TDI focus on: Matching Grant Funds
An effective support to policy initiatives to increase growth and bring about economic change
Firms in developing and emerging economies face the ongoing challenge of how to increase their technology and skills levels to match those of their competitors in more advanced economies. This skills and technology gap inhibits their ability to compete and grow in export markets and increases the risk of international competitors gaining a foothold in their domestic market.
They are also frequently reluctant to undertake major initiatives involving, for example, product and manufacturing development, quality certification or strengthening their position in the value chain. This reluctance can arise from both economic factors (excessive risk arising from the perceived high cost in relation to extremely uncertain outcomes) and psychological ones (insufficient information and lack of confidence).
Characteristic challenges facing firms in a developing economy:
- A shortage of corporate investment funds arising from low growth local markets.
- In particular, a shortage of funds to support SME development.
- High cost of finance.
- Products that are falling behind the rapidly advancing demands of globalised markets.
- Inadequate levels of quality and other certifications.
- Poor information on market requirements, particularly export markets, and inadequate dissemination methods to stay abreast of ongoing changes.
- Inadequate management skills.
- Infrequent contact with international markets.
- Loss of domestic market share arising from increasing imports of more sophisticated products.
- Obsolete manufacturing and processing plant and equipment.
- Weaknesses in the technological base.
However, to bring about growth and secure market position, it is essential to improve firm-level competitiveness, upgrade performance, enhance skills, add value and develop market linkages. Such improvements require proactive and positive steps, based on changes in behaviour and acceptance of new challenges.
Grants can be an incentive to change
From a policy point of view, encouraging firms to take the necessary steps in the right direction can be assisted by a suitable level of incentive. The matching grant fund (MGF) mechanism is a proven technique in stimulating change:
- Financial support reduces the perceived risk of investing in business development, thereby encouraging firms to embark on growth initiatives.
- The commitment of firms to development projects is significantly increased by virtue of their contribution to the cost.
- The time limited nature of a matching grant fund provides a finite window of opportunity to obtain assistance, thereby forcing putative beneficiaries into action.
- On the other hand, free services tend not to be critically evaluated, or indeed particularly valued, by enterprises. A significant, non-trivial contribution by firms to the cost of services assisted by MGFs reduces the likelihood of irrelevant or low value services being supported.
- Establishing a programme on a reimbursable basis facilitates the quality control possible at the stage of performance (although not impact) assessment.
- The existence of an ex-post assessment of performance encourages the maintenance of a focus on quality and value for money throughout implementation of the activities supported.
The availability of financial assistance to mitigate the cost encourages them to take initiatives earlier and to a higher standard than they might otherwise do, or may not do at all.
The impact in terms of changing behaviour is proven in a properly run matching grant fund:
In a study of the Competitiveness Fund in South Africa, a World Bank funded MGF undertaken by TDI Group, 80% of beneficiaries indicated they had undertaken competitiveness enhancing projects earlier and/or to a higher standard than they would have done without financial assistance.
Structure of a grant scheme
The level of financial support is normally 50%. The project and outputs are normally agreed in advance. The actual costs to be assisted can vary depending on the type of grant scheme, but it is not normal to support either capital investment or recurrent costs, e.g. wages, rents, etc.
A Matching Grant Programme is a highly flexible tool. It can, for example, be made available to all enterprises in a particular country or it can target specific regions, product groups, clusters or value chains that are likely to have an above average economic impact. A very wide range of competitiveness enhancing activities can be made eligible for grant assistance, or the Programme can focus on a specific activity. For example, a very successful recent project in Moldova solely targeted quality certification in support of an important government policy initiative to strengthen the country’s quality infrastructure.
TDI Group is a world leader in designing and managing matching grant funds. It understands the challenges and has a significant track record of successful project execution. Contact: michaelp@tdigroup.ie for more details or call ++353-1-444 6565
