Description
Recent years have seen an increasing effort in developing and transformation countries to improve the business environment. The focus has mainly been at reducing red tape and improving the regulatory environment.
The Local Business
Environment and Local
Economic Development:
Comparing Approaches
Doug Hindson
Jörg Meyer-Stamer
www.mesopartner.com
mesopartner working paper
11 / 2007
©by the authors
Doug Hindson, [email protected]
J örg Meyer-Stamer, [email protected]
Duisburg 2007
mesopartner working papers are a product of mesopartner, a
consultancy partnership specialised in local economic development.
For more information, see www.mesopartner.com
ISSN 1613-298X
Table of Contents
1 Introduction 1
2 What is the business environment? 3
3 What is locational quality? 5
4 How do “business environment” and “location” differ? 6
5 What is local economic development? 8
6 Business environment and LED processes: How do they compare? 11
7 Implications 16
7.1 What are the most important elements in the BE? 16
7.2 Who should lead the BE reform process? 17
7.3 External and local experts and other resources 18
7.4 Capacity building and training 18
7.5 The role of institutions 19
7.6 Approaches to sustainability 19
8 Conclusion: Enabling environment, locational quality and growth 20
9 Annex 21
9.1 References 21
9.2 Useful Websites 22
9.3 Features of some Local BE initiatives 23
Summary
Recent years have seen an increasing effort in developing and transformation countries to im-
prove the business environment. The focus has mainly been at reducing red tape and improv-
ing the regulatory environment. Initially addressing primarily the national level, the focus has
started to shift towards regional and local levels since it is here that government agencies di-
rectly interact with businesses. In this way, an overlap has emerged between the business en-
vironment approach and the local economic development (LED) approach. However, from the
LED perspective, a favourable business environment involves a broad set of locational factors
which is only partly shaped by government. Another important difference refers to the inter-
vention approach. While BE interventions have a tendency to be top-down and to depend on
external consultants, the LED approach emphasises bottom-up processes and a strong in-
volvement of local actors. A consistent effort to reduce red tape and improve the local regu-
latory environment is an important element of bottom-up LED processes. It is important,
though, to understand that an effort to fight red tape has little impact on the competitive ad-
vantage of a location. In fact, an argument can be made that efforts to improve the business
environment will have a stronger impact in already strong locations, so that it can ultimately
widen the gap between growing and lagging locations and thus reinforce spatial disparities.
1 Introduction
Over the last decade or so donors and governments in developing and tran-
sition countries have been paying growing attention to improving the envi-
ronment for business as a means of promoting enterprise development and,
through it, of growing their economies, increasing employment, improving
welfare and reducing poverty.
1
The focus on the business environment (BE)
is a response to disappointing experiences with direct support measures to
firms, including finance and business development services (BDS), and the
finding that the positive effects of direct support measures, where they oc-
cur, are undermined if the wider environment is characterised by burden-
some regulations, poor service delivery, corruption and a weak entrepreneu-
rial culture. For instance, a couple of years ago research found that register-
ing a business in Canada took two days, involved two procedures and cost
next to nothing, while in South Africa it took 30 days, involved seven pro-
cedures and cost the equivalent of a third of the annual per capita GDP, and
in Bolivia 82 days, 20 procedures and 2.5 times the value of the annual per
capita GDP (Djankov et al. 2001). This was a startling finding, in particular
in view of the fact that countries like Bolivia had been subjected to “Struc-
tural Adjustment Programs” since the 1980s.
Initially, most of the effort to create improved environments for business
was focussed on the national level, particularly on national policies, laws,
regulations and their administration. However, in the last two years or so, a
number of initiatives have been launched that focus on the environment for
business at the local level. This follows from the realisation that even if na-
1 The focus on improving the business environment may be traced through a number
of websites, notably, www.businessenvironment.org and www.enterprise-
development.org. The former was launched early in 2005 as an ‘Inter-Agency Ex-
change Information’ on donor-supported work to improve the business environment
for small enterprises and promote “pro-poor growth”. It covers overall approaches of
small and medium enterprise policies and institutions and provides useful links with
most other websites on the business environment. The latter is the official website of
the Donor Committee for Enterprise Development (formerly Committee of Donor
Agencies for Small Enterprise Development), established in 1976 as a forum to
share experiences and provide common guidelines for enterprise development work
in developing countries. Since the formation, in 2001, of the ‘Enabling Environ-
ment’ working group, the improvement of the business environment has become a
major focus of the Committee. This culminated with the Conference on “Reforming
the Business Environment for Small Enterprise Development”, in Cairo, in Novem-
ber 2005.
2 Doug Hindson and Jörg Meyer-Stamer
tional reforms are undertaken, this does not automatically mean that busi-
ness will experience improvement at the local level, since local actors and
institutions may be slow to respond to national reforms. Particularly for
small businesses, relations with government are most intense and direct at
the local level, and decentralisation policies, which have been pursued in
numerous countries since the 1990s, have increased the importance of the
relationship between government and business at this level.
Improving the local business environment (LBE) has also, in effect, been a
focus of local economic development (LED), an area of development prac-
tice whose focus is on sub-national territories rather than whole countries.
Within LED the concept that most closely approximates that of the LBE is
locational quality, a term that covers the attributes of a location that make it
attractive for businesses interested in operating there. Locational develop-
ment represents one focus of a wider field of practice which also includes
enterprise development, community development and governance.
2
LED as a field of development practice differs from the BE not only in
terms of its focus on local factors, but also the degree to which it is
grounded in a conceptual framework and has gained experience in the use of
methods and tools of implementation. LBE – the application of BE methods
at the local level – is a new area of practice in which one finds both simi-
larities and difference with LED. There are some signs that the two practice
areas are beginning to converge.
The purpose of this paper is to explore these similarities and differences in
order to extract insights and lessons that could help strengthen local devel-
opment promotion. The paper looks first at the meaning of the business en-
vironment and then compares it with locational development to see where
the boundaries of the two fields lie in relation to each other. This is followed
by an examination of the way practitioners go about undertaking reform in
the two fields. The final section draws out some issues for consideration
when designing and implementing LBE and LED initiatives.
There are two main sources of information on which this paper is based.
The information on the LBE initiatives is taken primarily from papers pre-
sented to the conference on “Reforming the Business Environment”, held in
Cairo in December 2005, and from an Internet search on the business envi-
ronment. The information on LED is based the ongoing observation by
2 LED is itself a rapidly changing field of practice and conceptual development in
which its focus, scope and conceptual foundations are by no means settled. In this
paper we will be comparing LBE with what we regard as the most conceptually co-
herent and practically effective approaches in LED.
The Local Business Environment 3
mesopartner, an international development consultancy focussing on LED,
of the literature on experiences in industrialised, developing and transfor-
mation countries.
3
The conceptual framework of LED developed by meso-
partner is set out in the Hexagon of LED
4
, its implementation methodology
in a number of concepts and tools, the most widely known being the Partici-
patory Appraisal of Competitive Advantage (PACA)
5
, which by December
2006 had been applied in several hundred localities in more than 30 transi-
tion and developing countries.
It should be borne in mind that this set of sources provides only partial in-
sights into the initiatives involved. This means that full justice has not been
given to the interpretation of any single initiative. This paper focuses on the
approach that is either explicitly set out or implicit in the documents that de-
scribe the initiatives discussed here. The aim here is not to provide an ex-
haustive evaluation of each initiative – something that is beyond our re-
sources at this time. Rather the aim is to use these sources to as an entry
point for discussion of conceptual frameworks and implementation method-
ologies underlying BE and LED, and to assess their implications for practice
in local development.
2 What is the business environment?
Adopting the definition of Simon White, the term BE, as used here, refers to
all those factors external to businesses that either inhibit or favour their de-
velopment. Aside from this all-encompassing definition, there is no una-
nimity in the BE literature on what should be included in the term. White
has shown that development agencies currently use a number of rival terms
to cover the same or similar ground. These include “Business Climate”, “In-
vestment Climate” and “Enabling Environment”.
6
A related approach is the
“Regulatory Impact Assessment”.
7
Note that in the donor community the
term “Business Climate” is used in a way that is quite different from the
3 www.mesopartner.com
4 Meyer-Stamer (2003).
5 Information on the PACA approach may be found in Meyer-Stamer (2003) “ Par-
ticipatory Appraisal of Competitive Advantage (PACA): Launching Local Eco-
nomic Development Initiatives”, Mesopartner, Duisburg. www.mesopartner.com
6 White (2004).
7 Ladegaard (2005)
4 Doug Hindson and Jörg Meyer-Stamer
practice in OECD countries, where the term “business climate” refers pri-
marily to the perception of the business cycle.
In a recent review aimed at creating some order out of this terminological
disarray, White identifies a number of key factors that donor agencies in-
clude in their definitions. These are governance, policy frameworks, macro-
economic policies and strategies, legal and regulatory frameworks, organ-
isational frameworks, organisational capacity, access to infrastructure, cost
of infrastructure, access to finance, cost of finance, social conditions &
services, cultural & attitudinal influences and support services.
Taking this further, we suggest distinguishing a number of approaches in
terms of the issues they cover, as set out in the following figure.
Figure 1:
1. The concept of “business climate”, as used by donor agencies, refers to
the laws and regulations that directly impact companies. A “Business
Climate Survey” (BCS) primarily looks at laws and regulations and the
extent to which they do or do not discourage business activities. In a
BCS in a developing country, the first question is: “What is the state of
government?” In contrast, in a BCS in a European country, the first
question is “What is the state of business?”
The Local Business Environment 5
2. A “Regulatory Impact Assessment” (RIA) comes from a somewhat dif-
ferent background. It was originally introduced in Anglo-Saxon indus-
trialised countries with a long history of regulating private providers in
markets that are subject to “natural monopoly”; in contrast, continental
European countries until very recently mostly chose to address natural
monopoly within state-owned enterprise. In RIA, the term “regulation”
was introduced from this background, yet over time acquired a broader
meaning. Still, an RIA would take a close look at, for instance, how the
electricity market is regulated, something that a BCS would not neces-
sarily do.
3. An Investment Climate Survey (ICS) takes a yet wider perspective and
also investigates service provision from government in areas like physi-
cal infrastructure.
Note that government service delivery in developmental activities is not ad-
dressed by any of the approaches mentioned so far. According to the ortho-
dox view in donor agencies, this is the world of business development serv-
ices (BDS), i.e. an area where government should not directly deliver serv-
ices to companies in the first place. Yet, in reality, governments in low in-
come countries put considerable effort into provision of business services,
for example in many African countries.
So what then is the “business environment”? BCS, RIA and ICS each give a
different answer. The common denominator, though, is their focus on gov-
ernment. They are all based on the assumption that government intervention
is the problem, not the solution, and that the most promising approach to
creating a favourable business environment is to get government out of the
way as far as possible.
3 What is locational quality?
The term locational quality refers to the range of factors that make a loca-
tion attractive or otherwise for business. Among LED practitioners, it is
common to draw a distinction between locational factors that are “tangible”
and those that are “intangible”. Tangible factors include geographical loca-
tion, availability and cost of real estate, availability and efficiency of trans-
port and communication infrastructure, availability and cost of skilled
workers, cost of energy and environmental compliance, and taxes, levies
and subsidies. Intangibles from a business perspective include the efficiency
of government, the business climate, the availability of related industries
and supportive institutions. From a household’s perspective, intangibles in-
6 Doug Hindson and Jörg Meyer-Stamer
clude the quality of housing and the environment, the availability of schools
and higher education institutions, health and social institutions, culture and
recreation.
8
Increasingly, from the perspective of LED, locational development has
come to mean efforts to enhance the “competitive advantage” of the loca-
tion, i.e. to create a unique locational profile that cannot be easily replicated
by other localities. This is a term coined by Michael Porter, who argued,
based on an enquiry into the competitive advantage of nations, that “it is the
combination of national and intensely local conditions that fosters competi-
tive advantage”.
9
Locational quality is something that is the result of market processes, gov-
ernment intervention and collective action. On the one hand, the concept of
“locational quality” involves a more holistic perspective than the business
environment approach. On the other hand, though, it has a narrower per-
spective due its focus at a local or regional territory.
4 How do “business environment” and “location” differ?
Table 1 re-arranges these elements of the BE into categories that enable
comparison between the scope of the business environment and that of the
location as set out respectively in White’s paper and in the mesopartner
publications quoted above.
8 Meyer-Stamer (2003b), p.28.
9 Porter (1990), p 158.
The Local Business Environment 7
Table 1: Factors in the business environment and in the location
Factors in the Business Environment Factors in the Location
Physical & natural environments
Access to infrastructure
Cost of infrastructure
Governance & institutions
Policy framework
Macro-economic policies & strategies
Legal and regulatory framework
Organisational framework
Organisational capacity
Support services
Social
Social conditions & services
Cultural & attitudinal influences
Economic/markets
Access to finance
Cost of finance
Physical & natural environments
Geographical location
Natural environment
Infrastructure and services
Transport and communications
Energy
Governance & institutions
The business climate
Efficiency of government
Taxes, levies & subsidies
Support institutions
Social
Housing
Social services
Culture & recreation
Economic/market
Real estate
Skilled workers
Related industries
The table reveals that there is considerable overlap between the concepts of
BE and Location in terms of the factors they cover. Both include infra-
structure, governance, institutional, social, and economic factors. In both, all
of these are seen from the perspective of improving the environment for
business. In this sense, they share the view that promoting business devel-
opment means more than firm level interventions and that the wider eco-
nomic, social political and cultural context plays an important part in the
success of enterprises within a country or location.
A main difference in scope is, obviously, the inclusion of national policy,
including macro-economic policies in the BE, but not in the concept of lo-
cational quality. Another difference is the attention given to the physical and
natural environments. The BE includes infrastructure, but regarding loca-
tional quality, much more has to be addressed, including the geographical
location of an area and the state of its natural environment. Transport and
energy are highlighted in our definition of location, and, although not
shown, would, we presume, form part of White’s list of BE factors.
