PROFO: Promoting SME business association projects in Chile

1 PROFO: Promoting SME business associations World Bank 2013

PROFO: Promoting SME business association projects in ChilePROFO (Proyectos Asociativos de Fomento) is a government program, created in 1992 and managed by the Chilean National Development Agency (CORFO), that seeks to promote associations among groups of small and medium-sized enterprises (SMEs) in Chile. Its aim is to improve the technical, financial, and managerial capabilities of SMEs by providing gradually declining subsidies for implementing new business strategies designed to increase their profitability and competitiveness. Several program evaluations have shown a positive impact in terms of adding value to products and growth in the total factor productivity (TFP) of participating SMEs.

By Rodrigo Cortes-Lobos World Bank, 2013

Introduction Manufacturing SMEs have inherent competitive disadvantages because they lack economies of scale. A chronic problem in most countries, it is exacerbated in developing nations, where SMEs are the most numerous establishments in the economy. This makes their improvement critical to the country’s overall economic competitiveness. PROFO (Proyectos Asociativos de Fomento) was created in an attempt to emulate successful government policies developed to support SMEsi in Spain and Italy. A previous Chilean experience in the agricultural sector also provided background and motivation for the PROFO program. Technology transfer groups (GTTs),ii started by the Chilean Agriculture Ministry during the mid-1980s, provided technical support to groups of farmers who were adopting modern technology to improve their businesses. The Chilean National Development Agency (CORFO)iii created the PROFO program to apply the GTTs’ knowledge transfer model to other sectors.

In line with a new strategy for overall competitiveness improvement begun in the 1990s, the Technical Cooperation Services (SERCOTEC-CORFO)iv of the Ministry of the Economy launched the PROFO program with two main goals: to establish a business knowledge platform


and to provide financial support for SMEs to collaborate in alliances.

The logic behind giving SMEs incentive to collaborate was that alliances of small firms could gain more access to local and international markets than individual firms working alone. Through their cooperation they could also facilitate the adoption of new technologies in production processes and update management and commercialization techniques. CORFO established a financial support program to promote the association of at least five SMEs working in the same sector, giving them direct subsidies of up to 70 percent of the cost of hiring a manager to help them coordinate the association and gain access to governmental support instruments and programs for businesses.

One hindrance to the circulation of information and knowledge across industries is the lack of trust among SMEs, which fear the possibility of imitation and loss of company secrets. The PROFO program enabled groups of SMEs to establish trusting relationships among their members by providing a means to protect the companies’ sensitive information while still collaborating to achieve common objectives.

Unfortunately, the reputation of CORFO, the agency implementing the program, as an unwieldy and inefficient bureaucracy discouraged companies from participating in the program, as did the belief that CORFO was incapable of helping firms improve their competitiveness directly. To address this issue and improve the administration of the program, CORFO put private administrative agencies called “agentes operadores intermediarios” (AOIs) in charge of disseminating it across the country and to different industries. They were also in charge of recruiting new participants and assisting them during the application process, including gathering required documents (Rivas 2012).

Program design

In designing the PROFO program, policymakers in CORFO and the Ministry of the Economy took the following key factors into consideration:

• SMEs play a central role in the Chilean economy because they are a major source of employment and key contributors to local economies. In 2006, they provided more than 86 percent of the jobs in Chile (Ayyagari et al. 2007).

• Because they are small, SMEs do not benefit from economies of scale (Saarenketo et al. 2004). This places them at a disadvantage to large firms in the same product lines—an effect that is greater in the agricultural sector, where small and medium-sized farmers pay higher prices for production inputs, such as fertilizer, seeds, and pesticides (Errázuriz 1996; Portillas 2000).

• The isolation of most SMEs from the national innovation system reduces their chances of getting access to public support programs, technology, and assistance to improve their competitiveness (Goldberg 2008).

• If SMEs improve their management practices they can become more competitive in international as well as local markets.


• A group of SMEs attains benefit not only from a subsidy oriented to them, but also from their association with other SMEs facing similar problems and challenges.

