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  • 1. Submitted for Consideration to: Research Proposal Developmental Entrepreneurship in Sub-Saharan Africa: Identifying and Assessing Microenterprise Opportunities Dale S. Fickett 16th June 2010This document contains the preliminary research proposal for identifying developmentalentrepreneurship opportunities that will generate both social and financial value. It includes a broaddiscussion of contextual factors associated with this research, and it proposes a methodology fordeveloping a casual theory for predicting these social and financial returns a given entity would generatewhen addressing a given opportunity. Lastly, it delineates a range of benefits associated with theintended findings – foremost of which is enhancement of the alleviation of global poverty. Those livingin embryonic markets, especially those in extreme poverty, will benefit from a powerful lever to improvestandards of living, increase incomes and employment opportunities, and propagate a range of broadersocietal and developmental benefits. It is for these people – those in greatest need – that this work hasthe most value and why it is right that we undertake it.
  • 2. Table of ContentsI. Executive Summary ................................................................................................................... 3II. Research Context ....................................................................................................................... 3 Economics and Management Literature ........................................................................................ 3 Development Stakeholders ............................................................................................................ 5 Economic Development in Sub-Saharan Africa ............................................................................... 8 Private Investment & Economic Growth ...................................................................................... 11 Poverty Alleviation through Developmental Entrepreneurship .................................................... 12 Research on Addressing Developmental Entrepreneurship Opportunities ................................... 14 Required Research....................................................................................................................... 17 Context Conclusion ...................................................................................................................... 18III. Purpose ................................................................................................................................... 19IV. Audience ................................................................................................................................. 20V. Hypothesis ............................................................................................................................... 21 Poverty Alleviation ...................................................................................................................... 21 Commercial Viability .................................................................................................................... 23VI. Methodology ........................................................................................................................... 26 Refine the Hypothesis (1)............................................................................................................. 26 Assumptions & Preliminary Research Design (2) .......................................................................... 27 Determining a Representative Sample (3) .................................................................................... 27 Observation (4)............................................................................................................................ 28 Interpretation & Categorisation (5 & 6) ....................................................................................... 29 Correlation (7) ............................................................................................................................. 29 Causal Framework (8) .................................................................................................................. 30VII. Expected Outcomes ................................................................................................................. 30VIII. Benefits ................................................................................................................................... 31IX. Bibliography ............................................................................................................................ 32 2
  • 3. I. Executive SummaryThere is a small, but growing body of research on developmental entrepreneurship, or the support ofsmall business in developing countries, as a tool to alleviate global poverty. This tool is utilised by across-section of the global development community, and as such includes a number of stakeholdersfrom the public, private and civil sectors. Over the past 65 years this community has worked in variouscapacities to help alleviate the poverty in Sub-Saharan Africa. This region, with 51% of the populationliving under the global poverty line and having the largest cluster of countries with low developmentindicators, is arguably the region in greatest need of these efforts. One of the key levers in fightingpoverty is the stimulation of private investment to generate economic growth, however not alleconomic growth helps the poor. Developmental entrepreneurship is a method for economic growthwhich does, and in Sub-Saharan Africa it is increasingly a key lever for building markets that include thepoor as employees, venture owners, and consumers.An array of research is required to greater understand how to best apply the developmentalentrepreneurship