Course Unit: SMEs and INDUSTRIAL DEVELOPMENT, INES Ruhengeri by MUYOMBANO

Course Unit: SMEs and INDUSTRIAL DEVELOPMENT, INES Ruhengeri by MUYOMBANO 

ACADEMIC LEVEL III. ENTERPRENIEURSHIP MANAGEMENT

          Lecturer: Aimé MUYOMBANO. PhDs

                                                                                                                                                                             INES, 2016

Unit Course: Small, medium Entrepreneurship and Industrial Development

Module code: RID 323

·         Module title:  Rural Industrialization Development

·         Level:    3          Semester:     1      Credits:   20

·         First year of presentation: 2013 Administering Faculty: Economics, Social Sciences & Management

Pre-requisite or co-requisite:

·         Allocation of study and teaching hours

·         Total student hours:    200	·         Student hours	·         Staff hours
·         Lectures	·         80	·         160
·         Seminar/ workshop	·         30	·         60
·         Practical class laboratory	·         0	·         0
·         Structured exercises	·         10	·         20
·         Set readings etc	·         20	·         40
·         Self-directed study	·         30	·         0
·         Assignments/ projects	·         30	·         15
·         Revision and examination	·         0	·         10
·         Invigilation	·	·         0
·         Marking	·	·         (4:3)h*n
·	·	·         n= No of students
·         Total student hours	·         200	·

Aims and content

The aim of this module is to help students learn and comprehend how key resources of the enterprise can be successfully managed.

Learning outcomes

Knowledge and understanding

·         Poverty alleviation and income distribution in Rural areas

·         Rural poverty and agricultural transformation

·         Factors of growth

·         Industry development and SME perspectives

·         Rwanda industrial policies: challenges and opportunities

·         Role of SMEs in Rwanda industry development

  Cognitive /intellectual skills/application of knowledge

At the end of the module, based on local realities students will be able to understand and analyze the local industrial policies and factors of growth. 

Communication/ICT/ Analysis/ practical skills

Having successfully completed this module, students will be able to coordinate rural development projects, supervise survey activities.

Indicative content

 The indicative content of this module will be a well-grounded understanding of the major conditions for rural industrial development such as poverty reduction strategies and income distribution, factors of growth and the role of Small and Medium Enterprises in rural development.

Learning and teaching strategy

Lecture series and group discussions will be applied. Assignments will be given to students to stimulate their research interest. Presentation of assignments in class will give the opportunity to deepen the understanding of development factors. 

·         Assessment pattern

·         Component	·         Weighting	·         Learning objectives covered
·         CAT 1	·         20%	·
·         CAT 2	·         20%	·
·         Final exam assessment	·         60%	·
·         TOTAL	·         100%	·

Assessment strategy for feedback and student support during module

·         Learning outcomes are evaluated using two hours continuous assessment test (CAT) and  a three hours final exam

·         Self-directed learning is evaluated by giving the students assignments that they will discuss in groups and present the group work during tutorials. Class monitors will work with lecturers to ensure efficiency and effectiveness of assessment work

·         The use of appropriate referencing is evaluated in writing assessment

·         Each assessment will be marked and feedback will be presented within two weeks from the date of submission.

·         Examination scripts will be available and accessible for interested users.

Indicative resource/References

·         E. Wayne Nafziger, 2006: Economic development, 4th edition, Cambridge University press

·         Gerard H. GUS Gaynor, 2004: What every new manager needs to know: making a successful transition to management, AMACOM

·         GTZ, 2003: Guide to rural economic and enterprise development, working paper edition 1, November 2003

·         MINICOM, 2009: Rwanda Industrial Master Plan 2009-2020, Kigali

·         UNIDO, 2003: A path out of poverty: Developing rural and women entrepreneurship, United Nations industrial development organization, Vienna

Evaluation:

a.     Assignment (Scenarios, Hard talk and Simulation)

b.     CAT/PAT

c.     Final Examination

d.     Class attendance and participation will be highly taken into consideration.

 TOPIC I.INDUSTRY DEVELOPMENT AND SME PERSPECTIVE

I.0. Introduction

Industrialization has been fundamental to economic development. Only in circumstances such as extraordinary abundance of land or resources have countries succeeded in developing without industrializing. Not only is industrialization the normal route to development, but as a result of the globalization of industry, the pace of development can be explosive.

·         Over the past 30 years industrial growth has been accelerating in developing countries. The miracle economies of East Asia transformed themselves into industrial powerhouses within a generation, and the unprecedented pace of industrialization in China and India has lifted millions out of poverty. Exports of manufactures have been growing much more rapidly than the production of manufactures for many years, and developing countries are gaining a global market share. Industry seems to be making a historic absolute shift to the developing part of the world.

·   The combination of macro‐economic theory and entrepreneurial perspectives constitutes the theoretical framework for this study, from both manufacturing and service industries, and from three different regions. Analyze how small to medium‐sized enterprises (SMEs) use existing support systems as group with small means and become a corporate

I.1. Definition and meaning of the Industrial development and SME Perspective

Industrial development: The planning and building of new industries in special areas

1. The aggregate of manufacturing enterprises in a particular field: the steel industry.

2. Any general business activity: the tourist industry.

3. Trade or manufacture in general.

4. Systematic work or labor.

5. Energetic, devoted activity at any work or task; diligence.

6. The aggregate of work, scholarship, and ancillary activity in a particular field, often named after its principal subject the Mozart industry.

7. Archaeol. an assemblage of artifacts regarded as unmistakably the work of a single prehistoric group.

According to Gerard H. Gus Gaynor, Industrial, besides meaning capable withstanding factor wear and tear. If you're carpeting your home, avoid industrial carpet. It's easy to clean but not so soft. An industrial nation is a developed nation with manufacturing as part of its economy. If you work in the industrial sector, as opposed to say the arts sector, you work in manufacturing.

Industrial development revenue bonds (IDRBs): Bonds issued by a government entity as a means of financing the development of a privately owned company to provide benefits (such as increased employment opportunities) to a region facing economic challenges. These debt securities serve as a loan to the private company. In some cases, industrial development revenue bonds are tax-exempt, making the interest rate very low.

Industrial Development Bond (IDB):A type of municipal bond issued by a local or state government that uses funds raised to help finance private business projects. Though these projects are private, they may end up generating tax revenue for the government, for example through some public works types of projects. There are two types of IDBs, a development bond or revenue bond. Ratingson these types of bonds depend on the credit rating of the corporation backing them, and not that of the issuing government.

With the enactment of the Local Government Code in 1991, local government units (LGUs) were given more powers and bigger responsibilities for accelerating economic development and upgrading the quality of life of people in the community. As a result, LGUs have become very active in initiating industrial development in their localities. Industrial development is often used as a strategy to achieve rural development, primarily because it is a way of creating value-added products out of traditional agricultural products and resources, resulting in more economic employment opportunities.

In recent years, a significant investment shift from the National Capital Region (NCR) to the countryside was achieved as a result of the identification and establishment of growth areas to serve as industrial centers in the regions. However, in terms of capacity, not all regions can accommodate an industry-led development. More so, if the area is still predominantly agricultural. Given this, the LGU is faced with a greater challenge to choose correctly the type of industrial activity that it will pursue.

Local governments must weigh their options carefully in deciding what type of industrial development to undertake. Will the LGU follow the CALABARZON experience where world class industrial estates or enclaves are located, developed, and managed by big private developers? What if it concentrates on micro- to small-scale processing activities undertaken by a small group of producers in the locality? Will this kind of industrial activity generate the same revenue for the LGU? These are some of the questions that the LGU should think about intently before taking the next step towards industrial development.

I.2. Types of Industrial Estate Development

A local government unit must carefully deliberate on the type of industrial estate development it will pursue.

I.2.1. Why Industrial Estate (IE)?

 In the different countries, industrial estate (property) development hopes to provide the opportunity for community-based development with the goal of enhancing the living conditions of the Filipino people through employment generation. It was during the late 1980s when investments in industrial estate development assumed a more critical role in the country’s industrialization goals. To enhance the attractiveness of the Philippine economy to foreign capital, the government focused on the promotion and establishment of export processing zones and industrial parks.

Provincial Agri-Industrial Center (PIC) Program: A PIC is an industrial estate servicing the needs of provincial growth centers and catering to small and medium-scale enterprises largely dependent on locally available raw materials. Like the RGC, a PIC is a fenced-in type of industrial development that requires huge capital investments. In response to the need for small scale processing activity that will only require small investments.

The People’s Industrial Enterprise (PIE) was popularized in the countryside. The PIE is an area that caters to a number of micro- to small-scale production activities or to a group of small producers with established common facilities. Anchored on a resource based industry, it can be undertaken in the locality by a cluster of barangays or municipalities, without the fenced-in type of industrial estate development. These types of industrial estates led to the marketing and promotion of groups of provinces and areas instead of individual estates.

Their grouping gave birth to the concept of Growth Network and Corridor. For two or more neighboring provinces or regions linked together, a Growth Network or Corridor type of development is perceived to optimize the use of their resources. Some examples include the CALABARZON, NORTHQUAD, and the CagayanIligan Corridor. Recently, LGUs are testing out a smaller type of industrial activity called Developing Rural Industry and Village Enterprise Program or DRIVE. It involves the development of village-level enterprises, usually small or micro businesses with capital of P15 million or less. The goal of rural industries and village enterprises is to link up with large and long term projects to effect full economies of scale.

Under the Board of Investments (BOI) Executive Order 226 on registration guidelines, the types of industrial estates that can enjoy incentives are as follows:

ü  121 refers to a tract of land subdivided and developed according to a comprehensive plan under a unified continuous management, with provisions for basic infrastructure and utilities, with or without pre-built standard factory buildings and community of industries.

ü  Science and Technology Park (STP) is a knowledge-based center set up near a scientific or industrial community (like a university, campus, research institute, export processing zone, or industrial estate). It facilitates technology transfer from research laboratories to industries.

ü  Technology Incubation Center aims to stimulate the creation of new technology-intensive firms.

ü  Science and Technology Center is a central venue for a mass based science promotion and education. It’s purpose is to increase people’s awareness and understanding of the impact of science and technology on society through the facilitation of non formal, experimental learning of science concepts and its applications using indigenous resources. What is so special about

ü  Free Trade Zone (FTZ) refers to an isolated policed area adjacent to a port of entry and/or airport where imported goods may be unloaded for immediate transshipment. Goods may also be stored, repacked, sorted, or mixed in an FTZ.

I.3. Definition of Small and Medium Enterprise Perspective

The criteria for defining the size of a business differ from country to country, with many countries having programs of business rate reduction and financial subsidy for SMEs.

I.3.1. According to developed sphere, the SME is categorized in the follow component:

Company category	Employees	Turnover	Balance Sheet Total
Medium-sized	< 250	≤ €50 m	≤ €43 m
Small	< 50	≤ €10 m	≤ €10 m
Micro	< 10	≤ €2 m	≤ €2 m

In July 2011, the European Commission said it would open a consultation on the definition of SMEs in 2012. In Europe, there are three broad parameters which define SMEs:

Micro-enterprises have up to 10 employees

Small enterprises have up to 50 employees

Medium-sized enterprises have up to 250 employees.

The European definition of SME follows: "The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro."

EU member states have had individual definitions of what constitutes an SME. For example, the definition in Germany had a limit of 255 employees, while in Belgium it could have been 100. The result is that while a Belgian business of 249 employees would be taxed at full rate in Belgium, it would nevertheless be eligible for SME subsidy under a European-labelled programme.

According to German economist Hans-Heinrich Bass, "empirical researches on SME as well as policies to promote SME have a long tradition in [West] Germany, dating back into the 19th century. Until the mid-20th century most researchers considered SME as an impediment to further economic development and SME policies were thus designed in the framework of social policies. Only the Ordo liberalism school, the founding fathers of Germany's social market economy, discovered their strengths, considered SME as a solution to mid-20th century economic problems (mass unemployment, abuse of economic power), and laid the foundations for non-selective (functional) industrial policies to promote SMEs."

Poland: The SMEs sector in Poland generates almost 50% of the GDP, and out of that, for instance, in 2011 micro companies generated 29.6%, small companies 7.7%, and medium companies 10.4% (big companies 24.0%; other entities 16.5%, and revenues from customs duties and taxes generated 11.9%). In 2011 out of the total of 1,784,603 entities operating in Poland, merely 3,189 were classified as "large", so 1,781,414 were micro, small or medium. Companies of the SMEs sector employed 6.3 million people out of the total of 9.0 million of labour employed in the private sector. In Poland in 2011 was 36.2 SMEs per 1,000 of inhabitants.

United Kingdom: In the UK a company is defined as being an SME if it meets two out of three criteria: it has a turnover of less than £25m, it has less than 250 employees, it has gross assets of less than £12.5m.

The Department for Business Innovation and Skills estimated that at the start of 2014, 99.3% of UK private sector businesses were SMEs, with their £1.6 trillion annual turnover accounting for 47% of private sector turnover.

In order to support SMEs, the UK government set a target in 2010 "that 25% of government’s spend, either directly or in supply chains, goes to SMEs by 2015"; it achieved this by 2013.

Canada: Industry Canada defines a small business as one with fewer than 100 paid employees and a medium-sized business as one with at least 100 and fewer than 500 employees. As of December 2012, there were 1,107,540 employer businesses in Canada, of which 1,087,803 were small.

Small businesses make up 98.2 percent of employer businesses, medium-sized businesses make up 1.6 percent of employer businesses and large businesses make up 0.1 percent of employer businesses. In 2012, over 7.7 million employees, or 69.7 percent of the total private labour force, worked for small businesses and 2.2 million employees, or 20.2 percent of the labour force, worked for medium-sized businesses.

In total, SMEs employed about 10 million individuals, or 89.9 percent of employees. Canadian high-growth firms are present in every economic sector and are not just concentrated in knowledge-based industries. In terms of employment, the highest concentrations of high-growth firms in Canada during the 2006–2009 period were in construction (4.9 percent of all firms); business, building and other support services (4.6 percent); and professional, scientific and technical services (4.5 percent). In 2011, only 10.4 percent of SMEs exported. Nonetheless, they were responsible for $150 billion, or about 41.0 percent, of Canada's total value of exports.

Corporations in Canada are generally taxed at 29% federally. Canadian Controlled private corporations receive a 17% reduction in the tax rate on taxable income from active businesses up to $500,000. This small business deduction is reduced for corporations whose taxable capital exceeding $10M, and is completely eliminated for corporations whose taxable capital exceeds $15M.

It has been estimated that almost $2 trillion of Canadian SMEs will be coming up for sale over the next decade which is twice as large as the assets of the top 1,000 Canadian pension plans and approximately the same size as Canadian annual GDP.

United State: In the United States, the Small Business Administration sets small business criteria based on industry, ownership structure, revenue and number of employees (which in some circumstances may be as high as 1500, although the cap is typically 500). Both the US and the EU generally use the same threshold of fewer than 10 employees for small offices (SOHO).

