Shifting Philanthropic and Private Capital to SMEs

(Illustration by iStock/Muhamad Chabib alwi)

It’s old news, by now, that there is little investment in programs that help small and medium enterprises (SMEs) grow in low- and middle-income countries. Almost 10 years ago, an article in this magazine called for more SME funding, revealing that only 1 percent of overseas development aid goes toward supporting them. Since then that allocation has increased to 3 percent. But when we look at philanthropy in the US and Europe, the list of private foundations that have a primary focus on SME growth is extremely small, just over a dozen.

The problem is not lack of potential impact; SMEs represent nine out of 10 firms, the biggest employers worldwide, and without helping these firms grow, we cannot create jobs, lift people from poverty, empower women, or innovate solutions for the climate crisis. It is well understood that the potential to leverage impact is huge; for example, while government procurement and supply chain purchases represent the biggest marketplaces in the world—for goods and services that SMEs could supply—SMEs are often locked out of those marketplaces. A clear opportunity exists for philanthropic capital to unlock this kind of private and public sector capital, through targeted investments.

Why is philanthropy still hesitant? In the 20 years that Building Markets has supported small and medium-sized firms, we have found that there are three primary reasons why SME growth gets overlooked as a funding priority.

1. Business owners aren’t “poor enough.” The fact that small business leaders are engaged in productive economic activity suggests they are not the poorest of the poor; for some, this means that scarce philanthropic dollars are needed to serve the most vulnerable instead. And certainly, lifting the ultra-poor out of poverty is a noble and necessary use of philanthropic dollars.

However, this argument tends not to recognize the economic vulnerability of small business leaders and their employees in lower and middle-income countries. There are 3.4 billion people who are not living in poverty but just above it, half of whom are just one crisis away from falling into poverty. At a more local level, we see that many women, migrant and refugee business leaders and their employees in our networks in Colombia and Türkiye are in the lowest wealth quintiles of their communities. Safety nets or graduation programs are not necessarily the correct answer for these people; strengthening their economic resilience is necessary to help them escape the poverty traps that keep them vulnerable.

2. Not philanthropy’s problem. For many, SME growth is seen as more of an enabling environment or an SME financing problem, not something philanthropy for philanthropy to address. And of course, leadership by the World Bank and other multilateral development banks is critical, and the ease of starting or registering a business, participating in domestic or international trade, or even hiring staff is deeply affected by government policy. But when we see that globally, only 1 percent of procurement and supply chain dollars go to women-led businesses, we should look beyond the enabling environment to issues of information, networks, productive capabilities, and norms. Generating connections between SMEs and large firms in emerging economies results in productivity benefits for those small firms and a potential 10 percent lift to GDP. These are the areas in which philanthropy can play a catalytic role so that a targeted focus on creating networks between SMEs and buyers, rather than just policy, can create a meaningful boost for firms and the economy.

3. Where to Invest? SME growth remains less prioritized in philanthropic funding because of a lack of promising evidence to guide investment decision. It is true that the SME evidence field has grown, with approximately 200 rigorous impact evaluations conducted in the past 20 years. But most of these studies focus on training and access to finance, and the results have been mixed or isolated enough that it has been difficult for the development and academic community to feel confident about the kinds of interventions to scale or invest in. Despite some exciting emerging evidence, no more than fifteen impact evaluations examine market access interventions, connecting SMEs to buyers. Conducting rigorous studies on interventions connecting buyers and suppliers is often technically and logistically much more complicated than evaluating training or capital-based intervention.

What Is to Be Done?

How can we move the needle so that another version of this article doesn’t need to be written 10 years from now?

1. Create a multi-stakeholder alliance for SME growth. Addressing the market failures that hinder SME engagement in supply chains and growth more broadly is a multi-stakeholder problem. We must establish a coalition that brings together diverse actors—from philanthropy to government, business to non-profits—focused on achieving measurable outcomes, at a firm and systemic level. We need to offer a way for SMEs to grow while also offering a way for buyers to increase their confidence in small firm. By working together, these stakeholders can promote and expand the range of platforms, tools, and funding innovations to support small business growth throughout the ecosystem.

2. Learn from other sectors how to unlock the potential of supply chain capital. Large-scale initiatives like Aceli in the financial inclusion field—which de-risks and incentivizes lending among financial institutions for women and rural communities—offer a blueprint for de-risking supply chain diversification. Just as Aceli subsidizes origination costs for financial institutions, sourcing costs could be subsidized for medium and large buyers by supporting SME support organizations in conducting due diligence. By looking across sectors, we can draw inspiration and start testing models that can help us reduce critical market failures in supply chains, potentially unlocking millions of dollars that can support SME growth.

3. Expand the use of philanthropy and patient capital to test new business models. Philanthropy is necessary to ensure that small business leaders from hard-to-reach communities are reached through support services. But patient capital can help SME support organizations develop revenue models to leverage supply chain and procurement capital, creating more sustainable support services in the long term. Used effectively, the return on investment can be significant. From our own experience, we have facilitated over $1.4 billion in supply chain revenue for SMEs in our network. This has been done purely using grant dollars and represents a multiplier of eight on every grant dollar we have been given. There is a clear argument that this could be a for-profit social enterprise model, with revenue generated through transactions. However, developing that model and giving it the time to test, iterate, and scale requires long-term, patient capital.

4. Invest in building a body of evidence on market access interventions. The SME sector is handicapped in that there is insufficient evidence that is directionally helpful in knowing where to invest. Rather than having a funnel of interventions that gradually moves from R&D to scale, we have a Jackson Pollack splattering of studies—each individually interesting but insufficient to help deepen our understanding of what works to support SME growth. Market access interventions deserve greater study and evaluation. Studies that have shown promising results—whether a rug export program in Egypt, a bid training program in Liberia, or an e-commerce program in China—should be replicated to be better positioned to learn from a body of evidence rather than simply promising one-off studies.

With these investments and a meaningful shift toward unlocking private capital, we are confident that philanthropy can take advantage of market-based solutions to address poverty and economic vulnerability—a win-win for all.

Read more stories by Radha Rajkotia, Elizabeth Brown & Allison J. Anderson.