In both BE and LED, governance and governance institutions are key fac-
tors, but these appear in different forms. In both approaches, considerable
importance is attached to the way government administers regulations and
8 Doug Hindson and Jörg Meyer-Stamer
provides services of importance to business, though it should be noted that
the term “support institutions” in our definition refers not only to services
provided by government, but also those provided by the private sector, in-
cluding financial services and BDS.
A terminological difference is that we include the “Business Climate” as
one important locational factor, referring primarily to market conditions and
the ease of establishing business linkages within a location. This is clearly a
different meaning of the term “Business Climate” than that given to it by BE
practitioners, for whom the term refers to various aspects external to the
firm, or the whole BE as used here.
10
In our terminology, following common
practice in OECD countries, the business climate addresses primarily factors
that are created by businesses. In White’s terminology, the business climate
addresses factors that affect business from outside, mainly those created by
government.
The different approaches attach different weights to the importance of state
and market reform. White’s list makes reference only to access to and the
cost of finances (though his paper does show that markets more generally
are an important part of the BE), whereas our definition of locational quality
includes a wider range of market conditions. An underlying assumption in
some of the BE literature is that the main obstacle to business development
in developing countries is state failure, whereas we would argue that market
failure and network failure require as much attention.
5 What is local economic development?
Locational development represents only one element of LED. To compare
BE and LED as approaches, it is therefore necessary to take a more compre-
hensive look at LED.
What then is LED? A widely accepted definition is that it is a process in
which partnerships between local government, the private sector and the
community are established to manage local, and access external, resources
that can be used to stimulate the economy of a well defined territory. In its
earlier incarnations, the goal of LED was generally restricted to growing the
economic and tax base of a location. More recently, in the context of the
Millennium Development Goals, a distinction has been made between eco-
10 See, for example, the definition of Business Climate used by DANIDA, quoted in
White, op. cit. p. 20.
The Local Business Environment 9
nomic growth as the “immediate goal”, and poverty eradication as the
“overall goal” of LED.
11
Taking this further, J org Meyer-Stamer has developed the Hexagon of LED,
a framework grounded in the concept of systemic competitiveness.
12
This
organises the various elements and processes of LED in the form of a hexa-
gon, as presented in Figure 1.
In the Hexagon, the target group for LED is enterprises, which includes
large, medium, small and micro enterprises. They may be locally established
enterprises (and the approach to address them is often called Business Re-
tention & Expansion), business start-ups, and external investors. Enterprise
development involves improvements in the efficiency and competitiveness
of existing firms, the promotion of business start-ups, and the attraction of
external investors. Increasingly, LED practitioners approach enterprise de-
velopment from the perspective of economic clusters and value chains
which often cross-cut territorial boundaries, creating challenges for loca-
tional development.
Locational development, the elements of which have already appeared in ta-
ble 1 above, refers to improvements in the environment for business within
a location, including its infrastructure, natural environment, support and
service industries and the efficiency of government, all seen from the per-
spective of businesses operating in the area or considering investing in it.
"Synergies" refers to relationships between enterprise, location and commu-
nity (social) development in a location. Within the synergies triangle, these
are analysed first in terms of the conflicts that typically characterize these
relationships and then the potential for synergies between them that exploit
opportunities that are of mutual benefit.
The sustainability triangle examines enterprise, location and community
from the perspective of economic, ecological and social sustainability,
showing how lack of attention to the conditions for sustainability of any one
sphere will ultimately undermine the sustainability of the other two. It also
11 Conventional definitions of LED generally take the growth of the local economy,
employment and the tax base as their objectives. Growing concern to connect LED
with poverty reduction strategies, including the United Nations Millennium goals,
suggests that it is useful to distinguish between its immediate objective and overall
goal, particularly because not all LED support measures that promote growth also
lead to poverty reduction.
12 This concept is set out in Meyer-Stamer (2005).
10 Doug Hindson and Jörg Meyer-Stamer
demonstrates how creative thinking can turn social and environmental
sustainability problems into opportunities for business.
Figure 2:
Source: Meyer-Stamer J (2004) A Summary of the Hexagon of Local Economic
Development, Mesopartner, Duisburg
Governance does not refer only to the application of regulations and admini-
stration of services by government and its relations in these processes with
business and civil society. The term “governance”, as against “government”,
refers to a shift from government being the main driver of developmental
initiatives, including direct government intervention within markets and di-
rect support to individual businesses, towards a network pattern where pub-
lic, private and community actors interact in the effort to create a locational
competitive advantage. Better economic governance entails improvements
in the economic performance of local government based on changes in in-
stitutional arrangements, accountability and transparency.
The process triangle examines LED from the perspective of its management
roles over time. The triangle describes a process beginning with participa-
tory diagnosis of the local economy which stimulates participant motivation.
This is followed by participatory prioritization of actions which leads to
their implementation. Implementation is monitored and assessed to enable
The Local Business Environment 11
learning and improvement to take place. The circle is completed with a fur-
ther round of participatory diagnosis which takes the process to a higher
level.
How then does LED differ from the BE? It can be seen that all the factors
present in the BE approach in one form or another form a part of LED.
There are two main ways in which the approaches differ. The first is the
scope of the concept. The BE approach looks primarily at government, and
addresses government-created obstacles as the main developmental issue,
while LED pursues a much wider approach that attaches importance to im-
proving the functioning of markets as well. The second difference refers to
the intervention approaches, which is the subject of the next section.
6 Business environment and LED processes: How do they
compare?
The table below compares the approaches to improving the BE and to LED
across the following variables: scope, conceptual framework, approach to
diagnosis and approach to implementation. We have drawn up the table to
help analyse the differences between the approaches conscious that this
oversimplifies the field of play both in LED and BE, and that a more ex-
haustive examination of both could conceivably reveal greater similarities
than suggested here. Our purpose is to draw sharp distinctions to bring out
some key issues in these approaches.
From the table, a number of differences emerge. We noted earlier that
whereas LED focuses on defined sub-national territories, BE approaches
have mainly focussed on national economies, at least until very recently.
13
The substantive scope is not so different in theory since both LED and BE
consider all factors external to the firm, the one at the local level and the
other from a national perspective. In practice, though, LED has developed a
consciously holistic approach, covering environmental, economic, social
and governance factors influencing the environment for business, whereas
the main focus of BE initiatives in practice has been on the policy, legal,
regulatory and institutional environment, while market- and business-related
factors have been relatively neglected.
13 For instance, the International Finance Corporation in 2006 published “Simplifica-
tion of Business Regulations at the Sub-National Level. A Reform Implementation
Toolkit for Project Teams”.
12 Doug Hindson and Jörg Meyer-Stamer
This takes us to the conceptual framework underpinning the two ap-
proaches, where important differences begin to emerge. As shown above,
recent work on LED, notably the Hexagon, has strengthened the conceptual
underpinnings of LED, giving order to the range of factors that influence the
prospects for local economic development. Although this conceptual
framework is inspired by a wide range of theoretical and empirical works,
its clearest foundations lie in the concept of systemic competitiveness.
This is based on the insight that business competitiveness does not rest only
on the actions of individuals firms, but is influenced by their interactions
within economic clusters and value chains and the wider environment in
which they are embedded.
14
“Systemic competitiveness” uses the term “sys-
tem” in two different ways. First, it asks how the economic system at na-
tional or territorial level shapes the evolution of economic development. It
looks at how the behaviour of companies in markets and networks (micro
level) is shaped by macroeconomic policy and institutions (macro level), but
also “slow variables” such as the basic economic orientation (e.g. free mar-
ket vs. etatism) and the strategic alignment among key groups in the society
(meta level). It also addresses temporary and permanent interventions that
are essential to make markets work and to sustain companies’ efforts to
build a competitive advantage (meso level). Second, it looks at the specific
feedback loops between factors at different levels that shape the evolution of
a given economy, be it a national or a local economy. This is related to the
observation that successful economic development is never only the result
of the invisible hand of the market, but also of the quite visible hand of so-
cietal actors who formulate and implement generic and selective interven-
tions to promote economic development and to shape a competitive advan-
tage.
In contrast, the BE literature reviewed for this paper does not provide a clear
conceptual underpinning for the approach advocated. In fact, authors like
Altenburg and Drachenfels
15
question the underlying premises of the BE ap-
proach, pointing out that high growth countries like South Korea, China or
India quite obviously do not comply, and have never complied, with the
principles advocated by the BE approach. The BE approach is based on the
premise that state regulation and bureaucratic administrative processes are
the major inhibitors of business development, and in this respect it can be
seen as an evolution of the 1970s and 1980s research that led to the “struc-
tural adjustment” approach. This approach, which guided policy develop-
14 Meyer-Stamer (2005). See page 10 for a table on authors and writings economics
and other social sciences that have inspired the idea of systemic competitiveness.
15 Altenburg and Drachenfels (2005, 2006)
The Local Business Environment 13
ment in many developing and transformation countries in the 1980s and
1990s, did not quite render the results that were expected in terms of growth
and poverty alleviation.
16
For agencies like the World Bank, however, the
consequence was not to question the approach but to ask how it might be
intensified and deepened, and the BE approach was the answer.
17
The ap-
proach is based on the assumption that market failure is not a major issue,
and that markets will work properly once government gets out of the way.
There is good reason to question this assumption.
18
In fact, a recent World
Bank publication which claims to substantiate the relationship between gov-
ernment-created red tape and lack of business dynamism shows pretty much
the opposite, namely a rather loose correlation between the clumsiness of
government and the deterrent effect this has on business start-ups (Figure 3).
Figure 3: The correlation between red tape and business dynamism
Source: Klapper (2006)
Where the approaches differ most is in their dealing with issues of structure
on the one hand and process on the other. The BE approach emphasises the
need to address structure, i.e. the existing body of legislation. Based on our
experience with LED, we would rather suggest putting a strong emphasis
on process, i.e. the way in which the existing laws and regulations are im-
plemented. Regarding the process of implementing change, the various
stages in BE & LED processes are set out in Table 2 and illustrated in Fig-
ure 4 further below.
16 See, for instance, Rodrik (2006).
17 See, for instance, Palmade (2005).
18 See, for instance, Hoff and Stiglitz (2000) and Rodrik (2004).
14 Doug Hindson and Jörg Meyer-Stamer
Table 2: Comparing processes
Business Environment Participatory LED approaches
Diagnosis
• External expert based
• Documentary sources & survey me-
thods
• Lengthy, slow and costly
• Diagnostic capacity not transferred
substantially to local actors
Dialogue
• Seen as a distinct stage following
diagnosis
• No clear follow up strategy to ensure
action
Prioritisation of actions
• Experts provide recommendations
• Experts provide detailed reform
plans
Implementation
• Carrying out of detailed plans
• Reliance on external expertise
• Time consuming
Monitoring & evaluation
• Objective indicators tied to plans
• Amendments to plan based on indi-
cators
Diagnosis
• Little attention to traditional research me-
thods
• Participatory appraisal of competitive ad-
vantage
• Rapid, low cost, high capacity transfer to
local actors
Dialogue
• Not seen as a distinct stage in process
• Built into all phases from diagnosis to M&E
Prioritisation of actions
• Participatory
• Flows from diagnosis
• Involves local actors
• Based on quick, visible results
Implementation
• Action flows directly from diagnosis
• Incremental, cumulative, self re-enforcing
change
Monitoring & evaluation
• Participatory
• Focus on learning
• Continuous feed back & adjustment
The BE approach is strongly expert driven during all stages. This is evident
from the way in which diagnosis is undertaken which makes use of external
experts who use conventional documentary and survey research methods to
derive findings and recommendations. Public-private participation is con-
ceived as a distinct process that follows this diagnosis and is shaped by the
findings and recommendations based on it. The actions that follow are based
on detailed reform plans, also drawn up by external experts. This contrasts
sharply with participatory approaches, where a rapid diagnosis leads directly
to action. The focus is not only on improving the environment for business
in general, but also and in particular on increasing the competitive advan-
tage of the location and the businesses within it, which sharpens the diag-
nostic process. Dialogue is not seen as a distinct phase but rather built into
the entire process in a structured way. External specialists act as facilitators
The Local Business Environment 15
rather than consultants, using tools that enable structured interaction be-
tween local players.
Implementation is also conceived very differently in the two approaches.
Within the BE approach implementation is based on a detailed plan that
flows from the research and recommendations undertaken by external ex-
perts. It is conceived as a comprehensive and lengthy process. Local people
are trained up as experts to carry the process through, but remain dependent
on external experts for advice. In a rapid participatory process, actions are
prioritised by local actors involved in the research process and checked with
other local stakeholders. The choice of actions is determined by three crite-
ria: whether they can be undertaken with local resources, whether they can
be implemented swiftly, and whether they will have a visible impact. The
aim is not to tackle reform of the location on a broad front, but to identify
key action that set up an incremental, cumulative dynamic for change. On
the basis of small initial successes the scope for reform should widen to in-
clude more people, greater resources and larger and more complex inter-
ventions. The capacities of local actors are built up bit by bit through their
involvement in all stages of the process. Local actors champion this process
and determine its fate, while external consultants offer impartial facilitation
and provide light-touch support if and when this is needed as the process
develops. The result is an iterative process of diagnosis, action, reflection
and adjustment.
Monitoring and evaluation are also conceived differently. In the BE ap-
proach, M & E plays its orthodox role of enabling those managing the proc-
ess to check whether outcomes in practice meet those anticipated in the plan
and that project finances (mostly donor sourced) have been used for the in-
tended purposes. It relies on objectively verifiable indicators which are used
as a mechanism of control over the use of resources, more than as a means
of learning and adjustment. In the PACA approach M & E is conceived as a
participatory process. The indicators of success are chosen by local actors
on the basis of what they see as important for development in their locali-
ties, and how to measure it. The accent is less on control over the process
according to a pre-determined set of expected outputs than it is on drawing
lessons from the actions taking place. Participatory M & E creates a feed
back loop that promotes continuous learning and innovation.
Finally the processes taken as a whole differ markedly. Chart 2 provides an
illustration of these. The typical BE approach may be described as linear
and incomplete. Effort is expended mainly on assessment and dialogue.