The PROFO program was designed and implemented by SERCOTEC, a unit in CORFO that already specialized in SMEs. At the time, a number of institutional interventions in other countries had proved successful. In the north of Italy, for instance, the government provided services including financial, technical, and training assistance to SMEs, with the result that some—notably among shoe and footwear manufacturers—became very competitive in the international market, gaining access to high-quality market niches (Brusco 1990; Wattanapruttipaisan 2002). Such positive experiences could be attributed to the realization by policymakers that cooperation was a key factor in the success of SMEs.

Building on that example, the PROFO program required each participating group to be comprised of at least five SME producers of goods or services who would take collective actions during the period of the project to achieve agreed-upon goals. Each project had three stages: preparatory, implementation, and pursuit of a self-designed project.

During the preparatory phase, an idea for a business association was formulated either by a group of SME owners who wanted to apply to PROFO or by one of the intermediary agencies (AOIs) that promoted the program. In the latter case, the AOI would have selected a group of SMEs interested in forming a PROFO group, for which the agency would administer the funds and supervise progress once the project was approved. This phase had two main goals: (1) to assess the abilities of the individual SMEs in the group to develop joint activities and (2) to produce a group project plan to guide the association’s future actions. This stage lasted a maximum of 12 months, and 80 percent of the state subsidy went toward covering the assessment activities.

During the implementation phase, a PROFO-funded group developed a project proposal for adopting modern managerial techniques and new technologies that could support the production process and commercialization of its core businesses. The group selected and hired a group manager responsible for facilitating project activities and managing communication with the AOI. This stage lasted three years, with 70 percent of the subsidy covered by the Chilean government (with a maximum of US$100,000 yearly)—an amount that would steadily decrease during the years the project was in operation.

The objective of the final project phase was for the group to develop a project unique to their own situation that would build on the improvements achieved during earlier stages. For instance, a group of grape producers who established a business association during initial implementation then pursued legal formation as a company. After doing so, and hiring a manager to lead the company’s strategic planning, the association set the goal of transitioning during the final phase from grape production to wine production. By building on the knowledge gained earlier in their association with PROFO, the group was able to pursue projects of greater sophistication with a promise of significant value creation. Support for this final phase was


reduced to a period of up to two years during which each PROFO group had to finance at least 50 percent of the total cost of the project.

Implementation

The PROFO program was launched in 1991. During its first two years, it was administered by CORFO agency managers as well as the specialized unit, SERCOTEC. They supported 15 to 20 projects in 1992 and between 20 and 30 in 1993. This was out of a total of 75,636 companies eligible for the program that year, meaning CORFO only achieved 0.1 percent coverage of its target population, a considerable underperformance. To rectify this problem, AOIs were called in to help expand the program to a larger number of SMEs. By 1995 the number of projects had increased by 300 percent, and it continued growing until 2004 (see figure 1).

Figure 1: Number of SMEs Participating in PROFO Projects, 1992–2008

Source: CORFO and Muños Goma, 2009.

The PROFO program was originally created to support SME groups in the manufacturing sector. In 1996, the first program evaluation conducted by a group of economists of the Universidad de Chile showed positive results and suggested the program be extended to the agricultural sector, with project duration increased to up to four years. In 2001, of the total 445 PROFO groups, 23 percent were in the manufacturing sector and 32 percent in the agricultural sector. This distribution changed in the following years, with the proportion of groups in the agricultural sector reaching 58 percent in 2006 (see figure 2).


Figure 2: PROFO Projects Distribution by Industry, 2006

Source: Muños Goma 2009.

The initial budget for the program was approximately US$3.5 million in 1995, increasing to a peak of US$14.9 million in subsidies in 2004, when spending on it represented half the total of CORFO’s portfolio programs. In the same year, the private co-financing contributions of the PROFO program amounted to around US$9.9 million, or about 34 percent of the program’s total operating costs.

In 2005, the Chilean government created the National Council on Innovation for Competitiveness (CNIC).v Council members were selected from both the private sector and government to offer advice to the president on science and technology (S&T) policy. One of the council’s main recommendations was that a new design be developed for S&T-related government policies, to increase their effectiveness.

Because of this, CORFO was redirected to emphasize technological innovation and business development. To accomplish this, the agency created a new unit called Innova Chile that shifted PROFO from the diffusion strategies applied during the preceding years to a focus on working with a smaller number of companies who received larger awards and undertook projects of longer duration. Projects now could last up to six years, and the subsidy increased from US$280,000 to US$460,000 for each group.