tool. Currently, interventions take place on three levels: those which seek to shapethe enabling environment in which microenterprises operate (i.e. policy advocacy), those which seek tobuild markets by providing support along a value chain, and those which seek to support the individualmicroenterprise. The microenterprise sits at the centre of this research proposal, as she/he requires anability to: (1) identify and assess new venture opportunities; (2) design the right strategy to address theselected opportunity; and (3) execute that strategy effectively. The subject of this research is point 1 –identifying and assessing developmental entrepreneurship opportunities.The findings of this research proposal will be utilised across the aforementioned global developmentcommunity in a range of ways so that effort and resources may be prioritised and applied to thoseopportunities with the greatest likelihood of yielding financial returns and poverty alleviation outcomes.The described methodology for conducting this research includes: gathering and analysing existingresearch and data, observing and measuring existing microenterprises, and developing a causationframework which ascribes deterministic characteristics to the developmental entrepreneurshipopportunities. It is expected that a small subset of all opportunities will be the outliers which havehighest financial and social potential, and thus most deserving of entrepreneurial attention, funding, andother incubator-type supports. It is the pursuit of these opportunities which will have the win-win ofsocial outcomes without sole reliance on government or donation funding. Marshalling resources toaddress these opportunities, those of highest potential, will produce significant benefits for those livingin abject poverty – higher standards of living, increased incomes and employment opportunities, andmore indirect societal and developmental benefits. It is for these people – those in greatest need – thatwe undertake this work. II. Research ContextEconomics and Management Literature“Developmental entrepreneurship”, or “enterprise development”, sits at the intersection ofdevelopment economics theory and entrepreneurship theory, of the economics and managementdisciplines, respectively. From the economics literature, Naude summarises that both fields have 3
  • 4. developed rapidly over the past fifty years, but did so in relative isolation from one another; and that itis now widely recognised that it is “of great practical importance to understand if and whenentrepreneurship is a binding constraint on economic developing countries.”16 Areasof particular interest in relation to entrepreneurship within the development economics communityinclude: structural change and economic growth, income and wealth inequalities, welfare, povertytraps, and market failures.17 From the management literature, Bruton et al summarise that althoughthere have been tremendous strides in the entrepreneurship literature, it is largely based on evidencefrom developed country markets.18 With only 43 articles (of 7,482 published during 1990 – 2006 in thedefined ‘leading management journals’) addressing entrepreneurship in emerging economies, it remainsan area of great importance and “woefully under-examined.”19 In sum, development entrepreneurshipis the study of utilising the establishment of small businesses as a lever to alleviate poverty in countrieswith low levels of economic development, and requires research attention.Broadly, the existing research from both disciplines can be viewed within two categories – ‘top-down’policy recommendations, such as those to foster environments more conducive to entrepreneurialactivity; or ‘bottom-up’ examinations seeking to describe various insights relating to the individualentrepreneur, which tend to emanate from the management discipline. In the former, there have beenan array of findings, in relation to: developing country strategies to promote enterprise development20,financial regulatory change to increase access to financial institution accounts (for the benefit of smallAfrican firms)21, the growth effects of government strategies for pursuing trade and investmentliberalisation in Least Developed Countries (LDCs) and their concomitant effects on small firms22, socialentrepreneur development programmes to “attract back” developing country diaspora withentrepreneurial competencies23, and policy mobilisation to capacitate greater access to domestic,regional and global agro-markets as a poverty alleviation mechanism.24 These findings have generallybeen promulgated by the development economists, as they fall near the core scope of the discipline –providing policy recommendations regarding governance, utilisation of aid, trade, investment andmarkets regulation.Conversely, the ‘bottom-up’ research provides insights which are derived from examining the start-upfirm or the entrepreneur in a developing country context, including descriptive characteristics, successdeterminants, work outputs, and social contributions. Examples of such work, include: Kiggundu’sdescription of the African entrepreneur, typical start-up models, and the external contexts of which theyare a part25; Mbaku’s observations regarding corruption, and specifically entrepreneurs’ propensity fortrading bribes for political favours26; Jackson’s construction of a firm-level, rather than government- or16 Naude, W. (2010), p. 117 ibid.18 Bruton, G., Ahlstrom, D. and Obloj, K. (2008), p. 119 ibid., p. 320 Adeoti, J. (2000), p. 5721 Honohan, P. and Beck, T. (2007), pp. 141-14222 Siddiqi, M. (2008), pp. 42-4323 Prieto, L., Osiri, J. and Gilmore, J. (2009), p. 53; Murphy, R. (1999), p. 66124 Regnier, P. (2009), p. 12125 Kiggundu, M. (2002), p. 23926 Mbaku, J. (1999), p. 309 4
