Entrepreneurship is vital to innovation and growth: it brings new products and ideas to market, increasing competition and spurring other firms on to innovate more.
But levels of entrepreneurship and economic growth are not correlated. Why? Because the nature of “entrepreneurship” can mean many different things: from self-employment to running a growing business. The motivation varies a lot too: in lower income countries, a high rate of entrepreneurship is often symptomatic of the scarcity of paid employment. So what does this mean for the role of entrepreneurship in developing countries?
Yesterday, the SMF hosted a roundtable with researchers from the University of Warwick’s Centre for Competitive Advantage in the Global Economy – Professor Chris Woodruff and Dr Rocco Macchiavellio, who presented their findings from a range of studies in developing countries, including Sri Lanka, Chile and Kenya. The main results are summarised below:
It’s not (just) about finance
Giving microenterprises capital to invest raises their profits. This is as expected: finance can help firms access equipment, for example. What it doesn’t do is create jobs. Very few firms took advantage of capital to expand their businesses by employing more staff. Even the offer of wage subsidies were taken up by very few. Many firms do not want or have the capability to grow.
Many self-employed may be waiting for employment to come along
One reason that could explain the finding above is that many self-employed in developing countries do not want to take the risk of running a fully-fledged business with employees. Studies suggest that the vast majority of self-employed people look like wage earners in terms of their cognitive ability, how competitive they are, and motivation.
We don’t know if entrepreneurship training works
Often, Governments, charities and public bodies turn to solutions such as training as a means to give existing business owners the skills they need to better manage and grow their businesses. But the evidence on the effect of training schemes is very mixed. The effects range from significant in some cases to hardly any effect at all in the case of many schemes. In fact, the range of schemes and the range of countries they have been applied in makes it difficult to separate out potential differences that might relate to one scheme being better than another; and differences relating to fact that there are country-specific factors, such as culture and economic climate that may impede or increase the success rate of different types of training. What’s needed is more and better evaluation of what is already being done.
Firms that develop long-term relationships with foreign buyers benefit more
For those firms that are ambitious, exporting is an important way to growth. But from the perspective of foreign buyers, importing from a small new company in a different country with different regulations and laws can be a risk. This means that there is a strong advantage to those firms that are able to develop long-lasting relationships that allow them to build a reputation for reliability. Firms that do this are able to charge much more for the products they export: foreign buyers will pay a premium to buy from firms they trust.
But poor contract enforcement may stop these relationships happening in the first place
But this also means that it is hard for small new companies that do not have existing relationships to start exporting. Improving the legal framework and contract enforcement in developing countries could raise confidence among foreign buyers, helping smaller firms grow more quickly.