The new format also focused the program more closely on business strategy, with other activities, such as quality certifications, reassigned to different CORFO programs. Additionally, the restructuring introduced a new requirement for applicants in response to evaluations that had found a high turnover rate in the membership of PROFO groups over the life of the projects.

Actividad 0%

Agriculture 58%

Animal Production

12%

Manufacturing 10%

Services 7%

Others 13%


This high turnover rate seriously reduced the odds of a group project achieving expected results and as a result, any group of firms applying for PROFO project funding was now required to be legally established as a business partnership. After the implementation of this requirement, the number of PROFO projects fell by more than two-thirds, reducing the number of participating companies from 3,725 in 2002 to 1,203 in 2008.

After it was restructured in 2005, funding for the program dropped drastically, to US$5.6 million in 2008, reducing it to 19.1 percent of CORFO’s total annual budget. Both public and private contributions to program activities fell in the following years, with public support decreasing more. The relative participation of the private sector in program financing increased to 44 percent in 2008 (see Table 1). With the reduction in the number of new PROFO projects approved each year, the program aimed for greater impact on the performance of participating firms. Agency managers believed having fewer PROFO groups would increase the program’s success rate by allowing better administration with more efficient financing, monitoring, and support of PROFO groups’ activities, and the program would have a greater effect on product and process innovation.

Table 1: PROFO Budget Period, 2002–8 (in thousands USD)

Source: RIMIS 2011.

The effect of the restructuring on the PROFO program was a reduction in the number of projects at the implementation phase by more than half after 2005. On the other hand, the number of associations at the project phase increased. This effect was what CORFO intended. The idea was to cut losses by investing program resources in PROFO projects that had already been successful in achieving their goals in previous stages, rather than initiating new projects. In these cases, companies were more willing to increase their co-funding contributions to consolidate their PROFO groups and generate higher economic impacts (see figure 3).

2002 2003 2004 2005 2006 2007 2008CORFO Fund contibution 14.598 14.772 14.979 11.159 6.227 5.847 5.652SMEs Cofinance contribution 9.846 9.675 9.952 8.657 6.307 6.003 5.923TOTAL (included administration costs) 29.017 29.165 29.669 23.437 14.546 13.694 13.574Annual variation -‐ 1% 2% -‐21% -‐38% -‐6% -‐1%% of total CORFO Programs' Budget 45% 50,90% 50,60% 35,30% 21,90% 18,20% 19,10%


Figure 3: Evolution of the Three PROFO Phases, 2002–8

Source: Muños Goma, 2009.

Additional modifications to the program in 2005 sought to make it more flexible and tailored to the Chilean SME environment. These included an increase in the length of each phase of the program and a reduction in the number of SME group participants required from five to three. The companies’ capacity to engage in group processes with peers had been found to be limited, with time and effort needed to overcome mutual suspicion among group members who perceived each other as business rivals. Lengthening the project period addressed the complexity of working on collaborative processes by allowing extra time to build relationships, thus fostering higher success rates.

Results

In general, the SME beneficiaries who participated in independent evaluation studies perceived the implementation of the PROFO program positively. The studies were conducted by university researchers and consultants who helped assess program impact and suggested improvements. One adjustment which was evaluated positively was the inclusion of AOIs to help with the program’s diffusion and administration. Participants considered this a positive move because divorcing operational activities from program management improved the efficiency of the latter. It also helped with decentralization and increased the transparency of CORFO duties. Furthermore, AOIs aided the expansion of the program by reaching potential participants whose isolation had most likely kept them uninformed about both it and the benefits of business group collaboration.