In Australia, a SME has 199 or fewer employees. Microbusinesses have 1–4 employees, small businesses 5–19, medium businesses 20–199, large businesses 200+.

In New Zealand, 99% of businesses employ 50 or less staff, and the official definition of an SME is one with 19 or fewer employees.

I.4. According to developing sphere, the SME is categorized in the follow component:

Egypt: Most of Egypt's businesses are small-sized, with 97 percent employing less than 10 workers, according to census data released. Medium-sized enterprises with 10 to 50 employees account for around 2.7 percent of total businesses. However, big businesses with over 50 employees account for 0.4 percent of all enterprises nationwide.

The data is part of Egypt's 2012/13 economic census on establishments ranging from small stalls to big enterprises. Economic activity outside the establishments like street vendors and farmers, for example were excluded from the census. The results show that Egypt is greatly lacking in medium-sized businesses.

Seventy percent of the country's 2.4 million businesses have only one or two employees. But less than 0.1 percent only 784 businesses employ between 45 to 49 people.

In Kenya, the term is MSME stands for "micro, small and medium enterprises". Maximum number of employees = 10000. Micro Enterprises = up to 10 employees Small = 10 to 50 Medium = 150 to 1000

In Somalia, the term is SME (for "small, medium and micro enterprises"); elsewhere in Africa, MSME stands for "micro, small and medium enterprises". Maximum number of employees and maximum revenue it generates.

Nigeria: The Central Bank of Nigeria defines small and medium enterprises in Nigeria according to asset base and number of staff employed. The criteria are an asset base between N4 million and N500 million, and a staff strength between 10 and 100 employees.

South Africa: In the National Small Business Amendment Act 26 0f 2003, micro-businesses in the different sectors, varying from the manufacturing to the retail sectors, are defined as businesses with five or fewer employees and a turnover of up to R100 000ZAR. Very small businesses employ between 6 and 20 employees, small businesses employ between 21 and 50 employees. The upper limit for turnover in a small business varies from R1 million in the Agricultural sector to R13 million in the Catering, Accommodation and other Trade sector as well as in the Manufacturing sector, with a maximum of R32 million in the Wholesale Trade sector.

Medium-sized businesses usually employ up to 200 people (100 in the Agricultural sector), and the maximum turnover varies from R5 million in the Agricultural sector to R51 million in the Manufacturing sector and R64 million in the Wholesale Trade, Commercial Agents and Allied Services sector.

A comprehensive definition of an SME in South Africa is therefore any enterprise with one or more of the following characteristics:

·         Fewer than 200 employees

·         Annual turnover of less than R64 million

·         Capital assets of less than R10 million

·         Direct managerial involvement by owners

India: Under section 7 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the Indian government defined the size of micro, small, and medium enterprises as:

(a) In the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, as

ü  A micro enterprise, where the investment in plant and machinery does not exceed twenty-five lakh rupees;

ü  A small enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees; or

ü  A medium enterprise, where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees

(b) In the case of the enterprises engaged in providing or rendering of services, as:

ü  A micro enterprise, where the investment in equipment does not exceed ten lakh rupees;

ü  A small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or

ü  A medium enterprise, where the investment in equipment is more than two crore rupees but does not exceed five crore rupees.

Businesses that are declared as MSMEs and within specific sectors and criteria can then apply for "priority sector" lending to help with business expenses; banks have annual targets set by the Prime Minister’s Task Force on MSMEs for year-on-year increases of lending to various categories of MSMEs.

Small and medium-sized enterprises (SMEs; sometimes also small and medium enterprises) or small and medium-sized businesses (SMBs) are businesses whose personnel numbers fall below certain limits. The abbreviation "SME" is used in the European Union and by international organizations such as the World Bank, the United Nations and the World Trade Organization (WTO). Small enterprises outnumber large companies by a wide margin and also employ many more people. SMEs are also said to be responsible for driving innovation and competition in many economic sectors.

I.5.Microeconomics system comparison between the two spheres

It’s a microeconomic because it focusing on the individuals and few people on his/her management vis a vis to the Gross Domestic Product per capita at nominal values.

I.5.1. GDP Per Capita (individual income in the SME):

Gross Domestic Productper capita at nominal values. This is the value of all final goods and services produced per a personal within a nation in a given year, converted at market exchange rates to current U.S. dollars, divided by the average (or mid-year) population for the same year.

Comparison of GDP per Capita between Rwanda and Singapore according to the World Bank index 2015 Report

Rwanda	Singapore
Per Year in Dollars 740 $	Per year in dollars 173,377 $

I.5.2. Saving (individual income in the SME)

Cost Saving= PA-P2A Saving Rate Change=CS/PAx100

According to Keynesian economics, the amount left over when the cost of a person's consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time.

For example, if you ultimately paid 220 RwF for the potatoes good as it’s determine by the market, reaching at the said market the price changed to 150 RwF. Determine the Saving Rate Change

Solution

CS= 220-150=70 RwF

SRC=

 Calculation 2, if you estimated to pay a Kg of Sweet potatoes 120RwF for the good as it’s determine by the market,  at the said market the price changed to 100RwF. Determine the Saving Rate Change?

I.6. The role of interpersonal trust and knowledge in the number of small and medium enterprises

Explore the role of interpersonal trust and knowledge in the number of small and medium enterprises. They conclude that knowledge positively affects the number of SMEs, which in turn, positively affects interpersonal trust. Note that the empirical results indicate that interpersonal trust does not affect the number of SMEs. Therefore, although knowledge development can reinforce SMEs, trust becomes widespread in a society when the number of SMEs is greater

First the observed growth effects of internationalized SMEs and the capacity of SMEs to drive the economic development of a nation makes SMEs gives weight to this group of firms (OECD, 2009). The capacity of SMEs to drive economic development is also shown in the case of certain cases of both two spheres, like in Netherlands where a recent study shows that SMEs stand for almost 30% to 40% percent of the export of the Netherlands. Including indirect exports, a stunning 60% of the total export in the Netherlands comes from SMEs (EIM, 2010).

Second, although of considerable relevance for the economic development of a nation, SMEs have a higher exposure to trade barriers, compared to the larger organizations, in their internationalization endeavor. The main barriers are as Spence (2003) denotes the information and financial limitations.

More specifically, a research of the OECD (2009) demonstrates the top ranked internationalization barriers of SMEs are:

        The shortage of working capital to finance exports,

        Limited information to locate/analyze markets,

        The inability to contact potential overseas customers and at last

        The lack of managerial time, skills and knowledge.

The barriers addressed by the OECD (2009) are largely internal and are mainly a reflection of the resources and capabilities of an SME. The EIMb (2010), however, also depicted the external barriers and demonstrates that the lack of public support is one of the most important external barriers in the internationalization of SMEs.

The small and medium enterprises (SMEs) in China have achieved rapid and sustainable growth in the past two decades. Such growth has increasingly contributed to China’s economic development. Yet, weak linkages with external market, weak technological innovation, and limited SME financing have limited SMEs’ growth. This brings to the fore the need for more efficient and professional government services to SMEs to enhance their competitiveness.

The absence of high-quality services for enterprises should prompt government to provide SMEs with services that are more professional, more convenient and more individualized to enhance their competitive capability. SME clustering is crucial to addressing social and economic objectives, the achievement of which can make them more competitive in the global economy; generating and spreading innovations; creating employment; and distributing broad-based income and welfare. Convergence of

1) Production (cable SEs),

2) Market (textile industry SEs), and

3) Production chain (sewing machine SEs) comprises the main patterns of SME clusters.

This essentially reflects the “one village, one product” and “one town, one industry” concept. Future policy should expand the range of government services to SMEs. Local governments could learn some lessons from the Jiangsu government and devote attention to promulgating supporting policies for the development of small enterprises. Government should also develop an industrial cluster plan for small enterprises, as well as a financing and technological innovation system for SMEs.

I.7. Industrialization, structural change and growth

Industrialization is integral to economic development. Scarcely any countries have developed without industrializing, and rapidly growing economies tend to have rapidly growing manufacturing sectors. is a scatter diagram for developing countries between 2000 and 2005, showing the relationship between the growth in manufacturing value added (MVA), on the horizontal axis, and growth in gross domestic product (GDP), on the vertical axis.

The scatter points represent individual countries. The regression line shows that more rapid growth in manufacturing is correlated with more rapid GDP growth. It is difficult to say whether the direction of the relationship runs from more rapid growth in manufacturing to faster GDP growth or in the opposite direction, but the prominent role played by technology on exports in manufacturing suggests that output growth is more likely driven by manufacturing growth than the opposite.

As globalization proceeds, transition and developing countries and their enterprises face major challenges for strengthening their human and institutional capacities to take advantage of trade and investment opportunities. While governments make policies in trade and investment areas, it is enterprises that trade and invest.

Therefore, supply-side bottlenecks in the trade and investment areas and how governments, development partners and the private sector itself address these constraints have direct implications on the economic growth potential of transition and developing countries. SMEs play a key role in transition and developing countries.

These firms typically account for more than 90% of all firms outside the agricultural sector, constitute a major source of employment and generate significant domestic and export earnings. A major objective of work to promote the development of the SME sector is therefore to change the balance between these two groups of SMEs and to equip SMEs to better meet the challenges of globalization and to benefit from its opportunities.

I.8. Industrialization development friendly

Does industrialization contribute to the MDGs and, in particular, to the overarching goal of poverty reduction? Is it compatible with environmental sustainability? Unambiguously, sustained rapid economic growth normally leads to major poverty reduction and, conversely, poverty reduction is extraordinarily difficult in the context of stagnation. Yet beyond this, both manufacturing and resource-based industrial development are likely to have radically different consequences for poverty. A disadvantage of resource extraction and sometimes of agriculture is the tendency towards an unequal distribution of income. Resource-rich economies are often unequal because of unequal ownership of the resources, whereas agricultural exporters are sometimes unequal because of large concentrations of land in the hands of a few families.

Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. What businesses are defined as "small" in terms of government support and tax policy varies depending on the country and industry. Small businesses range from 15 employees under the Australian Fair Work Act 2009, 50 employees according to the definition used by the European Union, and fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits.

Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers,accountants, restaurants, guest houses, photographers, small-scale manufacturing, and online businesses, such as web design and programming, etc.

Characteristics

I.9. Small businesses in the Central Zone of São Paulo.

Researchers and analysts of small or owner-managed businesses generally behave as if nominal organizational forms (e.g., partnership, sole-trader or corporation) and the consequent legal and accounting boundaries of owner-managed firms are consistently meaningful. However, owner-managers often do not delineate their behaviour to accord with the implied separation between their personal and business interests. Lenders also often contract around organizational (corporate) boundaries by seeking personal guarantees or accepting privately held assets as collateral.Because of this behaviour, researchers and analysts should reject the relevance of the organizational types and implied boundaries in many contexts relating to owner-managed firms. These include analyses that use traditional accounting disclosures, and studies that view the firm as defined by some formal organizational structure.

I.9.1 Size definitions

The legal definition of "small business" varies by country and by industry. In the United States the Small Business Administration establishes small business size standards on an industry-by-industry basis, but generally specifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7.5 million in annual receipts for most non-manufacturing businesses.

The European Union generally defines a small business as one that has fewer than 50 employees. However, in Australia, a small business is defined by the Fair Work Act 2009 as one with fewer than 15 employees. By comparison, a medium-sized business or mid-sized business has less than 500 employees in the US, and fewer than 200 in Australia.

In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition. These criteria are followed by the European Union, for instance (headcount, turnover and balance sheet totals). Small businesses are usually not dominant in their field of operation.

The table below serves as a useful guide to business size nomenclature.

I.9.2. Business Size definitions

	AUS	US	EU
Minute/Micro	1-2	1-6	<10
Small	<15	<250	<50
Medium	<200	<500	<250
Large	<500	<1000	<1000
Enterprise	>500	>1000	>1000

• Most cells reflect size not defined in relevant legislation • Some definitions are multi-parameter, e.g., by industry, revenue, market share

I.9.3. Demographics

According to the 2012 Survey of Business Owners (SBO) there are: 27.6 million Businesses in the United States; 9.9 million Of these businesses in the United States were owned or led by a woman, representing 35.9% of overall business ownership.

I.9.4. Franchise businesses

Franchising is a way for small business owners to benefit from the economies of scale of the big corporation (franchiser).McDonald's and Subway are examples of a franchise. The small business owner can leverage a strong brand name and purchasing power of the larger company while keeping their own investment affordable. However, some franchisees conclude that they suffer the "worst of both worlds" feeling they are too restricted by corporate mandates and lack true independence. It is an assumption that small business are just franchisees, but the truth is many franchisors are also small business, Although considered to be a successful way of doing business, literature has proved that there is a high failure rate in franchising as well, especially in UK, where a research identifies out of 1658 franchising companies operating in 1984 only 601 remained existent 1998, a mere 36%.

I.9.5. Retailers' cooperative

A retailers' cooperative is a type of cooperative which employs economies of scale on behalf of its retailer members. Retailers' cooperatives use their purchasing power to acquire discounts from manufacturers and often share marketing expenses. It is common for locally owned grocery stores, hardware stores and pharmacies to participate in retailers' cooperatives. Ace Hardware, True Value, and NAPA are examples of retailers' cooperative.

I.9.6. Advantages

One of the claimed advantages of small business owners is the ability to serve market niches not covered by mass production. Consider how many big corporations would be willing to deal with antiques such as the store in the picture.

A small business can be started at a low cost and on a part-time basis. A small business is also well suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity.

Independence is another advantage of owning a small business. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors.[7] However, entrepreneurs have to work for very long hours and understand that ultimately their customers are their bosses.

Often, leaving your regular job to start a business put pressure on the new business venture and causing the business to fail due to the revenue not meeting expectation. Especially true if one has quit their job to start it up. It is important to recognize this before any job resignation.

Several organizations, in the United States, also provide help for the small business sector, such as the Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.

Small businesses (often carried out by family members) adjust quicker to the changing conditions; however they are closed to the absorption of new knowledge and employing new labour from outside.

I.10. Problems faced by small businesses

Small businesses often face a variety of problems related to their size. A frequent cause of bankruptcy is under capitalization. This is often a result of poor planning rather than economic conditions - it is a common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. For example, if the prospective owner thinks that he will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he should have not less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company's debt should he end up in bankruptcy court, under the theory of under capitalization.

In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs.

In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs, taxes and tax compliance. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.

Contracting fraud has been an ongoing problem for small businesses in the United States. Small businesses are legally obligated to receive a fair portion (23 percent) of the total value of all the government's prime contracts as mandated by the Small Business Act of 1953. Since 2002, a series of federal investigations have found fraud, abuse, loopholes and a lack of oversight in federal small business contracting, which has led to the diversion of billions of dollars in small business contracts to large corporations.

Another problem for many small businesses is termed the 'Entrepreneurial Myth' or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly.

