervention take place will be crucial to this review. This will allow us to be able to shed some light on whether the intervention has some external validity and consequently whether it could potentially work in an African context.8 In order to address the likely problem of limited evidence, particularly of relevance to Africa, the scope of the review will include all studies identifying final and intermediate outcomes. This will also better inform the causal chain analysis which will help inform our tentative findings about generalisability to African countries. In the studies selected, we will then search for any information on how and why interventions worked or did not work. The literature recommends that synthesis is informed by the theory of change embedded in the design of an intervention (see Waddington et al., 2012b). However, our focus is not only on the impacts directly anticipated by the intervention but also included unanticipated impacts. We will include the following interventions: Formalisation/ Business Environment (Institutional Improvement): such as tax simplification, intended to provide incentives for informal SMEs to formalise. Underlying assumption: that formal firms are less credit-constrained than their informal counterparts and therefore formalisation would be an effective way to help entrepreneurs. Indirect support to SMEs may include policies regarding business registration, property registration and regulatory frameworks (Fajnzylber et al., 2011; Monteiro and Assunção, 2012; McKenzie, 2013). Exports/Access to External Markets: defined as interventions that correct market failures such as information externalities and help SMEs overcome obstacles to exporting (Volpe and Carballo, 2010; Volpe et al., 2010; World Bank, 2010). Support for innovation policies is based on the idea that social to innovation private and Acs and designed to support innovation This review will different types of innovation support such as matching and tax as identified in the preliminary For instance, et al. evaluate the of matching provided after an for et al. (2012) analyse the impact of matching and credit for innovation, and et al. (2011) evaluate the effect of tax on Other of innovation support may also be identified during the search and interventions: defined as interventions that help firms from externalities and overcome the coordination failures that prevent SMEs from these externalities and et al., and technical defined as interventions that provide support for training and technical assistance, based on the idea that improve and wages of workers and to firm productivity et al., 2011; et al., 2007). This type of intervention also services and such as those by the World Bank et al. and et al. (2013). SME and in credit markets generate financial constraints, which in SME activities (Beck and and 2007; et al., The review will in this of interventions that provide or services to SMEs, such as those in World Bank (2010) for credit and in et al. (2009) for credit We note that sub-components within the business support interventions this review analyses may overlap. In this case, it will be important to them as as possible. If there is a analysis will be using detailed information on intervention however, this may not be possible if only a number of are To the of our knowledge, most of the papers the impact of a public policy targeted to SMEs a group with a group comparison group in the of quasi-experimental However, we will be studies that and from studies that have more than two we will also separate the evidence to the intervention In the of for instance, an intervention can use a an cluster or (see et al., have two they identify different and so and they in terms of data different rate, different of and so The selected studies on at one impact to do with outcomes, either or For the of this review, we will define firm performance impacts to to objective such as revenues, profits, innovation, formalisation, number of workers and access to credit. of firm performance impacts will be on and will be outcomes of SME support around better firm performance and growth and therefore can be revenues, profits, employment, productivity, innovation, and survival The following are of studies that we would to include in the review at these outcomes: Mano et (2012) experiment in Ghana to analyse the effect of SMEs training programme on sales, value added and Benavente and (2003) study of the effects of an association strategy on productivity in Arraiz et (2012) of the effect of value chain support on sales, employment and exports in (2009) evaluation of different Chilean SMEs programs for technical assistance, cluster programs, technology programs and credit programs on sales, output, employment, wage, productivity and and Castillo et (2011) study of the effects of process and innovation support on exporting, employment, wages and survival in outcomes vary to the type of but can be defined access to credit, training, tax simplification aimed at firms' formalisation, formalisation rate, policies aimed at improving the value and growth. These are all of direct intervention through outcomes. that provide access to credit aim to allow firms to an economic and/or As the firms in the market and the intended outcomes are survival and in productivity. with SME support related to innovation, training and the value chain the underlying assumption is that more skilled workers and a better value chain will in higher productivity, employment generation, access to markets and others. For instance, Ibarraran et al. (2009) focus on how interventions such as training programs, access to credit, product innovation and certification affect productivity of SMEs in Latin American countries. The review will draw on a broad search to identify studies that relate to the interventions aimed at SMEs in To address to the review will focus on analysis and include only studies that use and quasi-experimental such as design instrumental matching on propensity score matching and any other methods that to for (for example, selected have for the of program or into the and quasi-experimental methods are seen as the the main objective is to estimate the causal impact of an intervention or policy (see for et al., an intervention is designed or the identification strategy of an study convincing the findings on the impact of the program or intervention are to have that one can that the in the outcomes between and was by the This review will thus only studies that assess the impact of an intervention the and the at one or more in In where more than two are the can also involve comparison of the two The studies will therefore be from and data studies that on data show or use a matching to for in using matching for instance, should the intervention of the program to be able to make the that the problem of is due to the studies included will document the impact of any business support on SMEs to as In addition, the review will the impact of different types of business support on firm performance. As in Waddington et al. on studies that use and quasi-experimental methods may the studies that can be included in the review. Although this might be a particularly if one is interested in different interventions, we this because findings of studies that do not for their are of little relevance, and for The search strategy aims to cover as comprehensive a set of and sources as within the period because in the of the interventions of it is most likely that these have been in the formal literature on SMEs or in the literature on the part of national and international

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