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Self-employment and poverty in developing countries

The right policies can help the self-employed to boost their earnings above the poverty level and earn more for the work they do

10.15185/izawol.60 60 Fields, G

by Gary S. Fields

A key way for the world’s poor—nearly half of humanity—to escape poverty is to earn more for their labor. Most of the world’s poor people are self-employed, but because there are few opportunities in most developing countries for them to earn enough to escape poverty, they are working hard but working poor. Two key policy planks in the fight against poverty should be: raising the returns to self-employment and creating more opportunities to move from self-employment into higher paying wage employment.

Entrepreneurs and their impact on jobs and economic growth

Productive entrepreneurs can invigorate the economy by creating jobs and new technologies, and increasing productivity.

10.15185/izawol.8 8 Kritikos, A

by Alexander S. Kritikos

Entrepreneurs are a rare species. Even in innovation-driven economies, only 1–2% of the work force starts a business in any given year. Yet entrepreneurs, particularly innovative entrepreneurs, are vital to the competitiveness of the economy. The gains of entrepreneurship are only realized, however, if the business environment is receptive to innovation. In addition, policymakers need to prepare for the potential job losses that can occur in the medium term through “creative destruction” as entrepreneurs strive for increased productivity.

Immigrants and entrepreneurship

Business ownership is higher among immigrants, but promoting self-employment is unlikely to improve outcomes for less skilled immigrants

10.15185/izawol.85 85 Lofstrom, M

by Magnus Lofstrom

Immigrants are widely perceived to be highly entrepreneurial, contributing to economic growth and innovation, and self-employment is often viewed as a means of enhancing labor market integration and success among immigrants. Accordingly, many countries have established special visas and entry requirements to attract immigrant entrepreneurs. Research supports some of these stances, but expectations may be too high. There is no strong evidence that self-employment is an effective tool of upward economic mobility among low-skilled immigrants. More broadly prioritizing high-skilled immigrants may prove to be more successful than focusing on entrepreneurship.

Entrepreneurship and the business cycle

Nascent entrepreneurship can have some predictive power over the business cycle

10.15185/izawol.90 90 Thurik, R

by Roy Thurik

Entrepreneurship has a cyclical component, raising two questions. Is the entrepreneurship cycle related to the business cycle? And is there causality? A two-way relationship between entrepreneurship and the business cycle would be in line with the two faces of entrepreneurs: as agents of change creating upswings (opportunity entrepreneurship) and as rational actors escaping unemployment by setting up a business (necessity entrepreneurship). Nascent entrepreneurship can indeed be precyclical, implying that the two faces of entrepreneurship also show up in the business cycle, with promising policy implications.

Ethnic minority self-employment

Poor paid employment prospects push minority workers into working for themselves, often in low-reward work

10.15185/izawol.120 120 Clark, K

by Ken Clark

In many countries, ethnic minority groups are over-represented in self-employment compared with the majority community. The kind of work done by minority entrepreneurs can therefore be an important driver of the economic well-being of their ethnic group. Furthermore, growing the self-employment sector is a policy objective for many governments, which see it as a source of innovation, economic growth, and employment. While self-employment might offer economic opportunities to minority groups, it is important to understand the factors that underlie the nature and extent of ethnic entrepreneurship to evaluate whether policy measures should support it.

Latent entrepreneurship in transition economies

Some entrepreneurs and would-be entrepreneurs face financial and bureaucratic barriers to starting a business

10.15185/izawol.155 155 Atasoy, H

by Hilal Atasoy

Because entrepreneurial activity can stimulate job creation and long-term economic growth, promoting entrepreneurship is an important goal. However, many financial, bureaucratic, and social barriers can short-circuit the process of actually starting a business, especially in transition economies that lack established institutional systems and markets. The main obstacles are underdeveloped financial markets, perceptions of administrative complexity, political and economic instability, and lack of trust in institutions. Gender disparities in the labor market are also reflected in less entrepreneurial activity among women than men.

Entrepreneurship for the poor in developing countries

Well-designed entrepreneurship programs show promise for improving earnings and livelihoods of poor workers

10.15185/izawol.167 167 Cho, Y

by Yoonyoung Cho

Can entrepreneurship programs be successful labor market policies for the poor? A large share of workers in developing countries are self-employed in low-paying work or engage in low-return entrepreneurial activities that keep these workers in poverty. Entrepreneurship programs provide business training and access to finance, advisory, and networking services with the aim of boosting workers’ earnings and reducing poverty. Programs vary in design, which can affect their impact on outcomes. Recent studies have identified some promising approaches that are yielding positive results, such as combining training and financial support.

New firms entry, labor reallocation, and institutions in transition economies

In transition economies, better property rights protection and rule of law enforcement can boost job creation and growth

10.15185/izawol.180 180 Bruno, R

by Randolph L. Bruno

In the transition from central planning to a market economy in the 1990s, governments focused on privatizing or closing state enterprises, reforming labor markets, compensating laid-off workers, and fostering job creation through new private firms. After privatization, the focus shifted to creating a level playing field in the product market by protecting property rights, enforcing the rule of law, and implementing transparent start-up regulations. A fair, competitive environment with transparent rules supports long-term economic growth and employment creation through the reallocation of jobs in favor of new private firms.