Some of this misunderstanding arises from the failure to distinguish between small business managers as entrepreneurs or capitalists. While nearly all owner-managers of small firms are obliged to assume the role of capitalist, only a minority will act as entrepreneur. The line between an owner-manager and an entrepreneur can be defined by whether or not their business is growth oriented. In general, small business owners are primarily focused on surviving rather than growing, therefore not experiencing the five stages of the corporate life cycle (birth, growth, maturity, revival, and decline) like an entrepreneur would.

Still another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success. Networking and social media has been used as a major tool by small business in UK, but most of them just use a scatter-gun approach in a desperate attempt to exploit the market which has proven to be on no success. Over half of small firms lack a business plan.

A business plan is considered one of the most important factors for its success, business planning is associated with positivity in growth and if you are looking at funding most of them require a business plan, and this also serves as a strategic planning document which soon acts as a bible for decision making  An international trade survey reveals that British share of chamber business who are exporting rose from 32% in 2012 to 39% in 2013, although this may seem positive in reality the growth is slow as small business owners shy away from exporting due to perceived barriers.

I.11. Bankruptcy

When small business fails, the owner may file bankruptcy. In most cases, this can be handled through a personal bankruptcy filing. Corporations can file bankruptcy, but if it is out of business and valuable corporate assets are likely to be repossessed by secured creditors, there is little advantage to going to the expense of a corporate bankruptcy.

Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy. However, corporate assets are normally not exempt; hence it may be more difficult to continue operating an incorporated business if the owner files bankruptcy. Researchers have examined small business failures in some depth, with attempts to model the predictability of failure.

I.11.1. Social responsibility

Small businesses can encounter several problems related to corporate social responsibility, due to characteristics inherent in their construction. Owners of small businesses often participate heavily in the day-to-day operations of their companies. This results in a lack of time for the owner to coordinate socially responsible efforts.[19] Additionally, a small business owner's expertise often falls outside the realm of socially responsible practices contributing to a lack of participation.

Small businesses also face a form of peer pressure from larger forces in their respective industries making it difficult to oppose and work against industry expectations. Furthermore, small businesses undergo stress from shareholder expectations. Because small businesses have more personal relationships with their patrons and local shareholders they must also be prepared to withstand closer scrutiny if they want to share in the benefits of committing to socially responsible practices or not. 

I.11.2. Competence, ability, skills or knowledge as party of Human Capital

 Often the term "knowledge" is used. "Competence" is broader and includes cognitive ability ("intelligence") and further abilities like motoric and artistic abilities. "Skill" stands for narrow, domain-specific ability. The broader terms "competence" and "ability" are interchangeable.

Immaterial/intangible value of the Corporate= Knowledge equity (knowledge capital – knowledge liability) +emotional equity (emotional capital – emotional liability)

I.11.3. Importance of Human Capital in SME, small businesses and Corporate

Capital is defined as resource or the input into a SME, small businesses and corporate. Human capital can therefore be defined as an input in employees, the ability to perform a task with the aim of producing economic value.  Human skills are needed to implement a business idea.

Hence human capital importance is non ignorable in a corporate. The ability to perform a task is gained by an individual through learning and experience. 

 The SME and small businesses can organize training for the employees and in this way improve on the skills such as presentation, telephone manner, time management and self-evaluation towards set goals, and in this way have them get updated on new technologies and thus keep them on top of the game. The SME, small businesses and Cor porate can also opt to hire competent personnel.

I.12. Benefits of supporting local business

By opening up new national level chain stores, the profits of locally owned businesses greatly decrease and many businesses end up failing and having to close. This creates an exponential effect. When one store closes, people lose their jobs, other businesses lose business from the failed business and so on. In many cases, large firms displace just as many jobs as they create.

I.12.1. Value Added Human Capital

Putting these concepts together, the formula for measuring the value added ROI of the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyse and compare profitability between Corporates (companies) and industries because it eliminates the effects of financing and accounting decisions.

EBITDA = EBIT + Depreciation + Amortization

N0	Income statement for the year ending December 30.2015
01	Sales Revenue	500,000,000 RwF
02	Salaries	50,000,000 RwF
03	Rent Utilities	50,000,000 RwF
04	Depreciation	25,000,000 RwF
05	Operating Profit of earnings before interest and taxes (EBIT)	375,000,000 RwF
06	Interest Expense	50,000,000 RwF
07	Earnings before taxes (EBT)	325,000,000 RwF
08	Taxes	25,000,000 RwF
09	Net income	300,000,000 RwF

To calculate EBITDA, we find the line items for EBIT (375.000.000 RwF), depreciation ($50,000) and amortization (n/a) and then use the formula above:

EBITDA = 375,000,000 + 50,000,000 + 0 = 425, 000,000 RwF

EBIDTA allows analysts to focus on the outcome of operating decisions while excluding the impacts of non-operating decisions like interest expenses (a financing decision), tax rates (a governmental decision), or large non-cash items

By minimizing the non-operating effects that are unique to each company, EBITDA allows investors to focus on operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry, or companies operating in different tax brackets.

Human Capital = EBITDA – Financial Capital Costs

                              Human Capital Costs

Example 2. By the end of Rwanda’s 2014 financial year, the Ministry of Trade and Industry (MINICOM) strong-minded on December 30^th Rwanda’s 2014 Income statement of some Domestic corporate, X Corporate have a Sales Revenue of 6,50,000,000 RwF, Human Capital (Salaries and wages) of 100,000,000 RwF, Rent Utilities costed the corporate 50,000,000 RwF; Depreciation consumed 50,000,000 RwF;  Interest Expense value was 100,000,000 RwF; Government taxes and others income element esteemed 50,000,000 RwF. The corporate decided to determine the Amortization of its activities which costed 50,000,000 RwF. Calculate the following Values component:

v  Operating Profit of earnings before interest and taxes (EBIT)

v  Earnings before taxes (EBT)

v  Net income

v  EBITDA

I.13. Marketing

Although small businesses have close relationships with customers, finding new customers is a major challenge for small business owners. Small businesses typically find themselves strapped for time but in order to create a continual stream of new business, they must work on marketing their business every day.

Common marketing techniques for small business include networking, word of mouth, customer referrals, yellow pages directories, television, radio, outdoor (roadside billboards), print, and Internet marketing. Electronic media like TV can be quite expensive and is normally intended to create awareness of a product or service. Another means by which small businesses can advertise is through the use of "deal of the day" websites such as Group on and Living Social. These Internet deals encourage new visitors to small businesses.

I.13.1. Designing a Marketing Plan for SME and Small Businesses

• Market Research: To produce a marketing plan for small businesses, research needs to be done on similar businesses which should include desk and field research. This gives an insight in the target group’s behaviour and shopping patterns. Analysing the competitor’s marketing strategies makes it easier for Small business to gain market share.
• Marketing mix Marketing mix is a crucial factor for any business to be successful. Especially for a small business, competitor’s marketing mix can be very helpful. An appropriate market mix helps boost sales.
• Product Life Cycle After launch of the business, crucial points of focus should be increasing growth phase and delaying maturity phase. Once the business reaches maturity stage, an extension strategy should be in place. Re-launching is also an option at this stage. Pricing strategy should be flexible and based on the different stages of the PLC.
• Promotion Techniques: Its preferable to keep promotion expenses as low as possible. ‘Word of mouth’, ‘Email marketing’, ‘Print-ads’ in local newspapers etc. can be effective.
• Channels of Distribution: Selecting an effective channel of distribution may reduce the promotional expenses as well as overall expenses for a Small business.

I.13.2. Market structure

Market structure identifies how a market is made up in terms of:

The number of firms in the industry; The nature of the product produced; The degree of monopoly power each firm has; The degree to which the firm can influence price; Profit levels; Firms’ behaviour pricing strategies, non-price competition, output levels; The extent of barriers to entry and The impact on efficiency

Examples of markets include but are not limited to: commodity markets, insurance markets, bond markets, energy markets, flea markets, debt markets, stock markets, online auctions, media exchange markets, real estate market.

Quick Reference to Basic Market Structures
Market Structure	Seller, SME, Small Business and Corporate Entry Barriers	Seller, SME, Small Business and Corporate Number	Buyer, SME, Small Business and Corporate Entry Barriers	Buyer, SME, Small Business and Corporate Number
Perfect Competition	No	Many	No	Many
Monopolistic competition	No	Many	No	Many
Oligopoly	Yes	Few	No	Many
Oligopsony	No	Many	Yes	Few
Monopoly	Yes	One	No	Many
Monopsony	No	Many	Yes	One

I.13. 3. Importance of Market Structure

Degree of competition affects the consumer; will it benefit the consumer or not?; Impacts on the performance and behaviour of the company/companies involved

Market structure is best defined as the organisational and other characteristics of a market. We focus on those characteristics which affect the nature of competition and pricing but it is important not to place too much emphasis simply on the market share of the existing firms in an industry.

I.13.4. Demand and Supply in the SME and Small Businesses market

I.13.5. Demand component in the SME and Small Businesses market

In SME and Small Businesses market, demand is the utility for a good or service of an economic agent, relative to his/her income. (Note: This distinguishes "demand" from "quantity demanded", where demand is a listing or graphing of quantity demanded at each possible price. In contrast to demand, quantity demanded is the exact quantity demanded at a certain price.

I.13.6. Supply component in the SME and Small Businesses market

In economics, supply is the amount of something that firms, consumers, laborers, providers of financial assets, or other economic agents are willing to provide to the marketplace. Supply is often plotted graphically with the quantity provided (the dependent variable) plotted horizontally and the price (the independent variable) plotted vertically.

I.13.7. Combination of both Demand and Supply curve by determine an Equilibrium of Price and Quantity

I.13.7.1. Equilibrium of Price and Quantity from Supply and Demand

The state in which market supply and demand balances each other and, as a result, prices become stable.
Example:

The demand and supply equations of a good and Services and how you can calculate the equilibrium price and Quantity

Example 1.

•          P = −Qd + 240,

•          5P = Qs + 30.

Determine the equilibrium price and quantity.

Solution 2.

•          4P = −Qd + 240,         P=            Qd=240-120

•          5P = Qd + 30.

a) 4x30= - Qd+240    Qd= 120 9P=240+30                  120= - Qd+240

 b) 5x30=Qs+30   -Qs=30-150

150=Qs+30      Qs=120

Students Equation for calculation 1:

The demand and supply functions of a good are given by

•          P = −Qd + 120                   

•          3P = Qs + 15

Determine the equilibrium price and quantity

The demand and supply functions of a good are given by

•          P = −Qd + 125                   

•          2P = 3Qs + 30.

Determine the equilibrium price and quantity

Students Equation for calculation:

The demand and supply functions of a good are given by

•          2P = −Qd + 250                   

•          4P = 3Qs + 60.

Determine the equilibrium price and quantity

I.14. Contribution to the economy

In the US, small business (fewer than 500 employees) accounts for more than half the nonfarm, private GDP and around half the private sector employment. Regarding small business, the top job provider is those with fewer than 10 employees, and those with 10 or more but fewer than 20 employees comes in as the second, and those with 20 or more but fewer than 100 employees comes in as the third (interpolation of data from the following references). 

The most recent data shows firms with fewer than 20 employees account for slightly more than 18% of the employment. According to "The Family Business Review," "There are approximately 17 million sole-proprietorships in the US. It can be argued that a sole-proprietorship (an unincorporated business owned by a single person) is a type of family business" and "there are 22 million small businesses (fewer than 500 employees) in the US and approximately 14,000 big businesses." Also, it has been found that small businesses created the most new jobs in communities, "In 1979, David Birch published the first empirical evidence that small firms (fewer than 100 employees) created the most new jobs" and Edmiston claimed that "perhaps the greatest generator of interest in entrepreneurship and small business is the widely held belief that small businesses in the United States create most new jobs.

 The evidence suggests that small businesses indeed create a substantial majority of net new jobs in an average year." Local businesses provide competition to each other and also challenge corporate giants.

Of the 5,369,068 employer firms in 1995, 78.8 percent had fewer than 10 employees, and 99.7 percent had fewer than 500 employees.

I.15. Sources of funding

Small businesses in Biloela, Central Queensland, Australia, 1949

Small businesses use several sources available for start-up capital:

Self-financing by the owner through cash, equity loan on his or her home, and or other assets.

Loans from friends or relatives

Grants from private foundations

Personal savings

Private stock issue

Forming partnerships

Angel investors

Banks

Financial Platforms such as Lending Club and On Deck

SME finance, including Collateral based lending and Venture capital, given sufficiently sound business venture plans

Capital market bonds and Stock exchange

Some small businesses are further financed through credit card debt usually a poor choice, given that the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan. Recent research suggests that the use of credit scores in small business lending by community banks is surprisingly widespread. Moreover, the scores employed tend to be the consumer credit scores of the small business owners rather than the more encompassing small business credit scores that include data on the firms as well as on the owners.

Many owners seek a bank loan in the name of their business, however banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programs that may help a small business secure loans. In these programs, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business. The SBA also requires business owners to pledge personal assets and sign as a personal guarantee for the loan.

The 8a) Business Development Program assists in the development of small businesses owned and operated by African Americans, Hispanics, and Asians.

Canadian small businesses can take advantage of federally funded programs and services. See Federal financing for small businesses in Canada (grants and loans).

On October 2010, Alejandro Cremades and Tanya Prive founded the first equity crowd funding platform for small businesses in history as an alternative source of financing. The platform operates under the name of Rock The Post.

I.16. Business networks and advocacy groups SME and Small Business

SME and Small businesses often join or come together to form organizations to advocate for their causes or to achieve economies of scale that larger businesses benefit from, such as the opportunity to buy cheaper health insurance in bulk. These organizations include local or regional groups such as Chambers of Commerce and independent business alliances, as well as national or international industry-specific organizations.

Such groups often serve a dual purpose, as business networks to provide marketing and connect members to potential sales leads and suppliers, and also as advocacy groups, bringing together many small businesses to provide a stronger voice in regional or national politics. In the case of independent business alliances, promoting the value of locally owned, independent business (not necessarily small) through public education campaigns is integral to their work.

The largest regional small business group in the United States is the Council of Smaller Enterprises, located in Greater Cleveland. United Kingdom trade and Investment gives out research in different markets around the world, also research in program planning and promotional activities to exporters. The BEXA (British Exporters Association) role is to connect new exporters to expert services; it can provide details about regional export contacts, who could be made informally to discuss issues. Trade associations and all major banks could often provide links to international groups in foreign markets, some could also help set up joint venture, trade fairs etc.

TOPIC II. POVERTY ALLEVIATION, INCOME DISTRIBUTION IN RURAL AREAS AND FACTORS OF GROWTH

II.0 Introduction

The last two decades have witnessed the economic emergence of developing countries, which have as a group exhibited relatively high GDP growth rates, in excess of those prevailing in the developed countries. The gap has been particularly apparent since the middle 1990s. Much of this ‘shifting wealth’ has, furthermore, been translated to increasing human development, such as poverty reduction. Global poverty has fallen substantially, with a major portion of the decline attributable to China. Even when China is omitted from the sample, poverty reduction is still considerable (Chen and Ravallion, 2008).

