–Trial version for review, May 2021 —
The UK FCDO’s 2020 Technical Competency Framework on Private Sector Development specified key competencies to guide PSD advisors’ recruitment and professional development (2023 version here); these pages signpost recommended reading structured according to the 2020 competencies. These pages have no official status and are offered by the DCED as a resource for the PSD community.
On this page, you will find pointers on competency PSD 2: Private Sector Contribution to Development
For resources on other competencies, including cross-cutting capabilities, please refer back to the overview page.
To send comments or suggested additions to the contents below, please contact the DCED Secretariat at Admin@enterprise-development.org.
Competency PSD2: Private Sector Contribution to Development
- Competency 2.1 – Describe and analyse firm and sector-level drivers of productivity…
- Competency 2.2 – Describe, assess and advise on different strategies for firms for surviving / competing in local, regional and global markets …
- Competency 2.3 Describe and analyse different approaches/models adopted by private sector actors that contribute to domestic investment, and inclusive and low carbon economic development
- Competency 2.4 – Assess and advise on how policies and programmes can support partnerships between public and private sectors which mobilise resources and share risks and returns appropriately
- Competency 2.5 – Explain and assess how regulators, industry bodies, and civil society can improve business standards and safeguards for responsible business practices…
- Competency 2.6 -Explain key concepts in corporate governance …and its structure. Assess the adequacy of corporate governance models and practices, and outline the factors to consider when engaging both public and private actors in governance of an entity
- Competency 2.7 Build relationships with firms and private sector representatives through an understanding of local business culture and strategies
Productivity covers anything which improves the efficiency at which a firm, industry, sector or economy converts inputs to outputs. Differences in productivity across firms and sectors can be attributed to a multitude of factors – both internal to the firm (e.g. performance of workers and management, or technology adoption) or external to the firm (e.g. the business environment). These factors are further outlined below.
Why is productivity growth important to inclusive economic development? Productivity growth drives overall economic growth and can also be a key opportunity for poverty reduction. For example, increases in agricultural productivity (Ivanic and Martin, 2018) and labour shifts from traditional agriculture to more productive industries such as manufacturing (Aggarwal, 2016) are widely regarded as a important pathways to poverty reduction. MSMEs also offer a vehicle for acquiring and applying skills to raise productivity and income growth, and providing better wage-earning opportunities for the poor. For more evidence on the linkages between firm behaviour changes, productivity and economic development outcomes, please refer to the DCED Evidence Framework.
Poor business management capacity can, in part, firm-and sector-level productivity deficits in developing countries. Among UK firms, the UK Government’s Business Productivity Review (2019) even ranks leadership and management practices as the factor most correlated to productivity (based on data from Bloom et al, 2011: Management Practices across Firms and Countries).
- The International Growth Centre (IGC) report on Management Practices in the Private Sector (2019) summarises IGC-funded research projects on the state of management practices in developing countries and its link to productivity; sector-specific studies on management practices in the garment sector; and the role of specific management determinants such as financial literacy for firm productivity.
- For evidence on the roles of innovation and management practices in determining firm productivity in developing economies, with a focus on Central Asia and Eastern Europe, see EBRD (2016).
- Note that business management training has traditionally been a key intervention area of PSD donors and implementing agencies (e.g. ILO business development training packages). There is evidence to confirm positive impacts of publicy-funded and -implemented business management training on productivity, although only a few studies show long-term and statistically strong effects; for women, business management training is often only effective when combined with a grant (DCED Evidence Framework). The quest for larger-scale and more sustainable results has partly motivated the growing interest among donor agencies in the development of local, private-sector led business development services, and the market systems development approach (see also Competency PSD 5).
Skills development can help increase firm-level productivity in the informal and formal sectors and allow workers to take up more productive employment opportunities in the industrial and service sectors(e.g. ODI, 2019) As such, skills development is especially important in the context of the rising role of technology and urbanisation.
Key barriers to effective skills development are set out in the World Bank Group’s ‘Skills Development’ pages.
For a recent consideration of skills development in the time of COVID-19, see ILO (2021) a report based on the findings of an interagency survey completed in 2020 that captures both challenges and learnings from the rapid shift to distanced learning.