  • 5. donor-level view of the market context (based on research of textile and garment entrepreneurs inZimbabwe)27; and Valliere’s & Peterson’s extension of the economic growth model to reflect differencesbetween developed and emerging markets as regards new venture impacts on Gross Domestic Product(GDP) growth.28 In short, development entrepreneurship literature has shifted over the last twodecades from specific, supply-driven interventions for small enterprises, to broader marketdevelopment methods; as microfinance and business development services (BDS) are increasinglydemand-led and treated holistically through a value chain approach.29 Jones and Miehlbradt provide acomprehensive timeline of the enterprise development literature (see figure 1).30 Stage Description Beyond Credit Support for small enterprise is understood to go beyond provision (early to mid-1990s) of finance and includes ‘market development facilitation’, requiring an understanding of the systems in which the enterprise exists Subsector analysis approach is developed and applied Commercial Service Business Development Services (BDS) paradigm evolved to formalise Delivery a range of non-financial inputs to support indigenous entrepreneurs (1995-2002) – training, transportation, technology, market access and information Renewed focus on monitoring, evaluation and impact assessment Systems Approaches Under a range of names (e.g. pro-poor enterprise development, (2002 – present) value chain development, market development, and making markets work for the poor31) focus began to shift to how community and government organisations can play a role in promoting entrepreneurial activity Subsector analysis and BDS are blended to achieve new insights on industry competitiveness, value chain development, programme design and market demand assessment Developing Inclusive Practitioners are starting to focus on the poor as producers, Systems consumers and workers (2004-present) Some agencies are focused on the enabling environment, or external market context; and have greater integration of multiple functions and multiple players – policy level, value chain / meso- level, and micro-enterprise level interventions Current analytical frameworks focus on various aspects of poor people’s lives, such as culture and economic incentives Figure 1: Four Stages of Enterprise Development Theory and PracticeDevelopment StakeholdersDevelopmental entrepreneurship stakeholders are a subset of the broader global developmentcommunity. This community is comprised of: (1) inter-governmental organisations; (2) national andlocal public sector policy makers in developed and developing countries; (3) civil society; (4) the privatesector; and (5) beneficiaries (see figure 2).27 Jackson, P. (2004), p.76928 Valliere, D. and Peterson, R. (2009), p. 45929 Steel, W. (2009), pp. 286-29030 Jones, L. and Miehlbradt, A. (2009), pp.304-31431 “Making markets work for the poor” is often abbreviated “M4P.” 5
  • 6. The subset of these stakeholders that participate in the utilisation of developmental entrepreneurshipfor poverty alleviation is shown in figure 3. Each of the five stakeholder groups is represented within themap. Within inter-governmental organisations there are various efforts to develop economies byspurring the growth of inclusive markets through various market United Nations Inter-governmental Trade & Development Organisations Development Banks Inter-Parliamentary UN Conference on UN Development Organisation for Monetary Fund Co-operation & Commissions Development Organization International World Trade World Bank Programme Economic Regional Regional Union National & Local Beneficiaries Public Sector Donor Governments Recipient Governments Academic & Research Community Groups Indigenous Groups Non-Governmental Labour Unions Organisations Organisations Organisations Civil Society Associations Foundations Faith-Based Professional Charitable Institutes Private Sector Multi-national Small-to-Mid- Micro-Businesses Corporates Sized Businesses Figure 2: Global Development Stakeholders 32development programmes. In the public sector, government agencies sit on opposite sides of theOfficial Development Aid (ODA) flow – those that provide funding, and those that receive it. In civilsociety there are a range of organisations that prioritise sustainable livelihoods approaches in theirglobal poverty alleviation efforts, some of whom could also be classed as social entrepreneurs, based onthe maturity level of the organisation and their use of a not-for-profit model.33 Other socialentrepreneurs have grown their organisations to significant scale (as distinct from indigenousmicroenterprise beneficiaries) and are making a contribution to poverty alleviation – such as GrameenBank and International Development Enterprises.34 These stakeholder groups have traditionallymarshalled private donations and government funding to address developing country poverty throughnot-for-profit models, however new for-profit models are emerging.New for-profit social entrepreneurs are harnessing competitive capital to scale their operations. Asthese social entrepreneurs compete in private sector markets, so to are more traditional multi-nationalcorporates. For example, microfinance institutions span both for profit and not-for-profit models;32 See Kinda, T. and Loening, J. (2008); UN Development Programme (2008)33 See Coates, B. and Saloner, S. (2009); Ewalt, D. (2009); and O’Brien, J. (2008)34 See Yanus, M. (2007) and Polak, P. (2008) 6