II.1. Definition and meaning of the Poverty Alleviation, Income distribution in rural areas and factors of growth

II.1.1. Poverty Meaning and Alleviation Methods

What is Poverty? • The Oxford Dictionary defines poverty as “the state of being extremely poor” wherein one lacks the basic human needs such as food, water, sanitation, clothing, shelter, health care and education.

 • The concept of poverty is a multi-faceted concept. Poverty can be said as the state of being poor in other words the lack of means of providing material needs or comforts. But poverty is not only about lack of material goods but also lack or denial of opportunities for a certain sector of the society

• Poverty implies a condition in which a person finds him unable to maintain a living standard adequate for his physical and mental efficiency. He even fails to meet his basic requirements. Poverty is in fact a relative concept.

 • It is very difficult to draw a demarcation line between affluence and poverty. According to Adam Smith, “Man is rich or poor according to the degree in which he can afford to enjoy the necessaries, the conveniences and the amusements of human life.”

According to the United Nations fundamentally, poverty is the inability of getting choices and opportunities, a violation of human dignity. It means lack of basic capacity to participate effectively in society.

 • The World Bank declares that poverty is a pronounced deprivation in well-being, and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity.

 • Poverty also encompasses low levels of health and education, poor access to clean water and sanitation, inadequate physical security, lack of voice, and insufficient capacity and opportunity to better one‟s life.

• The World Bank defined the new international poverty line as Rs.79.21 a day for 2005 (equivalent to Rs.63.37 a day in 1996 US prices) but have recently been updated to Rs.158.41 per day.

• According to 2010 data from UN development program an estimated 29.8% of Indians live below the country's national poverty line.

II.2. Types of Poverty Causes and Effects

Poverty are generally categorised into types of poverty. They are i) absolute and ii) relative poverty. Absolute Poverty • By the Copenhagen Declaration Absolute Poverty is a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information.

 •The term 'absolute poverty' is sometimes synonymously referred to as 'extreme poverty.

•Absolute poverty refers to a set standard which is consistent over time and between countries. It depends not only on income but also on access to services. Relative Poverty

•Relative poverty is defined contextually as economic inequality in the location or society in which people live.

 •Relative poverty views poverty as socially defined and dependent on social context, hence relative poverty is a measure of income inequality.

High population growth is often said the reason behind although demographers argue that it is just a symptom rather than the cause. The various causes are:

i)              Caste System

ii)             Unequal distribution of wealth

iii)            Illiteracy

iv)            Increase in unemployment

v)             Low productivity

vi)            Voicelessness or powerlessness

vii)           Vulnerability due to disasters, conflicts etc..

Poverty increases the risk of homelessness. Slum-dwellers make up a third of the world‟s urban population. 5. Deterioration of living conditions can often compel children to abandon school to contribute to the family income, putting them at risk of being exploited. It is also seen that the countries with higher relative poverty are at higher risk of unrest and also civic and domestic violence.

II.3. Steps to Alleviate Poverty

For much of history, poverty was considered largely unavoidable as traditional modes of production were insufficient to give an entire population a comfortable standard of living. Aristotle has said in his masterpiece- Politics that, ‘Poverty is the parent of revolution and crime.’ Poverty creates an imbalance in the equality of the society, resulting in population explosion, unemployment, child labour and a rising graph of crimes.

II.4. The following measures are advocated in order to curb poverty:

a) Economic Liberalization Extending property rights protection to the poor is one of the most important poverty reduction strategies a nation can implement. Securing property rights to land, the largest asset for most societies, is vital to their economic freedom. The World Bank concludes that increasing land rights is „the key to reducing poverty‟ citing that land rights greatly increase poor people‟s wealth, in some cases doubling it.

 b) Investing in Infrastructure, Education and Technology UN economists argue that good infrastructure, such as roads and information networks, helps market reforms to work. Cell phone technology brings the market to poor or rural sections. With necessary information, remote farmers can produce specific crops to sell to the buyers that bring the best price. Such technology also helps bring economic freedom by making financial services accessible to the poor.

Employment and Productivity Economic growth has the indirect potential to alleviate poverty, as a result of a simultaneous increase in employment opportunities and increase labour productivity.

d) Building opportunities for self-sufficiency Making employment opportunities available is just as important as increasing income and access to basic needs. This can be done by creating companies that employ the poor while creating "radically" affordable goods.

e) Microloans One of the most popular of the new technical tools for economic development and poverty reduction are microloans made famous in 1976 by the Grameen Bank in Bangladesh. The idea is to loan small amounts of money to farmers or villages so these people can obtain the things they need to increase their economic rewards.

 f) Empowering Women The empowerment of women has relatively recently become a significant area of discussion with respect to development and economics; however it is often regarded as a topic that only addresses and primarily deals with gender inequality. Because women and men experience poverty differently, they hold dissimilar poverty reduction priorities and are affected differently by development interventions and poverty reduction strategies.

Increasing the supply of basic needs-Food and other goods Agricultural technologies such as nitrogen fertilizers, pesticides and new irrigation methods have dramatically reduced food shortages in modern times by boosting yields past previous constraints. Removing constraints on government services Government revenue can be diverted away from basic services by corruption. Funds from aid and natural resources are sent to overseas banks instead of spending for the poor. Therefore stricter laws must be enacted to curb corruption.

II.5. Income distribution

 In economics, income distribution is how a nation’s total GDP is distributed amongst its population.[1]

Income and its distribution have always been a central concern of economic theory and economic policy. Classical economists such as Adam Smith, Thomas Malthus and David Ricardo were mainly concerned with factor income distribution, that is, the distribution of income between the main factors of production, land, labour and capital.

Modern economists have also addressed this issue, but have been more concerned with the distribution of income across individuals and households. Important theoretical and policy concerns include the relationship between income inequality and economic growth.

II.5.1. Measurement of Income distribution

The concept of inequality is distinct from that of poverty and fairness. Income inequality metrics (or income distribution metrics) are used by social scientists to measure the distribution of income, and economic inequality among the participants in a particular economy, such as that of a specific country or of the world in general. While different theories may try to explain how income inequality comes about, income inequality metrics simply provide a system of measurement used to determine the dispersion of incomes.

II.5.2. Cause of income distribution

Causes of income inequality and of levels of equality/inequality include: tax policies, other economic policies, labor union policies, monetary policies, the market for labor, abilities of individual workers, technology and automation, education, globalization, gender, race, and culture.

II.6. Factors of growth

 Factors of growth which generally considered as a subset of cytokines, refer to the diffusible signaling proteins that stimulate cell growth, differentiation, survival, inflammation, and tissue repair. They can be secreted by neighboring cells, distant tissues and glands, or even tumor cells themselves. Normal cells show a requirement for several growth factors to maintain proliferation and viability. Growth advantage is often found for the cells which secrete a growth factor.

Economic growth is an increase in real GDP. It means an increase in the value of goods and services produced in an economy. The rate of economic growth measures the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into:

• Demand side factors
• Supply side factors

II.6.1. Inflation Rate

In order to calculate the inflation rate for any product or service, you will need the price of the goods or services for the two periods of time in question. You then use the following formula to calculate the inflation rate:

Inflation Rate = ((T2 - T1)/T1) x 100

Where,

T1 = Price for the first time period or the starting number

T2 = Price for second time period or the ending number

Here's an example. Let's say that the price the average 32-inch flat screen television was 400.000 RwF last year currently the said Flat is costed 410. 000 RwF, calculate the annual rate in the Rwandan Currency Francs of Inflation for Rate for 32-inch flat screen televisions?

Solution/ answer

Inflation Rate = ((T2 - T1)/T1) x 100

Flat Screen TV on previous price was 400.000 RwF

 Currently, the said Flat Screen TV is costed 410.000 RwF

Inflation rates

IR

II.6.2. Deflation Rate

In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). This should not be confused with disinflation, a slow-down in the inflation rate (i.e., when inflation declines to lower levels). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money the currency of a national or regional economy. This allows one to buy more goods with the same amount of money over time.

Formula

Example: The Last Previous year price of Potato’s items was 100 RwF per Kg, Current the product price is increasing on same items  B = 125

Calculate the Deflation of the Items               

Deflation of Items

II.6.3. Monetary policy

Central banks implement monetary policy by controlling the money supply through several mechanisms. Typically, central banks take action by issuing money to buy bonds (or other assets), which boosts the supply of money and lowers interest rates, or, in the case of contractionary monetary policy, banks sell bonds and take money out of circulation. Usually policy is not implemented by directly targeting the supply of money.

II.6.4. Fiscal policy

Fiscal policy is the use of government's revenue and expenditure as instruments to influence the economy. Examples of such tools are expenditure, taxes, debt.

For example, if the economy is producing less than potential output, government spending can be used to employ idle resources and boost output. Government spending does not have to make up for the entire output gap.

Demand Side Factors Influence Growth of Aggregate Demand (AD)

AD= C+I+G+X-M. Therefore a rise in Consumption, Investment, Government spending or exports can lead to higher AD and higher economic growth.

II.7. Graph Showing Rise in AD

II.7.1. What Could Affect AD?

Interest Rates. Lower interest rates would make borrowing cheaper and should encourage firms to invest and consumers to spend. People with mortgages will have lower monthly mortgage payments so more disposable income to spend. However, recently we had a period of zero interest rates, but due to low confidence and reluctant banks growth was still sluggish.

Consumer Confidence. Consumer and business confidence is very important for determining economic growth. If consumers are confident about the future they will be encouraged to borrow and spend. If they are pessimistic they will save and reduce spending.

Asset Prices. Rising house prices create a positive wealth effect. People can remortgage against the rising value of their home and this encourages more consumers spending. House prices are an important factor in the UK, because so many people are homeowners.

Real Wages. Recently, the UK has experienced a situation of falling real wages. Inflation has been higher than nominal wage, causing a decline in real incomes. In this situation, consumers will have to cut back on spending reducing their purchase of luxury items.

Value of Exchange Rate. If the Pound devalued, exports would become more competitive and imports more expensive. This would help to increase demand for domestic goods and services. A depreciation could cause inflation, but in the short term at least it can provide a boost to growth.

Banking Sector. The 2008 Credit crunch showed how influential the banking sector can be in determining investment and growth. If the banks lose money and no longer want to lend, it can make it very difficult for firms and consumers leading to a decline in investment.

Factors that determine Long Run Economic Growth: In the long run, economic growth is determined by factors which influence the growth of Long Run Aggregate Supply (the PPF of the economy). If there is no increase in LRAS, then a rise in AD will just be inflationary.

This graph shows an increase in LRAS and AD, leading to an increase in economic growth without inflation. II.7.2. LRAS can be influenced

Levels of infrastructure. Investment in roads, transport and communication can help firms reduce costs and expand production. Without necessary infrastructure it can be difficult for firms to be competitive in the international markets. This lack of infrastructure is often a factor holding back some developing economies.

Human Capital. Human capital is the productivity of workers. This will be determined by levels of education, training and motivation. Increased labour productivity can help firms take on more sophisticated production processes and become more efficient. Development of Technology. In the long run development of new technology is a key factor in enabling improved productivity and higher economic growth.

II.8. Other Factors that Can Affect Growth in the Short Term.

Commodity Prices. A rise in commodity prices such as a rise in oil prices can cause a shock to growth. It causes SRAS to shift to the left leading to higher inflation and lower growth.

Political Instability. Political instability can provide a negative shock to growth.

Weather. The exceptionally cold December in 2010, led to a shock fall in GDP

Annual Rate of Economic Growth

Examples of Economic Growth

II.9.  A graph showing Quarterly economic growth.

In 1981 and 1991, there are two periods of negative economic growth. In 1981, this negative economic growth was due to:

Higher interest rates (reducing borrowing)

Lower government spending (tight fiscal policy)

Appreciation in the value of the pound which made exports uncompetitive.

II.10. In the mid-1980s, the high economic growth was caused by

Rising consumer confidence

Relatively low real interest rates

Rising wages

Rising house prices causing a rise in wealth and consumer spending

TOPIC III. RWANDA INDUSTRIAL POLICIES: CHALLENGES AND OPPORTUNITIES

III.0. Introduction

Rwanda has registered high achievements in all sectors of the economy since 1994. The construction industry as a distinct sector, which makes a significant contribution to Rwanda’s GDP, serves as a central delivery mechanism in the generation and quality of all economic and social development activities in Rwanda. In recognition of this role the Government has committed to pursue policies that encourage and facilitate the growth of the sector. This section provides a background to the current status of industrial development in Rwanda with respect to the two pillars of export competitiveness and domestic production. In particular, it records the progress made so far in achieving the Vision 2020 goals.

The diversification of the Rwandan economy into new sectors of activity is essential for meeting the goals set by the Government of Rwanda (GoR) in Vision 2020. The industrial sector is currently small, contributing on average around 15 per cent of GDP. For Rwanda to reach the Vision 2020 target, it requires the share of industry to increase to 26% of GDP.

III.1. Definition and meaning of Rwandan Industrial Policies: Challenges and Opportunities

The construction industry in Rwanda plays a significant role in the socio-economic development and it offers direct employment. Transport infrastructure provides easy access to markets and inputs, stimulating agricultural production and leading to improved welfare of the population. Through employment provided by new infrastructure projects, rehabilitation and maintenance, the industry contributes significantly towards the country’s GDP. Not only does the construction sector provide employment to the country’s work force, but more than 50% of the employment so created is in the unskilled labor market, resulting in capacity building.

This will oblige the industrial sector to outstrip services and agriculture by recording at least 12% growth annually. Achieving this transformation requires a dynamic and coherent industrial policy for Rwanda. An industrial transformation is also required in order to achieve the employment targets of Vision 2020 non-farm employment will reach 1.4 million.

Rwandan firms have an opportunity to serve this market, but will also face greater competition from SME and businesses in countries with larger and more sophisticated industrial sectors, such as Egypt and Kenya. Effective policy is required to ensure that Rwandan enterprise can compete regionally and beyond. Industrial development is structured upon two economic pillars of domestic production and export competitiveness.

The construction of these pillars is built upon the foundation of a strong enabling environment. Doing so is essential in addressing Rwanda‘s increasing trade deficit, which currently exceeds US$0.9 billion, by reducing dependence on imports and significantly boosting export revenues.

The role of industrial policy as illustrated in international best practice - is to foster growth, value addition and dynamic expansion into new areas of comparative advantage where market failures would otherwise prevent or slow development. Tackling these market failures directly is seen as a first-best solution. As a result, this Industrial Policy is issue-specific and

III.2. Recent Industrial Performance in Rwanda

Rwanda‘s GDP reached $5.5 billion in 2010, translating into a GDP per capita level of $5404 . Rwanda‘s productive structure is still dominated by agriculture and low-value services. Food crops form the largest single sub-sector of the Rwandan economy at 31 per cent of GDP. This is followed by wholesale and retail trade with 14 per cent, while other large service sectors predominate, including real estate and business services (10 per cent of GDP), transport and communication (8 per cent), public administration (5 per cent) and education (5 per cent).