The most important driver of change within firms in advanced industrialised economies is innovation (EBRD, 2016). After management practices, it is also one of the most important factors influencing productivity in developing economies. While there is debate over what to include in measuring innovation (see section 1 of Hall, 2011 for an academic overview), the link between innovation and productivity is generally positive and significant.
MSMEs are generally less likely to use innovative technologies or processes, so supportive policies and institutions adapted to the needs of MSMEs may strengthen their ability to innovate. Chapter 4 of ‘SME Policy Index: ASEAN 2018, Boosting Competitiveness and Inclusive Growth’ considers the ways that governments can promote innovation within firms.
The section ‘Firms/farmers increase productivity due to innovative technology’ in the DCED Evidence Framework offers practical examples on this topic. Also, see AFBD (2020) for an examination of the determinants of innovation and its effect on productivity across 52 emerging and developing economies, comparing African firms to their counterparts elsewhere. They show that access to finance has a strong effect on firms’ decisions to embrace innovation, as well as access to external knowledge and skills development in ICT (especially for product innovation by African firms).
Related to innovation (see above), embracing technology can have a positive effect on productivity, if the technology is suitable for purpose and operators have the necessary skills to effectively use it.
Chapter 4 of ‘SME Policy Index: ASEAN 2018, Boosting Competitiveness and Inclusive Growth’ gives an overview of the ways in which governments and donors can encourage technology uptake and innovation in developing country MSMEs in Southeast Asia. Also, the DCED Digitalisation Knowledge Page gives a selection of reads on the potential that digital technologies hold for development, including a short synthesis note on PSD and Digitalisation.
The private sector and developing country governments have a role in encouraging entrepreneurship, and donors can have positive effects by partnering effectively to address gaps. For evidence the effects of firm creation on productivity and economic development, see the DCED Evidence Framework pages on ‘Firm creation and registration lead to higher productivity/revenues’ and ‘When new firms are created or registered, more people are employed’.
For example, efforts by governments to increase entrepreneurship include introducing business zones for specific industries to reduce business costs, encouraging formalisation by making business registration simpler, and improving the business environment more generally. The private sector can encourage firm creation, for example, by providing easy access to finance for MSMEs or by offering business development services to entrepreneurs. See also:
- Global Entrepreneurship Monitor 2019-2020 Global Report
- OECD SME and Entrepreneurship Outlook 2019
- Business Productivity Review, HMG 2019 (UK)
In developing countries, the MSME sector can be underserved, resulting in the ‘missing middle’ with a large informal sector and a few large dominant firms. While engaging with large private sector players to stimulate sectors and markets is a focus for donor support, the MSME sector is also increasingly prioritised. Firms have a number of strategic options for surviving and competing in local, regional and global markets, and for overcoming constraints. There are both public and private sector actors whose mission it is to help firms, especially MSMEs, to build profitable businesses and contribute to the sustainable development of communities (for example, the Argidius Foundation).
Business schools identify a number of key elements to growing a competitive business (summarized on websites like business.com).
Strategies for firms for overcoming commercial, economic, political / governance and other constraints
Constraints to surviving and competing in local, regional or global markets can be commercial, economic, political or based on other combinations of outside factors.
- Regulatory, political and governance constraints can disproportionately affect MSMEs if the business environment is poor. Improving the business environment is therefore a key way for donors to help firms overcome constraints and grow. See ‘Creating Better Business Environments for Micro and Small Enterprises’ (DCED, 2018) for a technical look at this topic.
- According to World Bank Enterprise Survey data, SMEs perceive access to finance as the most significant obstacle which hinders their growth (Wang, 2016). In addition to regulatory reform, support to financial intermediaries and other measures are reviewed by IFC, 2013. For more resources on access to finance visit CGAP.org.
- For more insights into the effects of training and mentorship to help overcome commercial and economic constraints, refer to the IGC and the Aspen Network of Development Entrepreneurs (2018). Research based on the Global Accelerator Learning Initiative data set suggests that business acceleration programs can help businesses get off the ground, but that securing investment is more challenging in emerging markets, despite promising ventures. They also found that founding teams with women attract significantly less equity investment, so addressing additional social and political barriers to women’s participation in the economy may be necessary.