  • 7. include start-ups and mature corporates; have core businesses in banking, retailing, and mobiletelecommunications; have local versus global footprints; centre on a double bottom line versus solecommercial motive; and offer basic versus complex product ranges.35Within the private sector, other for-profit models have been introduced to fight global poverty. Asmentioned, microfinance institutions, and other social entrepreneurs are using for-profit SME modelsthat provide finance, training, or other inputs required by the micro-entrepreneur. SKS Microfinancestands as a good example of a microfinance provider, modelled as ‘for-profit’ from inception.36 Thesesocial entrepreneurs are innovating ways to contribute to poverty alleviation, and there is increasingly abody of research on social entrepreneurship which is relevant to its utilisation as a tool to achieve globaldevelopment outcomes.37 In the private sector, more mature multi-national corporates have launchedvarious Corporate Social Responsibility programmes which contribute to local entrepreneurship tovarying degrees. These programmes range from making traditional donations to the establishment offoundations to leveraging core capabilities that achieve social outcomes as a pillar of corporatestrategy.38 These corporate philanthropic activities occur on an industry backdrop that includes Inter-governmental Private Sector Organisations Emerging Market Programme Owners Microenterprise and Market Development Programme Corporate Social Directors Responsibility Leaders Beneficiaries Creditors Microfinance Shareholders Institutions & BDS Providers Entrepreneurs Customers Other Social Employees Entrepreneurs Suppliers Developed Country ODA Agencies Sustainable Livelihoods Developing Country Advocates Finance Ministries National & Local Civil Society Public Sector Figure 3: Map of Developmental Entrepreneurship Market Participants35 See Annibale, R. (2009), p. 26336 See Akula, V. (2008)37 See Harris, J., Sapienza, H. and Bowie, N. (2009); Prieto, L., Osiri, J. and Gilmore, J. (2009); Zahra, S., Gedajlovic,E., Neubaum, D. and Shulman, J. (2009); Hockerts, K. and Wustenhagen, R. (2009); Dean, T. and McMullen, J.(2007); Maier, J. and Schoen, O. (2007); and Dorado, S. (2006)38 Porter, M. and Kramer, M. (2008), pp. 451-477 7
  • 8. competition, amongst Western and (increasingly) emerging market multinational organisations, to taplocal pools of natural resources, talent and consumers in new markets.39All of the participants may play a role in the process of developing indigenous entrepreneurs, and assuch may be included in the beneficiaries category (hence the overlap depicted in the Venn diagram).Of course, core to the beneficiaries category are the poor themselves, who play different roles along thevalue chain. The ‘beneficiaries’ category can be split into three sub-categories. First,those that provide required input include the providers of debt and equity financing, those providingcapacity building training and other BDS services, employees that provide required labour, and goodssuppliers. Moving left to right, the entrepreneurs transform these inputs, through value-creatingactivity, into outputs for indigenous populations. In so doing, these entrepreneurs improve their ownlivelihood and those of their family through increased income and thus expanded economic choices.Lastly, on the right, the end-users or customers, benefit through the availability of, and the directpurchases of, a good or service which improves their standard-of-living.Clearly, there is a set of complex relationships amongst global development community, especially asvarious organisations play differing roles in various engagements. This complexity also applies for thesubset of stakeholders that participate in developmental entrepreneurship initiatives. Whether viewedthrough the lens of the economist, management theorist, entrepreneur, corporate leader, policy-maker,beneficiary, or global development practitioner – developmental entrepreneurship is a significant toolfor generating organic and pro-poor economic growth, building sustainable livelihoods, and alleviatingconditions of poverty in these embryonic markets where the benefits are most needed.Economic Development in Sub-Saharan AfricaIn 2005, 51% of the Sub-Saharan African (SSA) population was living below the global poverty line of$1.25 per day (measured in purchasing power parity), the world’s highest regional poverty rate.40 Of the1.4 billion people that live in this extreme state of poverty globally41, approximately 400M42 are in SSA,or 28.5% of the global poor.43 In fact, despite having 11.4% of the world’s population, the regionproduces only 0.023% of global GDP.44 Moreover, the region has the lowest average GDP per capita atonly $2,031.45The hardships of extreme poverty in SSA are exacerbated by the lack of opportunities for improvingone’s standard of living. It is one thing to be extremely poor in an environment in which one has hopedue to the opportunities presented by his/her environment, but quite another when the environmentpresents few opportunities to improve one’s condition. The UN has classified countries based on theirlevel of economic development, and SSA is the largest collection of ‘Low’ developed countries,46 or39 Accenture (2009), p. 740 UN Development Programme (2009a), p.741 ibid42 Based on calculations from UN Development Programme (2009a), Statistical Annex, pp. 191-19443 ibid44 UN Development Programme (2009a), pp. 191-194, 198; measured in PPP45 UN Development Programme (2009a), p. 174; measured in PPP46 Based on calculations from UN Development Programme (2009a), Statistical Annex, pp. 191-194 8