The industrial sector contributed 15 per cent of GDP in 2010, less than half the size of the services and agricultural sectors and some way short of Vision 2020‘s target of 26 percent. Construction is the largest industrial sub-sector, with 7 per cent of total GDP or 52 per cent of industrial output in 2010, up from 41 per cent in 2002. Manufacturing makes up 43 per cent of industrial output and just 7 per cent of total GDP, predominantly in food processing and

Gross Domestic product means the total value of goods produced and services provided in a country in a year. GDP is customarily reported on annual basis.

Using the Expenditures Approach

Expenditures

Transfer Payments	$54
Interest Income	$150
Depreciation	$36
Wages	$67
Gross Private Investment (I)	$124
Business Profits	$200
Indirect Business Taxes	$74
Rental Income	$75
Net Exports (X-M)	$18
Net Foreign Factor Income	$12
Government Purchases (G)	$156
Household Consumption (C)	$304

By using the data in Table 1 we can calculate the GDP using the expenditures approach. As you can see, the table contains more data than is necessary so you have to look for the parts which make up the expenditures approach to calculating GDP.  The necessary data is highlighted within the table. Remember:

GDP = C + G + I + (X - M)

In this case the C is represented by Household Consumption which is $304.

The G refers to Government Spending which is $156

.I is gross private investment and is $124.

(X - M) is the net exports and in the table is shown to be $18.

Therefore: 

GDP = $304 + $156 + $124 + $18

GDP = $602 

GDP can be contrasted with gross national product (GNP) or, as it is now known, gross national income (GNI). The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms.

GDP is product produced within a country's borders; GNI is product produced by enterprises owned by a country's citizens. The two would be the same if all of the productive enterprises in a country were owned by its own citizens, and those citizens did not own productive enterprises in any other countries. In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a country's borders, but by an enterprise owned by somebody outside the country, counts as part of its GDP but not its GNI; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNI but not its GDP.

We can also compute the annual growth rate if we know the amount per period by which the amount increased. The formula is:

Annual growth rate = (

 Where n is the number of periods in the year n=4.

Example: The previous quarter GDP is 6502.3, and the current quarter GDP is 6580.8. What is the equivalent annual growth rate?

Annual growth rate = (

By the end of Rwanda’s 2012 financial year, the Ministry of Finance and Economic Planning (MINECOFIN) Requested to determine the Rwanda’s 2012 Gross Domestic Product (GDP); Gross National Income (GNI) and Annual growth rate.

N0	Articles	Amount in Million
01	Gross Private investment in previous 6 months	Rwf             250 M
02	Gross Private investment in previous 6 months	Rwf             300 M
03	Export Price Index 11/12	Rwf             130 M
04	Gross Private investment in previous 6 months	Rwf               50 M
05	Export in Coffee and Tee	Rwf               50 M
06	Gross Private Investment in Current 6 Months	Rwf             120 M
07	Gross Private Investment in Current 6 Months	Rwf               30 M
08	Importation of computers	Rwf               25 M
09	Imported goods from United States	Rwf               65 M
10	Exported Inyange and Nyirangarama product	Rwf               70 M
11	Gross Private Investment in Current 6 Months	Rwf             350 M
12	Imported Vehicles TOYOTA	Rwf               10 M
13	Gross Private Investment in Current 6 Months	Rwf             100 M
14	Imported Markers for Schools and Universities	Rwf             100 M
15	Exported Agaseke	Rwf            250 M
16	Government Purchases	Rwf            650 M
17	Household Consumption	Rwf            500 M

v

.   Determine a Global GDP

v  Determine a Net Exports (EX-IM)

v  Determine Gross National Income (GNI)

v  Determine Annual growth rate when N=6

III.3. Balance of Trade and Investment

 

Rwanda‘s exports of goods have increased significantly in the recent past, rising to $254 million in 2010 from $62 million in 2003. Export revenues are highly concentrated in a few products, with coffee, tea and minerals together making up 79 per cent of exports excluding re-exports. Considering services, tourism is also a significant earner of foreign exchange, bringing in $200 million of exports in 2010. However, imports to Rwanda have grown faster, from $325 million in 2003 to $1,389 million in 2010 .

The ratio of exports to imports fell from 23 per cent in 2008 to 18 per cent in 2010, with Rwanda‘s trade in goods deficit exceeding $1 billion representing around 20 per cent of Rwanda‘s GDP. Rwanda therefore has a severe balance of payments deficit, with the trade deficit slightly offset by tourist revenue, FDI, aid transfers and remittances. For long-term sustainability, Rwanda needs to increase its exports. Alongside minerals, tea and coffee, Rwanda has a number of much smaller existing exports – including horticulture, pyrethrum, hides and skins, and handicrafts.

These exports have shown significant volatility in recent years, particularly as a result of the global economic crisis. Rwanda‘s imports largely constitute products that have had some degree of manufacturing especially raw materials whose prices have been rising steadily. Among the top 15 imports in 2008, 2009 and 2010, only vegetable oils, raw sugars, palm oil and soaps could be classified as commodities or low technology products. Other imports are predominantly medium technology products, such as vehicles, building materials, pharmaceuticals or computing.

Rwanda‘s investment levels have increased significantly in recent years, though they have been volatile. In 2010, registered investments totaled RWF 232 billion compared to RWF 645 billion in 2009. This is partially due to large, one-off entrants such as the Lake Kivu gas

III.4. Current Status of Industrial Development Initiatives

The Ministry of Trade and Industry has developed a number of key policies and strategies aimed at improving the business environment and complementing efforts to develop the industrial sector. These include the SME Development Policy (2010), Trade Policy (2010), Competition Policy (2010)

 

The central remit of the Rwanda Development Board (RDB), established in 2008, includes providing current and potential exporters with trade and market information as well as advice and recommendations the Government on practical measures to stimulate export trade. It acts as a one-stop-shop for investors and has significantly reduced the cost of doing business, making Rwanda the most reformed in the region. 

The Private Sector Federation of Rwanda (PSF) aims to strengthen private companies, build human capacity for the private sector, facilitate sustainable funding sources for Rwanda‘s private sector, develop a vibrant membership association of private sector players and provide economic dispute arbitration. 

The industrial sector especially SMEs has also been supported by international NGOs including Netherlands Development Agency (SNV), UNIDO and USAID which have implemented industry support projects especially in support of rural small scale enterprises. 

Good governance and zero-tolerance to corruption has given Rwanda a competitive edge compared to its regional neighbours.  Institutions charged with capacity building have been empowered to so such as WDA and PSCBS in conjunction with MIFOTRA. 

Land reform policies are being implemented and will impact on land availability for industries and agriculture. 

Rwanda has joined both the EAC and the Commonwealth bodies hence ensuring more partnerships and wider markets.

III.5. Vision and Objectives

The vision of the policy is for Rwanda to have:

“Competitive industrial and advanced services sectors producing over $1.5 billion of exports by 2020, while increasing the number of off farm jobs.”

The broad goals of the Rwandan Industrial Policy are those stipulated in the Vision 2020 and the Economic Development and Poverty Reduction Strategy 2008-12 (EDPRS). These include promoting the growth of the economy with the target of becoming a middle-income country by 2020 - requiring GDP growth of at least 8 per cent on average per annum. They also include the goal of structural transformation, with industry accounting for 26% of GDP by 2020; the national investment rate reaching 30 per cent of GDP; and non-farm employment reaching 1.4 million. In order to achieve these high level goals, the Industrial Policy has three objectives. These include:

Increase domestic production for local consumption

Improve Rwanda’s export competitiveness

Create an enabling environment for Rwanda’s industrialization

III.5.1. Industrial Policy Objectives

Rwandan Industrial Policy promotes the diversification of the economy into higher value-added sectors and generates new areas of comparative advantage. The objectives are as follows;

Increase domestic production for local consumption

Improve Rwanda’s export competitiveness

Create an enabling environment for Rwanda’s industrialization

III.5.1.1. The Industry sector policy is based on the following principles

Organize a progressive disengagement of the Government from the productive sector and promote private sector development;

Training in the use of new manufacturing technologies.

Organizing Industries that are competitive, environmental friendly and sustainable;

Elaboration of the legal and regulatory texts governing the industry sector;

Promotion of Agro Industry concentrating on value addition.

Encouraging the cooperation between learning and research institutions with the industrial sector

Decentralization of the industrial activities

Promotion of competitiveness in the industrial sector towards growth in productivity

Promotion of Micro, small, and medium enterprises.

III.5.1.2. Challenges facing industrial sector in Rwanda

A challenge to rapid industrialization of Rwanda is mainly linked to serious inadequacy of national energy supplies.

Inadequate pollution control as factories have no proper liquid-waste disposal systems, and consequently pollute soils, groundwater and the surface water.

Out dated technologies, many of the factories use out-dated technologies that are associated with energy demands and waste generation to levels that have adverse impact on the environment, and render the operations expensive and unsustainable.

III.6. Rwandan Industrial Policies Analysis

This section looks at two main issues. Firstly, it addresses the need for Rwanda to increase its domestic production and improve its export competitiveness in order to drive Rwanda‘s industrialization. Secondly, it also provides an analysis of the enabling environment necessary for Rwanda‘s industrial growth. The Figure 2 above illustrates the analytical framework utilized in guiding Rwanda‘s Industrial Policy.

III.5.1. Domestic production 

Rwanda imported $1,227 million of goods in 2009, indicating a trade in goods deficit in excess of $1 billion. This is fundamentally an unsustainable position and is only possible due to FDI and particularly large aid inflows. Beyond export diversification for long-term economic growth sustainability, Rwanda needs to look to boost production in industries in which it currently only imports.

Table 1: Rwanda’s top 15 imports in 2009

Rank	Product millions	Imports in $
1	Vehicles	110
2	Metal parts and structures	96
3	Petrol	96
4	Telecommunications	83
5	equipment	81
6	Pharmaceuticals and medicaments	70
7	Electric generators	53
8	Computing and electronics	51
9	Electrical equipment	40
10	Cement	30
11	Vegetable oils	30
12	Manufactured fertilisers	29
13	Goods transport vehicles	21
14	Raw sugars	18
15	Palm oil	17
16	Soaps

Rwanda‘s imports largely constitute products that have had some degree of manufacturing. Among the top 15 imports in 2009, only vegetable oils, raw sugars, palm oil and soaps could be classified as commodities or low technology products. Other imports are predominantly medium technology products, such as vehicles, building materials, pharmaceuticals or computing. Competing with imports therefore requires significant investment and technological upgrading for Rwandan firms, with specific cluster focus required, particularly in advanced industries such as pharmaceuticals or building materials.

III.7. Rwanda’s Export competiveness 

Rwanda‘s exports, including tourism, have increased significantly over the past decade, rising to US$454 million in 2010. This marks an impressive trend in nominal export revenue growth since 2003. Export growth was led by tourism, tea, coffee and mining sectors, as well as strong growth of re-exports.10 Table 2: Rwanda’s Exports in 2010: $ millions11 PRODUCTS Jan-December 2010 Tourism 200,000,000 Total Mining 67,790,142 Cassiterite 42,207,860 Coltan 18,482,773 Wolfram 7,099,509 Coffee 56,081,155 Tea 55,709,223 Hides & Skins 3,743,825 Pyrethrum 1,406,548 Other exports 33,824,285 Re-exports 35,902,211 Total Receipts 454,457,389 The bulk of Rwandan exports, currently around 80 per cent, are concentrated in Rwanda‘s traditional commodity export sectors of tea, coffee and minerals. Other export sectors, such as hides and skins, handicrafts and horticulture, bring in much smaller amounts of foreign currency comparatively.

There is therefore an evident need to diversify in greater quantities into alternative sectors for exports. Rwanda depends on volatile commodity products within its tea, coffee, and minerals industries, for the vast majority of its export revenues. Over-dependence on commodities for exports can contribute to lower long-term growth.

While Rwanda‘s coffee, tea and tourism strategies focus on moving towards more targeted, high-end market niches, progress is not complete and a global downturn may impact these specialty markets as well. Rwanda can escape the commodity trap‖ by diversifying its exports into targeted products and services, innovating, increasing productivity, and serving higher margin, niche markets. The global market is becoming increasingly complex, with value chains stretching across continents.

III.8. Key challenges to SMEs growth

SMEs in Rwanda face many macro-level challenges faced by large companies, including limited transport and energy, lack of a strong insurance industry, limited financial outreach, difficulties with contract enforcement and a weak education system.

They also, according to the 2008 GTZ/PSF study ‘Cutting Red Tape’, face huge burdens in regulatory compliance costs that can be better absorbed by larger firms. Unlike larger firms that may have the time and resources to invest in capital and human capacity building, SMEs often have limited abilities to develop the skills of their staff or to take advantage of local economies of scale in terms of energy, transport or raw materials.

They also often lack the ability to gather and process market information outside of what is immediately relevant to their current business due to lack of technical knowledge and training on how to make use of this information.

They are dependent upon a single individual or small group of individuals to develop business ideas and assume the risk of start-up or expansion and the burden of taxation and other regulations. This means that even for entrepreneurs that do see opportunities in the market, it is difficult to bring those ideas to fruition due to the potential costs of failure.

This challenge is exacerbated by the fact that financial institutions find it too high of a risk to lend to SMEs given the cost/benefit ratio in terms of time and resources required to process relatively smaller sized SME loans. This in addition to the difficulties most SMEs face in consolidating capital and creating business plans to become viable lending candidates.

 This creates a blockage to growth, where SMEs that have the skills to scale-up or move into manufacturing and processing cannot due to their limited access to finance. A 2008 OTF/PSF survey identified the challenges faced by SMEs.

The top challenge was high taxes, caused by the current tax regime. Next was the lack of customer/market knowledge, lack of capital, uncompetitive prices, access to finance and transport. The SME policy addresses all of these concerns with the exception of transport and uncompetitive pricing, as these are macro-issues related to import prices and infrastructure development. Further challenges are cited in the 2008 Capacity Needs Assessment of the SME sector, completed by PSF.

These additional challenges include a lack of entrepreneurial culture and rudimentary production and limited access to appropriate technology in addition to re-enforcing the challenges stated in the OTF/PSF survey.

The key challenges to start-up/struggling and established SMEs are discussed here in the order of where they would impact the business cycle, thus connecting to the five key objectives outlined in this policy. An analysis of the challenges to the development of a vibrant SME sector must go beyond the study of existing SMEs in Rwanda.

While many of the challenges they cite are addressed in this and supporting policies, it is important to recognize that there are challenges to this sector that individual SMEs are not in a position to recognize or highlight. This is why the ultimate aims of the GoR, as well as key stakeholder analysis, are taken into account throughout this policy.

In Rwanda only 1.33% of SME are engaged in industry, therefore the challenges they face in terms of access to technology and innovation will not feature prominently in surveys of SMEs, which are dominated by commerce and services.

However, key stakeholder interviews and the explicit objective of the GoR to move toward value added processing to reverse the trade imbalance and reduce poverty focuses the policy on encouraging the SME sector to enter into industry and transforming the landscape of SMEs away from commerce and toward production.