- For examples of enterprise development projects, see the evaluations and reports page from Argidius, and the DCED Knowledge Page on Small Enterprise Development for more resources on different forms of support to MSMEs.
Exogenous shocks such as the COVID-19 pandemic can also pose a significant constraint to business survival. The COVID-19 pandemic quickly moved from a public health crisis to an additional economic crisis, affecting a majority of businesses globally in some form. See the PSD and COVID-19 pages from the DCED, especially the ‘Promoting economic recovery and resilience’ page, for resources focusing on strategies to promote business survival, growth and resilience.
For key resources on designing donor programmes and policies for inclusive and low carbon development, see this sub-section of Competency 1.4.
Key ways in which the private sector contributes to domestic investment, and inclusive development are listed under Competency 1.2.
The current and potential role of institutional investors, companies, banks and foundations in sustainable development is reviewed in this report (UN Global Compact and others, 2015), while trends in private sector climate finance are explored by UN, 2015. GIZ (2019) highlights green and inclusive business models and different tools to support them. OECD (2013) explores private sector initiatives to measure and report on green growth.
Donor agencies now agree that government budgets and capabilities are not sufficient to achieve the Sustainable Development Goals (SDGs). Donors therefore need to tap into the private sector to achieve the SDGs. In practice, partnering with the private sector, or Private Sector Engagement (PSE), has become a strategic priority across most donor agencies and sectoral departments: It is about an ‘agency-wide call to action, and a mandate to work hand-in-hand with the private sector’ to design and deliver development programs ‘across all sectors’ (USAID, 2019). As a result, donors increasingly play a catalytic role in achieving results, rather than fully designing, funding, and managing short-term projects with the private sector.
Partnering, or engaging with the private sector, involves two broader sets of strategies (DCED, 2019):
- Engaging with private investors, funds and financial institutions, to mobilise additional private finance, through different blended finance approaches, or to encourage its use towards SDG-relevant projects, through results-based finance.
- For an introduction to these ‘innovative finance’ strategies, and options for appropriate donor engagement, see DCED (2019) or the associated 2-page summary.
- For more detailed resources on different approaches to mobilising private finance and reviews of effective practice (e.g. regarding the design of blended finance vehicles) see the dedicated section on the DCED PSE knowledge page.
- DFID’s resource guide on financial instruments for PSD (DFID, 2014) explains instruments and appropriate risk management in detail.
- The FCDO-funded Impact Programme website also offers a range of relevant resources and case studies.
2. Engaging large companies (often from donor countries) to enhance the contribution of their core business to the SDGs. Most of these partnership approaches are based on grants or in-kind contributions by donors and may include participation in, or co-funding of, sectoral roundtables, or direct co-financing of innovative business models (e.g. through challenge funds).
- Resources on effective practice can be accessed in this dedicated section of the DCED’s PSE knowledge page.
- Evaluations of challenge funds can be found here. Typically, donor grants do not exceed 50% of the project costs to ensure private sector ownership. The DCED’s Additionality Guidelines explore how to demonstrate that the private sector partner would not have invested in a project without donor support.
- A key evolution in donor agencies’ approach to manage risks is an increased focus on effective relationship management with businesses. Success factors include building relationships before entering partnerships; joint design of partnership projects; clear management and governance structures in partnerships; results-based management’ and the flexibility to adjust approaches over the course of engagement (e.g. USAID, 2019, DCED, 2017)
Responsible business practices, or Responsible Business Conduct (RBC), are defined by the OECD as a set of principles and standards (that) set out an expectation that businesses avoid and address negative impacts of their operations, including throughout their supply chains, while contributing to sustainable development where they operate. RBC means considering and integrating environmental and social issues within core business activities (OECD, 2017; OECD, 2019).
