Entrepreneurship for the poor in developing countries Updated

Characteristics of self-employed workers in developing countries

Lower income countries generally have a higher share of self- employed workers in the labor market, particularly farmers and own-account workers, referred to here as small-scale entrepreneurs. In sub-Saharan Africa and South Asia, more than three-quarters of workers are farmers or non-agricultural self-employed workers ( Figure 1). Small-scale entrepreneurs tend to be older and less educated than wage employees, with more volatile labor market activities and a greater likelihood of exiting the labor market rather than moving to other forms of employment. Consequently, the chances of living in poverty are higher for small-scale entrepreneurs than for wage employees. Indeed, close to 70% of self- employed workers worldwide live in poor households and strive to make a living with their labor-market activities [5]. During the large labor market shock of the COVID-19 pandemic, the share of the self-employed increased particularly among young workers [6].

Scope of small-scale entrepreneurship programs

Small-scale entrepreneurship programs Small-scale entrepreneurship programs aim to promote entrepreneurial activities and more productive businesses. The programs tend to address constraints facing individual workers, such as missing skills, entrepreneurial mind-sets, social capital, and access to credit. The goal of these programs is to improve workers’ livelihoods through self-established businesses more than it is to foster innovative enterprises to drive economic growth. The programs seek to affect several common outcomes of interest [1]:

• labor market activities such as business start-up and expansion and increased self-employment;

• labor market income and profits;

• business practices and knowledge that can affect business performance, such as record-keeping, registration, and separation of individual and business accounts;

• business performance, often captured by revenues and the scope of such business activities as sales, number of employed workers, and size of inventories;

• financial behavior, such as acquisition of business loans, saving accounts, and insurance plans that could affect the resource allocation of businesses;

• mind-set, attitudes toward risk, confidence and optimism, and time preference that may be related to entrepreneurial traits.

Identifying the target group

Small-scale entrepreneurship programs help would-be entrepreneurs set up a business and existing entrepreneurs improve their performance. As do other social programs, small-scale entrepreneurship programs can be directed at specific demographic groups, such as youth and women, or social category, such as social assistance beneficiaries and micro-credit clients. In addition, information on employment status and region (such as farmer and urban informal worker) can also be used for targeting, to take into account the differences in businesses and forms of employment across urban and rural areas.

When a target group is identified—such as self-employed women, out-of-school youth, social assistance beneficiaries, and micro-credit clients—profile studies are needed to understand their skills, capabilities, and constraints. Some combination of surveys, tests, qualitative interviews, and assessments can be used to better understand potential participants [7]. Recently, programs have increasingly used tests to objectively measure cognitive skills (such as the Raven test and the Digit-span test), non-cognitive skills (such as the entrepreneur self-test), and basic skills (numeracy and literacy tests) [8].

Selection of activities for support

Entrepreneurship programs generally require that potential participants apply for the program and describe their business idea and plan. Some programs select participants based on the viability of their business proposal or on the type of activities planned. Others use the business proposal to assess the competence of applicants and identify their needs. Still others use the business proposal for both purposes. However, this kind of approach may not be appropriate when the majority of potential participants are unskilled, vulnerable workers who do not see their work as entrepreneurial activities or themselves as business people. Further, many of them may not have identified a specific business idea let alone written a business plan.

A less common model is a collective approach in which ideas are identified by the program organizers, often social enterprises, non-governmental organizations, or private-sector entities [9]. In this model, program organizers identify business opportunities based on pre-program market analysis such as sector mapping and demand surveys. The program formulates business plans based on the availability of natural resources, infrastructure, and human capital and on the condition of the regulatory environment. The program then recruits individual workers or groups such as cooperatives or associations to participate in the pre-identified business areas. Participants are expected to develop or continue their business within the parameters set by the program while benefiting from the program organizers’ collective knowledge and know-how, connections to local value chains and markets, and synergy from economies of scale. Micro-franchising and value chain integration models provide examples of this approach.

Technical components

Programs typically include one or more of four technical components: training, finance (business capital), advisory services (such as coaching), and networking. Training is provided to strengthen technical skills in entrepreneurship and financial literacy as well as specific vocational and occupational skills. Access to finance is facilitated through the provision of business capital or regular cash transfers. Advisory services include coaching to build soft skills such as grit, positive mind-set, resilient attitudes and problem solving, facilitation of financial services such as savings and insurance products, natural resource management support, and counseling for wage employment opportunities. Finally, market access and networking services aim to support value chain integration. According to a comprehensive review of Economic Inclusion programs, almost all programs include some sort of skills training; coaching and business capital provision are quite common as well (Figure 1).

What is known about the impacts?

Only a few small-scale entrepreneurship programs have had a built-in monitoring and evaluation component, and even fewer had been subject to scientifically rigorous impact evaluations when an early meta-analysis was conducted [1]. Over time, many studies have rigorously evaluated the impacts of entrepreneurship programs and a few meta-analyses analyzed their effectiveness. Key findings in these studies are summarized as follows.

First, entrepreneurship programs do generate modest but positive returns. In many cases, they are better in increasing the likelihood of employment than other labor market interventions such as employment service [3]. The results are driven by higher returns of these interventions in countries where private sector wage employment is quite limited.

Second, bundled packages tend to work better than stand-alone interventions. Even if the bundling may increase the unit cost of the intervention, addressing multiple constraints generates higher returns. For instance, cash grants combined with behavioral interventions or training and group formation were more effective than cash alone (as commonly discussed as “cash plus”) [2]. Similarly, asset transfers were more effective when training for market linkages was provided. These findings suggest that training alone or financing alone may not be sufficient to address complex constraints faced by small-scale entrepreneurs in developing countries [1].

Third, services are promising when designed and tailored for specific groups of the population such as women and youth to address their additional challenges. For instance, Kenya’s Gender and Enterprise Together (GET Ahead) program combines standard business training topics (e.g. record keeping, separation of business and household finances) as well as basic numeracy and literacy with gender related contents. A rigorous evaluation found strong impacts on sales and profits of women entrepreneurs three years after the intervention [12]. Moreover, support for networking and providing role models can also be effective particularly for female entrepreneurs.

Fourth, how services are delivered can affect the effectiveness. For instance, beyond classroom-based training, incorporating appropriate pedagogical approaches and supplementary services for the poor and vulnerable (mostly subsistence entrepreneurs) could help. Personal initiatives to build entrepreneurial mind-set or simplified rule-of-thumb [13] rather than sophisticated technical skills can enhance the effectiveness of the programs.