This goal means that access to technology is a key objective of this policy as it supports the GoR’s vision for how the sector can contribute to its overarching goals. The same is also true of the lack of entrepreneurial culture.

This would not be cited as a challenge in surveys of existing entrepreneurs, although it is discussed in such surveys as PSF’s 2008 SME survey. If the GoR seeks to foster a shift to more innovative business, it is imperative that it encourages entrepreneurship.

III.8.1. Lack of entrepreneurial culture

The unstructured environment in which SMEs operate and their inability to be open to new or innovative ideas presents a major challenge to the development of the SME sector.

The 2008 PSF Capacity Needs Assessment of SMEs, which surveyed 2100 SMEs operating in Rwanda, indicated that the need for a greater entrepreneurial culture is a major priority for SMEs in terms of building human capacity and supporting potential growth.

This was further re-enforced by key stakeholder interviews. Stakeholders expressed the need to develop an entrepreneurial mindset in Rwandan educational institutions as well as the need to support existing entrepreneurs. Most SMEs duplicate business ideas until the market is saturated with copycat enterprises (mostly in trade or services), which also require lower input costs than value-addition activities, and are therefore lower risk.

This means they are not taking advantage of potential business opportunities or even entering into business activities at all.

III.8.2. Limited technical and business skills

Many SMEs suffer from lack of technical and business skills. SMEs themselves identify a variety of skills gaps in areas including ICT, technical and industrial knowledge, finance, accounting and management.

Many SMEs have rudimentary production facilities, low quality products and underutilize appropriate technologies. There is also limited innovation and competitiveness in the SME sector caused by a lack of technical and managerial skill.

III.8.3. Limited Business Development Services (BDS)

SMEs face a lack of good quality business development services tailored to their needs. PSF's efforts thus far have been forced to scale back due to resource and capacity constraints, meaning many businesses have not received the skills they need to succeed. Studies indicate that while many institutions exist to provide BDS services, the quality of these services varies greatly, making SMEs wary of taking advantage of them.

Furthermore, the previous lack of private sector involvement means that the private sector does not need to commit to these services and interventions may be inappropriate to the needs of SMEs.

III.8.4. The high cost of doing business

The high cost of doing business is cited by SME owners as one of the biggest challenges. This is in terms of high energy and transport costs.

In addition, SMEs in Rwanda face significant compliance burdens dealing with existing regulation. The current tax regime is both costly and difficult to comprehend. The 2008 GTZ/PSF study ‘Cutting Red Tape’ cites regulatory compliance as a major block to all businesses in Rwanda, with over 40% of spontaneous responses stating that regulatory compliance was a key constraint to business growth.

This study estimates that the regulatory burden faced by business amounts to 3% of Rwanda’s GDP annually. This burden is a particular challenge to SMEs with fewer, less specialized staff than large firms as these companies often must have managers or bookkeepers dealing with compliance instead of performing their regular work.

III.8.5. Lack of access to finance

SMEs lack access to financial services. As evidenced by the OTF/PSF survey, financial institutions perceive SMEs as high risk and are therefore inflexible in terms of collateral and repayment terms. This is compounded by the fact that most small borrowers lack experience and understanding of financial organizations and do not have the necessary technical skills to make successful applications. In addition, most financial products from commercial banks are not suitable to the agricultural sector, where most SMEs currently operate, and existing regulations limit the total funds available for lending.

III.8.6. Difficulty accessing market information and markets

SMEs face difficulties accessing and utilizing information regarding local, regional and international pricing, a major constraint to business planning as well as about the regulatory environment in Rwanda and regionally.

Among SMEs there is poor participation in the policymaking process, meaning they have little knowledge of interventions designed to assist them. SMEs have inadequate access to market information that could benefit their businesses as well as inadequate knowledge about marketing their products both nationally and internationally.

III.9. Rwandan Industrial Policies Opportunities

III.9.1. Rwanda Industrial Production Strategies supported by SMEs

According to the NISR Report (2014), the participation and involvement of Rwanda Foreign policy, the Consumer Spending in Rwanda decreased to 913 FRW Billion in the first quarter of 2015 from 922 FRW Billion in the fourth quarter of 2014. Consumer Spending in Rwanda averaged 823.88 FRW Billion from 2011 until 2015, reaching an all-time high of 927 RwF Billion in the third quarter of 2014 and a record low of 712 RwF Billion in the first quarter of 2011.

III.9.2. Contribute to wealth creation through efficient and strategic      partnerships with, investment and tourism promotion, acquisition and transfer of knowledge and technology, equitable world trade and regional integration

Rwanda continues to promote private sector development by involving International development agencies, non-governmental agencies, Inter-governmental Organizations, Diplomatic corps accredited with Residence Rwanda, Researchers, Analysts, Academicians, Writers, and World Affairs actors by aiming at fostering both local and foreign investment on one hand and technical and financial bilateral and Multilateral cooperation support on other hand and undertaking reforms with the objective of making the country a favourable place for investment through its foreign policy for global socio-economic development

Rwanda Business	Last	Previous	Highest	Lowest	Unit
Industrial Production	4.90	6.60	21.00	-6.20	Percent
Changes In Inventories	9.00	21.00	21.00	3.00	FRW B.
Competitiveness Index	4.27	4.21	4.27	3.99	Points
Competitiveness Rank	62.00	66.00	80.00	62.00
Corruption Index	49.00	53.00	53.00	25.00	Points
Corruption Rank	55.00	49.00	121.00	49.00
Ease of Doing Business	46.00	32.00	143.00	32.00
Manufacturing Production	5.60	14.90	22.10	-9.70	percent

Sources: BNR Report, 2015

The benchmark interest rate in Rwanda was last recorded at 6.50 percent. Interest Rate in Rwanda averaged 7.75 percent from 2005 until 2015, reaching an all-time high of 9 percent in September of 2005 and a record low of 6 percent in November of 2010. Interest Rate in Rwanda is reported by the National Bank of Rwanda.

III.9.3. Rwanda on the increasing of Gross Domestic Product 

According to BNR Report (2012:2), Rwanda has achieved impressive development progress since the 1994 war and genocide against Tutsi. It is now consolidating gains in social development and accelerating growth while ensuring that they are broadly shared to mitigate risks to eroding the Country’s hard-won political and social stability; enjoyed political stability. 

The last parliamentary elections held in September 2013 saw 64% of the seats taken by women candidates and the Rwandan Patriotic Front which maintained absolute majority in the Chamber of Deputies. Rwanda's long-term development goals are embedded in a strategy entitled Vision 2020, which seeks to transform Rwanda from a low-income agriculture-based economy to a knowledge-based, service-oriented economy with a middle-income country status by 2020.

GDP Constant Prices in Rwanda decreased on 1209 RwF Billion in the first quarter of 2015 from 1222 RwF Billion in the fourth quarter of 2014. GDP Constant Prices in Rwanda averaged 1076.88 RwF Billion from 2011 until 2015, reaching an all-time high of 1222 Billion in the fourth quarter of 2014 and a record low of 899 RW Billion in the second quarter of 2011.

III.9.4. Rwanda on Foreign Investment Strategies

According to the NISR Report (ibid), on contribute an consulting the foreign policy organs, The stocks of goods held by firms in Rwanda increased by 9 RwF Billion in the first quarter of 2015. Changes In Inventories in Rwanda averaged 9.59 RwF Billion from 2011 until 2015, reaching an all-time high of 21 RwF Billion in the second quarter of 2014 and a record low of 3 RwF Billion in the second quarter of 2011.

Rwanda scored 49 points out of 100 on the 2014 Corruption Perceptions Index reported by Transparency International. Corruption Index in Rwanda averaged 39.20 Points from 2005 until 2014, reaching an all-time high of 53 Points in 2012 and a record low of 25 Points in 2006.

III.9.5. Rwanda on doing business Strategies

According to the World Economic Forum's Global Competitiveness Repot (2013-2014) ranked Rwanda the 2^nd easiest place to do business in Africa. The table 2 below snows the Rwanda rank across 11 indicators of doing business compared to other African countries for the Year 2013-2014.

Top Ten Countries in Doing Business in Sub-Saharan Africa 2013-2014

Eco	Ease of doing Business Rank	Starting a business	Dealing with Construction Permits	Get electricity	Registering Property	Getting Credit	Protecting Investors	Paying Taxes	Trading across Borders	Enforcing Contracts	Resorving Insolvency
Mauritius	20	2	22	1	7	7	2	1	1	7	2
Rwanda	33	1	14	2	1	1	3	3	31	2	22
South Africa	41	7	1	27	15	5	1	4	7	12	8
Botswana	56	12	11	13	2	11	7	6	23	14	1
Ghana	67	20	37	6	4	5	5	9	8	4	16
Seychelles	80	16	10	25	9	40	9	2	2	13	3
Zambia	83	6	7	29	17	1	12	9	32	20	5
Cape Verde	121	8	28	28	6	14	24	4	11	1	38
Swaziland	123	39	5	34	24	9	21	7	13	41	4

Source: World Bank Doing Business Report 2013-2014

III.9.6. Rwanda’s doing Business performance by category 2013-2014

	DB 2013	DB 2014	Changing Rank
Rwanda Ranking	52nd	32nd	20
Starting a Business	8	9	-1
Dealing with Construction permits	98	85	13
Getting Electricity	49	53	-4
Registering Property	63	8	55
Getting Credit	23	13	10
Protecting Investors	32	22	10
Paying axis	25	22	3
Trading Across Borders	158	162	-4
Enforcing Contracts	39	40	-1
Resolving insolvency	167	137	30

Source: World Bank Doing Business Report 2013-2014

III.9.7. Reasons to Invest in Rwanda

Indicator	Reasons
Good  macroeconomic environment	Rwanda enjoyed a year-on-year average real GDP growth rate of 8.1 percent between 2007 - 2012, among the highest in major African economies and neighbouring countries, a moderate inflation of one digit and stable exchange rate.
Good governance	The country is politically stable with well-functioning institutions, rule of law and zero tolerance for corruption, clear vision for growth through private investment support and development
Investor friendly climate	World Bank Doing Business Repot 2013 ranked Rwanda the 2nd top global reformer for six consecutive years and 3rd easiest place to do business in Africa. It is among the best competitive place to do business in Africa and 1st in East African Community. On credit ranking by Fitch in 2012-2013, Rwanda was upgraded to B. Rwanda is among top 4 African countries in terms of internet connectivity according to Oracle in 2012.
Access to markets	Rwanda is a Market of 10.5 million people with a rapidly growing middle class. It is located centrally bordering with 3 countries in East Africa and the huge market of Democratic Republic of Congo. The country adhered to EAC Common Market and Customs Union with market potential of over 125 million people with all trade facilities the EAC bloc offers.
Untapped    investments opportunities	Potential investment abound, particularly in the following sectors: opportunities; Infrastructure: Opportunities in rail, air , water transportation to further develop Rwanda as an EAC hub; Agriculture: Potential for agriculture productivity growth and value addition; Energy: Power generation, off grid generation and significant methane gas opportunities; Tourism: Unique assets creating booming sector, growth potential in birding & business/conference tourism Information and Communication Technology: Priority sector for Vision 2020; new ICT Park to be developed and Other attractive sectors include real estate and construction, financial services and mining.
Rwanda is Highly Competitive	Rwanda is now the third most competitive country in Sub-Saharan Africa after Mauritius and South Africa Globally, Rwanda is in the upper half of the WEF's Global Competitiveness Index after jumping     10 places, ahead of many historically stronger countries in Europe and America
Excellent Business Environnement	Rwanda has the third strongest regulatory framework in Sub-Saharan Africa, only slightly behind South Africa and is ranked 8th globally by the World Bank doing business repot in stating a business

Source RDB, 2013

One of the Objectives of the Rwanda Foreign Policy is to motivate, encourage and facilitate the foreigners and others investors to invest in Rwanda and it became Ease of Doing Business in Rwanda deteriorated to 46 in 2014 from 32 in 2013. Ease of Doing Business in Rwanda averaged 62.43 from 2008 until 2014, reaching an all-time high of 143 in 2008 and a record low of 32 in 2013. Ease of Doing Business in Rwanda is reported by the World Bank.

III.9.8. Rwanda on Tourism strategies

According to Mincom RTP (2009:3), Tourism has been identified as a priority sector to achieve Rwanda's development goals as set out in Vision 2020. With the application of previous tourism policies, the country has been able to make significant progress in developing and managing its tourism sector in recent years.

In 2008, the number of foreign visitors to Rwanda reached just under one million from about 826,000 in 2007, an increase of 30 per cent. Estimates indicate that tourism revenues significantly increased between 2007 and 2008, from $138 million to $209 million/ Rwanda's tourism industry accounts for a significant portion of foreign revenue. Current estimates for tourism revenue in 2007 and 2008 make up almost as much as the entire export base - $209 million in 2008 compared to $262 million for official exports. This makes the industry very important for Rwanda's macroeconomic stability and prospects of economic growth.

In accordance with the objectives set out within Vision 2020, which included increasing of competitiveness particularly in the service and industry sectors, More recently, at the annual International Tourism Board (ITB) held in Berlin, Germany in March 2005 and March 2011, Rwanda was named respectively the fourth and the second best exhibitor in the category of African exhibitors.

At the World Travel Market in London, England, Rwanda's delegation attracted 24 new tour operators from around the world who made agreements with local tour operators to send tourists to Rwanda. Profiting these occasions and other related opportunities. Rwanda as a nation state should exploit this international trade ingredient with the aim at attracting foreign investors and not being detriment of developed countries in the globalized era.

In the future, the primary measurement of success in the international tourism sector will be based on international tourism revenue. The accurate measurement of tourism revenue will be improved by seeking the cooperation of key stakeholders, and by conducting regular quantitative and qualitative visitor surveys. The tables below indicate the tourism sector targets in terms of revenue and number of arrivals.

III.9.8.1. Tourism targets for Rwanda 2009-2020

Revenue	2008	2009	2010	2011	2012	2013
	$ 210 M	$ 210 M	$ 225 M	$ 244 M	$ 277	$ 627 M
Number of Arrivals	980.000	980.000	1.031.000	1.089.000	1.199.000	2.219.000

Source: Rwanda Tourism Policy, 2009

III.9.8.2. Tourism leisure and business Targets for Rwanda 2009-2020

Revenue	2008	2009	2010	2011	2012	2020
	$ 178. 5 M	$ 178.5 M	$ 192 M	$ 210 M	$ 251 M	$ 624 M
Number of Arrivals	407.000	431.000	460.448	541.000	545. 000	1.262.000

Source: Rwanda Tourism Policy, 2009

III.9.9. Rwanda on Multinational, Transnational and Regional Corporate.

The landlocked African country, Rwanda was improved that also is possible to develop itself by motivate and encourage the Multilateral, transnational and Regional corporate to invest and corroborate with Rwandan community and exchanging the raw materials, semi and final product on one hand, export local goods and services supported by these Corporate to world affairs market.