Knowledge spillovers and future jobs

In the future, jobs will be created by those bold enough to transform new ideas and knowledge into innovations

10.15185/izawol.218 218 Audretsch, D

by David B. Audretsch

Globalization brings both good and bad job news. The bad news is that jobs will be outsourced from high-cost developed countries into lower-cost locations as soon as the associated economic activity becomes mechanized and predictable. The good news is that globalization creates opportunities that can be realized by people bold enough to transform new ideas and knowledge into innovations. In that way, entrepreneurs will play a vital role in creating the jobs of the future by transforming ideas and knowledge into new products and services, which will be the competitive advantage of the advanced economies.

Financing high-potential entrepreneurship

Government should create an enabling environment—for entrepreneurs and investors—rather than try to pick “winners”

10.15185/izawol.252 252 Nanda, R

by Ramana Nanda

Entrepreneurship is essential to job creation and to productivity growth and therefore is an important matter for government policy. However, policymakers face a difficult challenge because successful growth for a few firms—which cannot easily be identified in advance—is accompanied by widespread failure for most other new firms. Predicting which firms will fail and which will succeed is nearly impossible. Instead of futilely trying to pick winners, governments can play a useful role in facilitating the growth of the most promising firms by setting the conditions for efficient trial-and-error experimentation across firms.

Conditions for high-potential female entrepreneurship

Individual and environmental factors can lead women to start innovative market-expanding and export-oriented ventures—or block them

10.15185/izawol.255 255 Terjesen, S

by Siri A. Terjesen

Female-led ventures that are market-expanding, export-oriented, and innovative contribute substantially to local and national economic development, as well as to the female entrepreneur’s economic welfare. Female-led ventures also serve as models that can encourage other high-potential female entrepreneurs. The supply of high-potential entrepreneurial ventures is driven by individuals’ entrepreneurial attitudes and institutional factors associated with a country’s conditions for entrepreneurial expansion. A systematic assessment of those factors can show policymakers the strengths and weaknesses of the environment for high-potential female entrepreneurship.

Corporate income taxes and entrepreneurship

The type, quality, and quantity of entrepreneurship are influenced significantly by corporate income taxes—though only slightly

10.15185/izawol.257 257 Block, J

by Jörn Block

Corporate income taxation influences the quantity and type of entrepreneurship, which in turn affects economic development. Empirical evidence shows that higher corporate income tax rates reduce business density and entrepreneurship entry rates and increase the capital size of new firms. The progressivity of tax rates increases entrepreneurship entry rates, whereas highly complex tax codes reduce them. Policymakers should understand the effects and underlying mechanisms that determine how corporate income taxation influences entrepreneurship in order to provide a favorable business environment.

Do family and kinship networks support entrepreneurs?

Family and kinship ties offer multiple benefits to developing country entrepreneurs but can also have adverse effects

10.15185/izawol.262 262 Nordman, C

by Christophe Jalil Nordman

Family and kinship networks are important in helping people get jobs and start companies, as statistics for developing countries show. Promising new research has begun to assess the positive and negative effects of these family and kinship ties on entrepreneurial success. To what extent, and why, are family networks used, and do they result in better economic outcomes for entrepreneurs? Results point to the need for policymakers to identify and emulate efficient informal networks in order to develop innovative support policies for vulnerable entrepreneurs, especially for those who are attached to weak or inefficient networks.

Measuring entrepreneurship: Type, motivation, and growth

Effective measurement can help policymakers harness a wide variety of gains from entrepreneurship

10.15185/izawol.327 327 Desai, S

by Sameeksha Desai

Policymakers rely on entrepreneurs to create jobs, provide incomes, innovate, pay taxes to support public revenues, create competition in industries, and much more. Due to its highly heterogeneous nature, the choice of entrepreneurship measures is critically important, impacting the diagnosis, analysis, projection, and understanding of potential and existing policy. Some key aspects to measure include the how (self-employment, new firm formation), why (necessity, opportunity), and what (growth). As such, gaining better insight into the challenges of measuring entrepreneurship is a necessary and productive investment for policymakers.

Do institutions matter for entrepreneurial development?

In post-Soviet countries, well-functioning institutions are needed to foster productive entrepreneurial development and growth

10.15185/izawol.334 334 Aidis, R

by Ruta Aidis

Supportive institutional environments help build the foundations for innovative and productive entrepreneurship. A few post-Soviet countries have benefitted from international integration through EU membership, which enabled the development of democracy and free market principles. However, many post-Soviet economies continue to face high levels of corruption, complex business regulations, weak rule of law and uncertain property rights. For them, international integration can provide the needed support to push through unpopular yet necessary stages of the reform process.