The basis for both voluntary and mandatory RBC standards is a number of leading international guidelines and principles – some of which are linked to international or domestic legislative instruments or policy. Most importantly, these include:
- The UN Guiding Principles on Business and Human Rights;
- ILO work on RBC with respect to labour rights (e.g. the ILO Resolution concerning decent work in global supply chains and the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy);
- The OECD Guidelines on Multinational Enterprises; and
- The UN Global Compact principles
Key overview documents on promoting RBC include:
In the past decade, national governments and the EU have made increased efforts to integrate core elements of international guidelines and principles (see the Introduction above) into legislative instruments targeting companies registered in their territories and their international supply chains.
Recent legislative due diligence and reporting initiatives (as mapped for example by PWC, 2018) fall into two broad categories:
- Sector or issue-specific legislative instruments, such as the ‘Conflict Minerals’ regulations in the US and the EU, the EU Timber Regulation, Modern Slavery Acts in Australia and the UK and the Dutch Child Labour Due Diligence Act.
- Horizontal legislative instruments covering the entire economy and multiple OECD risks, such as the French Duty of Vigilance Law, the proposed German Supply Chain Due Diligence Act and the proposed supply chain due diligence legislation at EU-level.
Beyond their sectoral scope, examples of other variations between legislative initiatives include of the scope of companies affected; due diligence reach in supply chains; the scope of implementation mechanisms, including self-reporting obligations and necessity of third-party audits.
As explored in more detail in a forthcoming DCED scoping paper on RBC, the need for, and effectiveness of legislation is much debated. While voluntary RBC initiatives have been found to be insufficient to achieve change (e.g. German government data reported on business-humanrights.org), early evidence on whether legislation leads to better company performance against RBC criteria is still inconclusive (Savourey and Brabant, 2021). A lack of support to compliance to developing country suppliers also risks leading to their exclusion from European markets.
Legislation is therefore only one element of what is often described as a ‘smart mix’ of measures to promote RBC (see for example the RBC policy of the Netherlands Ministry of Foreign Affairs). Governments can also support responsible business practices in other, complementary ways (OECD, 2018), including by
- facilitating and encouraging RBC, e.g. by providing information and guidance, and funding or participating in sectoral platforms encouraging the adoption of RBC standards
- partnering with companies, e.g. by cost-sharing new initiatives by companies to achieve higher standards of RBC in their supply chains
- endorsing or highlighting good examples of RBC.
In addition the private sector and industry bodies, as well as civil society play a key role in advancing RBC, as further outlined below.
Industry bodies can play an important role in representing private sector interests in discussions on RBC standards and in providing information, guidance and training to their member companies.
For example, legislative initiatives at EU and country-level have involved close consultations with industry bodies on the need for, and appropriate type of, legislation. Industry bodies have also actively raised awareness of international RBC standards among their constituents (e.g. BIAC, on the OECD guidelines).
Several industry bodies also provide guidance to their members on how to realise a positive impact on sustainable development (e.g. Luxemburg Union of Enterprises). Some private-sector organisations (e.g. Swedish Investors for Sustainable Development) bring together financial sector actors to enhance investor’s ability to assess aspects of RBC in their investment decisions.
Civil society plays an important role in promoting RBC by
- raising public awareness of business practices and advocating for RBC standards (e.g. business-humanrights.org)
- monitoring and benchmarking company performance (e.g. World Benchmarking Alliance)
- assisting companies in measuring and reporting their sustainability impact by developing standards (e.g. GRI) or certificates (e.g. Fair Trade)
- facilitating or participating in voluntary private sector platforms and multi-stakeholder initiatives to develop good practice principles (e.g. Better Cotton Initiative)
The OECD defines corporate governance as ‘a set of relationships between the company’s management, it’s board, its shareholders and other stakeholders’ and ‘the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined’. (OECD, 2015).
Detailed guidance for corporate governance has been published by a variety of public and private sector bodies, for example:
The UK Corporate Governance Code, Financial Reporting Council, 2018
Principles of Corporate Governance, Business Roundtable, 2016
G20/OECD Principles of Corporate Governance, OECD, 2015
Governance for SME Sustainability and Growth, IFC, 2019
The responsibility of company boards to oversee corporate risk is widely recognised as a core principle of corporate governance. The global financial crisis graphically exposed the failures of risk management in many leading financial institutions. Many boards were found to be ignorant of the magnitude of risk many companies were exposed to. Prior to the crisis, risk management had frequently been regarded as a limited function and not been properly integrated into senior management planning and decision-making (OECD, 2009). Recent events such as the diesel emission scandal and several large-scale cybersecurity breaches have highlighted that poor risk management is not limited to the financial sector.