82 92

36 37

83 79 50

368

397 481

442

231 201

189

10 10 0 1 1 10

36

2002 2003 2004 2005 2006 2007 2008

Num

ber o

f PROFO

Projects

Years

Preparatory Implementation Specific Project


Several evaluations of the PROFO program carried out at different times showed successful results. The first was done by the Department of Economics of the Universidad de Chile in 1997. For the period 1992–96, the researchers compared SMEs who participated in PROFO for at least three years to a control group selected at random from a population of nonparticipating companies (Universidad de Chile 1997; Benavente and Crespi 2003).The study showed significant positive results on several indicators, such as organization (a firm’s capacity to plan, operate, and manage the productive process and business), introduction of strategic planning, new marketing strategies, hiring of professionals, and personnel training activities to improve administration. SMEs participating in the program were shown to provide more and better-paying jobs and have greater productivity following their participation than comparable firms in the control group. PROFO companies also increased their annual sales by 51.4 percent, while sales for the non-PROFO companies decreased by 8.2 percent during the same period. Overall, this study estimated a social benefit rate (the profit after discounting the program cost) of 2.4 and a fiscal benefit rate of 3.2, meaning the government received 3.2 dollars in tax revenue for each dollar it invested in the program.

In 2002, the same organization conducted a second evaluation of the program (Universidad de Chile 2003). This time, the researchers surveyed 1020 companies (102 PROFO projects) that had finished the program during the period 1999–2000, with a response rate of 56 percent (571 completed surveys). Of these, 307 were from manufacturing and other nonagricultural sectors, and 264 were from the agricultural sector. The study also covered 18 PROFO groups and 75 companies that participated in the first evaluation in 1997. A control group comprised 440 nonparticipating companies, with a response rate of 67% (295 completed surveys). The survey evaluated the impact of the program at least one year after projects were concluded.

This evaluation’s findings echoed the positive results found in the previous study. It showed increases in annual sales of 22.6 percent for the program participants and salaries 15.7 percent higher than for companies in the non-PROFO reference group. The benefit–cost analysis revealed positive social benefits for those PROFO groups that completed the program. For each Chilean peso invested on direct subsidies to the projects, four were returned in tax revenues. It was not possible, however, to determine if the economic benefits obtained by the group of companies that completed the program could cover the cost of those that quit.

In 2005, a study using the dataset from the 2003 Universidad de Chile survey analyzed the networking capacities developed by the SMEs that participated in the PROFO program from 1998–2001. The authors calculated the Standardized Actor Degree Centrality Index (CD), a method of social network analysis (or sociometrics). It measures the number of linkages reported among firms relative to the total number of firms in a network on three sociometric dimensions— commercial, technological, and financial. This methodology tracked the evolution of the network’s structure with regard to linkages among PROFO partners, its effect on efficiency, and the effects of public intervention on firms’ innovativeness and competitiveness.

The results of this study confirmed the program’s accomplishments in terms of strengthening the industrial linkages among PROFO participants, finding a significant increase in stable


relationships among them. It also found that participant companies performed better as a result of their networking activities and provided strong evidence of positive contributions by intermediary agencies (AOIs) and PROFO managers as catalysts and coordinators of networking. Although firms that invested more in creating and developing linkages had better results in process innovation, however, no significant results were found on product innovation (Maffioli 2005).

The most recent PROFO program evaluation was conducted by RIMISP,vi an independent organization hired in 2011 by the Chilean government. It focused on a later period—2002–2008—and was based on interviews and surveys with AOIs and PROFO members. That information was combined with sales data from the Chilean income tax system, in order to allow econometric analysis of the program. Researchers drew a sample of 163 program participants from a total of 1,136 companies and selected at random a control group of nonparticipating firms with similar characteristics.

This study found only a few positive impacts from the program. Although the PROFO members examined had a positive perception of program benefits, the actual positive impact was small, and found for those in the manufacturing sector. No impact was found for those in other sectors, such as agriculture and services. In addition, while the PROFO program had positive effects on job creation, many participants exited the program before completing the entire scope of their projects. This problem was explained by two main factors: first, the high heterogeneity of the PROFO group members, which made successful cooperation difficult, and, second, their unrealistic expectations about short-term results. When expected benefits did not materialize in the first years of the program, they abandoned the project.

Furthermore, in contrast to previous evaluation results, this study found a negative impact on labor productivity in the primary sectors of agriculture, forestry, fishing, and mining. In response, CORFO argued that because the study’s methodology did not separate the three different phases of the program, it may have overlooked positive impact for some portion of the phases.

