Multiple disruptions of various magnitudes

Economic development is an essential precondition of overall development within a country. Growth and resilience of Small and Medium Enterprises (SMEs) in Serbia are critical in that regard, as they are the backbone of Serbian economy and account for two thirds of formal business sector employment (SMEs including microenterprises).

The growth and resilience of SMEs in Serbia have been challenged by a range of disruptions of different magnitudes and impacts in recent years. Some of those are earthquake-like, such as COVID-19 pandemic, and some are more like a slow, but persistent erosion, such as depopulation. But, as the old proverb says, “when life gives you lemons, make a lemonade” — we are witnessing that those disruptions present both challenges and opportunities.

The COVID-19 pandemic hit Serbian SMEs hard. According to the COVID-19 Socio-Economic Impact Assessment more than two thirds of SMEs were interrupted, 20% of SMEs had to restrict almost their entire operations and as many as an additional 49% of these SMEs worked with significantly reduced capacity and lacked resources. While the pandemic exacerbated other existing challenges they face, such as access to finance and markets, it also opened opportunities with the rise of nearshoring as a policy priority for many European states.

Additionally, depopulation in Serbia presents a big challenge for SMEs, with changes in labour force quality and availability, as well as shifts in the needs of a society with a changing population structure and, consequently, different customer needs. At the same time this situation offers opportunities for developing products and services for an aging population.

As many other countries, Serbia also needs to adjust to the acceleration of technological developments. The opportunity here is to design and offer new services and products using digital technologies. The European Union’s Green Deal and the Green Agenda for the Western Balkans present a push and, at the same time, a call for the transition towards a green and circular economy.

All these circumstances were taken into account when we started looking for ways to help make SMEs in Serbia more resilient and ensure their sustainable growth. It was clear that we are facing a complex problem — one that has an unknown solution and is dynamic. Or to be more illustrative — it is like a tunnel we enter and have no idea how long we will be in the dark, even if there is an exit on the other end.

UNDP Serbia’s Deep Demonstration process

In order to figure out how to best support the government and society to tackle this challenge, our team at UNDP Serbia joined the first cohort of Deep Demonstrations supported by UNDPs Innovation Facility and funded by the Government of Denmark. Together with Deloitte, we have gone through an intense five-month process, that proved unique and valuable in many ways. To give you a glimpse, this is what it encompassed:

1. Looking at the problem in its entirety: We took time to analyse the broader ecosystem around SMEs in the country, identifying drivers, trends, challenges and opportunities for SME growth and resilience. The idea was to look at the problem from a system level and detect acupuncture points that can support system transformation. This approach is in stark contrast to how international development projects are usually set up, where stand-alone projects would look at SME development from one particular lens, for example environmental sustainability or access to finance. Instead, apart from these, we looked at the issue from many other different angles such as regulatory environment, skilled labour force, technology, and digital transformation, customers, and markets, with a special emphasis on sustainability and inclusion across all the above areas.
2. Forming a diverse team and working in new ways: Rather than working with colleagues within one particular cluster, we composed a team of 10 UNDP Serbia staff from across the office, with expertise in private sector engagement, governance, economics, sustainable finance, start-up development, green and circular economy, environment and climate change, digitalization, skills, and labour. Despite the challenges that this way of working brought, such as figuring out new lines of communication and decision making, the ultimate benefit is evident — we are making sure that we don’t neglect certain aspects of SME resilience or place too much importance to some other.
3. Engaging with and learning from a variety of relevant actors: First we conducted numerous interviews with representatives of the private sector, government, donors, academia, civil society, and financial institutions. Subsequently, a series of virtual workshops with various relevant actors enabled us to collaboratively identify and analyse features and futures of the SME sector in Serbia. This diversity in perspectives helped us develop a more holistic approach to the challenge of future-proof and smart SME development. There are a number of partners already working in the area of SME development in Serbia, so it was particularly important that UNDP finds a good approach and value proposition, where it can contribute the most, having in mind its mandate and position.

The Deep Demonstration process produced a number of results. First, it helped us articulate a tentative vision for SMEs Serbia: SMEs being at the frontier of technological and green transformation accelerate sustainable human and economic development in the country.

Second, it enabled us to understand complex problems better and to find a new way to work in the office by fostering greater collaboration across teams and leveraging our individual and collective knowledge to do more with less.

Third, the process allowed us to better understand the nature, needs, and dynamics of SMEs in Serbia and to begin to integrate these findings into a coherent portfolio of possible interventions that are expected to inform and learn from each other as they are implemented.

What we learned about SMEs

The starting point of any intervention aimed at improving SME resilience is understanding the three key needs of any business: customer needs, money, and operations. They are interconnected and interdependent and need to be in in balance in order for an enterprise to keep running and be resilient to the external changes and disruptions that come its way. We based this understanding on a detailed ecosystem mapping of the SME sector in Serbia and its links with other issues such as technological developments, geo-political trends, and depopulation.

This has enabled us to verify assumptions on the existing gaps in the SME ecosystem, draw new insights, acknowledge their linkages and interdependencies and sketch areas where UNDP, through a portfolio of interconnected interventions, can support the existing ecosystem of government agencies, development partners, private sector, and other stakeholders to advance SME development. Here are some opportunity areas we sensed that can address those gaps:

1. Integration into supply chains: Support SMEs to develop requisite skills and expertise and foster fair collaboration with large companies to overcome the issue of SME isolation and lack of integration into supply chains.
2. Customer-centricity aligned with societal needs: Support SMEs to understand existing and potential customers’ interests through joint programmes that also respond to the needs of the wider society with a diverse set of private and public sector partners.
3. Leveraging regional integration: support the Government of Serbia to elevate SMEs as effective and successful business actors in an increasingly integrated Western Balkans Common Regional Market.
4. Technology for all: Support the Government of Serbia to develop additional digital tools, such as platforms, to address the issues of rapid changes in technological and regulatory environment relevant for SMEs, while also assisting SMEs to develop strong digital capabilities to close the digital gap, uncover a range of new opportunities and business models enabled by emerging technologies and alert about cybersecurity threats.
5. Sustainable finance: Work with development partners and other relevant actors already active in this area to elevate sustainable and foster green and unconventional finance options to help Serbian SMEs grow and thrive.
6. Cultural shifts for Entrepreneurship: Leverage support from creative industries and innovative, forward-looking partners to tackle the issues of cultural reservations towards entrepreneurship and investments.

What happens next — vision for the future

We seek to support growth of SMEs that are future-proof, in a way that can not only meet their needs related to customers, finance and operations despite potential shocks, but also make them technologically savvy, environmentally friendly, and able to respond to the wider needs of the society.

We are now in dialogue with government and donors on how to support elevation of the system to enable growth of SMEs that are more resilient to shocks in the future.

So far, the government is fully on board. It has been part of this process since the early days of portfolio development. The first signals from donors are also positive. They have reacted positively to the idea of a wider portfolio to which they can contribute and that can have greater impact with less investment. One of the strong appeals of a portfolio approach is that it is engaging multiple government partners in one go, as opposed to donors’ usual bilateral cooperation modalities where they may only cooperate with a single Ministry or Government Agency. It is still early days, so if you are interested in collaborating do not hesitate to reach out: sdgi.rs@undp.org.

*Blog originally published on: UNDP Innovation.