Practical steps to improve corporate risk management include implementing board risk committees and chief risk officer functions as part of senior management. Emerging areas of risk may also be integrated into existing structures, e.g. supply chain risks into sustainability committees. Beyond these structural changes it is increasingly recognised that the organisational or corporate culture is a key factor in driving risk. This cannot be understood or managed through traditional control and compliance mechanisms. Instead, culture is affected by multiple factors such as the examples set by senior leaders, the company’s business model and principles for motivating employees and rewarding performance. As companies increase in size, complexity and reach, gathering information for effective risk management is increasingly challenging and can to a significant extent be driven by external actors, e.g. regulators, NGOs and the media (Harvard Business Review, 2019). For more detailed analysis and guidance on corporate risk management please refer to:
Risk management and corporate governance, OECD 2014
Global Risk Report, WEF, 2021
The global financial crisis triggered profound reflections on the role of companies in society. Since then, new global challenges such as climate change, rising inequalities and political uncertainty are adding to the demands for businesses and their leaders to look beyond short-term financial gain. The implications for corporate governance of a more challenging and uncertain global operating environment are increasingly reflected in industry guidance and regulation. For example, the UK, the 2018 Corporate Governance Code states that ‘the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture’ (UK FCR, 2018).
The shift from shareholder to stakeholder governance appears to be accelerating in light of corporate vulnerabilities exposed by the COVID-19 pandemic and the growing climate emergency. Environmental, social and governance (ESG) issues have moved to the top of the corporate agenda in several sectors. A recent survey of 170 board members in more than 20 countries commissioned by the World Economic Forum highlighted increased commitment to ESG issues as well as to diversity, equity and inclusion (DEI). It also found that board members want to see greater alignment of executive pay with company ESG performance and a move away from short-term shareholder-return-maximisation to long-term sustainable value creation (WEF, 2021). For further insights into recent corporate governance trends please consult:
Thoughts for Boards of Directors 2020, Harvard Law School Forum on Corporate Governance, 2019
A guide to the big ideas and debates in corporate governance, Harvard Business Review, 2019
5 ESF concerns for corporate boards with a social conscience, WEF, 2021
Bringing public and private actors together in (semi-)formal entities to address sustainable development challenges has become increasingly popular, in particular through multi-stakeholder initiatives (MSIs). Evaluations have highlighted a range of success factors for effective MSIs, including shared definitions of the problem(s) to be addressed and what success looks like; awareness of how partner expectations and dynamics may affect collaboration, trust-building, and relationship management; and the importance of sufficient secretariat support to ensure operational effectiveness. For reviews of experiences with MSI mechanisms please review the dedicated DCED resources. The DCED page on Private Sector Engagement has additional guidance and knowledge products for a variety of partnership models.
While the vast majority of companies operate in order the generate profits, the behaviours, values and priorities that make up the local business culture tend to vary significantly between countries and regions. Engaging positively with how local businesses operate is essential to understand their incentives and priorities which in turn forms the basis for successful relationships. As a basis for this, understanding the political economy in which businesses operate is key.
- The Beginner’s Guide to Political Economy Analysis, UKAID, 2017
- Culture and Business, Saylor Academy, 2012
- Understand the local business culture, Department for International Trade, 2020
- How to build trust with business partners from other cultures, Harvard Business Review, 2020
Collaboration between private and public actors can be challenging. Bridging cultural barriers as part of the process adds further complexity. While mutual understanding and a shared vision are likely to be essential starting points, it may be advisable to seek additional guidance on principles and processes for building successful partnerships.
- The Partnership culture navigator, The Partnering Initiative, 2016
- Improving the management of complex business partnerships, McKinsey & Company, 2019
- Partnership toolkit, NESTA, 2019