Private sector plays a crucial role in the development of the agricultural sector across global markets. Not only are local small and medium enterprises considered essential for economic progress in most developing countries, but larger “lead firms” are increasingly establishing closer ties with SME suppliers due to rising standards in food regulations, traceability, and transparency.
When lead firms establish linkages with SME processors and suppliers, the potential for win-win outcomes soars. Lead firms can lower supply chain risks, reduce costs, and increase access to local quality products, while SMEs gain access to new markets, financing, and skills, as well as generate significant local employment and income opportunities.
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According to a recent study completed by the infoDev unit of the World Bank — conducted by Agland Investment Services, a subsidiary of Dexis Consulting Group — partnerships between lead firms and SMEs in the agricultural processing sector often form organically. However, several barriers exist that could be eased by donors and public sector actors, thereby unlocking economic growth and development impact.
Characteristics of successful B2B linkages
Although agro-processing activities in developing countries are expanding, several obstacles prevent lead firms from linking with SMEs on their own.
If barriers are too great, lead firms may not invest the time and resources to overcome them. Instead, they may bring manufacturing “in-house,” seek suppliers in more developed economies, or leave the supply chain altogether. Thus, benefits to the local economy, as well as improvements to food quality, security, and safety, may never be realized.
Four elements of successful B2B linkages in agriculture
A profitable opportunity must exist to motivate lead firms to engage with SMEs. In the West Bank, the International Finance Corporation worked with olive oil SMEs to help them differentiate their product, which was not competitive in the export market. The project helped SMEs promote a premium-priced specialty product that caught the interest of a United States-based importer. Because value existed, the company continued to import the product, even after project completion.
The lead firm and SMEs must perceive tangible benefits of working together. In Colombia, dairy company Alquería sought lower-cost production methods, and quickly saw potential in also increasing the quality and productivity of its SME suppliers. Alquería instituted a supplier development program that resulted in a high-quality raw material supply for itself, while the SMEs found a reliable buyer, and both parties increased revenue.
A minimum level of SME capacity is necessary to meet lead-firm requirements for scale, quality, cost, labor, and environmental standards. Capacity-building activities — such as training, advisory services, and mentoring — can help SMEs contribute to a lead firm’s supply chain. In one case studied, publicly supported technical and marketing assistance allowed rice processing SMEs in Cambodia to gain the attention of global lead firm importers, resulting in a dramatic increase in rice exports.
Legal, regulatory, service, and infrastructure factors are critical to establishing lead firm and SME linkages. In Uganda, beer company Nile Breweries Ltd. lobbied the government to lower excise taxes after it linked with SMEs to establish a local sorghum supply chain for a new beer. The reduced taxes allowed the product to compete with low-cost homebrews, leading it to become the highest-selling beer in the country.
Interventions to support B2B linkages
Business linkages do not simply happen because of the presence of large companies in developing economies. Rather, there is an important role for the public sector in enabling linkages. Public sector actors may help to build the capacity of SMEs, work with lead firms to meet their specific needs, or work broadly across an industry.
In the Cambodia rice sector example, IFC established a project to provide needed support to rice processing SMEs as the country emerged from decades of civil unrest, political upheaval, and bad economic policy. A “bottom-up” intervention focused on capacity building reached 169 SMEs in the country, helping to position them as suppliers to foreign importers and distributors.
Additionally, the public sector can work in a “top-down” approach, partnering with companies through public-private partnerships tailored to the needs of a company. In the Colombia dairy example, Alquería partnered with a government-run training institution to deliver programs that improved productivity of SMEs in the company’s supply chain.
The public sector may also engage in “industry-wide” initiatives to promote broader competitiveness in a specific industry, such as in Central America where the U.S. Agency for International Development worked with coffee organizations, government agencies, producers’ associations, and potential lead firms to increase productivity and improve business practices along the coffee supply chain.
As discussions around the private sector’s role in global development continue to grow, harnessing lead firms to enable SME growth is an innovative approach worth further attention. Greater research into market opportunities, with an ear toward the needs of the private sector, will uncover further possibilities for business-to-business linkages while meeting the diverse goals of the private sector, SMEs, development institutions, and the public sector.