Entrepreneurship for the poor in developing countries

Characteristics of self-employed workers in developing countries

Self-employed workers constitute a large share of workers in developing countries. The lower a country’s income per capita, the higher its labor market share of self-employed workers, 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; the average for all developing countries is about 50% [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 [1].

Scope of 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, social capital, and access to credit. The goal of the 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 [2]:

• 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;

• attitudes toward risk, confidence and optimism, and time preference that may be related to entrepreneurial traits [2].

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 microcredit 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 microcredit 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 [3]. 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). Previously conducted assessments of the business environment (such as the Finscope survey) or interviews with local businesses can complement the profiling work to better understand the business environment facing potential participants [4]. In addition, demand for the small-scale entrepreneurship program and a willingness to participate in it might also be assessed, to gauge whether low take-up of program support among the poor is likely to be an issue, as has been found across many different assistance programs in developing countries.

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 [4]. 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, advisory services, and networking. Almost all programs include some sort 
of training (Figure 1). Access to finance and networking services are more common 
in South Asia than in other developing country regions, reflecting widespread experience with microfinance and networking support, such as self-help groups. Advisory services are more frequently included in the programs in the Latin America and Caribbean region.

What do we know about the impacts?

Only a few small-scale entrepreneurship programs have had a built-in monitoring and evaluation component, and even fewer have been subject to scientifically rigorous impact evaluations. Among the studies that have rigorously evaluated the impacts of small-scale entrepreneurship programs, the results are mixed. For instance, the likelihood that a program will have a positive impact varies widely according to the outcome of interest (Figure 2).

Recent evaluations suggest that business knowledge and practices, such as record-keeping, registration, and separation of individual and business accounts, are easier to change than many other outcomes. Thus, interventions such as business training work relatively well for existing entrepreneurs. However, these programs tend to have good outputs but weak outcomes [6]. That is, improved business knowledge and practices (outputs) do not necessarily translate into business growth or higher profits (outcomes).

What seems to be important in yielding better outcomes from business support programs is to incorporate appropriate pedagogical approaches and supplementary services for the poor and vulnerable. For instance, a study suggests that business training based on “rule of thumb” practices rather than more sophisticated methods may be more effective, especially for the most vulnerable and poor self-employed workers who have limited skills [7]. Also, following up classroom training with technical assistance services tailored to individual needs and business context can strengthen impacts [5].

Compared with changing business knowledge and practice, it is more difficult to change labor market outcomes, including employment levels, hours worked, and earnings. Moreover, promoting business expansion is more challenging than promoting business start-up [8]. In general, small-scale entrepreneurship programs that combine training with financing or counseling tend to have better labor market outcomes, particularly among youth. Examples of programs that combine skills training with financial support for the most vulnerable populations include a program in Nicaragua that combined training with grants for social safety net beneficiaries [9] and the graduation model used by the Consultative Group to Assist the Poor (CGAP). The CGAP graduation model is a global effort to create pathways to help the poorest people out of extreme poverty by sequencing safety nets, livelihood training, and access to finance. These examples suggest that training alone or financing alone may not be sufficient to address complex constraints faced by small-scale entrepreneurs in developing countries [2].

Overall, these interventions tend to have the strongest impact for youth and the weakest impact for women. Women often face more severe constraints in acquiring skills and running a business, and their husbands, fathers, or other male relatives tend to retain control over finances even if women are business owners or the recipients of microcredit, as in Ghana, Malawi, and Sri Lanka [3], [10], [11]. These results suggest that programs need to be better tailored to address the specific constraints facing self-employed women. An example of a successful program is the Adolescent Girls Initiative in Liberia. This initiative, specifically targeted to young women, provided training in the locality where the women resided (to accommodate their mobility constraints) and included free childcare (addressing their family responsibilities). These design elements may help explain the program’s success.

Delivery arrangements also can affect program impacts. Involving the private sector in program delivery is associated with improved impacts [2]. Programs are sometimes run by social enterprises, which use the methods and disciplines of business and the power of the marketplace to advance social, environmental, and human justice goals. Indeed, social enterprises and non-governmental organizations are increasingly playing a major role in designing and delivering small-scale entrepreneurship programs.