Whether action takes place will depend on the will of national and local ac-
tors, but there is no clearly developed process to ensure this, except through
the continuing support of external experts, using external funding. The par-
16 Doug Hindson and Jörg Meyer-Stamer
ticipatory approach creates a virtuous circle of development. It begins, ends
and begins again with participatory assessment. Incremental, cumulative
changes driven by local actors using mainly local resources and responding
to local opportunities enable larger, more ambitious initiatives to be under-
taken as personal and institutional capacities are built in the process.
Figure 4: Comparing process approaches
Comparing process approaches 2
BE: li near and incompl et e PACA: a virtuous spiral
External
expert
assessment
Public
private
dialogue
Action left
to national
actors
Use on
conventional
assessments
Focus of many
BE approaches
Participatory
assessment
Participatory
prioritisation
of actions
Participatory
M & E
benchmarking
Feedback
& appraisal Motivation
Implementation
Source: Hindson D & Meyer-Stamer J , (2007) “Improving the Local Environment for
Business in Mozambique: A Suggested Approach”. (Forthcoming)
7 Implications
It is too soon to talk about drawing lessons for future work on the LBE
based on the few initiatives reviewed here (for details see the Annex). In-
stead, this paper ends by emphasising a number of issues that we believe are
important in conceiving and implementing LBE and LED initiatives.
7.1 What are the most important elements in the BE?
The regulatory system and the administrative processes by which it is ad-
ministered are taken by the donors and their government partners as the
The Local Business Environment 17
most important aspect of the BE to business. This may well be so in many
localities in developing countries, but needs to be verified case by case,
based in particular on the views of the businesses concerned. Other factors
such as infrastructure and government service provision, as well as a func-
tioning business service market, are also high on the list of concerns of
business. In some cases weak private sector institutions, including markets,
and the level of development of value chains and their governance systems
may be as important as governance and public service provision issues. The
advantage of a participatory diagnosis is that the actual concerns of local
business come to the fore and help shape the reform agenda from the inside,
whereas expert driven processes may impose priorities that do not accord
with those of local businesses.
7.2 Who should lead the BE reform process?
There may be no one right answer to this question either between places or
over time within any one place. Donors are currently initiating and, in some
places, driving the reform process, at least in its first stages. If local actors
do not take charge early on, this holds the danger of perpetuating external
dependence for both guidance and resources. It also involves the risk that
the reform effort subsides as soon as donors’ interest vanes.
It is clear that government needs to take a leading role in reforming itself,
i.e. its system of regulation and administrative practice. It is unlikely,
though, that state-led state reform will focus on the aspects most important
to business unless the latter gives continuous inputs into the process – which
is where PPD is important. However reforms within value chains and the
markets for goods and services is probably best driven by the private sector.
Note that the creation of red tape is not a government monopoly, but many
businesses, especially large corporations, are also quite “good” at it. The an-
swer to the question who should lead is probably that actors from the public,
private and NGO sector should lead in their own spheres, but that dialogue
between them is needed to improve the reform process overall.
One of the trickiest issues relates to the fact that laws and regulations, and
inefficient implementation of them, may be linked to illegitimate interests of
public sector officials or private companies. For public sector officials, is-
suing a permit and similar activities are often an opportunity to demand a
bribe, as is the timely execution of a process, such as paying a bill. There is,
thus, a strong interest on the part of public officials to leave things as they
are. For instance, cutting the number of procedures involved in registering a
business from 15 to five implies that several government offices may lose
an important source of bribes. For private companies, arcane, unpredictable
18 Doug Hindson and Jörg Meyer-Stamer
or inefficient procedures can be an important source of rents. For instance,
taxi operators who are already in business have absolutely no interest in re-
moving regulations that hinder the entrance of additional operators.
One would want to address the process of creating a more favourable busi-
ness environment as a win-win-game, but that is not necessarily easy to
achieve. If streamlining regulations and processes involves a win-lose-game,
it is crucial to assure high level political support to make any progress.
7.3 External and local experts and other resources
The use of experts in promoting development can have a debilitating effect
on local initiative. The IFC approach, which is fairly typical of the way
many donor organisations operate, tends to perpetuate this, which may ex-
plain why it gives so much attention to the training of local expertise.
19
However, the resource intensive nature of both the external expertise and the
training of local expertise may make it costly to replicate this approach, es-
pecially in poorer countries. Rapid, participatory appraisal approaches are
less resource intensive and less likely to create and perpetuate local depend-
ency on external expertise, yet their applicability to economically very poor
and institutionally incapacitated countries and areas within them faces chal-
lenges given that they depend on local champions and the use of local insti-
tutions. Are there pre-conditions in terms of economic potential and institu-
tional capacity of localities that underlie the success of these two ap-
proaches? Are there ways in which the two approaches can be adapted to
meet a wider range of locational conditions? These are questions that call
for further investigation.
7.4 Capacity building and training
Expert-intensive processes such as that being applied by the IFC may create
and perpetuate dependence. Specialised training of local experts to replace
them may simply reproduce the problem in another form, in particular in
those countries and locations where officials and specialists are job-hopping
all the time and/or where a change in government implies a major wave of
19 The authors of IFC’s recent “Toolkit” would obviously not agree with this state-
ment. However, in our experience organisations like IFC tend to confuse teaching
and learning. Running a training course for domestic role players where they are in-
formed that too much Red Tape is bad is teaching. Running an exercise where local
government officials for the first time see administrative processes through the eyes
of a private business owner is learning.
The Local Business Environment 19
replacements in public sector employees. The other way of tackling capacity
shortages is to identify the individuals within a location who have potential
and to build their skills in the processes of both diagnosis and in action, re-
lying much more on learning-by-doing and on coaching rather than training.
This approach has the advantage of mobilising local knowledge and exper-
tise, which makes further skills development easier, and directly linked to
performance.
7.5 The role of institutions
Notwithstanding a widely held belief in development circles, institutional-
ising an activity provides no guarantee that this activity will be effectively
implemented on a sustained basis. Creating new institutions such as one-
stop-shops can absorb a great deal of time and money better spent on deliv-
ery (especially if the result is a one-more-stop-shop). It can create tension
with existing service providers and stoke political conflict where the institu-
tion is seen as a basis for political power and patronage. For these reasons, it
may be more effective to focus on building relationships and networks that
support direct action and allowing these to develop into more formal struc-
tures if and when a clear need for this becomes evident and local actors sup-
port the idea.
7.6 Approaches to sustainability
If building institutions is no guarantee of sustainability, what is? Processes
as much as institutions are important to sustainability. Structuring them in
ways that create feed back loops of learning and innovation is one part of
this. Understanding the determinants of sustainability in the economy,
community and environment and identifying and exploiting the synergies
between them as opportunities for business creates a positive dynamic that
supports the sustainability of all spheres. Creating a logic of virtuous circles
and virtuous spirals is more promising than the linear logic of many projects
and programmes, as it opens the way for continuous improvement. To start
a major BE reform process pre-supposes the availability of considerable re-
sources, including funding for external experts and funds for training local
experts. Starting small and building local momentum before taking on larger
challenges is important to sustainability. It provides no guarantee, but does
avoid the typical experience of externally resourced and foreign expert-
driven development processes that start with a bang and all too often end
with a whimper.
20 Doug Hindson and Jörg Meyer-Stamer
8 Conclusion: Enabling environment, locational quality and
growth
The proponents of the business environment approach, which is effectively
a “fighting red tape” approach, appear to be on the safe side. Making gov-
ernment more efficient, more transparent and more predictable in its inter-
action with business cannot possibly be wrong. The question is, though:
How much effort should be spent on this, and what results can be expected?
The answers that we would tend to give are somewhat ironic. We would ar-
gue that it makes sense to distinguish two types of locations. First, there are
locations which are thriving that are located in a country with a strong econ-
omy. Such a location does already have a favourable environment on the
business side of things. If government in such a location becomes more effi-
cient, there is a good chance that local businesses can grow faster (for in-
stance because it takes much less time and effort to expand their operations).
In this type of location, a red tape reduction programme can indeed create a
competitive advantage to the extent that this local government moves
quicker and further than local governments in other locations that compete
for inward investment.
Second, there are locations where the local economy is not doing well.
Many secondary towns in rural areas in low income countries would fall
into this group. In this kind of place, reducing red tape and the associated
tax burdens that small producers, in particular, find so crushing, would be
important, but by no means sufficient to initiate a substantial growth proc-
ess. It would help local businesses, but it would not create a competitive ad-
vantage relative, in particular, to international markets. In slowly growing or
stagnant locations, the main problem is market failure, and the failure of
government and/or collective actors to effectively address market failure.
Developmental interventions need to be designed accordingly.
This is, then, the irony of local efforts to reduce red tape: They speed up the
growth of locations that are already charging ahead, but they are unlikely to
accelerate growth a great deal in locations that are stagnant. In other words,
they may actually reinforce the strong trend towards growing regional dis-
parities that most countries suffer from anyway. This is one of the reasons
why we advocate the pursuit of a holistic LED approach. LED is much more
than cutting red tape. Effectively pursued, LED has the ability to unleash
endogenous potentials that generate a genuine growth dynamic, and thus
create an environment where cutting red tape can, then, make a much bigger
difference.
The Local Business Environment 21
9 Annex
9.1 References
Altenburg, Tilman, & Drachenfels, Christian von (2005): A critical assessment of the "new
minimalist approach" to private-sector development. Bonn: Paper to be presented at
the 11th EADI General Conference, Working group "Industrialization Strategies",
Bonn, 21 - 24 September 2005.
Altenburg, Tilman, & Drachenfels, Christian von (2006): Creating an enabling business en-
vironment in Asia: To what extent is public support warranted? Paper presented to
the Asia Regional Consultative Conference "Creating Better Business Environments
for Enterprise Development".
GTZ (2006) Facilitator’s Manual Local Red Tape Reduction to Improve the Business Cli-
mate, Verson 1.1
Hang PTT (2005) “A Private Sector Perspective on Business Environment Reform: the Ca-
se of Vietnam, Vietnam Chamber of Commerce and Industry, presented at Confe-
rence on Reforming the Business Environment: from assessing problems to measu-
ring results”, Cairo, Egypt.
Hindson D & Meyer-Stamer J (2007?) “Improving the Local Environment for Business in
Mozambique: A Suggested Approach”, for a forthcoming book on Small Business
Development in that country. (Forthcoming)
Hindson V and D, (2006) Trainers’ Manual on Cutting Red Tape, GTZ and InWEnt, South
Africa.
International Labour Office, “Business Climate Survey” and questionnaire entitled “Enqui-
ry to entrepreneurs and local civil servants about the ‘Local Business Climate for
Entrepreneurship’, ILO n.d.
Ladegaard, Peter (2005): Improving Business Environments through Regulatory Impact
Analysis - Opportunities and challenges for developing countries. Paper prepared for
the International Conference on Reforming the Business Environment, Cairo, Egypt,
29 November to 1 December.
Meyer-Stamer J (2003) The Local Competitive Advantage Training Initiative, Training
Manual, Version December.
Meyer-Stamer J (2003b) “The hexagon of local economic development and LED in South
Africa”, Mesopartner, Duisburg. www.mesopartner.com
Meyer-Stamer J (2005) “Systemic Competitiveness Revisited; Conclusions for Technical
Assistance in Private Sector Development”, Working Paper, Mesopartner, Duisburg.
Schoen C (2006) Business Climate Survey, Indonesia 2005, Mesopartner.
Porter, ME (1990) The Competitive Advantage of Nations, New York, Free Press.
White S (2004) “Donor Approaches to Improving the Business Environment for Small En-
terprise” Working Group on Enabling Environment, Committee on Donor Agencies
for Small Enterprise Development, www.sedonors.org, Washington.
22 Doug Hindson and Jörg Meyer-Stamer
9.2 Useful Websites
www.businessenvironment.org
www.doingbusiness.com
www.ifc.org
www.mesopartner.com
www.sedonors.org
9.3 Features of some Local BE initiatives
Why the focus of BE is widening to include the local
While information sources on the BE are already huge and burgeoning, an Internet scan
on the local business environment (LBE) throws up relatively few initiatives as yet.
20
This is likely to change as the importance of the local BE gains wider recognition.
There are a number of reasons why the focus is widening to include the local business
environment. One is that efforts at improving national policy and regulatory frameworks
have begun to gain acceptance in many countries and with the progress of reform at this
level, obstacles to change at the local level have become more visible. At the same time,
decentralisation processes have increased the powers and functions of local authorities,
without, however, necessarily being accompanied by the resources or improvements in
capacity that their successful execution requires.
More positively, it is increasingly recognised that local authorities are often better
placed to inter-act with business given their spatial proximity. They are often busi-
nesses’ first contact with government and this affects their perception of all of govern-
ment. Being close to local businesses, local government is well placed to understand lo-
cal business needs, particularly those of small business, and either to create or remove
obstacles to its development. Local authorities are generally responsible for spatial
planning, the implementation of environmental, health, safety and other forms of regu-
lation and for provision of basic infrastructure and services that are important to busi-
nesses. Moreover, local authorities tend to formulate a variety of local by-laws. Local
government also has important coordinating functions that are difficult for higher levels
of government to undertake. These includes coordination of development and service
programmes framed by national or regional level government departments, such as
transportation, communications, housing, research and agricultural extension work.
Comparing some local BE initiatives
What then is going on in the area of BE at the local level? The table below compares
five recent donor-conceived and supported local BE initiatives in terms of the following
variables: geographical and substantive scope, the actors involved and their roles, the
approach to BE reform processes, the institutions involved and the approach take in re-
gard to sustainability.
20 The most important Website on the BE is probably www.businessenvironment.org
24 Doug Hindson and Jörg Meyer-Stamer
We emphasise again that our purpose here is not to provide a fine-grained, empirically
substantiated evaluation of each of the initiatives, which would not be possible without
more detailed research on each of them. Rather, it is to extract from the reported cases
some key aspects of the approaches adopted and to reflect on their implications for local
development practice.