In sum, the PROFO program has been shown to be successful in promoting alliances among SMEs. Since its creation, it focused on solving an important problem faced by SMEs in Chile: the disconnection among small companies that usually work alone without the advantage of sharing business information and knowledge. The program gave them the opportunity to work together to share strategic information to enhance their management and commercialization capabilities and improve their sales. No evidence indicated, however, that it improved the firms’ product innovation. One possible explanation for this negative result is the general emphasis of PROFO group activities on the commercial aspects of their current products and services rather than the development of new products. The latter would have required more resources to conduct research and development activities, whose results are also known to be more unpredictable.

The program also helped improve the environment for firm cooperation. Firms began to appreciate the program’s services and to recognize the benefits of associating with other SMEs


facing similar problems. Increased confidence motivated a change in the perception of rivalry among SME managers. They understood the necessity of conducting collaborative activities to overcome challenges, such as conquering new international markets. For instance, PROFO groups in the agricultural sector were able to achieve a reduction in production costs through the joint acquisition of inputs, investments, and sales. A very successful case was the SME wineries, mentioned above, that produced bulk wine and sold it to big wine companies. After participating in the program, the wineries were able to work together to produce their own high-quality wine and export it to global markets (Rivas 2012).

Lessons learned

Since its creation, the PROFO program has demonstrated itself to be one of the most solid Chilean S&T programs, with 23 years of uninterrupted operation. Accordingly, several lessons can be observed based on its success.

Association Incentives

The success of a PROFO group was directly related to the interpersonal relationships among its members. The group needed to be cohesive to achieve significant goals, and this required interaction to develop trust among its members; the program helped with this.

Integration of Actors

Although the benefits of involving AOIs to facilitate the promotion and administration of the program were clear, these private organizations had an incentive to formulate and approve new PROFO projects but not to follow up on the groups during the project development phase. The lack of assistance left the PROFO groups with insufficient support to develop further actions. Meanwhile, an AOI could have helped a group monitor its achievement of PROFO goals and evaluate its PROFO managers, and, more importantly, it could have served the group as a sort of permanent consultant on management and strategic decisions.

Program Evaluations

The PROFO program was evaluated several times, and these studies contributed to the learning process. They highlighted the importance of interpersonal relationships in the SME groups and trust among partners, and of the experience of the managers and the necessity of private co-financing of the projects. These lessons were taken up by the program along the way. Furthermore, key information from the evaluations helped in making adjustments to the program to improve its scope and efficiency and provided a basis for extending the program to other sectors, such as agriculture, with increased duration in consideration of longer production processes.

In 2005, CORFO changed its strategy to focus on the consolidation of PROFO groups in response to evaluations that indicated high turnover in membership that undermined the stability of the groups and the achievement of program goals. The new strategy had consequences for program coverage and reduced public funding. At the same time, however, it improved the


chances of success for groups that demonstrated higher commitment to their goals and a willingness to increase their co-financing contributions to the program.

Focus on Management Capabilities

Finally, analysis indicated that the role played by the PROFO manager was another key factor in the success of projects, confirming research results on other experiences of the same sort (Dini 2001). Monitoring the hiring process to guarantee the selection of candidates with the right skills to lead a PROFO group is very important. They should be capable of facilitating the implementation of the business plan for the group without being undermined by any one of its members. During the project, the manager must ensure that the execution of the business plan maximizes the benefits for the entire group and avoid practices that benefit some at the expense of others.

The selection of the PROFO group managers turned out to be a critical factor in the program design. The group managers were supposed to be experienced businesspeople. In practice, however, they often did not fulfill this requirement. For the most part, the PROFO groups hired young professionals without any management experience who became very dependent on the group members’ opinions and decisions. This weakness was gradually corrected as the managers gained experience, and through CORFO’s creation of an operational manual to advise in the managerial hiring process, with clear responsibilities and obligations established in advance.

References

Ayyagari, M., T. Beck, and A. Demirguc-Kunt. 2007. “Small and Medium Enterprises across the Globe.” Small Business Economics 29 (4): 415–34.

Benavente, J. M., and G. Crespi. 2003. “The Impact of an Associative Strategy (the PROFO Program) on Small and Medium Enterprises in Chile.” SPRU.

Brusco, S. 1990. “The Idea of the Industrial District: Its Genesis.” In Industrial Districts and Inter-firm Co-operation in Italy, ed. F. Pyke, G. Becattini, and W. Sengenberger. Geneva: ILO.