  • 9. those with depressingly few opportunities to escape poverty. Globally, there are 385.1M living in these24 countries, and 357.4M of them are in SSA. 401.6M of the SSA population lives in countries of‘Medium’ development,47 or where conditions are somewhat better. SSA suffers the lowest Sector Agriculture, Fishing & Forestry Education Energy & Mining Finance Health & Other Social Services Industry & Trade Information & Communication Law, Justice & Public Administration Transportation Water, Sanitation & Flood Protection Economic Management Environmental & Natural Resource Mgt. Financial & Private Sector Development Human Development Theme Public Sector Governance Rule of Law Rural Development Social Development, Gender & Inclusion Social Protection & Risk Management Trade & Integration Urban Development Figure 4: World Bank Lending Activity Categorisationdevelopment rankings on every primary measure – the lowest overall human development index, lowestlife expectancy at birth, lowest adult literacy rate, and lowest educational enrolment rate.48 In sum, thepoor of Sub-Saharan Africa face the harshest living conditions, and most of these people lackopportunities to escape this extreme poverty by nature of the low levels of indigenous economicactivity.The causes of extreme poverty, or a lack of economic development, are highly debated; and theprescribed solutions even more so (see section III – Audience). Interventions have ranged in size andscope, and both ‘top-down’ and ‘bottom-up’ efforts have been driven by the stakeholder groupsmentioned. These efforts fall within an umbrella process that includes: (1) Harnessing required inputs –human capital, financial capital, social networks, and intellectual capital; (2) Ensuring policyeffectiveness in input utilisation (primarily at national level), in setting development priorities, inpromoting and regulating markets conducive to inward foreign direct investment (FDI), in settingdomestic (e.g. agriculture, education, health) and international policy (e.g. security, trade, monetary);and (3) Measuring and reporting the achievement of outcomes in the areas of poverty and hunger,health, education, economic growth, gender equality, environmental sustainability, and governance.47 ibid48 UN Development Programme (2009a), p. 174; measured in PPP 9
  • 10. The sheer breadth of the World Bank’s lending activity provides a useful framework for categorisingglobal development initiatives (see figure 4).49Interventions also occur within a complex and dynamic development environment (see figure 5). Thereare a range of existing economic, demographic, geo-political and socio-cultural factors to consider.These change over time, and vary across countries and regions. To some extent, this change is driven byexternal ‘globalisation effects’. Placed on the backdrop of the increasing pervasiveness of connectivetechnologies, propagation of corporates’ expansive global operating models, and the increasingprevalence of open market policies, this set of effects impacts the country-specific factors mentioned.Moreover, this dynamic has been recently impacted by the extent of the 2008-09 financial markets crisisand resultant global economic recession (labelled ‘current economic disruption’). A range ofdevelopment challenges remain, and these Millennium Development Goals (MDGs) were agreed uponby the international community in 2000, with a set of specific targets for improvements by 2015.50 Current Continuing Economic Globalisation Effects Development Disruption Increased Growth in Challenges New Pockets of Multi-directional Resources Emerging Market War for Talent Innovation Capital Flows • Capital constraints Constraints Consumers – national debt, aid and investment • Extreme Poverty & • Commodity price Complexity of Country-Specific Development Factors Hunger volatility Degree of Growth in Improvements in Improvements in Wealth • Primary Education • Weakening global Commodity outward FDI to Macro-economic Agricultural Distribution / • Gender Equality trade Dependency Developed Stability Productivity Inequality • Child Mortality Economic • Credit Constraints Countries and Banking • Maternal Health Variability in Under- Diversification of Sector Re- Constraints on Poverty Fiscal Health and • HIV/AIDS, Malaria regulation New Inward FDI Employment Export Base Reduction Trends Current Accounts and other Diseases • Asset Devaluations • Environmental (e.g. Equities, Real Sustainability graphic Health & Demo- Population Profile Rural to Urban Emigration / Life Estate) Education & Growth Rate Migration Immigration Expectancy • Global Partnership • USD Currency Trends Levels for Development Devaluation and political Monetary Democracy & ODA Climate Change Food Geo- Pockets of Armed Human Rights Implications Reductions Vulnerability Crises Conflict Progress Levels • Unemployment Growth Attitudes Shaped cultural Socio- History of Aid Tribal and Community Religious & by Disaster National • Slowing Economic Spiritual Beliefs Identity Dependency Norms Survival Output Figure 5: Complexity of Development Challenges49 See World Bank (2009a), pp. 33, 37, 41, 45, 49 and 53; this categorisation is derived from the World Bank’smethod of classifying their lending activity from 2004 to 200950 See United Nations (2009) 10
  • 11. On balance, it’s encouraging to note that since the establishment of the MDGs, progress in SSA has beenmade in certain areas (see figure 6).51 Between 2002 and 2007 SSA economic growth topped 6.5% - thehighest rate in 30 years. For 2009, growth is expected to have slowed to 1%, as demand abroad fortraded goods decreases and capital flows shrink on the back of the global economic downturn. TheInternational Monetary Fund’s (IMF) outlook includes growth of 4% in 2010 and 5% thereafter. Thereare a number of downside risks to the estimate, and policy recommendations centre on the continuanceof fiscal measures to promote countercyclical stimuli and additional monetary loosening until recovery Percentage of people living on less than $1/day has decreased from 58% in 1999 to 51% in 2005 Proportion of undernourished population has decreased from 32% for 1990-92 to 29% in 2008, despite the challenges of severe food price spikes Proportion of children under five that are underweight decreased from 31% in 1990 to 28% in 2007 Enrolment in primary education has increased from 58% in 2000 to 74% in 2007 Gender parity in primary education is improving, but worsening at secondary level; and women’s representation in national parliament has doubled Child mortality has decreased from 183 deaths per 1000 births in 1990 to 145 in 2007 Only marginal improvements in maternal deaths New HIV infections have decreased since 1996, but two-thirds of the 