Developing private enterprises: Issues and prospects – Ram Babu Nepal

Developing countries are facing the critical challenges of alleviating poverty and correcting inequalities in the distribution of income and opportunities, delivering the basic goods and services, stabilizing and sustaining the levels of growth and development achieved. Private enterprises can make meaningful contribution in facing these challenges in a number of ways including industrial development, increase in production and productivity, investment and trade and providing employment opportunities to the growing number of economically active population. The development community had now realized that private enterprises are at the heart of economic success, the main engine of growth and the source of entrepreneurship. Private enterprises support in ensuring most productive uses of country’s human resources, enhancing general economic welfare, maintaining regional balance and encouraging growth and development. The local entrepreneurs in particular play a key role in reaching out to disadvantaged area, supplying essential commodities and generating employment. Robust and dynamic private enterprises are at the heart of development process. They not only invigorate the national economy but also increase job opportunities and reduce poverty. A vibrant private sector generates jobs, raises income and makes better, cheaper goods and services available and helps generating revenue which the government needs to expand the access to health, education, infrastructure services and to boost productivity.
Private enterprises represent a wide variety of activities i.e., from farming, small and medium enterprises (SMEs), and manufacturing companies to multinational enterprises. It may be unorganized (not registered) or organized and formally registered. Although large enterprises are the vital part of national economy, small and unorganized enterprises also play meaningful role in the delivery of essential goods and services to people and generating employment locally. They are driven by profit motive. Physical and financial capital is owned privately. The capacity of risk taking determines the nature of operations substantially. Private entrepreneurs invest in new ideas, products and facilities to stay relevant and ahead of competition. Personal initiatives, innovation and vision are the main influencing factors in the development of private enterprises. The operations of these enterprises are influenced mainly by market trend, test of customers, capacity and willingness to take risks. Developing private enterprises is about fostering developing and encouraging innovation and entrepreneurship in individuals and their groups. The rationale behind focusing the development of private enterprises are as follows:

“Sustain economic growth – Production and employment are complimentary and vital to economic growth. Growth creates jobs that use labor, the main assets of the poor and contributes to reduce poverty. Private enterprises contribute to economic growth by boosting production. Other economic activities, that is, transport and communications are dependent on production. Growth increases and expands tax base that enables government to generate revenue which can be used for public well-being and enhancing human productivity.

“Expand job opportunities – Employment does not only provide the source for livelihood but also enhances the opportunity to live with dignity. People always look for opportunity to work and make their identity even though they have income for living. Employment is key link between output growth and poverty alleviation. Employment contributes in increasing household expenditure on health, housing and education. Secure, safe and well-paid jobs and productive self-employment are important pathways out of poverty for the billions of poor men and women in developing countries that struggle to survive. Due to informal nature, private enterprises also provide job opportunities to those who could not find job in formal economy.

“Improvement in the quality of life – The demands for the basic social services (health, education, drinking water, sanitation etc.) is increasing. The government’s performance is also judged against its capacity to deliver these services. Delivering those services to growing population demands pragmatic and cooperative approach. Private enterprises can compliment the government in providing those services and improving infrastructures – the essentials for the sustainable improvements of livelihoods. As a measure to respond to increasing demand for education and health services, governments have already adopted the policy of promoting private sector participation in education and health. Construction contractors have contributed in building infrastructures. Private provision of goods and services with public financing can also be well-suited to the social sectors, as another form of support for poverty reduction. Private enterprises can be engaged on a contractual basis to operate not-for-profit social facilities, like schools and health clinics. They support in empowering the poor by providing them with services and consumer products, increasing the opportunities of choices and reducing costs. Local businessmen support people in meeting the needs of basic goods at a reasonable cost which makes life easier. The social benefits of the strong and vibrant small and medium enterprises in empowering people to alleviating poverty for many of the poor have been well recognized. Nepal provides a good example of the contribution of local businessmen in remote and underprivileged areas. Private enterprises are already meeting the needs of the poor in places where the government does not reach. The end results of improved services to the poor can be seen in terms of economic growth and reduced poverty.

Development of private enterprises demands careful analysis of the constraints, the identification of appropriate remedial measures and the development of suitable implementation strategy. Entrepreneurs in developing countries face a number of challenges at various stages of business operations i.e., registration, set up, operation and expansion. Modernizing technical skill of traditional craftsmen through training and the provision of equipment is critical to boost local economy and prevent people leaving their traditional businesses.

The common constraints in the development of private enterprises in developing countries are: (a) low rate of investment due to low rate of saving, (b) underdeveloped entrepreneurship and motivation, (c) low productivity because of the lack of skilled manpower and the capacity to invest in modern technologies, (d) inadequate incentives for innovation due to socio-cultural factors, values and lack of technical and business skills, (e) difficulty in predicting rate of return due to smallness of the size of market, and frequent changes in government policies that affect business. The poor face challenges in enhancing their entrepreneurship which obstruct them from: (1) owning assets (such as land); (2) accessing finance for development; (3) acquiring market information; (4) formalizing their businesses; and (5) accessing infrastructure services.

Macro-economic instability, lack of comprehensive and integrated policy on trade, industries, investment, banking and insurance, labor, underdevelopment of infrastructures, procedural complexities for entry and exit to business, limited flow of technology, underdeveloped financial markets and support services are the major challenges in the development of private sector in developing countries. The strategy to promote private enterprises includes a number of approaches including: (1) creation of favorable environment to foster private investment and entrepreneurship; (2) promotion, innovation and entrepreneurship; (3) support the development, modernization and expansion of businesses; and (4) providing financial support and incentives. The objective of achieving sustainable and broad-based development contributing to fair distribution of income and opportunities depends to a great extent in the support of private enterprises. Domestic resources are much larger than actual or potential external resources. But there is a need to adopt pragmatic policies and programs that channel domestic resources for productive purposes to promote growth and development.

Posted on: 2007-05-06 21:57:09 (Server Time)