According to BNR Report, (2015:24), creating a new image of the country as a business friendly venue, Rwandan Population initiated a sustainable peaceful, security and Good governance which were motivated the Foreign Direct Investment and could be benefiting both the state and the community

This is an instance where the development of Rwandan government may also lead to the advancement of the Rwandan people. However we need to be sure to look at the potential impact of FDI. Specialty coffees may increase the workforce, new corporations invested will also grow the workforce, but Rwanda needs to be sure that its people are not exploited for their labour. MNCs/ TNCs are often toted as companies that exploit LEDCs for cheap labour. This is most likely not the case. Rwanda scored 4.27 points out of 7 on the 2014-2015 Global Competitiveness, 2Competitiveness Index in Rwanda averaged 4.18 Points from 2011 until 2015, reaching an all-time high of 4.27 Points in 2015 and a record low of 3.99 Points in 2011. Competitiveness Index in Rwanda is reported by the World Economic Forum,

External Debt in Rwanda remained unchanged at 1670.21 USD Million in 2014 from 1670.21 USD Million in 2014. External Debt in Rwanda averaged 1081.95 USD Million from 1991 until 2014, reaching an all-time high of 1680.20 USD Million in 2004 and a record low of 479.54 USD Million in 2006.

Rwanda is the 62^nd most competitive nations in the world out of 144 countries ranked in the 2014-2015 edition of the Global Competitiveness Report published by the World Economic Forum. Competitiveness Rank in Rwanda averaged 68.20 from 2011 until 2015, reaching an all-time high of 80 in 2011 and a record low of 62 in 2015. Competitiveness Rank in Rwanda is reported by the World Economic Forum, BNR Report (ibid).

III.9.10.  Rwanda as an active player in Global issues

According to the UN repot, (2005:5), Rwanda has been the centre of much international attention since 1994 war and genocide perpetuate against Tutsi. The country is an active member of the United Nations, having presided over the Security Council during part of 1995 and again in 2013-2014. The UN assistance mission in Rwanda, a UN Chapter 6 peace-keeping operation, involved personnel from more than a dozen countries. Most of the UN development and humanitarian agencies have had a large presence in Rwanda,

After a long trajectory, Rwanda decided to be an active role mode player in the world affairs by fighting against all components that could bring back what happen on Rwanda as far as Genocide, poverty, hunger, bad governance, dictatorship, centralize government.

According to Rwanda Assistance Cooperation (2004), Rwanda is a member of the United Nations, African Union, Commonwealth of Nations, Common Market for Eastern and Southern Africa (COMESA), International Conference on the Great Lakes Region (ICGLR), Economic Community of the Great Lakes Countries (CEPGL), Economic Community of Central African States (ECCAS) and the East African Community, it assisted them to trade itself vis a vis world affairs where it shifted from  being a "land locked" into "land linked"

Because of its contributions, Rwanda was globally reported on graft by anti-corruption watchdog; Transparency International has ranked Rwanda the least corrupt country

East African countries, 4th least corrupt country in Africa and 49^th in the world, RDB Report (2015)

according to WEF Global Competitiveness Report, (2015)^, Investor friendly climate in Rwanda was characterised by official racking given to Rwanda according to the efforts used which effected it as the 2^nd best global reformer 2012'; 8^th easiest place to start a business; 6hrs to register a business; 19^theasiest place to pay taxes worldwide, Most competitive place to do business in East Africa countries and 3^rd in Africa.

Rwanda's size and location encouraged the Community to think big and feel stronger by integrating itself with Regional economies, continent and the world affairs in general. The purpose was to expand markets for potential investors and turn from being "land locked" to a “Land Linked” in the interests of competitiveness. 

  

TOPIC IV. ROLE OF SMEs IN RWANDA INDUSTRY DEVELOPMENT

IV.0 Introduction

The Government of Rwanda (GoR) has a vision to become a middle-income country. In order to achieve this goal the medium term Economic Development and Poverty Reduction Strategy (EDPRS) states that it must achieve an annual GDP growth rate of 8.1% and increase off-farm employment to 30% by 2012. Small and Medium Enterprises (SMEs) and micro enterprises in Organization for Economic Cooperation and Development (OECD) countries account for over 95% of all firms, 60-70% of employment and 55% of GDP and create the majority of new jobs, indicating the impact SMEs have on employment.

In contrast, currently over 80% of Rwandans are engaged in agricultural production. The SME sector, including formal and informal businesses, comprises 98% of the businesses in Rwanda and 41% of all private sector employment though the formalized sector has much growth potential with only 300,000 currently employed. Most micro and small enterprises employ up to four people, showing that growth in the sector would create significant private sector non-agricultural employment opportunities.

IV.1. Definition and meaning of SMEs in Rwandan Industry Development

SMEs Definition For the purposes of this policy, SMEs are to be considered based on the following conditions (in line with the World Bank report of 2004) whereby two of the three conditions must be met. For the avoidance of doubt, in this policy when using the popular term “SME”, it is taken to include micro enterprises as well as small and medium enterprises. Registered cooperatives may also benefit from this policy in so far as they are SMEs.

Size of the Enterprise	Net capital investments (Million RwF)	Annual Turn over (Million RwF)	Number of Employees
Micro Enterprises	Less than 0.5	Less than 0.3	1 to 3
Small Enterprises	0.5 to 15	0.3 to 12	4 to 30
Medium Enterprises	15 to 75	12 to 50	31 to 100
Large Enterprises	More than 75	More than 50	More than 100

Notes on definition

Two of the three conditions should be met

  Rwanda Revenue Authority (RRA) has a different definition of SMEs for tax purposes

Informal companies are defined as those not registered in accordance with the

Companies Act or other legislation related to SMEs and cooperatives In this policy, SME is used to describe micro as well as small and medium enterprises

IV.2. Previous SMEs initiatives

Rwanda has seen a variety of initiatives to support Rwandan SMEs from the government, Development Partners (DPs), financial and non-governmental organization (NGO) sectors. However, these initiatives have suffered from a lack of resources, coordination and capacity. Limited and disparate implementation of the majority of these projects makes it difficult to adequately assess their success or failure. Within the government supported sector the most prominent of these initiatives was the former Centre d’Appui aux Petites et Moyennes Enterprises (CAPMER), a

IV.4.1.1. Individuals SMEs marke

public/private institution mandated to provide training, advice and technical support to SMEs.

However, this institution lacked the capacity and resources to provide the necessary support to develop the SME sector. In 2009, CAPMER was integrated into the Rwanda Development Board (RDB) in order to combine its mandate with export and investment promotion and general private sector development services. 

The RDB was formed to coordinate and combine all services and support for Rwandan private sector development including investment and export support, business registration, environmental and tax advice, free trade zone and IT development and cluster specific programs such as tourism development. RDB's vision to transform Rwanda into a dynamic global hub for business investment and innovation focuses on the macro situation in Rwanda.

The RDB provides several specific initiatives to support SMEs, including training programs, networking and moveable asset registration, in addition to working to improve the overall business environment in Rwanda. The broad high-level mandate of RDB makes the ground level implementation of SME programming difficult with existing resources.

IV.3. Rationale for the new SMEs policy

Small and medium enterprise strength comes from the ability of smaller firms to react quickly and flexibly to adapt to market realities and to take advantage of opportunities that would not be an advantage to larger firms. Small enterprises grow to medium enterprises as they are increasingly able to develop the resources to expand out of their local economic system.

Thousands of small companies operating at the micro level, taking advantage of local resources and opportunities, form the base of a healthy economy by providing local services, jobs and supplying or processing for larger firms and markets. Although substantial supporting initiatives had been undertaken by the GoR, they have failed to create the enabling environment necessary to develop the sector. Key challenges include:

Limited resources and human capacity for previous initiatives meant they were unable to fulfill the mandate of SME development or to extend their services country-wide

Limited coordination and partnership in these initiatives meant that many ongoing activities, in the public and private sector, were not sufficiently connected and harmonized to maximize their potential for SME development

A limited policy environment lacking focus and a prioritization of cluster and sector specific policies meant that the general policy environment was not targeted at SMEs

The structure of previous finance schemes, by placing them in large intermediary institutions with complicated application procedures and limited assessment capacity, meant the SMEs found them difficult to access

The (low) quality and “one size fits all” approach for business development services meant that the private sector did not take advantage of them, though the current PSF model is working to address this constraint

The general regulatory environment in Rwanda is structured toward large companies that have the time and resources to comply, making the existing structures a challenge to grow for SMEs

Inadequate Infrastructure for rural SME development that inhibits implementation of innovative ideas and provision of services

IV.4. Analysis and Overview of the SME sector

 Macroeconomic situation In spite of the negative growth rate worldwide due to the recent financial crisis, Rwanda’s 2009 growth rate of 6.0%, (slowed from 11.6% in 2008)4 , remains as evidence of Rwanda’s extraordinary economic development. In terms of government revenue, tax revenues increased by 10% in 2009 compared to the previous year, largely from the collection of Value Added Tax (VAT). Inflation continued to fall from 22.3% at the end of 2008 to 5.7% at the end of 2009. Agricultural input, with the potential it brings in value-addition sectors, increased by 10% in 2009 due to the success of crop intensification programs.

IV.4.1. SMEs market Curve

Price	Inyange National corporate ’s Demand	Nyirangarama National  corporate ’s Demand	Market Demand
500,000 RwF	32	43
550,000 RwF	30	40
600,000 RwF	28	37
650,000 RwF	26	34
700,000 RwF	24	31
750,000 RwF	22	28
800,000 RwF	20	25
850,000 RwF	18	22
900,000 RwF	16	19
950,000 RwF	14	16
1,000,000 RwF	12	13
1,050,000 RwF	10	10
1,100,000 RwF	8	7
1,150,000 RwF	6	4
1,200,000 RwF	3	0

a)            Calculate the  Volume of Employee (Labor force)  at the Market

b)            Give the graphic combined both the two corporate’s Demand

This economic growth, increased agricultural production and reduced inflation show that Rwanda has the potential to enable a vibrant SME sector, with the ability to support the GoR through tax revenue and to take advantage of the trade benefits of the East African Community (EAC). In tandem with strong economic performance, the GoR has introduced a range of institutional changes and innovative policies to further support the business environment.

A 2008 PSF study estimated that there are over 72,000 SMEs operating in Rwanda, while only 25,000 of them are formally registered. This study found most small enterprises in Rwanda start off as micro businesses and grew into small businesses or they are formed to supplement the income of middle to upper income households.

Rwandan small and micro businesses comprise 97.8% of the private sector and account for 36% of private sector employment. They often lack proper accounting and financial systems. Rwandan medium sized enterprises, by contrast, are well-established businesses that are individually or jointly owned. They have set administrative processes, qualified personnel and trained staff, employ between 50-100 people and account for 0.22% of businesses in Rwanda, contributing 5% of total private sector employment. Combining these categories shows that SMEs comprise approximately 98% of the total businesses in Rwanda and account for 41% of all private sector employment.

 According to the EAC’s report on SMEs in Rwanda, the vast majority of SMEs (93.07%) work in commerce and services. This is followed by 1.86% in professional services, 1.66% in Arts & Crafts, 1.33% in industry, 0.94% in financial services, 0.7% in tourism and 0.45% in agriculture and livestock. This heavy concentration in the commerce and services sector, with only 1.33% in industry, reveals the need to address the challenges faced by SMEs, in order to build an economy based on value added exports.

IV.5. Key challenges to SMEs growth

SMEs in Rwanda face many macro-level challenges faced by large companies, including limited transport and energy, lack of a strong insurance industry, limited financial outreach, difficulties with contract enforcement and a weak education system. They also, according to the 2008 GTZ/PSF study ‘Cutting Red Tape’, face huge burdens in regulatory compliance costs that can be better absorbed by larger firms.

Unlike larger firms that may have the time and resources to invest in capital and human capacity building, SMEs often have limited abilities to develop the skills of their staff or to take advantage of local economies of scale in terms of energy, transport or raw materials. They also often lack the ability to gather and process market information outside of what is immediately relevant to their current business due to lack of technical knowledge and training on how to make use of this information.

They are dependent upon a single individual or small group of individuals to develop business ideas and assume the risk of start-up or expansion and the burden of taxation and other regulations. This means that even for entrepreneurs that do see opportunities in the market, it is difficult to bring those ideas to fruition due to the potential costs of failure.

This challenge is exacerbated by the fact that financial institutions find it too high of a risk to lend to SMEs given the cost/benefit ratio in terms of time and resources required to process relatively smaller sized SME loans. This in addition to the difficulties most SMEs face in consolidating capital and creating business plans to become viable lending candidates. This creates a blockage to growth, where SMEs that have the skills to scale-up or move into manufacturing and processing cannot due to their limited access to finance.

The key challenges to start-up/struggling and established SMEs are discussed here in the order of where they would impact the business cycle, thus connecting to the five key objectives outlined in this policy. An analysis of the challenges to the development of a vibrant SME sector must go beyond the study of existing SMEs in Rwanda. While many of the challenges they cite are addressed in this and supporting policies, it is important to recognize that there are challenges to this sector that individual SMEs are not in a position to recognize or highlight.

This is why the ultimate aims of the GoR, as well as key stakeholder analysis, are taken into account throughout this policy. In Rwanda only 1.33% of SME are engaged in industry, therefore the challenges they face in terms of access to technology and innovation will not feature prominently in surveys of SMEs, which are dominated by commerce and services.

IV.5.1. Lack of entrepreneurial culture

The unstructured environment in which SMEs operate and their inability to be open to new or innovative ideas presents a major challenge to the development of the SME sector. The 2008 PSF Capacity Needs Assessment of SMEs, which surveyed 2100 SMEs operating in Rwanda, indicated that the need for a greater entrepreneurial culture is a major priority for SMEs in terms of building human capacity and supporting potential growth.

IV.5.2. Limited technical and business skills

 Many SMEs suffer from lack of technical and business skills. SMEs themselves identify a variety of skills gaps in areas including ICT, technical and industrial knowledge, finance, accounting and management. Many SMEs have rudimentary production facilities, low quality products and underutilize appropriate technologies. There is also limited innovation and competitiveness in the SME sector caused by a lack of technical and managerial skill.

IV.5.3. Limited Business Development Services (BDS)

SMEs face a lack of good quality business development services tailored to their needs. PSF's efforts thus far have been forced to scale back due to resource and capacity constraints, meaning many businesses have not received the skills they need to succeed. Studies indicate that while many institutions exist to provide BDS services, the quality of these services varies greatly, making SMEs wary of taking advantage of them.

IV.5.4. High cost of doing business

The high cost of doing business is cited by SME owners as one of the biggest challenges. This is in terms of high energy and transport costs. In addition, SMEs in Rwanda face significant compliance burdens dealing with existing regulation. The current tax regime is both costly and difficult to comprehend.

