Micro, Small and Medium Enterprises (MSMEs) are undeniably the backbone of any economy and have the potential to bring about economic transformation and job creation. The Financial Sector Deepening Zambia (FSD Zambia) in its report Unlocking Financial Opportunities for Micro and Small Enterprises (2021) alludes that MSMEs account for 97% of all businesses in Zambia, 70% of the Nation’s Gross Domestic Product (GDP) and 88% of employment.
However, given their modest size and limited operating experience, it is difficult for MSMEs to obtain economies of scale and access strategic resources. As a result of these hurdles, MSMEs tend to have relatively low productivity and competitiveness, making them less likely to compete in the domestic market as well as enter the world market.
To navigate the challenges faced by MSMEs, Foreign Direct Investment (FDI) through FDI-MSME linkages should be encouraged. These linkages, as suggested by the Organization for Economic Cooperation and Development (OECD), can be considered as business cooperation between multinational companies and local MSMEs. The linkages can either be between firms operating in the same stage of the production process or between firms operating in different stages along the production process. By conjoining with FDI enterprises, the local MSMEs can gradually upgrade technology to meet the demands of foreign partners, acquire skilled human capital, acquire machinery, increase their production capacity and enhance MSME participation in Global Value Chains (GVC).
A study conducted in Vietnam on the manufacturing sector found that SMEs were able to participate in GVC and be more competitive in the international market due to the introduction of new products and increased production capacity resulting from FDI-SME Linkages. The United Nations Conference on Trade and Development (UNCTAD) in 2010 focused on Integrating Developing Countries SMEs in GVC and held a similar view that FDI enterprises can be a good channel through which SMEs can indirectly integrate into GVCs without paying high entry costs to foreign markets. Furthermore, these linkages can help to convey the spillovers of technology and knowledge from multinational companies (MNCs) to domestic firms, and therefore enhance MSMEs competitiveness and ability to participate directly in GVCs.
Despite the benefits that could potentially arise from the FDI-MSME linkages, challenges hinder MSMEs from attracting FDI enterprises to invest in them. The high cost of doing business in Zambia associated with obtaining permits and licenses creates an unfavourable environment for MSMEs to thrive and formalize their businesses. Many MSMEs operate informally because they cannot afford the monetary costs to obtain all licenses and permits, they require to operate and hence cannot attract the necessary investment. FDI Enterprises can only invest in a formalized business.
Another challenge is that there is a lack of information on the MSMEs that exist and the sector they operate in. This makes it difficult for foreign enterprises to locate MSMEs they may be interested in investing in. Additionally, a domestic market for MSMEs is not guaranteed. The public procurement reservation scheme has been inactive by the Zambia Public Procurement Authority to ensure that MSMEs have a guaranteed market for their products
With the understanding of the importance of MSMEs to the Zambian economy, it is important that the Zambian government prioritizes their growth and provides an enabling environment that can attract and promote FDI-MSME linkages that are capable of growing MSMEs, making them competitive and ultimately contribute to the alleviation of poverty, economic growth and reduction in the unemployment rate.
The Government must hasten its efforts to reduce the cost of doing business in Zambia by harmonizing and streamlining licenses and permits. Additionally, the Government through the Ministry of Small and Medium Enterprise Development (MSMED), should accelerate the creation of the MSME database and collaborate with the Zambia Development Agency (ZDA) to link the profiled MSMEs to potential investors on an investment platform. ZDA can emulate and create a similar platform that is currently being run by UNIDO called the Digital Investment Profiling System (DIPS), which profiles local manufacturers and links them with potential investors.
Finally, wider market access domestically through the active implementation of the MSME reservation scheme by the Zambia Public Procurement Authority (ZPPA) has the potential to attract investment in local MSMEs.
