Businesses in conflict; growing or coping?

Interest in small businesses in fragile states has grown and is now large: Small and medium-sized enterprises (SMEs) are not only recognised for their ability to provide jobs, incomes and much-needed products and services in places where large or foreign businesses are scarce. The present focus on SMEs as a means to bring about development goes beyond their positive economic contribution and stresses their role in building social cohesion, fostering state legitimacy and restoring community security. However, the assumptions underpinning this policy discourse lack solid empirical evidence. The aim of this study  therefore is to help fill that gap.

Drawing on the experience from the Netherlands Private Sector Investment Programme for fragile states and based on interviews with 50 entrepreneurs of small firms in Afghanistan, Pakistan, the Democratic Republic of Congo, Sierra Leone and South Sudan this report presents firsthand evidence on how local entrepreneurs perceive, experience and deal with fragility.

A core finding of the study points to the fact that the success of many SMEs in fragile settings hinges on their ability to rely on personal and social networks as well as on arrangements with non-state governance actors (e.g. traditional leaders or insurgent groups) rather than on formal institutions. This inevitably affects the way these businesses foster or undermine social cohesion and state legitimacy. A second finding of this study is that, although equipped and eager to grow, many SMEs operating in places of insecurity and high risk deliberately deploy coping strategies rather than realising their growth potential. A third finding combines elements of the two earlier conclusions: If the structural drivers of business constraints in fragile contexts are ignored and eventually reinforced by conventional donor interventions, the latter risk reproducing and solidifying the very same structures that cause long-term instability and preclude firms from shifting from a focus on short-term resilience to longer-term growth strategies.

Discussing these findings the study proposes critical elements for SME support strategies that strive to assist SMEs with running their businesses despite insecurity and risks while strengthening their broader stabilising effects.