Features GTZ-SA IFC ILO GTZ – Indone-
sia
SNV- LAOS &
VIETNAM
1. Scope
Geographical Main economic
centres in lo-
calities
Municipalities Municipalities Region & its
districts
Provinces
Main factors consid-
ered
Red tape (in
regulations &
service deliv-
ery)
Regulations Generic &
sector specific
regulations
All factors in
the BE, local
and sector
All government
factors in the
BE
2. Actors
Initiator Donor Donor Donor Donor Prime Minis-
ter’s Office via
Ministry of In-
dustry
Donor’s partner Government Municipality n.s. Region Ministry of In-
dustry
Donor’s main local
partners
LG & business
organisations
LG LG Region Provinces
Drivers LG & business Donor followed
by PP roundta-
ble
n.s Local partners Ministry of In-
dustry
Business involvement Fully involved
in all phases of
red tape reduc-
tion process
Micro & small
seen as pri-
mary benefici-
aries & are ac-
tively engaged
by IFC
n.s Involved in as-
sessment of
competitive ad-
vantage & PPD
Involvement of
small business
is seen as es-
sential to suc-
cess
Facilitator National con-
sultants
External ex-
perts
n.s External ex-
perts
SNV
Assessment special-
ists
Assessment
undertaken by
national facili-
tators in PPD
context
International
specialists who
build local con-
sultant capacity
ILO & other
contracted
specialists
International
consultants
who involve
local specialists
International
consultants
who try to build
capacity of lo-
cal specialists
The Local Business Environment 25
3. Process
Pre-conditions Informal, em-
phasise PPD
processes
Public agree-
ment: political
will backed by
direct benefici-
aries
n.s. n.s No precondi-
tions set, but
support of na-
tional govern-
ment seen as
important
Diagno-
sis/assessment
Participatory
assessment
involving LG &
business
Detailed expert
based diagno-
sis and as-
sessment
Statistical data
& “business
climate” survey
regional and
local competi-
tiveness
“Business cli-
mate survey”
based on sta-
tistical data
collection fol-
lowed by en-
terprise sur-
veys & inter-
views after
PPD process
Quick scan of
business envi-
ronment using
secondary data
& PACA tools.
Dialogue PPD initiates &
sustains proc-
ess
Public-private
roundtables
created follow-
ing implemen-
tation to sustain
implementation
by overseeing
reform & ex-
panding the
agenda
Follows sur-
veys & is based
on survey find-
ings. Results in
action plan for
the following
year
n.s. Multi-
stakeholder
workshop using
PACA tools is
key element in
process
Training ToT given to
national LED
experts & local
training to LG
officials & pre-
paratory train-
ing to
stakeholders
Comprehensive
training of local
government
officials advo-
cated
Capacity
building of local
actors through
their involve-
ment in partici-
patory ap-
praisal
Approach to imple-
mentation
Tackles fairly
substantial red
tape issues
from the outset
Large scale
administrative
engineering &
legal change
put to LG
n.s. Strong focus on
measuring re-
gional and local
competitive-
ness
Focus on quick
wins to build
momentum
rather than
comprehensive
and detailed
planning
26 Doug Hindson and Jörg Meyer-Stamer
Who is responsible LG (+facilita-
tors)
LG +external
experts
Under taken by
local actors
who can call on
ILO for expert
support
n.s. Local actors
are the
implementers,
supported
where neces-
sary by facili-
tators
M & E Integrated into
the process
Based on in-
depth analysis
and good indi-
cators
n.s. “Soft” & “hard”
indicators pro-
vide basis for
M&E
Importance of
benchmarking
mentioned but
not developed
in detail
Time horizon Continuous Project ap-
proach until
one-stop-shop
set up
Continuous
process if taken
up by local ac-
tors
n.s. Continuous
Institutions
Institutions PPD forum Stresses im-
portance of
host institution
and role of one-
stop-shop
n.s. n.s. n.s.
Sustainability
Resources Minimal exter-
nal resources
needed (1-2
facilitators)
Heavy use of
external exper-
tise
ILO and other
donor re-
sources for
technical sup-
port
n.s. Mainly local
plus a donor
funded facilita-
tor
Sustainability Sustained by
dialogue proc-
ess
Sustained by
institution of
one-stop-shop
Envisages a
circular busi-
ness climate
survey process
n.s. Sustainability
rests on creat-
ing a virtuous
circle beginning
and ending with
quick “business
climate” scans
Note: n.s. =not specified.
Comparing the approaches
Scope
With regard to geographical scope, the five initiatives all work within administrative
boundaries - municipalities in four cases, and a province in one. The choice of geo-
graphical scope is probably influenced by the fact that these are donor initiatives in
partnership with governments. With the exception of the GTZ initiative in Indonesia
which includes “all factors” affecting the business environment, the substantive focus
on these initiatives is government regulations and administrative practices, suggesting
The Local Business Environment 27
that, as in the case of most national BE approaches, market failure is not yet a strong fo-
cus of LBE initiatives either.
The actors involved
Donors are the main initiators of these BE exercises, though it is interesting that in the
case of SNV in Laos and Vietnam, it was the Prime Minister’s Office via the Ministry
of Industry that approached the donor.
In all five cases, government actors are seen as the main national and local partners.
Business is involved in some way in all cases, but mainly as participants in processes or
as beneficiaries rather than drivers. In so far as they are identified as such, the main
drivers of these LBE initiatives are local governments. Facilitation is a key element in
all the cases and the facilitation is done by international experts,, except in the case of
South Africa, where nationals are used. All cases report efforts to build local consultant
capacity to undertake this work.
In all five LBE initiatives, the diagnostic phase is facilitated by external experts. Reli-
ance on external experts for research and implementation is strongest, it seems, in the
case of the IFC initiatives in Latin America, and weakest in the case of the SNV initia-
tives in Laos and Vietnam, where the PACA methodology strongly informed the proc-
ess.
The processes involved
Pre-conditions
Some of the initiatives specify pre-conditions for BE exercises and others do not. The
IFC insists on a publicly announced agreement by government backed by the support of
the business community, before going ahead with an initiative. This may be understood
in the light of other features of the IFC approach which include very comprehensive,
expert-based assessments of the BE followed by ambitious, sustained reform pro-
grammes including policy, regulation and administration.
Diagnosis
There are substantial differences between the case studies’ reports on the question of di-
agnosis. At the one end of the spectrum, the IFC gives greatest energy and resources to
this phase, which is driven by external experts. At the other end lies the GTZ approach
in South Africa, where diagnosis is undertaken by local government and business,
guided by national facilitators. In Laos and Vietnam, the SNV has drawn on PACA
tools to structure participatory diagnosis supplemented by use of a range of statistical
indicators. Here efforts to improve the BE have been focussed on raising the competi-
tiveness of districts and the businesses operating within them. For others such as the
28 Doug Hindson and Jörg Meyer-Stamer
ILO, “business climate” surveys, based on interviews with business actors have been the
centre-piece of BE diagnosis.
Public-private dialogue
Public-private dialogue (PPD) emerges as a key feature of the reform process in all but
one of the initiatives. However, the way in which PPD is handled differs significantly
from one initiative to the next. For the GTZ Local Red Tape Reduction Initiative in
South Africa, facilitated PPD is seen where the process starts and maintaining the PPD
process is seen as critical to maintaining the process. In the IFC and ILO initiatives,
PPD follows and is informed by prior diagnosis undertaken by external experts. In both
these initiatives, it is seen as a key factor that sustains and can widen the agenda for re-
form. The approach adopted by the SNV in Laos draws on PACA, in which analysis
and prioritisation form part of a single process. Within the PACA approach, the point is
not to promote dialogue for its own sake, but rather to focus on getting practical actions
happening, which then calls for focussed dialogue between those parties who are able to
make things happen. The establishment of policy networks and forums for dialogue are
advocated only where there is a clear need for these, arising for example at a point
where the diversity and complexity of actions taking place in a location could benefit
from more systematic exchange between the actors.
Approach to implementation
There are two main ideas behind the implementation approaches represented in the case
studies under consideration. The first is to work out a plan for what needs to be re-
formed in some detail based on prior research, muster the resources and then tackle the
problem systematically over a pre-determined time period, while the second is to get a
process of interaction going between the local actors, tackle issues which yield rapid,
visible results and use the momentum created by small successes to take on larger chal-
lenges. The IFC approach is the best example of the former and the SNV Laos and
Vietnam approach of the latter, while the other three cases seem to fall somewhere in
between.
All the case studies conceive of either “local government” or “local actors” as the driv-
ers of the BE reform process, but there are differences in the degree to which they rely
on external experts, from the IFC at the one end, which gives external experts a central
role throughout, to the SNV Laos and Vietnam initiatives which rely much more heavily
on local actors to keep the momentum going. It should be noted that in the PACA ap-
proach, a central role is given to local champions, on whose shoulders rest the ultimate
success of the process.
Monitoring and evaluation
The degree to which M & E is highlighted differs from one initiative to the next, as does
the role it plays in the process. In the IFC approach, impact evaluation, using objective
The Local Business Environment 29
indicators, plays a central role both in measuring the success of initiatives and as the ba-
sis for decisions about further reform. At the other end of the spectrum the GTZ Red
Tape Reduction initiative incorporates an M & E dimension and PPD is intended to
throw up indicators for M & E. The GTZ Indonesia and SNV Laos and Vietnam initia-
tives also generate M & E indicators from the dialogue process. What does not come out
clearly from the reports on these latter initiatives is the critical role of M & E in con-
tinuous learning and innovation, something that is at the heart of PACA.
Institutions
The information contained in the case studies does not enable us to say a great deal
about the institutional arrangements for LBE reform. The GTZ South Africa Red Tape
Reduction Initiative uses existing dialogue structures, where these exist, that enable
business and local government to come together to discuss and prioritise reform initia-
tives. The IFC approach mentions the role of host institutions and emphasises that they
should not only be committed to it, but also be in a position to provide resources. The
other institution highlighted by the IFC is the one-stop-shop, which it sees as the insti-
tutional mechanism through which improved service provision by government for busi-
ness will be provided. The other three case studies do not give much insight into this as-
pect. The PACA approach, which strongly influenced the SNV initiatives in Laos and
Vietnam, advocates the use of existing institutions rather than the creation of new ones,
except where there is a clear need for the latter and this is strongly supported by the lo-
cal actors themselves.
Sustainability
The initiatives reported give only partial or indirect insights into the issue of
sustainability in BE reform. For the IFC approach, it is the creation of an effective advi-
sory council and the one-stop-shop, which are the guarantee of sustainability – i.e. in-
stitutions ensure it. The GTZ South Africa model sees the PPD process itself as securing
sustainability – i.e. the process itself is the guarantee. The conception of sustainability is
very different in the ILO and SNV approaches. Here it is the creation of circular, self-
reinforcing processes, starting and ending with business climate surveys which provides
the best guarantee of sustainability i.e. sustainability is guaranteed by the process, not an
institution per se. This is similar to the PACA approach in which the guarantee of
sustainability lies in continuous learning and innovation to improve the competitiveness
of the location and the businesses operating within it, based on a process that begins
with participatory diagnosis and ends with it leading to a higher level of development.
mesopartner is a consultancy partnership that specialises in
territorial development, cluster promotion and value chain devel-
opment. It was founded in December 2002 and registered in
April 2003 by Dr Ulrich Harmes-Liedtke, Dr Jörg Meyer-Stamer
and Christian Schoen. Frank Wältring joined in 2004.
The most widely used product of mesopartner is PACA, a meth-
odology to kick-start or refocus local economic development ini-
tiatives which has been developed by Jörg Meyer-Stamer. It has
been successfully applied in many developing and transformation
countries. The main objectives of mesopartner are
• to train PACA practitioners in various countries,
• to develop more specific PACA instruments, for instance for
cluster analysis, value chain analysis and analysis of govern-
ment-created obstacles to business,
• to develop and disseminate further methodologies and tools
for local and regional economic development initiatives,
• to develop innovative concepts and tools to train practitioners
in local and regional economic development.
Another mesopartner product is RALIS (Rapid Appraisal of Local
Innovation Systems). As technology and innovation continue to be
major preoccupations of local actors who want to create a local-
ised advantage in a globalised world, we expect that there is a lot
of potential demand for a tool like RALIS which addresses the
most important obstacle for the leveraging of local innovation
systems: fragmentation between local companies, agencies and
organisations.
Further mesopartner products are
• the Compass of Local Competitiveness, a balanced scorecard-
based approach to performance management of territorial de-
velopment initiatives,
• GENESIS, a methodology for the rapid and participatory
elaboration of strategic interventions for a local or regional
economy.
You find more information at our website, www.mesopartner.com
mesopartner working papers
10
(2007)
J örg Meyer-
Stamer
Designing a Regional Development Agency: Options
and Choices
09
(2007)
Ulrich Harmes-
Liedtke
Benchmarking Territorial Competitiveness
08
(2005)
J örg Meyer-
Stamer, Ulrich
Harmes-Liedtke
How to Promote Clusters
07
(2004)
J örg Meyer-
Stamer
Governance and Territorial Development: Policy,
Politics and Polity in Local Economic Development
06
(2004)
J örg Meyer-
Stamer
Regional Value Chain Initiatives: An Opportunity for
the Application of the PACA-Approach
05
(2003)
J örg Meyer-
Stamer
The Hexagon of Local Economic Development and
LED in South Africa
04
(2003)
J örg Meyer-
Stamer
Why is Local Economic Development so difficult, and
what can we do to make it more effective?
03 (rev.
2004)
J örg Meyer-
Stamer
The Hexagon of Local Economic Development
02
(2005)
J örg Meyer-
Stamer, Christian
Schoen
Rapid Appraisal of Local Innovation Systems
(RALIS): Assessing and Enhancing Innovation Net-
works.
01 (rev.
2004)
J örg Meyer-
Stamer
Participatory Appraisal of Competitive Advantage
(PACA): Launching Local Economic Development
Initiatives
All workings papers are available for download at www.mesopartner.com
doc_495455883.pdf
Recent years have seen an increasing effort in developing and transformation countries to improve the business environment. The focus has mainly been at reducing red tape and improving the regulatory environment.