33M infected live in SSA Continued rise in greenhouse gas emissions, and increased effects of drought Aid to Least Developed Countries falls far short of the 2010 target Figure 6: Sub-Saharan Africa Millennium Development Goal Progressgains momentum. In the medium term, recommendations focus on maintaining sustainable budgetdeficits, spending on infrastructure and human capital development, and programmes to improve publicsector effectiveness.52Private Investment & Economic GrowthOne of the key factors of developing countries’ economic growth, and an environment conducive to thedevelopmental entrepreneurship opportunity, is the ability to attract FDI and deploy it for productiveuse within the private sector.53 Countries need a sound business environment in the form of goodgovernment regulations to benefit from FDI; however excessive regulation can discourage foreigninvestment.54 Necessary conditions to attract FDI also include infrastructure relevant to the proposedproject, stability of property rights, and democracy insofar as it provides a deterrent to expropriation51 ibid52 IMF (2009), pp. 1-353 OECD (2006a), pp. 11-1454 Busse, M. and Groizard, J. (2006), p. 1 11
  • 12. and corruption.55 There is also research indicating a correlation between good governance andeconomic performance.56 Furthermore, the Organisation for Economic Co-operation & Development(OECD) recommends that in order to attract increased investment, developing countries should foster adiversified financial sector, lower the costs of investment, reduce risks, improve competition, anddevelop capacity.57 In order that developing countries harness financial capital and other inputs asproductive means towards economic growth ends, policies must focus on creating climates mostconducive to inward investment. “What ultimately count are the productivity gains that result fromproduct and process innovations brought about through investments, as well as the extent to which jobsand capital flow from declining industries to expanding ...economic activities.”58Fox and Sekkel Gaal summarise that SSA growth was stimulated by policies in the 1980s and 1990s thatprovided macro-economic stability and expansion of the domestic sector.59 However, SSA remains theleast attractive region for inward investment, based upon the World Bank’s Doing Business 2010 rankingof business-related regulation (i.e. ease of obtaining a business license, ability to enforce contracts, etc.).Importantly, this does not capture other factors related to investment climate, such as the robustness ofphysical and financial infrastructure or regulation of the markets in which the entrant would compete.On the basis of business regulation alone, SSA as a region has one of the lowest rates of reform, with63% of countries instituting a regulatory change. However, this is up substantively from 22% in 2005;and with 12 reforms in place, Rwanda has instituted the most change of any country, globally.60 As thepoorest region in the world, and despite relatively poor physical infrastructure, Sub Saharan Africa hasmade large progress in promoting economic growth, in large part, through macro-economic stability,political reforms, and, increasingly, regulatory changes – all aimed at improving investmentattractiveness. Consequently, the environment for developmental entrepreneurship opportunities isimproving.Poverty Alleviation through Developmental EntrepreneurshipEconomic growth does not equal economic development, or improvements in the alleviation of poverty,health services, education, etc. Income is one of the primary metrics used in economic analysis.Economists utilise several methods for measuring income distributions – size distribution of income, asmeasured by the Gini coefficient; functional distributions, or factor share distributions (i.e. returns toland, labour, capital); and measures of absolute poverty, as measured by the Human Poverty Index.61These measures provide insight into the nature of economic growth, and specifically who is benefitingfrom that growth. Economic growth may alleviate poverty and address income inequalities, but notnecessarily. For example, historic growth constrained within extractive industry segments in developingcountries led to increased gross national incomes, and with constant demographics, per capita incomes55 Khan, M. (2005), pp.77-8256 See Hall, R. and Jones, C. (1999)57 OECD (2006a), pp. 15-1758 ibid59 Fox, L. and Sekkel Gaal, M. (2008), pp. 1-260 World Bank (2009b), pp. 1-561 Todaro, M. and Smith, S. (2006), pp. 195-207 12
  • 13. naturally rose as a mathematical consequence; but this income was highly concentrated and relativelyfew people escaped poverty as a result, hence growth without development.62The economic growth which does assist in poverty alleviation for broad portions of the population hasbeen termed ‘pro-poor growth’ or the development of ‘inclusive markets.’ There is a significant body ofresearch supporting the assertion that entrepreneurial activity is critical to developing economies, andthat it contributes to poverty alleviation. The OECD promotes the “central role” of the private sector inpoverty alleviation, and provides an analytical framework and set of policy recommendations tofacilitate pro-poor growth, including providing incentives for entrepreneurship and investment byfostering: (1) low market entry and exit barriers; (2) predictable rules of exchange; (3) secure andtransferrable property rights; (4) enforceability of contracts; and (5) low levels of corruption.63 Azmatand Samaratunge found that a range of factors brought about the prevalence of small-scale individualentrepreneurs (i.e. microenterprises), which form a major part of the informal workforce and contributesignificantly to economic growth in developing countries.64 Debrah concludes that SSA governmentsshould promote the informal sector as a significant source of employment.65 Furthermore, Lado &Vozikis posit, “That entrepreneurship is vitally important to economic development of a nation isindisputable.”66; and Morris concludes that sustainable economic development does not occur withoutentrepreneurship, and higher levels of entrepreneurship are directly correlated with increases in GDP,societal wealth, and quality of life.67Fox and Sekkel Gaal observe that most poor households derive income through the sale of their labourto themselves or to others, and that earning more money faster is the key factor in increasing theimpact of economic growth on poverty reduction. Furthermore, to overcome existing challenges to jobcreation, African economies need to be more globally competitive, by focusing policy initiatives oncreating climates attractive for investment. Finally, they conclude that the high growth in the informalsector (or micro-enterprises) is a supply-side response to weak demand for labour amongst medium andlarge enterprises; and prospects for increasing productivity in small hold agribusiness provides a viableroute for working out of poverty.68 According to the UNDP, “The poor harbour a potential forconsumption, production, innovation, and entrepreneurial activity that is largely untapped.”69 They alsosite many examples of businesses that are creating “value for all” by buying from, and selling to, thepoor.70 Benefits are significant, as businesses have enjoyed profits (microfinance institutions earning23% return on equity, as an industry average), growth potential in new markets, innovation capabilityenhancements, and an expanded labour pool. Likewise they reference a range of benefits for the poor –income, improved standards of living, higher productivity and increased empowerment.71 Challengesassociated with conducting business in SSA are noteworthy – infrastructure shortfalls, difficulties62 Ibid, pp. 15-2063 OECD (2006a), pp. 14-15, 2064 Azmat, F. and Samaratunge, R. (2009), p. 43765 Debrah, Y. (2007), p. 106366 Lado, A. & Vozakis, G. (1997), p. 5567 See Morris, M. (2001)68 Fox, L. and Sekkel Gaal, M. (2008), pp. 1-269 UN Development Programme (2008), pp. 1-1270 ibid71 ibid 13
  • 14. enforcing contracts, lack of market information, and skills gaps. In some instances, these challenges canbe overcome through the utilisation of the five strategies provided (see figure 7).72Although there are a range of entrepreneurial activities that are likely to contribute to povertyreduction, private investment in the agriculture sector is one of the highest priorities.73 Agriculturalgrowth is now thought possible in SSA, as high growth rates in certain regions have fostered hope that itcan be replicated, and as food prices have risen, there is increasingly a realisation that newopportunities may be opening to utilise land and labour as global agriculture supply is near fullcapacity.74 Also, the World Bank determined that, “Private investment reduces poverty wheninvestment rates are high and occurs in sectors that intensively use factors owned by the poor. In SubSaharan Africa that means land and unskilled labour.”75 Lastly, Competitive Commercial Agriculture forAfrica (CCCA) found that opportunities abound for African small hold farmers, especially given risingdemand forecasts due to changes in food consumption patterns and demographic shifts.76In short, development entrepreneurship in Sub Saharan Africa is thus a key lever for poverty alleviation,as it develops inclusive markets that utilise land and labour to alleviate conditions of extreme poverty.Moreover, those opportunities with the highest correlation to poverty alleviation in SSA are believed tobe agricultural and set within a conducive regulatory environment.Research on Addressing Developmental Entrepreneurship OpportunitiesMicroenterprises require a set of resources, which differ from their developed world counterparts, andleverage those resources differently, as a function of the substantive constraints of their environment.Trulsson categorises these constraints as: access to finance, financial management competencies,market orientation, human resources, physical infrastructure, policies & regulations, and information &networks.77 Duncombe & Heeks find that poor rural entrepreneurs also rely heavily on informal, socialand local information systems, especially shared telephony services. Nichter & Goldmark find small firmgrowth factors in four areas – the entrepreneur, the firm, relationships & networks, and context &environment.78 Similarly, Okpara concludes that an entrepreneur’s pro-activity in engaging in exportmarkets, and related financial commitments, cause higher firm profitability and growth.79 Micro-entrepreneurs must use innovative techniques to garner required inputs in contexts of significantconstraints, and in the pursuit of profit they leverage those scarce resources in unique ways that arepredominantly context driven.Access to finance is a key obstacle for the micro-entrepreneur. Overall trends indicate a significantlyconstrained flow of capital to emerging markets – decreasing from $890B in 2007 to $390B in 2008 and$140B projected for 2009.80 Micro-entrepreneurs, especially in this environment, find it difficult to72 ibid73 World Bank (2009c), pp. 1-3, 5-774 ibid75 Kochendörfer-Lucius, G. and Pleskovic, B. (2005), p. 176 World Bank (2009c), pp. 2-477 Turlsson, P. (2002), p. 33178 Nichter, S. and Goldmark, L. (2009), p. 145379 Okpara, J. (2009), pp. 1281-128280 Cline, W. (2009), p. 2 14