Economics Department University of Chile. 1997. Impacto del instrumento PROFO en la pequeña y mediana empresa. Informe Final. Dirección de Presupuestos [Profo Impacts on SMEs: Final Report]. Ministerio de Hacienda, Santiago de Chile.

Departamento de Economía de la Universidad de Chile. 2003. Programas Asociativos de Fomento PROFOs de CORFO. Informe Final de Evaluación [CORFO’s Group Development Programs (PROFOs). Final Evaluation Report]. Dirección de Presupuestos. Ministerio de Hacienda, Santiago de Chile.


Dini, M. 2001. Programas de Fomento de la Articulación Productiva: Experiencias en América Latina en los años noventa ECLAC. [Promotion Program of Productive Linkage: the experience of Latin America in the ‘90s]

Errázuriz, L. F., and E. Muchnik. 1996. Visión crítica de la agricultura chilena y sus políticas [Critical View of the Chilean Agricultura and its Policies] (No. 245). Centro de Estudios Públicos.

Goldberg, M., and E. Palladini. 2008. “Chile: A Strategy to Promote Innovative Small and Medium Enterprises.” World Bank Policy Research Working Paper 4518.

Maffioli, Alessandro. 2005. “The Formation of Network and Public Intervention: Theory and Evidence from the Chilean Experience.” ISLA Working Papers 23.

Muños Goma, O. 2009. El Desarrollo Institucional de CORFO y sus estrategias desde 1990. Desarrollo Productivo En Chile: La Experiencia De CORFO Entre 1990 Y 2009 [The Institutional Development of CORFO between 1990 and 2009]. FLACSO-Chile, Catalonia.

Portilla, B. 2000. “La política agrícola en Chile: lecciones de tres décadas [The Chilean Agricultural Policy: Lessons of Three Decades] . Naciones Unidas, CEPAL, División de Desarrollo Productivo y Empresarial, Unidad de Desarrollo Agrícola.

RIMISP. 2011. Evaluación de impacto. Informe Final. Programas de Fomento de CORFO [PROFO Program Impact Evaluation: Final Report]. Ministerio de Economía, Santiago, Chile.

Rivas, Gonzalo. 2012. La experiencia de CORFO y la transformación productiva de Chile. Evolución, aprendizajey lecciones de desarrollo [The experience of CORFO and the Productive Transformation of Chile]. Serie Políticas Públicas y Transformación Productiva. Banco de Desarrollo de América Latina.

Saarenketo, S., K. Puumalainen, O. Kuivalainen, and K. Kyläheiko. 2004. “Dynamic Knowledge-Related Learning Processes in Internationalizing High-Tech SMEs.” International Journal of Production Economics 89 (3): 363–78.

Wattanapruttipaisan, T. 2002. “Promoting SME Development: Some Issues and Suggestions for Policy Consideration.” Bulletin on Asia-Pacific Perspectives 3: 57–67.

Notes i SMEs in Chile are classified by Article 2 of Chilean law N°20.416, in which small-sized firms are defined as those for which annual sales are between 2,400-25,000 UF (US$107,200 - US$1,115,000) and medium-sized firms as those with annual sales higher than 25,000 UF but lower than 100,000 UF (US$4,460,000). ii GTT: Grupos de Transferencia Tecnológica (Technology Transfer Groups).


iii CORFO: Corporación de Fomento de la Producción de Chile (Chilean Production Development Corporation). For more information, see www.corfo.cl. iv SERCOTEC, El Servicio de Cooperación Técnica (Technical Cooperation Service), is a subsidiary of CORFO, funded in 1952. Its main goal is to provide financial support and technical assistance to Chilean SMEs. For more information, see www.sercotec.cl. v CNIC, the Consejo Nacional de Innovación y Competitividad (National Council for Innovation and Competitiveness), is a Chilean presidential council that identifies and develops innovation and competitiveness policies with respect to science, technology, human capital, development, and technology transfer, among other areas. For more information, see www.cnic.cl. vi RIMISP is the Centro Latinoamericano para el Desarrollo Rural (Latin America Center for Rural Development), a nonprofit organization created in 1986 whose work is centered on studying the institutional changes, productive transformations, and social transformations of rural communities in Latin American. For more information, see www.rimisp.org.

Documents

PROFO: Promoting SME business association projects in Chile