IV.5.5. Lack of access to finance SMEs

 Lack of access to financial services. As evidenced by the OTF/PSF survey, financial institutions perceive SMEs as high risk and are therefore inflexible in terms of collateral and repayment terms. This is compounded by the fact that most small borrowers lack experience and understanding of financial organizations and do not have the necessary technical skills to make successful applications.

In addition, most financial products from commercial banks are not suitable to the agricultural sector, where most SMEs currently operate, and existing regulations limit the total funds available for lending.

Difficulty accessing market information and markets SMEs face difficulties accessing and utilizing information regarding local, regional and international pricing, a major constraint to business planning as well as about the regulatory environment in Rwanda and regionally.

Among SMEs there is poor participation in the policymaking process, meaning they have little knowledge of interventions designed to assist them. SMEs have inadequate access to market information that could benefit their businesses as well as inadequate knowledge about marketing their products both nationally and internationally.

IV.6. Promote a culture of entrepreneurship among Rwandans

Challenge addressed Lack of entrepreneurial culture and mindset in business environments Entrepreneurial culture is underdeveloped among Rwandans given the short history of business in the country and the absence of successful role models. Many Rwandans will not become entrepreneurs, but will contribute to the growth of business as skilled employees. Skills development, as well as the promotion of entrepreneurship for those in programs that display entrepreneurial motivation, are already being addressed by TVET and PSF initiatives.

However, as identified by the PSF capacity needs assessment, promoting a culture where those with the desire and energy to become entrepreneurs are nurtured and encouraged is integral to growth of the SME sector. Whilst entrepreneurship has been introduced into the curriculum of numerous institutions, there is often not yet a practical element. By offering practical opportunities for young people interested in business to engage in entrepreneurship, they are more likely to engage in entrepreneurial activities.

Strategies:

A number of key policy strategies are required to achieve the aim of this policy objective. They will be executed in collaboration with Ministry of Education (MINEDUC) and the Workforce Development Authority (WDA). 

Introduce a component of entrepreneurship training into school and TVET curriculums, both focusing on risk and innovation and also business skills such as financial management and marketing

 Introduce a youth entrepreneurship course for existing associations of out-of-school or vulnerable youth interested in starting their own business; the course would include training in business skills such as financial management, marketing, risk and innovation; this would be funded by the capacity building component of the SME fund 

Establish a national Young Enterprise Scheme with annual competitions; this is a nation-wide program that offers teams of young people over the age of 14 (in selected educational institutions) the opportunity to run a business for an academic year; teams select a board of directors; choose a product or service; market and sell their product; manage the company and gain real experience of running a business; they are mentored by a local businessman and at the end of the project are entered into a national competition, the winner receiving the “Young Enterprise of the Year Award” 

Implement a mentoring program for young people starting businesses via the BDS centers; leaders of local successful businesses should be recruited and trained in how to offer advice to young people 

Identify successful entrepreneurs who would act as ambassadors to young people; these ambassadors would be required to make at least for appearances per year in their district to groups of young people 

Introduce talks on business related topics and visits by leaders in government and private sector targeting children from their early age, i.e. pre-primary and primary school

IV.7. Facilitate SMEs access to business development services

The policy objective to facilitate access to business development services has 3 components, each of which contributes to improving services and providing capacity building support for SMEs.

Business Development Services Business Development Service (BDS) Centers were first introduced in 2006 to address SME capacity and access issues and to decentralize services across the country. However, the BDS centers have been met with varied success. The BDS centers were restructured and relaunched

in February 2010 as a private/private partnership sponsored by PSF/RDB and local government. There are currently 22 centers throughout Rwanda operated by trained and selected independent BDS advisors, working as paid consultants, and BDS staff. This program is currently too new to be thoroughly evaluated. This policy proposes to use this recent rollout as a pilot to inform future strategy direction.

Offering a mixture of private and public services should be the recommended model for the provision of BDS services. The model takes into consideration the results of the 2008 PSF/OTF survey in which 48% of SMEs said they would pay for BDS services. This is especially noteworthy given the challenges BDSs have faced thus far and the size (72000) of the SME sector.

Strategies: A number of strategies are required to achieve the aim of this component.  Establish operational BDS centers in targeted high-impact areas with at least two staffmembers, in collaboration with other key stakeholders who want to offer their services; the services they provide should include Access to finance training

Market information

Access to IT

Business advisory clinics

Training on bookkeeping

Advice for completing tax return

 Database of approved consultants

 Tax advisory services

 e-Government portal for government services to the citizenry

IV.8. Access to local, regional and international markets and market information

SMEs in Rwanda lack an understanding of the local, regional and international market in which they operate, limiting their ability to take advantage of potential market opportunities. They do not have the resources or time to spend gathering and understanding market information that would be useful to their operations. This inhibits SME innovation and growth. Locally this leads to heavy duplication of business ideas. Consequently, competition stifles the sector instead of leading to diversification and innovation.

This means that SMEs are unable to compete with larger businesses that have the time and resources to devote to market research. In addition, GoR procurement procedures favor larger businesses and are limited to registered companies that automatically exclude the majority of SMEs.

Strategies: A number of key policy strategies are required to achieve this component.  In each district with a BDS, develop a strategy on how to network with SMEs to determine their changing market information needs and how to best create tools for them to access this information 

Comprehensive databases of market information to be made available at BDS centers for SMEs 

Facilitate participation of SMEs in International Fairs and in Trade Missions; Develop and implement a program on preferential access by SMEs to GoR procurement contracts and Promote innovation and technical capacity of SMEs for competitiveness International experience, as well as examples from the Rwandan context, have shown the positive impact appropriate technologies and infrastructural developments can have on the SME sector and especially manufacturing and start-ups.

However, Rwandan SMEs currently face a range of challenges to effectively integrating these technologies. The fact that the sector is predominantly informal and lacks access to finance is a major challenge to the use of technologies. Many SMEs also lack the technical and analytical skills to effectively use these technologies or to interpret ideas arising from government research initiatives. There is a need to harness the power of technology transfer to build capacity and spur entrepreneurship within the SME sector.

Strategies A number of key strategies are required in order to achieve this component:  Promote creativity and innovation in the SME sector through the establishment of annual award schemes that recognize innovation and technology development  Through BDS centers, facilitate links between research institutions and SMEs to commercialize research products, focusing on targeted clusters along the value chain including agricultural research for agro-business, product development and eco-technology in tourism etc. 

Using mobile ICT vans, increase the adoption of appropriate and useful ICT into SME business practices  Introduce regular IT training for SMEs and make available subsidized business software loaded laptops for attendees  In collaboration with private sector real estate developers, establish regional industrial parks in four provinces to provide necessary basic infrastructure for SMEs clustered in manufacturing and services  Introduce appropriate technology demonstration centers, in partnership with SMEs, within the industrial parks for practical training and acquisition of technologies for value-addition  Provide access for SMEs to the Special Economic Zones (SEZ) for facilitating technology transfer and technology diffusion among the operating firms the assumption being having access to adequate infrastructural facilities and working alongside other large and small enterprises will promote technological adoption.

IV.9. Interaction with other policies

 The Rwandan Small and Medium Enterprise (SME) Policy is designed to complement a set of existing policies/strategies that aim to increase non-farm employment, develop business and technical skills in the Rwandan workforce, support targeted value-added clusters, strengthen the financial sector, grow the tax base and facilitate investment finance to generate industrial growth.

Sector and business “cluster development” is widely regarded as one of the most effective ways of encouraging and supporting inter-firm collaboration, institutional development and industry wide growth. Such collaboration can optimize SME structures and facilitates utilization of knowledge and expertise and access to the latest technologies, equipment and financial products and services.

There have been several recent policies developed by the GoR that focus on cluster development for value-addition sectors to increase Rwanda’s international competitiveness, create more opportunities, expand the supply of skilled people and technology, expand the local supplier base, increase efficiency and productivity and foster innovation.

 The SME policy will support these policies for SME clusters in a particular field that can be linked by commonalities by improving productivity / efficiency and by stimulating and enabling innovation, facilitating commercialization and new business formation. The SME policy is supported by the following policies, laws and strategies: 

Organic Law Determining the Use and Management of Land in Rwanda (2005)

  Trade Policy (2006)

  Industrial Policy (2006)

Handcraft Policy (2006)

National Policy on the Promotion of Cooperatives (2006)

Economic Development and Poverty Reduction Strategy (EDPRS-2007)

National Microfinance Policy and Implementation Strategy (2007)

Financial Sector Development Plan (2007)

Rwanda Tea Strategy (2008)

Rwanda Coffee Strategy (2008)

Strategic Plan for the Transformation of Agriculture in Rwanda (2009)

Technical and Vocational Education and Training (TVET) policy (2009)

Companies Act (2009)

Law Regulating Labour in Rwanda (2009)

National Savings Mobilization Strategy

SACCO (Savings and Credit Cooperatives) Strategy (2009)

MINICOM Strategic plan 2009-2012

Rwanda Craft Industry Strategic Plan (2009-2013)

Special Economic Zone Policy (2010 draft) 

Mining Policy (2010)

Tourism Policy and Master Plan (2010)

Hides and Skins Policy (2010 draft)

Intellectual Property Policy (2010)

Competition and Consumer Protection Policy and Act (2010 draft)

Access to local, regional and international markets and market information

 SMEs in Rwanda lack an understanding of the local, regional and international market in which they operate, limiting their ability to take advantage of potential market opportunities. They do not have the resources or time to spend gathering and understanding market information that would be useful to their operations.

 This inhibits SME innovation and growth. Locally this leads to heavy duplication of business ideas. Consequently, competition stifles the sector instead of leading to diversification and innovation. This means that SMEs are unable to compete with larger businesses that have the time and resources to devote to market research. In addition, GoR procurement procedures favor larger businesses and are limited to registered companies that automatically exclude the majority of SMEs. Strategies A number of key policy strategies are required to achieve this component.

In each district with a BDS, develop a strategy on how to network with SMEs to determine their changing market information needs and how to best create tools for them to access this information

 Comprehensive databases of market information to be made available at BDS centers for SMEs

 Facilitate participation of SMEs in International Fairs and in Trade Missions

Develop and implement a program on preferential access by SMEs to GoR procurement contracts Promote innovation and technical capacity of SMEs for competitiveness International experience, as well as examples from the Rwandan context, have shown the positive impact appropriate technologies and infrastructural developments can have on the SME sector and especially manufacturing and start-ups. However, Rwandan SMEs currently face a range of challenges to effectively integrating these technologies. The fact that the sector is predominantly informal and lacks access to finance is a major challenge to the use of technologies. Many SMEs also lack the technical and analytical skills to effectively use these technologies or to interpret ideas arising from government research initiatives. There is a need to harness the power of technology transfer to build capacity and spur entrepreneurship within the SME sector.

Strategies

A number of key strategies are required in order to achieve this component: 

Promote creativity and innovation in the SME sector through the establishment of annual award schemes that recognize innovation and technology development

 Through BDS centers, facilitate links between research institutions and SMEs to commercialize research products, focusing on targeted clusters along the value chain including agricultural research for agro-business, product development and eco-technology in tourism etc.

Using mobile ICT vans, increase the adoption of appropriate and useful ICT into SME business practices

Introduce regular IT training for SMEs and make available subsidized business software loaded laptops for attendees

 In collaboration with private sector real estate developers, establish regional industrial parks in four provinces to provide necessary basic infrastructure for SMEs clustered in manufacturing and services

 Introduce appropriate technology demonstration centers, in partnership with SMEs, within the industrial parks for practical training and acquisition of technologies for value-addition

 Provide access for SMEs to the Special Economic Zones (SEZ) for facilitating technology transfer and technology diffusion among the operating firms the assumption being having access to adequate infrastructural facilities and working alongside other large and small enterprises will promote technological adoption.

                                                                        REFERENCES

E. Wayne Nafziger, 2006: Economic development, 4th edition, Cambridge University press

Gerard H. GUS Gaynor, 2004: What every new manager needs to know: making a successful transition to management, AMACOM

GTZ, 2003: Guide to rural economic and enterprise development, working paper edition 1, November 2003

MINICOM 2011, Rwanda National Export Strategy NES

MINICOM, 2009: Rwanda Industrial Master Plan 2009-2020, Kigali

BNR 2011, Foreign Private Investment in Rwanda,  Kigali

MINICOFIN 2012, EDPRS II

MINICOFIN 2012, VISION 2020

UNIDO, 2003: A path out of poverty: Developing rural and women entrepreneurship, United Nations industrial development organization, Vienna

Florin, J., 2005. Is venture capital worth it? Effects on firm performance and founder returns.Journal of Business Venturing 20, 113–136.

Noe, R.A. (2002). Employee Training and development. New York: McGraw-Hill.

Wilson, P.J. (2009). Human Resource Development, (2^nd ed.), London: Kogan page

Armstrong, M. (2010). Human Resource Management Practice, (11^th ed.), London: Kogan Page.

Amstrong, M. (2008). Strategic Human Resource Management, (4^th ed.), London: Kogan Page.

Torrington, D., Hall, L., Taylor, S. (2008). Human Resource Management, (7^th ed), Harlow:Prentice Hall.

Aime MUYOMBANO 2015, Analysis Rwanda foreign Policy orientation and contribution to its Economic development. (assessing the effect of Foreign Direct Investment, foreign aid and remittances)

                                       

                                                       Syllabus and Notes

Aimé MUYOMBANO (PhD Scholar), Syllabus of Mechanism of International Communications and Policy, Masters JKUAT.

Aimé MUYOMBANO (PhD Scholar), Syllabus of Employee Resourcing, Masters JKUAT.

Aimé MUYOMBANO (PhD Scholar), Syllabus of Policy, Objects and Principles of Devolution, Masters JKUAT.

Aimé MUYOMBANO (PhD Scholar), Syllabus of Project appraisal and impact assessment, Masters JKUAT.

Aimé MUYOMBANO (PhD Scholar), Syllabus of Strategies and policies of Development, UR

Aimé MUYOMBANO (PhD Scholar), Syllabus of Strategies and policies of Development, UR

Aimé MUYOMBANO (PhD Scholar), Syllabus of Key issues of International Relations, ULK. 

Aimé MUYOMBANO (PhD Scholar), Syllabus of Advanced International Relations ULK.

Aimé MUYOMBANO (PhD Scholar), Syllabus of Policy and Strategies of Development, ULK. 

Aimé MUYOMBANO (PhD Scholar), Syllabus of Contemporary Political Systems Analysis, ULK.

Aimé MUYOMBANO (PhD Scholar), Syllabus of Industrial Economics, UNILAK.

Aimé MUYOMBANO (PhD Scholar), Syllabus of Organization and Society Development, UNILAK.

Aimé MUYOMBANO (PhD Scholar), Syllabus of organization and Society Development Perspective, UNILAK

Aimé MUYOMBANO (PhD Scholar), Syllabus of Development Economics, UNILAK.

Aimé MUYOMBANO (PhD Scholar), Syllabus Public Policy Formulation and implimentation INES Ruhengeri

Aimé MUYOMBANO (PhD Scholar), Syllabus Rwanda Economy INES Ruhengeri

                                      

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