**9**

**Figure 3. A continuum of Enterprise Assistance Models**

|**Supply**Driven|-<br>*|||Demand Driven|
|---|---|---|---|---|
|State Development|Autonomous|Assistance Fund|Assistance Fund|Voucher progm|
|Promotion Agency<br>Government Mngrnt<br>Centralized<br>Govcrnment SP a/<br>Full subsidy|Public agency<br>Private/Contract Mgt<br>Part decentralized<br>Private/public<br>SPs<br>Some service fees|Public agency<br>Govt control<br>Part decntralized<br>Private SPs<br>Co-payment|Pvt/Contract rnngmt<br>Decentralized<br>Private SPs<br>Co-payment|Pvt/Contrct nngmt<br>Decentratized<br>CO-paynmt<br>Private (?local) SPs<br>(Smaul/micro<br>ents)|
|a/<br>SP = service pro|vider||||

# Who gets the grants?

2.18 In trying to maximize social benefits all grant programs face a rationing problem. That is, if services are supplied at below free market price then there is by definition 'excess' demand, which leads to queuing, and thus the potential for arbitrary/corrupt behavior on the part of those in control of the funds. This problem has to be guarded against by designing a market-like rationing method. In practice Matching Grant projects have used simple objective eligibility criteria, and firm self-selection through FIFO and partial co-payments. Those eligible firms that are first in the queue are not necessarily the most efficient firms, but selecting the fastest respondents may have momentum benefits, which might be called X-efficiency effects. If the primary objective is institution building (e.g. making a market for business services) and if this is most likely with rapid momentum, then rapid disbursement of funding (FIFO) with low selection discretionality might be X-efficient. Nevertheless, the use of grants should best involve criteria which approximate to efficient selection.

# **Should there be** subsidies **for equipment purchase?**

2.19 To assist small firms to invest there may be a case for subsidizing the cost of equipment. (This has been done in some micro-enterprise projects). However the case is not strong. A market failure in financing of fixed assets is less likely than for financing of know-how. Know-how benefits are more diffusable than is the case with equipment, yielding a benefit potentially considerably higher than the market cost<sup>24</sup> . For example know-how embodied in workers can move between jobs, or to people outside the workforce, while equipment tends to remain proprietary and inaccessible to other firms. Thus for equipment the benefits are generally fully captured by the purchasing enterprise whereas for knowledge acquisition they may not be. There may also be a market failure in access to finance which penalizes know-how purchasers. For equipment loans banks have norms for asset valuation and loan security (e.g. collateral), which reduce the uncertainty of lending. For investment in knowledge such norms may not exist.

2.20 The case for equipment subsidies is stronger in some special cases. For example, with collective investments there may be external knowhow benefits. This might for example apply to a design center or a common repair facility. Collective investment arrangements have been promoted for this reason by business associations in countries such as Italy and Germany, or public-private assistance centers (Japan, Denmark, Korea). In South Africa business partnerships were encouraged to prepare joint programs for outside assistance<sup>25</sup> . Nevertheless, a collective investment that captures these external benefits is more

- 24 A prime example of positive knowledge diffusion externalities is the mass acquisition of internet capability throughou **t** he population which may be considered to produce social benefits far greater than the financial costs (e.g. salaries of IT workers) or the price of software and IT products.

> 25 See "South Africa; Industrial Competitiveness and Job Creation Project" World Bank Appraisal Report 1997.