The Local Business
Environment and Local
Economic Development:
Comparing Approaches
Doug Hindson
Jörg Meyer-Stamer
www.mesopartner.com
mesopartner working paper
11 / 2007
©by the authors
Doug Hindson, [email protected]
J örg Meyer-Stamer, [email protected]
Duisburg 2007
mesopartner working papers are a product of mesopartner, a
consultancy partnership specialised in local economic development.
For more information, see www.mesopartner.com
ISSN 1613-298X
Table of Contents
1 Introduction 1
2 What is the business environment? 3
3 What is locational quality? 5
4 How do “business environment” and “location” differ? 6
5 What is local economic development? 8
6 Business environment and LED processes: How do they compare? 11
7 Implications 16
7.1 What are the most important elements in the BE? 16
7.2 Who should lead the BE reform process? 17
7.3 External and local experts and other resources 18
7.4 Capacity building and training 18
7.5 The role of institutions 19
7.6 Approaches to sustainability 19
8 Conclusion: Enabling environment, locational quality and growth 20
9 Annex 21
9.1 References 21
9.2 Useful Websites 22
9.3 Features of some Local BE initiatives 23
Summary
Recent years have seen an increasing effort in developing and transformation countries to im-
prove the business environment. The focus has mainly been at reducing red tape and improv-
ing the regulatory environment. Initially addressing primarily the national level, the focus has
started to shift towards regional and local levels since it is here that government agencies di-
rectly interact with businesses. In this way, an overlap has emerged between the business en-
vironment approach and the local economic development (LED) approach. However, from the
LED perspective, a favourable business environment involves a broad set of locational factors
which is only partly shaped by government. Another important difference refers to the inter-
vention approach. While BE interventions have a tendency to be top-down and to depend on
external consultants, the LED approach emphasises bottom-up processes and a strong in-
volvement of local actors. A consistent effort to reduce red tape and improve the local regu-
latory environment is an important element of bottom-up LED processes. It is important,
though, to understand that an effort to fight red tape has little impact on the competitive ad-
vantage of a location. In fact, an argument can be made that efforts to improve the business
environment will have a stronger impact in already strong locations, so that it can ultimately
widen the gap between growing and lagging locations and thus reinforce spatial disparities.
1 Introduction
Over the last decade or so donors and governments in developing and tran-
sition countries have been paying growing attention to improving the envi-
ronment for business as a means of promoting enterprise development and,
through it, of growing their economies, increasing employment, improving
welfare and reducing poverty.
1
The focus on the business environment (BE)
is a response to disappointing experiences with direct support measures to
firms, including finance and business development services (BDS), and the
finding that the positive effects of direct support measures, where they oc-
cur, are undermined if the wider environment is characterised by burden-
some regulations, poor service delivery, corruption and a weak entrepreneu-
rial culture. For instance, a couple of years ago research found that register-
ing a business in Canada took two days, involved two procedures and cost
next to nothing, while in South Africa it took 30 days, involved seven pro-
cedures and cost the equivalent of a third of the annual per capita GDP, and
in Bolivia 82 days, 20 procedures and 2.5 times the value of the annual per
capita GDP (Djankov et al. 2001). This was a startling finding, in particular
in view of the fact that countries like Bolivia had been subjected to “Struc-
tural Adjustment Programs” since the 1980s.
Initially, most of the effort to create improved environments for business
was focussed on the national level, particularly on national policies, laws,
regulations and their administration. However, in the last two years or so, a
number of initiatives have been launched that focus on the environment for
business at the local level. This follows from the realisation that even if na-
1 The focus on improving the business environment may be traced through a number
of websites, notably, www.businessenvironment.org and www.enterprise-
development.org. The former was launched early in 2005 as an ‘Inter-Agency Ex-
change Information’ on donor-supported work to improve the business environment
for small enterprises and promote “pro-poor growth”. It covers overall approaches of
small and medium enterprise policies and institutions and provides useful links with
most other websites on the business environment. The latter is the official website of
the Donor Committee for Enterprise Development (formerly Committee of Donor
Agencies for Small Enterprise Development), established in 1976 as a forum to
share experiences and provide common guidelines for enterprise development work
in developing countries. Since the formation, in 2001, of the ‘Enabling Environ-
ment’ working group, the improvement of the business environment has become a
major focus of the Committee. This culminated with the Conference on “Reforming
the Business Environment for Small Enterprise Development”, in Cairo, in Novem-
ber 2005.
2 Doug Hindson and Jörg Meyer-Stamer
tional reforms are undertaken, this does not automatically mean that busi-
ness will experience improvement at the local level, since local actors and
institutions may be slow to respond to national reforms. Particularly for
small businesses, relations with government are most intense and direct at
the local level, and decentralisation policies, which have been pursued in
numerous countries since the 1990s, have increased the importance of the
relationship between government and business at this level.
Improving the local business environment (LBE) has also, in effect, been a
focus of local economic development (LED), an area of development prac-
tice whose focus is on sub-national territories rather than whole countries.
Within LED the concept that most closely approximates that of the LBE is
locational quality, a term that covers the attributes of a location that make it
attractive for businesses interested in operating there. Locational develop-
ment represents one focus of a wider field of practice which also includes
enterprise development, community development and governance.
2
LED as a field of development practice differs from the BE not only in
terms of its focus on local factors, but also the degree to which it is
grounded in a conceptual framework and has gained experience in the use of
methods and tools of implementation. LBE – the application of BE methods
at the local level – is a new area of practice in which one finds both simi-
larities and difference with LED. There are some signs that the two practice
areas are beginning to converge.
The purpose of this paper is to explore these similarities and differences in
order to extract insights and lessons that could help strengthen local devel-
opment promotion. The paper looks first at the meaning of the business en-
vironment and then compares it with locational development to see where
the boundaries of the two fields lie in relation to each other. This is followed
by an examination of the way practitioners go about undertaking reform in
the two fields. The final section draws out some issues for consideration
when designing and implementing LBE and LED initiatives.
There are two main sources of information on which this paper is based.
The information on the LBE initiatives is taken primarily from papers pre-
sented to the conference on “Reforming the Business Environment”, held in
Cairo in December 2005, and from an Internet search on the business envi-
ronment. The information on LED is based the ongoing observation by
2 LED is itself a rapidly changing field of practice and conceptual development in
which its focus, scope and conceptual foundations are by no means settled. In this
paper we will be comparing LBE with what we regard as the most conceptually co-
herent and practically effective approaches in LED.
The Local Business Environment 3
mesopartner, an international development consultancy focussing on LED,
of the literature on experiences in industrialised, developing and transfor-
mation countries.
3
The conceptual framework of LED developed by meso-
partner is set out in the Hexagon of LED
4
, its implementation methodology
in a number of concepts and tools, the most widely known being the Partici-
patory Appraisal of Competitive Advantage (PACA)
5
, which by December
2006 had been applied in several hundred localities in more than 30 transi-
tion and developing countries.
It should be borne in mind that this set of sources provides only partial in-
sights into the initiatives involved. This means that full justice has not been
given to the interpretation of any single initiative. This paper focuses on the
approach that is either explicitly set out or implicit in the documents that de-
scribe the initiatives discussed here. The aim here is not to provide an ex-
haustive evaluation of each initiative – something that is beyond our re-
sources at this time. Rather the aim is to use these sources to as an entry
point for discussion of conceptual frameworks and implementation method-
ologies underlying BE and LED, and to assess their implications for practice
in local development.
2 What is the business environment?
Adopting the definition of Simon White, the term BE, as used here, refers to
all those factors external to businesses that either inhibit or favour their de-
velopment. Aside from this all-encompassing definition, there is no una-
nimity in the BE literature on what should be included in the term. White
has shown that development agencies currently use a number of rival terms
to cover the same or similar ground. These include “Business Climate”, “In-
vestment Climate” and “Enabling Environment”.
6
A related approach is the
“Regulatory Impact Assessment”.
7
Note that in the donor community the
term “Business Climate” is used in a way that is quite different from the
3 www.mesopartner.com
4 Meyer-Stamer (2003).
5 Information on the PACA approach may be found in Meyer-Stamer (2003) “ Par-
ticipatory Appraisal of Competitive Advantage (PACA): Launching Local Eco-
nomic Development Initiatives”, Mesopartner, Duisburg. www.mesopartner.com
6 White (2004).
7 Ladegaard (2005)
4 Doug Hindson and Jörg Meyer-Stamer
practice in OECD countries, where the term “business climate” refers pri-
marily to the perception of the business cycle.
In a recent review aimed at creating some order out of this terminological
disarray, White identifies a number of key factors that donor agencies in-
clude in their definitions. These are governance, policy frameworks, macro-
economic policies and strategies, legal and regulatory frameworks, organ-
isational frameworks, organisational capacity, access to infrastructure, cost
of infrastructure, access to finance, cost of finance, social conditions &
services, cultural & attitudinal influences and support services.
Taking this further, we suggest distinguishing a number of approaches in
terms of the issues they cover, as set out in the following figure.
Figure 1:
1. The concept of “business climate”, as used by donor agencies, refers to
the laws and regulations that directly impact companies. A “Business
Climate Survey” (BCS) primarily looks at laws and regulations and the
extent to which they do or do not discourage business activities. In a
BCS in a developing country, the first question is: “What is the state of
government?” In contrast, in a BCS in a European country, the first
question is “What is the state of business?”
The Local Business Environment 5
2. A “Regulatory Impact Assessment” (RIA) comes from a somewhat dif-
ferent background. It was originally introduced in Anglo-Saxon indus-
trialised countries with a long history of regulating private providers in
markets that are subject to “natural monopoly”; in contrast, continental
European countries until very recently mostly chose to address natural
monopoly within state-owned enterprise. In RIA, the term “regulation”
was introduced from this background, yet over time acquired a broader
meaning. Still, an RIA would take a close look at, for instance, how the
electricity market is regulated, something that a BCS would not neces-
sarily do.
3. An Investment Climate Survey (ICS) takes a yet wider perspective and
also investigates service provision from government in areas like physi-
cal infrastructure.
Note that government service delivery in developmental activities is not ad-
dressed by any of the approaches mentioned so far. According to the ortho-
dox view in donor agencies, this is the world of business development serv-
ices (BDS), i.e. an area where government should not directly deliver serv-
ices to companies in the first place. Yet, in reality, governments in low in-
come countries put considerable effort into provision of business services,
for example in many African countries.
So what then is the “business environment”? BCS, RIA and ICS each give a
different answer. The common denominator, though, is their focus on gov-
ernment. They are all based on the assumption that government intervention
is the problem, not the solution, and that the most promising approach to
creating a favourable business environment is to get government out of the
way as far as possible.
3 What is locational quality?
The term locational quality refers to the range of factors that make a loca-
tion attractive or otherwise for business. Among LED practitioners, it is
common to draw a distinction between locational factors that are “tangible”
and those that are “intangible”. Tangible factors include geographical loca-
tion, availability and cost of real estate, availability and efficiency of trans-
port and communication infrastructure, availability and cost of skilled
workers, cost of energy and environmental compliance, and taxes, levies
and subsidies. Intangibles from a business perspective include the efficiency
of government, the business climate, the availability of related industries
and supportive institutions. From a household’s perspective, intangibles in-
6 Doug Hindson and Jörg Meyer-Stamer
clude the quality of housing and the environment, the availability of schools
and higher education institutions, health and social institutions, culture and
recreation.
8
Increasingly, from the perspective of LED, locational development has
come to mean efforts to enhance the “competitive advantage” of the loca-
tion, i.e. to create a unique locational profile that cannot be easily replicated
by other localities. This is a term coined by Michael Porter, who argued,
based on an enquiry into the competitive advantage of nations, that “it is the
combination of national and intensely local conditions that fosters competi-
tive advantage”.
9
Locational quality is something that is the result of market processes, gov-
ernment intervention and collective action. On the one hand, the concept of
“locational quality” involves a more holistic perspective than the business
environment approach. On the other hand, though, it has a narrower per-
spective due its focus at a local or regional territory.
4 How do “business environment” and “location” differ?
Table 1 re-arranges these elements of the BE into categories that enable
comparison between the scope of the business environment and that of the
location as set out respectively in White’s paper and in the mesopartner
publications quoted above.
8 Meyer-Stamer (2003b), p.28.
9 Porter (1990), p 158.
The Local Business Environment 7
Table 1: Factors in the business environment and in the location
Factors in the Business Environment Factors in the Location
Physical & natural environments
Access to infrastructure
Cost of infrastructure
Governance & institutions
Policy framework
Macro-economic policies & strategies
Legal and regulatory framework
Organisational framework
Organisational capacity
Support services
Social
Social conditions & services
Cultural & attitudinal influences
Economic/markets
Access to finance
Cost of finance
Physical & natural environments
Geographical location
Natural environment
Infrastructure and services
Transport and communications
Energy
Governance & institutions
The business climate
Efficiency of government
Taxes, levies & subsidies
Support institutions
Social
Housing
Social services
Culture & recreation
Economic/market
Real estate
Skilled workers
Related industries
The table reveals that there is considerable overlap between the concepts of
BE and Location in terms of the factors they cover. Both include infra-
structure, governance, institutional, social, and economic factors. In both, all
of these are seen from the perspective of improving the environment for
business. In this sense, they share the view that promoting business devel-
opment means more than firm level interventions and that the wider eco-
nomic, social political and cultural context plays an important part in the
success of enterprises within a country or location.
A main difference in scope is, obviously, the inclusion of national policy,
including macro-economic policies in the BE, but not in the concept of lo-
cational quality. Another difference is the attention given to the physical and
natural environments. The BE includes infrastructure, but regarding loca-
tional quality, much more has to be addressed, including the geographical
location of an area and the state of its natural environment. Transport and
energy are highlighted in our definition of location, and, although not
shown, would, we presume, form part of White’s list of BE factors.
In both BE and LED, governance and governance institutions are key fac-
tors, but these appear in different forms. In both approaches, considerable
importance is attached to the way government administers regulations and
8 Doug Hindson and Jörg Meyer-Stamer
provides services of importance to business, though it should be noted that
the term “support institutions” in our definition refers not only to services
provided by government, but also those provided by the private sector, in-
cluding financial services and BDS.
A terminological difference is that we include the “Business Climate” as
one important locational factor, referring primarily to market conditions and
the ease of establishing business linkages within a location. This is clearly a
different meaning of the term “Business Climate” than that given to it by BE
practitioners, for whom the term refers to various aspects external to the
firm, or the whole BE as used here.
10
In our terminology, following common
practice in OECD countries, the business climate addresses primarily factors
that are created by businesses. In White’s terminology, the business climate
addresses factors that affect business from outside, mainly those created by
government.
The different approaches attach different weights to the importance of state
and market reform. White’s list makes reference only to access to and the
cost of finances (though his paper does show that markets more generally
are an important part of the BE), whereas our definition of locational quality
includes a wider range of market conditions. An underlying assumption in
some of the BE literature is that the main obstacle to business development
in developing countries is state failure, whereas we would argue that market
failure and network failure require as much attention.
5 What is local economic development?
Locational development represents only one element of LED. To compare
BE and LED as approaches, it is therefore necessary to take a more compre-
hensive look at LED.
What then is LED? A widely accepted definition is that it is a process in
which partnerships between local government, the private sector and the
community are established to manage local, and access external, resources
that can be used to stimulate the economy of a well defined territory. In its
earlier incarnations, the goal of LED was generally restricted to growing the
economic and tax base of a location. More recently, in the context of the
Millennium Development Goals, a distinction has been made between eco-
10 See, for example, the definition of Business Climate used by DANIDA, quoted in
White, op. cit. p. 20.
The Local Business Environment 9
nomic growth as the “immediate goal”, and poverty eradication as the
“overall goal” of LED.
11
Taking this further, J org Meyer-Stamer has developed the Hexagon of LED,
a framework grounded in the concept of systemic competitiveness.
12
This
organises the various elements and processes of LED in the form of a hexa-
gon, as presented in Figure 1.
In the Hexagon, the target group for LED is enterprises, which includes
large, medium, small and micro enterprises. They may be locally established
enterprises (and the approach to address them is often called Business Re-
tention & Expansion), business start-ups, and external investors. Enterprise
development involves improvements in the efficiency and competitiveness
of existing firms, the promotion of business start-ups, and the attraction of
external investors. Increasingly, LED practitioners approach enterprise de-
velopment from the perspective of economic clusters and value chains
which often cross-cut territorial boundaries, creating challenges for loca-
tional development.
Locational development, the elements of which have already appeared in ta-
ble 1 above, refers to improvements in the environment for business within
a location, including its infrastructure, natural environment, support and
service industries and the efficiency of government, all seen from the per-
spective of businesses operating in the area or considering investing in it.
"Synergies" refers to relationships between enterprise, location and commu-
nity (social) development in a location. Within the synergies triangle, these
are analysed first in terms of the conflicts that typically characterize these
relationships and then the potential for synergies between them that exploit
opportunities that are of mutual benefit.
The sustainability triangle examines enterprise, location and community
from the perspective of economic, ecological and social sustainability,
showing how lack of attention to the conditions for sustainability of any one
sphere will ultimately undermine the sustainability of the other two. It also
11 Conventional definitions of LED generally take the growth of the local economy,
employment and the tax base as their objectives. Growing concern to connect LED
with poverty reduction strategies, including the United Nations Millennium goals,
suggests that it is useful to distinguish between its immediate objective and overall
goal, particularly because not all LED support measures that promote growth also
lead to poverty reduction.
12 This concept is set out in Meyer-Stamer (2005).
10 Doug Hindson and Jörg Meyer-Stamer
demonstrates how creative thinking can turn social and environmental
sustainability problems into opportunities for business.
Figure 2:
Source: Meyer-Stamer J (2004) A Summary of the Hexagon of Local Economic
Development, Mesopartner, Duisburg
Governance does not refer only to the application of regulations and admini-
stration of services by government and its relations in these processes with
business and civil society. The term “governance”, as against “government”,
refers to a shift from government being the main driver of developmental
initiatives, including direct government intervention within markets and di-
rect support to individual businesses, towards a network pattern where pub-
lic, private and community actors interact in the effort to create a locational
competitive advantage. Better economic governance entails improvements
in the economic performance of local government based on changes in in-
stitutional arrangements, accountability and transparency.
The process triangle examines LED from the perspective of its management
roles over time. The triangle describes a process beginning with participa-
tory diagnosis of the local economy which stimulates participant motivation.
This is followed by participatory prioritization of actions which leads to
their implementation. Implementation is monitored and assessed to enable
The Local Business Environment 11
learning and improvement to take place. The circle is completed with a fur-
ther round of participatory diagnosis which takes the process to a higher
level.
How then does LED differ from the BE? It can be seen that all the factors
present in the BE approach in one form or another form a part of LED.
There are two main ways in which the approaches differ. The first is the
scope of the concept. The BE approach looks primarily at government, and
addresses government-created obstacles as the main developmental issue,
while LED pursues a much wider approach that attaches importance to im-
proving the functioning of markets as well. The second difference refers to
the intervention approaches, which is the subject of the next section.
6 Business environment and LED processes: How do they
compare?
The table below compares the approaches to improving the BE and to LED
across the following variables: scope, conceptual framework, approach to
diagnosis and approach to implementation. We have drawn up the table to
help analyse the differences between the approaches conscious that this
oversimplifies the field of play both in LED and BE, and that a more ex-
haustive examination of both could conceivably reveal greater similarities
than suggested here. Our purpose is to draw sharp distinctions to bring out
some key issues in these approaches.
From the table, a number of differences emerge. We noted earlier that
whereas LED focuses on defined sub-national territories, BE approaches
have mainly focussed on national economies, at least until very recently.
13
The substantive scope is not so different in theory since both LED and BE
consider all factors external to the firm, the one at the local level and the
other from a national perspective. In practice, though, LED has developed a
consciously holistic approach, covering environmental, economic, social
and governance factors influencing the environment for business, whereas
the main focus of BE initiatives in practice has been on the policy, legal,
regulatory and institutional environment, while market- and business-related
factors have been relatively neglected.
13 For instance, the International Finance Corporation in 2006 published “Simplifica-
tion of Business Regulations at the Sub-National Level. A Reform Implementation
Toolkit for Project Teams”.
12 Doug Hindson and Jörg Meyer-Stamer
This takes us to the conceptual framework underpinning the two ap-
proaches, where important differences begin to emerge. As shown above,
recent work on LED, notably the Hexagon, has strengthened the conceptual
underpinnings of LED, giving order to the range of factors that influence the
prospects for local economic development. Although this conceptual
framework is inspired by a wide range of theoretical and empirical works,
its clearest foundations lie in the concept of systemic competitiveness.
This is based on the insight that business competitiveness does not rest only
on the actions of individuals firms, but is influenced by their interactions
within economic clusters and value chains and the wider environment in
which they are embedded.
14
“Systemic competitiveness” uses the term “sys-
tem” in two different ways. First, it asks how the economic system at na-
tional or territorial level shapes the evolution of economic development. It
looks at how the behaviour of companies in markets and networks (micro
level) is shaped by macroeconomic policy and institutions (macro level), but
also “slow variables” such as the basic economic orientation (e.g. free mar-
ket vs. etatism) and the strategic alignment among key groups in the society
(meta level). It also addresses temporary and permanent interventions that
are essential to make markets work and to sustain companies’ efforts to
build a competitive advantage (meso level). Second, it looks at the specific
feedback loops between factors at different levels that shape the evolution of
a given economy, be it a national or a local economy. This is related to the
observation that successful economic development is never only the result
of the invisible hand of the market, but also of the quite visible hand of so-
cietal actors who formulate and implement generic and selective interven-
tions to promote economic development and to shape a competitive advan-
tage.
In contrast, the BE literature reviewed for this paper does not provide a clear
conceptual underpinning for the approach advocated. In fact, authors like
Altenburg and Drachenfels
15
question the underlying premises of the BE ap-
proach, pointing out that high growth countries like South Korea, China or
India quite obviously do not comply, and have never complied, with the
principles advocated by the BE approach. The BE approach is based on the
premise that state regulation and bureaucratic administrative processes are
the major inhibitors of business development, and in this respect it can be
seen as an evolution of the 1970s and 1980s research that led to the “struc-
tural adjustment” approach. This approach, which guided policy develop-
14 Meyer-Stamer (2005). See page 10 for a table on authors and writings economics
and other social sciences that have inspired the idea of systemic competitiveness.
15 Altenburg and Drachenfels (2005, 2006)
The Local Business Environment 13
ment in many developing and transformation countries in the 1980s and
1990s, did not quite render the results that were expected in terms of growth
and poverty alleviation.
16
For agencies like the World Bank, however, the
consequence was not to question the approach but to ask how it might be
intensified and deepened, and the BE approach was the answer.
17
The ap-
proach is based on the assumption that market failure is not a major issue,
and that markets will work properly once government gets out of the way.
There is good reason to question this assumption.
18
In fact, a recent World
Bank publication which claims to substantiate the relationship between gov-
ernment-created red tape and lack of business dynamism shows pretty much
the opposite, namely a rather loose correlation between the clumsiness of
government and the deterrent effect this has on business start-ups (Figure 3).
Figure 3: The correlation between red tape and business dynamism
Source: Klapper (2006)
Where the approaches differ most is in their dealing with issues of structure
on the one hand and process on the other. The BE approach emphasises the
need to address structure, i.e. the existing body of legislation. Based on our
experience with LED, we would rather suggest putting a strong emphasis
on process, i.e. the way in which the existing laws and regulations are im-
plemented. Regarding the process of implementing change, the various
stages in BE & LED processes are set out in Table 2 and illustrated in Fig-
ure 4 further below.
16 See, for instance, Rodrik (2006).
17 See, for instance, Palmade (2005).
18 See, for instance, Hoff and Stiglitz (2000) and Rodrik (2004).
14 Doug Hindson and Jörg Meyer-Stamer
Table 2: Comparing processes
Business Environment Participatory LED approaches
Diagnosis
• External expert based
• Documentary sources & survey me-
thods
• Lengthy, slow and costly
• Diagnostic capacity not transferred
substantially to local actors
Dialogue
• Seen as a distinct stage following
diagnosis
• No clear follow up strategy to ensure
action
Prioritisation of actions
• Experts provide recommendations
• Experts provide detailed reform
plans
Implementation
• Carrying out of detailed plans
• Reliance on external expertise
• Time consuming
Monitoring & evaluation
• Objective indicators tied to plans
• Amendments to plan based on indi-
cators
Diagnosis
• Little attention to traditional research me-
thods
• Participatory appraisal of competitive ad-
vantage
• Rapid, low cost, high capacity transfer to
local actors
Dialogue
• Not seen as a distinct stage in process
• Built into all phases from diagnosis to M&E
Prioritisation of actions
• Participatory
• Flows from diagnosis
• Involves local actors
• Based on quick, visible results
Implementation
• Action flows directly from diagnosis
• Incremental, cumulative, self re-enforcing
change
Monitoring & evaluation
• Participatory
• Focus on learning
• Continuous feed back & adjustment
The BE approach is strongly expert driven during all stages. This is evident
from the way in which diagnosis is undertaken which makes use of external
experts who use conventional documentary and survey research methods to
derive findings and recommendations. Public-private participation is con-
ceived as a distinct process that follows this diagnosis and is shaped by the
findings and recommendations based on it. The actions that follow are based
on detailed reform plans, also drawn up by external experts. This contrasts
sharply with participatory approaches, where a rapid diagnosis leads directly
to action. The focus is not only on improving the environment for business
in general, but also and in particular on increasing the competitive advan-
tage of the location and the businesses within it, which sharpens the diag-
nostic process. Dialogue is not seen as a distinct phase but rather built into
the entire process in a structured way. External specialists act as facilitators
The Local Business Environment 15
rather than consultants, using tools that enable structured interaction be-
tween local players.
Implementation is also conceived very differently in the two approaches.
Within the BE approach implementation is based on a detailed plan that
flows from the research and recommendations undertaken by external ex-
perts. It is conceived as a comprehensive and lengthy process. Local people
are trained up as experts to carry the process through, but remain dependent
on external experts for advice. In a rapid participatory process, actions are
prioritised by local actors involved in the research process and checked with
other local stakeholders. The choice of actions is determined by three crite-
ria: whether they can be undertaken with local resources, whether they can
be implemented swiftly, and whether they will have a visible impact. The
aim is not to tackle reform of the location on a broad front, but to identify
key action that set up an incremental, cumulative dynamic for change. On
the basis of small initial successes the scope for reform should widen to in-
clude more people, greater resources and larger and more complex inter-
ventions. The capacities of local actors are built up bit by bit through their
involvement in all stages of the process. Local actors champion this process
and determine its fate, while external consultants offer impartial facilitation
and provide light-touch support if and when this is needed as the process
develops. The result is an iterative process of diagnosis, action, reflection
and adjustment.
Monitoring and evaluation are also conceived differently. In the BE ap-
proach, M & E plays its orthodox role of enabling those managing the proc-
ess to check whether outcomes in practice meet those anticipated in the plan
and that project finances (mostly donor sourced) have been used for the in-
tended purposes. It relies on objectively verifiable indicators which are used
as a mechanism of control over the use of resources, more than as a means
of learning and adjustment. In the PACA approach M & E is conceived as a
participatory process. The indicators of success are chosen by local actors
on the basis of what they see as important for development in their locali-
ties, and how to measure it. The accent is less on control over the process
according to a pre-determined set of expected outputs than it is on drawing
lessons from the actions taking place. Participatory M & E creates a feed
back loop that promotes continuous learning and innovation.
Finally the processes taken as a whole differ markedly. Chart 2 provides an
illustration of these. The typical BE approach may be described as linear
and incomplete. Effort is expended mainly on assessment and dialogue.
Whether action takes place will depend on the will of national and local ac-
tors, but there is no clearly developed process to ensure this, except through
the continuing support of external experts, using external funding. The par-
16 Doug Hindson and Jörg Meyer-Stamer
ticipatory approach creates a virtuous circle of development. It begins, ends
and begins again with participatory assessment. Incremental, cumulative
changes driven by local actors using mainly local resources and responding
to local opportunities enable larger, more ambitious initiatives to be under-
taken as personal and institutional capacities are built in the process.
Figure 4: Comparing process approaches
Comparing process approaches 2
BE: li near and incompl et e PACA: a virtuous spiral
External
expert
assessment
Public
private
dialogue
Action left
to national
actors
Use on
conventional
assessments
Focus of many
BE approaches
Participatory
assessment
Participatory
prioritisation
of actions
Participatory
M & E
benchmarking
Feedback
& appraisal Motivation
Implementation
Source: Hindson D & Meyer-Stamer J , (2007) “Improving the Local Environment for
Business in Mozambique: A Suggested Approach”. (Forthcoming)
7 Implications
It is too soon to talk about drawing lessons for future work on the LBE
based on the few initiatives reviewed here (for details see the Annex). In-
stead, this paper ends by emphasising a number of issues that we believe are
important in conceiving and implementing LBE and LED initiatives.
7.1 What are the most important elements in the BE?
The regulatory system and the administrative processes by which it is ad-
ministered are taken by the donors and their government partners as the
The Local Business Environment 17
most important aspect of the BE to business. This may well be so in many
localities in developing countries, but needs to be verified case by case,
based in particular on the views of the businesses concerned. Other factors
such as infrastructure and government service provision, as well as a func-
tioning business service market, are also high on the list of concerns of
business. In some cases weak private sector institutions, including markets,
and the level of development of value chains and their governance systems
may be as important as governance and public service provision issues. The
advantage of a participatory diagnosis is that the actual concerns of local
business come to the fore and help shape the reform agenda from the inside,
whereas expert driven processes may impose priorities that do not accord
with those of local businesses.
7.2 Who should lead the BE reform process?
There may be no one right answer to this question either between places or
over time within any one place. Donors are currently initiating and, in some
places, driving the reform process, at least in its first stages. If local actors
do not take charge early on, this holds the danger of perpetuating external
dependence for both guidance and resources. It also involves the risk that
the reform effort subsides as soon as donors’ interest vanes.
It is clear that government needs to take a leading role in reforming itself,
i.e. its system of regulation and administrative practice. It is unlikely,
though, that state-led state reform will focus on the aspects most important
to business unless the latter gives continuous inputs into the process – which
is where PPD is important. However reforms within value chains and the
markets for goods and services is probably best driven by the private sector.
Note that the creation of red tape is not a government monopoly, but many
businesses, especially large corporations, are also quite “good” at it. The an-
swer to the question who should lead is probably that actors from the public,
private and NGO sector should lead in their own spheres, but that dialogue
between them is needed to improve the reform process overall.
One of the trickiest issues relates to the fact that laws and regulations, and
inefficient implementation of them, may be linked to illegitimate interests of
public sector officials or private companies. For public sector officials, is-
suing a permit and similar activities are often an opportunity to demand a
bribe, as is the timely execution of a process, such as paying a bill. There is,
thus, a strong interest on the part of public officials to leave things as they
are. For instance, cutting the number of procedures involved in registering a
business from 15 to five implies that several government offices may lose
an important source of bribes. For private companies, arcane, unpredictable
18 Doug Hindson and Jörg Meyer-Stamer
or inefficient procedures can be an important source of rents. For instance,
taxi operators who are already in business have absolutely no interest in re-
moving regulations that hinder the entrance of additional operators.
One would want to address the process of creating a more favourable busi-
ness environment as a win-win-game, but that is not necessarily easy to
achieve. If streamlining regulations and processes involves a win-lose-game,
it is crucial to assure high level political support to make any progress.
7.3 External and local experts and other resources
The use of experts in promoting development can have a debilitating effect
on local initiative. The IFC approach, which is fairly typical of the way
many donor organisations operate, tends to perpetuate this, which may ex-
plain why it gives so much attention to the training of local expertise.
19
However, the resource intensive nature of both the external expertise and the
training of local expertise may make it costly to replicate this approach, es-
pecially in poorer countries. Rapid, participatory appraisal approaches are
less resource intensive and less likely to create and perpetuate local depend-
ency on external expertise, yet their applicability to economically very poor
and institutionally incapacitated countries and areas within them faces chal-
lenges given that they depend on local champions and the use of local insti-
tutions. Are there pre-conditions in terms of economic potential and institu-
tional capacity of localities that underlie the success of these two ap-
proaches? Are there ways in which the two approaches can be adapted to
meet a wider range of locational conditions? These are questions that call
for further investigation.
7.4 Capacity building and training
Expert-intensive processes such as that being applied by the IFC may create
and perpetuate dependence. Specialised training of local experts to replace
them may simply reproduce the problem in another form, in particular in
those countries and locations where officials and specialists are job-hopping
all the time and/or where a change in government implies a major wave of
19 The authors of IFC’s recent “Toolkit” would obviously not agree with this state-
ment. However, in our experience organisations like IFC tend to confuse teaching
and learning. Running a training course for domestic role players where they are in-
formed that too much Red Tape is bad is teaching. Running an exercise where local
government officials for the first time see administrative processes through the eyes
of a private business owner is learning.
The Local Business Environment 19
replacements in public sector employees. The other way of tackling capacity
shortages is to identify the individuals within a location who have potential
and to build their skills in the processes of both diagnosis and in action, re-
lying much more on learning-by-doing and on coaching rather than training.
This approach has the advantage of mobilising local knowledge and exper-
tise, which makes further skills development easier, and directly linked to
performance.
7.5 The role of institutions
Notwithstanding a widely held belief in development circles, institutional-
ising an activity provides no guarantee that this activity will be effectively
implemented on a sustained basis. Creating new institutions such as one-
stop-shops can absorb a great deal of time and money better spent on deliv-
ery (especially if the result is a one-more-stop-shop). It can create tension
with existing service providers and stoke political conflict where the institu-
tion is seen as a basis for political power and patronage. For these reasons, it
may be more effective to focus on building relationships and networks that
support direct action and allowing these to develop into more formal struc-
tures if and when a clear need for this becomes evident and local actors sup-
port the idea.
7.6 Approaches to sustainability
If building institutions is no guarantee of sustainability, what is? Processes
as much as institutions are important to sustainability. Structuring them in
ways that create feed back loops of learning and innovation is one part of
this. Understanding the determinants of sustainability in the economy,
community and environment and identifying and exploiting the synergies
between them as opportunities for business creates a positive dynamic that
supports the sustainability of all spheres. Creating a logic of virtuous circles
and virtuous spirals is more promising than the linear logic of many projects
and programmes, as it opens the way for continuous improvement. To start
a major BE reform process pre-supposes the availability of considerable re-
sources, including funding for external experts and funds for training local
experts. Starting small and building local momentum before taking on larger
challenges is important to sustainability. It provides no guarantee, but does
avoid the typical experience of externally resourced and foreign expert-
driven development processes that start with a bang and all too often end
with a whimper.
20 Doug Hindson and Jörg Meyer-Stamer
8 Conclusion: Enabling environment, locational quality and
growth
The proponents of the business environment approach, which is effectively
a “fighting red tape” approach, appear to be on the safe side. Making gov-
ernment more efficient, more transparent and more predictable in its inter-
action with business cannot possibly be wrong. The question is, though:
How much effort should be spent on this, and what results can be expected?
The answers that we would tend to give are somewhat ironic. We would ar-
gue that it makes sense to distinguish two types of locations. First, there are
locations which are thriving that are located in a country with a strong econ-
omy. Such a location does already have a favourable environment on the
business side of things. If government in such a location becomes more effi-
cient, there is a good chance that local businesses can grow faster (for in-
stance because it takes much less time and effort to expand their operations).
In this type of location, a red tape reduction programme can indeed create a
competitive advantage to the extent that this local government moves
quicker and further than local governments in other locations that compete
for inward investment.
Second, there are locations where the local economy is not doing well.
Many secondary towns in rural areas in low income countries would fall
into this group. In this kind of place, reducing red tape and the associated
tax burdens that small producers, in particular, find so crushing, would be
important, but by no means sufficient to initiate a substantial growth proc-
ess. It would help local businesses, but it would not create a competitive ad-
vantage relative, in particular, to international markets. In slowly growing or
stagnant locations, the main problem is market failure, and the failure of
government and/or collective actors to effectively address market failure.
Developmental interventions need to be designed accordingly.
This is, then, the irony of local efforts to reduce red tape: They speed up the
growth of locations that are already charging ahead, but they are unlikely to
accelerate growth a great deal in locations that are stagnant. In other words,
they may actually reinforce the strong trend towards growing regional dis-
parities that most countries suffer from anyway. This is one of the reasons
why we advocate the pursuit of a holistic LED approach. LED is much more
than cutting red tape. Effectively pursued, LED has the ability to unleash
endogenous potentials that generate a genuine growth dynamic, and thus
create an environment where cutting red tape can, then, make a much bigger
difference.
The Local Business Environment 21
9 Annex
9.1 References
Altenburg, Tilman, & Drachenfels, Christian von (2005): A critical assessment of the "new
minimalist approach" to private-sector development. Bonn: Paper to be presented at
the 11th EADI General Conference, Working group "Industrialization Strategies",
Bonn, 21 - 24 September 2005.
Altenburg, Tilman, & Drachenfels, Christian von (2006): Creating an enabling business en-
vironment in Asia: To what extent is public support warranted? Paper presented to
the Asia Regional Consultative Conference "Creating Better Business Environments
for Enterprise Development".
GTZ (2006) Facilitator’s Manual Local Red Tape Reduction to Improve the Business Cli-
mate, Verson 1.1
Hang PTT (2005) “A Private Sector Perspective on Business Environment Reform: the Ca-
se of Vietnam, Vietnam Chamber of Commerce and Industry, presented at Confe-
rence on Reforming the Business Environment: from assessing problems to measu-
ring results”, Cairo, Egypt.
Hindson D & Meyer-Stamer J (2007?) “Improving the Local Environment for Business in
Mozambique: A Suggested Approach”, for a forthcoming book on Small Business
Development in that country. (Forthcoming)
Hindson V and D, (2006) Trainers’ Manual on Cutting Red Tape, GTZ and InWEnt, South
Africa.
International Labour Office, “Business Climate Survey” and questionnaire entitled “Enqui-
ry to entrepreneurs and local civil servants about the ‘Local Business Climate for
Entrepreneurship’, ILO n.d.
Ladegaard, Peter (2005): Improving Business Environments through Regulatory Impact
Analysis - Opportunities and challenges for developing countries. Paper prepared for
the International Conference on Reforming the Business Environment, Cairo, Egypt,
29 November to 1 December.
Meyer-Stamer J (2003) The Local Competitive Advantage Training Initiative, Training
Manual, Version December.
Meyer-Stamer J (2003b) “The hexagon of local economic development and LED in South
Africa”, Mesopartner, Duisburg. www.mesopartner.com
Meyer-Stamer J (2005) “Systemic Competitiveness Revisited; Conclusions for Technical
Assistance in Private Sector Development”, Working Paper, Mesopartner, Duisburg.
Schoen C (2006) Business Climate Survey, Indonesia 2005, Mesopartner.
Porter, ME (1990) The Competitive Advantage of Nations, New York, Free Press.
White S (2004) “Donor Approaches to Improving the Business Environment for Small En-
terprise” Working Group on Enabling Environment, Committee on Donor Agencies
for Small Enterprise Development, www.sedonors.org, Washington.
22 Doug Hindson and Jörg Meyer-Stamer
9.2 Useful Websites
www.businessenvironment.org
www.doingbusiness.com
www.ifc.org
www.mesopartner.com
www.sedonors.org
9.3 Features of some Local BE initiatives
Why the focus of BE is widening to include the local
While information sources on the BE are already huge and burgeoning, an Internet scan
on the local business environment (LBE) throws up relatively few initiatives as yet.
20
This is likely to change as the importance of the local BE gains wider recognition.
There are a number of reasons why the focus is widening to include the local business
environment. One is that efforts at improving national policy and regulatory frameworks
have begun to gain acceptance in many countries and with the progress of reform at this
level, obstacles to change at the local level have become more visible. At the same time,
decentralisation processes have increased the powers and functions of local authorities,
without, however, necessarily being accompanied by the resources or improvements in
capacity that their successful execution requires.
More positively, it is increasingly recognised that local authorities are often better
placed to inter-act with business given their spatial proximity. They are often busi-
nesses’ first contact with government and this affects their perception of all of govern-
ment. Being close to local businesses, local government is well placed to understand lo-
cal business needs, particularly those of small business, and either to create or remove
obstacles to its development. Local authorities are generally responsible for spatial
planning, the implementation of environmental, health, safety and other forms of regu-
lation and for provision of basic infrastructure and services that are important to busi-
nesses. Moreover, local authorities tend to formulate a variety of local by-laws. Local
government also has important coordinating functions that are difficult for higher levels
of government to undertake. These includes coordination of development and service
programmes framed by national or regional level government departments, such as
transportation, communications, housing, research and agricultural extension work.
Comparing some local BE initiatives
What then is going on in the area of BE at the local level? The table below compares
five recent donor-conceived and supported local BE initiatives in terms of the following
variables: geographical and substantive scope, the actors involved and their roles, the
approach to BE reform processes, the institutions involved and the approach take in re-
gard to sustainability.
20 The most important Website on the BE is probably www.businessenvironment.org
24 Doug Hindson and Jörg Meyer-Stamer
We emphasise again that our purpose here is not to provide a fine-grained, empirically
substantiated evaluation of each of the initiatives, which would not be possible without
more detailed research on each of them. Rather, it is to extract from the reported cases
some key aspects of the approaches adopted and to reflect on their implications for local
development practice.
Features GTZ-SA IFC ILO GTZ – Indone-
sia
SNV- LAOS &
VIETNAM
1. Scope
Geographical Main economic
centres in lo-
calities
Municipalities Municipalities Region & its
districts
Provinces
Main factors consid-
ered
Red tape (in
regulations &
service deliv-
ery)
Regulations Generic &
sector specific
regulations
All factors in
the BE, local
and sector
All government
factors in the
BE
2. Actors
Initiator Donor Donor Donor Donor Prime Minis-
ter’s Office via
Ministry of In-
dustry
Donor’s partner Government Municipality n.s. Region Ministry of In-
dustry
Donor’s main local
partners
LG & business
organisations
LG LG Region Provinces
Drivers LG & business Donor followed
by PP roundta-
ble
n.s Local partners Ministry of In-
dustry
Business involvement Fully involved
in all phases of
red tape reduc-
tion process
Micro & small
seen as pri-
mary benefici-
aries & are ac-
tively engaged
by IFC
n.s Involved in as-
sessment of
competitive ad-
vantage & PPD
Involvement of
small business
is seen as es-
sential to suc-
cess
Facilitator National con-
sultants
External ex-
perts
n.s External ex-
perts
SNV
Assessment special-
ists
Assessment
undertaken by
national facili-
tators in PPD
context
International
specialists who
build local con-
sultant capacity
ILO & other
contracted
specialists
International
consultants
who involve
local specialists
International
consultants
who try to build
capacity of lo-
cal specialists
The Local Business Environment 25
3. Process
Pre-conditions Informal, em-
phasise PPD
processes
Public agree-
ment: political
will backed by
direct benefici-
aries
n.s. n.s No precondi-
tions set, but
support of na-
tional govern-
ment seen as
important
Diagno-
sis/assessment
Participatory
assessment
involving LG &
business
Detailed expert
based diagno-
sis and as-
sessment
Statistical data
& “business
climate” survey
regional and
local competi-
tiveness
“Business cli-
mate survey”
based on sta-
tistical data
collection fol-
lowed by en-
terprise sur-
veys & inter-
views after
PPD process
Quick scan of
business envi-
ronment using
secondary data
& PACA tools.
Dialogue PPD initiates &
sustains proc-
ess
Public-private
roundtables
created follow-
ing implemen-
tation to sustain
implementation
by overseeing
reform & ex-
panding the
agenda
Follows sur-
veys & is based
on survey find-
ings. Results in
action plan for
the following
year
n.s. Multi-
stakeholder
workshop using
PACA tools is
key element in
process
Training ToT given to
national LED
experts & local
training to LG
officials & pre-
paratory train-
ing to
stakeholders
Comprehensive
training of local
government
officials advo-
cated
Capacity
building of local
actors through
their involve-
ment in partici-
patory ap-
praisal
Approach to imple-
mentation
Tackles fairly
substantial red
tape issues
from the outset
Large scale
administrative
engineering &
legal change
put to LG
n.s. Strong focus on
measuring re-
gional and local
competitive-
ness
Focus on quick
wins to build
momentum
rather than
comprehensive
and detailed
planning
26 Doug Hindson and Jörg Meyer-Stamer
Who is responsible LG (+facilita-
tors)
LG +external
experts
Under taken by
local actors
who can call on
ILO for expert
support
n.s. Local actors
are the
implementers,
supported
where neces-
sary by facili-
tators
M & E Integrated into
the process
Based on in-
depth analysis
and good indi-
cators
n.s. “Soft” & “hard”
indicators pro-
vide basis for
M&E
Importance of
benchmarking
mentioned but
not developed
in detail
Time horizon Continuous Project ap-
proach until
one-stop-shop
set up
Continuous
process if taken
up by local ac-
tors
n.s. Continuous
Institutions
Institutions PPD forum Stresses im-
portance of
host institution
and role of one-
stop-shop
n.s. n.s. n.s.
Sustainability
Resources Minimal exter-
nal resources
needed (1-2
facilitators)
Heavy use of
external exper-
tise
ILO and other
donor re-
sources for
technical sup-
port
n.s. Mainly local
plus a donor
funded facilita-
tor
Sustainability Sustained by
dialogue proc-
ess
Sustained by
institution of
one-stop-shop
Envisages a
circular busi-
ness climate
survey process
n.s. Sustainability
rests on creat-
ing a virtuous
circle beginning
and ending with
quick “business
climate” scans
Note: n.s. =not specified.
Comparing the approaches
Scope
With regard to geographical scope, the five initiatives all work within administrative
boundaries - municipalities in four cases, and a province in one. The choice of geo-
graphical scope is probably influenced by the fact that these are donor initiatives in
partnership with governments. With the exception of the GTZ initiative in Indonesia
which includes “all factors” affecting the business environment, the substantive focus
on these initiatives is government regulations and administrative practices, suggesting
The Local Business Environment 27
that, as in the case of most national BE approaches, market failure is not yet a strong fo-
cus of LBE initiatives either.
The actors involved
Donors are the main initiators of these BE exercises, though it is interesting that in the
case of SNV in Laos and Vietnam, it was the Prime Minister’s Office via the Ministry
of Industry that approached the donor.
In all five cases, government actors are seen as the main national and local partners.
Business is involved in some way in all cases, but mainly as participants in processes or
as beneficiaries rather than drivers. In so far as they are identified as such, the main
drivers of these LBE initiatives are local governments. Facilitation is a key element in
all the cases and the facilitation is done by international experts,, except in the case of
South Africa, where nationals are used. All cases report efforts to build local consultant
capacity to undertake this work.
In all five LBE initiatives, the diagnostic phase is facilitated by external experts. Reli-
ance on external experts for research and implementation is strongest, it seems, in the
case of the IFC initiatives in Latin America, and weakest in the case of the SNV initia-
tives in Laos and Vietnam, where the PACA methodology strongly informed the proc-
ess.
The processes involved
Pre-conditions
Some of the initiatives specify pre-conditions for BE exercises and others do not. The
IFC insists on a publicly announced agreement by government backed by the support of
the business community, before going ahead with an initiative. This may be understood
in the light of other features of the IFC approach which include very comprehensive,
expert-based assessments of the BE followed by ambitious, sustained reform pro-
grammes including policy, regulation and administration.
Diagnosis
There are substantial differences between the case studies’ reports on the question of di-
agnosis. At the one end of the spectrum, the IFC gives greatest energy and resources to
this phase, which is driven by external experts. At the other end lies the GTZ approach
in South Africa, where diagnosis is undertaken by local government and business,
guided by national facilitators. In Laos and Vietnam, the SNV has drawn on PACA
tools to structure participatory diagnosis supplemented by use of a range of statistical
indicators. Here efforts to improve the BE have been focussed on raising the competi-
tiveness of districts and the businesses operating within them. For others such as the
28 Doug Hindson and Jörg Meyer-Stamer
ILO, “business climate” surveys, based on interviews with business actors have been the
centre-piece of BE diagnosis.
Public-private dialogue
Public-private dialogue (PPD) emerges as a key feature of the reform process in all but
one of the initiatives. However, the way in which PPD is handled differs significantly
from one initiative to the next. For the GTZ Local Red Tape Reduction Initiative in
South Africa, facilitated PPD is seen where the process starts and maintaining the PPD
process is seen as critical to maintaining the process. In the IFC and ILO initiatives,
PPD follows and is informed by prior diagnosis undertaken by external experts. In both
these initiatives, it is seen as a key factor that sustains and can widen the agenda for re-
form. The approach adopted by the SNV in Laos draws on PACA, in which analysis
and prioritisation form part of a single process. Within the PACA approach, the point is
not to promote dialogue for its own sake, but rather to focus on getting practical actions
happening, which then calls for focussed dialogue between those parties who are able to
make things happen. The establishment of policy networks and forums for dialogue are
advocated only where there is a clear need for these, arising for example at a point
where the diversity and complexity of actions taking place in a location could benefit
from more systematic exchange between the actors.
Approach to implementation
There are two main ideas behind the implementation approaches represented in the case
studies under consideration. The first is to work out a plan for what needs to be re-
formed in some detail based on prior research, muster the resources and then tackle the
problem systematically over a pre-determined time period, while the second is to get a
process of interaction going between the local actors, tackle issues which yield rapid,
visible results and use the momentum created by small successes to take on larger chal-
lenges. The IFC approach is the best example of the former and the SNV Laos and
Vietnam approach of the latter, while the other three cases seem to fall somewhere in
between.
All the case studies conceive of either “local government” or “local actors” as the driv-
ers of the BE reform process, but there are differences in the degree to which they rely
on external experts, from the IFC at the one end, which gives external experts a central
role throughout, to the SNV Laos and Vietnam initiatives which rely much more heavily
on local actors to keep the momentum going. It should be noted that in the PACA ap-
proach, a central role is given to local champions, on whose shoulders rest the ultimate
success of the process.
Monitoring and evaluation
The degree to which M & E is highlighted differs from one initiative to the next, as does
the role it plays in the process. In the IFC approach, impact evaluation, using objective
The Local Business Environment 29
indicators, plays a central role both in measuring the success of initiatives and as the ba-
sis for decisions about further reform. At the other end of the spectrum the GTZ Red
Tape Reduction initiative incorporates an M & E dimension and PPD is intended to
throw up indicators for M & E. The GTZ Indonesia and SNV Laos and Vietnam initia-
tives also generate M & E indicators from the dialogue process. What does not come out
clearly from the reports on these latter initiatives is the critical role of M & E in con-
tinuous learning and innovation, something that is at the heart of PACA.
Institutions
The information contained in the case studies does not enable us to say a great deal
about the institutional arrangements for LBE reform. The GTZ South Africa Red Tape
Reduction Initiative uses existing dialogue structures, where these exist, that enable
business and local government to come together to discuss and prioritise reform initia-
tives. The IFC approach mentions the role of host institutions and emphasises that they
should not only be committed to it, but also be in a position to provide resources. The
other institution highlighted by the IFC is the one-stop-shop, which it sees as the insti-
tutional mechanism through which improved service provision by government for busi-
ness will be provided. The other three case studies do not give much insight into this as-
pect. The PACA approach, which strongly influenced the SNV initiatives in Laos and
Vietnam, advocates the use of existing institutions rather than the creation of new ones,
except where there is a clear need for the latter and this is strongly supported by the lo-
cal actors themselves.
Sustainability
The initiatives reported give only partial or indirect insights into the issue of
sustainability in BE reform. For the IFC approach, it is the creation of an effective advi-
sory council and the one-stop-shop, which are the guarantee of sustainability – i.e. in-
stitutions ensure it. The GTZ South Africa model sees the PPD process itself as securing
sustainability – i.e. the process itself is the guarantee. The conception of sustainability is
very different in the ILO and SNV approaches. Here it is the creation of circular, self-
reinforcing processes, starting and ending with business climate surveys which provides
the best guarantee of sustainability i.e. sustainability is guaranteed by the process, not an
institution per se. This is similar to the PACA approach in which the guarantee of
sustainability lies in continuous learning and innovation to improve the competitiveness
of the location and the businesses operating within it, based on a process that begins
with participatory diagnosis and ends with it leading to a higher level of development.
mesopartner is a consultancy partnership that specialises in
territorial development, cluster promotion and value chain devel-
opment. It was founded in December 2002 and registered in
April 2003 by Dr Ulrich Harmes-Liedtke, Dr Jörg Meyer-Stamer
and Christian Schoen. Frank Wältring joined in 2004.
The most widely used product of mesopartner is PACA, a meth-
odology to kick-start or refocus local economic development ini-
tiatives which has been developed by Jörg Meyer-Stamer. It has
been successfully applied in many developing and transformation
countries. The main objectives of mesopartner are
• to train PACA practitioners in various countries,
• to develop more specific PACA instruments, for instance for
cluster analysis, value chain analysis and analysis of govern-
ment-created obstacles to business,
• to develop and disseminate further methodologies and tools
for local and regional economic development initiatives,
• to develop innovative concepts and tools to train practitioners
in local and regional economic development.
Another mesopartner product is RALIS (Rapid Appraisal of Local
Innovation Systems). As technology and innovation continue to be
major preoccupations of local actors who want to create a local-
ised advantage in a globalised world, we expect that there is a lot
of potential demand for a tool like RALIS which addresses the
most important obstacle for the leveraging of local innovation
systems: fragmentation between local companies, agencies and
organisations.
Further mesopartner products are
• the Compass of Local Competitiveness, a balanced scorecard-
based approach to performance management of territorial de-
velopment initiatives,
• GENESIS, a methodology for the rapid and participatory
elaboration of strategic interventions for a local or regional
economy.
You find more information at our website, www.mesopartner.com
mesopartner working papers
10
(2007)
J örg Meyer-
Stamer
Designing a Regional Development Agency: Options
and Choices
09
(2007)
Ulrich Harmes-
Liedtke
Benchmarking Territorial Competitiveness
08
(2005)
J örg Meyer-
Stamer, Ulrich
Harmes-Liedtke
How to Promote Clusters
07
(2004)
J örg Meyer-
Stamer
Governance and Territorial Development: Policy,
Politics and Polity in Local Economic Development
06
(2004)
J örg Meyer-
Stamer
Regional Value Chain Initiatives: An Opportunity for
the Application of the PACA-Approach
05
(2003)
J örg Meyer-
Stamer
The Hexagon of Local Economic Development and
LED in South Africa
04
(2003)
J örg Meyer-
Stamer
Why is Local Economic Development so difficult, and
what can we do to make it more effective?
03 (rev.
2004)
J örg Meyer-
Stamer
The Hexagon of Local Economic Development
02
(2005)
J örg Meyer-
Stamer, Christian
Schoen
Rapid Appraisal of Local Innovation Systems
(RALIS): Assessing and Enhancing Innovation Net-
works.
01 (rev.
2004)
J örg Meyer-
Stamer
Participatory Appraisal of Competitive Advantage
(PACA): Launching Local Economic Development
Initiatives
All workings papers are available for download at www.mesopartner.com
doc_495455883.pdf