  • 15. access credit and equity financing to expand their ventures. Mushinski & Pickering observe thatmicroenterprises have virtually no access to formal credit markets.81 Microfinance provides asubstantial form of debt financing for the micro-entrepreneur. Hossain and Knight argue in favour ofmicrocredit due to its role in expanding micro-enterprises and fighting rural poverty.82 However, thereis a debate regarding microfinance’s effectiveness. Smith & Thurman in A Billion Bootstraps argue forthe expansion of micro-credit, while Amsden & Ha Joon Chang argue against such expansion in someover-supplied markets as new entrants may displace existing enterprises and have net worseningeffects. 83 Datar et al levy another attack on microfinance providers, concluding that in their push toalleviate poverty, they should focus on assisting their clients build sustainable enterprises, rather thanon providing greater volumes, and ever larger loan amounts.84 Financial capital is a primary input forthe microenterprise, and microfinance providers are well positioned to providing this crucial step out ofpoverty.Microenterprises are also dependent on other facets of the enabling environments, including regulatorysupport from their governments. Such supports include: efficiency in acquiring business permits orclosing a business, property rights and contract enforcement protections, efficiency in taxationadministration, and the regulations applicable to the market in which a given entrepreneur operates.Other domestic regulatory supports are often more indirect, but of consequence – financial sectorstability, domestic infrastructure and human capacity investments, fiscal sustainability, public sectorgovernance, and stances on human rights. Indirect international policy is often more remote to theentrepreneur, but still relevant based on the entrepreneur’s competitive market (e.g. extent ofimporting/exporting). These factors include: ODA expenditures, trade agreements, security, andmonetary stability. Examples of related research, include: Beck et al on financial market policy tobroaden access85; the World Bank’s Doing Business series covering cross-border comparisons of reformsrelated to improving efficiency in operating businesses86; Aubert on promoting developing worldinnovation87; Ayele on investment incentives and resultant market distortions88; the World Bank workingpaper on regulatory conditions required to attract FDI89; Phillips et al on policy recommendations tofoster entrepreneurial activity90; and Bennett’s argument for government support of informal firms.91Social capital, or relationship networks, is also a critical input for micro-entrepreneurs. Wheelerobserves that developing world entrepreneurs who build sustainable, successful enterprises rely uponinformal networks that include other private sector players, non-governmental organisations (NGOs),and other community groups, as developed with the Sustainable Local Enterprise Network Model.9281 Mushinski, D. and Pickering, K. (2007), p. 56782 Hossain, F. and Knight, T. (2008), p. 15583 See Smith, P. and Thurman, E. (2007); Amsden, A. (2007); Ha-Joon Chang (2007)84 Datar, S., Epstien, M. and Yuthas, K. (2008), pp.38-4585 Beck, T., Demirgüç-Kunt, A. and Honohan, P. (2009), p. 11986 See World Bank (2009b)87 See Aubert, J. (2005)88 See Ayele (2006)89 See Busse, M. and Groizard, J. (2006)90 See Phillips, C. and Bhatia-Panthaki, S. (2007)91 See Bennett, J. (2009)92 Wheeler et al (2005), pp. 36-37 15
  • 16. Networks can also facilitate the recruitment of the start-up team recruitment, and Ibeh posits that thesefirms can overcome barriers to entry to international markets through recruitment.93 Likewise, Zhu et alfound that developing country SMEs can increase their internationalisation capabilities by leveragingembedded networks with local governments and business groups.94 Conversely, Bernard et aldemonstrate the limitation of certain network nodes, as market-oriented and community-orientedorganisations in rural settings are constrained by geographical remoteness, social conservatism, lack ofaccess to resources, and limited management capacity.95Incubators and other BDS providers supply microenterprises with a range of services, including access tomentors, management advisory services, training, increased access to financing (especially routes toequity financing), and access to technology and process innovations. These providers stretch across thereferenced stakeholder groups, and include not-for-profit and for-profit models. The effectiveness ofincubators in spurring developmental entrepreneurship is currently debated. Ayers & Harman reportthe findings of infoDev, a network of 300 such incubators: (1) successful incubators were led byvisionary leaders with influence on policy; (2) important contributions were made by universities,foundations and corporations in mentoring, sharing facilities, research access and board memberships;and (3) most clients had difficulty accessing private investment.96 Tulchin and Jones debated theeffectiveness of microenterprise incubators in addressing poverty, with Tulchin in favour of the supportincubators provide, and Jones arguing that most developing world incubators are structured to supportventures with high growth potential, and benefit relatively few people. However, Jones also comments,“I do believe that it might be possible for certain new models of incubators to exist that could catalysepro-poor economic advancement.” She also proposes that they would have to demonstrate clearconnection to pro-poor impacts, be well monitored and the models tested. Moreover, these incubatorswould focus on the creation of labour intensive businesses, or accelerate equitable growth across thevalue chain.97Given the appropriate opportunity, and provided access to needed resources, what strategy should amicro-entrepreneur employ to successfully launch and grow his/her enterprise? There is a new andgrowing body of research on micro-enterprise strategy, including: Akula’s summarisation of micro-finance institutions’ recommendations on what businesses should do that serve the poor98; severalresearch findings in relation to market definition and international trade by micro-enterprises99; andPorteous, as well as Frishammar & Anderssen, provide insights in relation to market access andmarketing strategy.100 Lastly, significant work by the UNDP, released in 2008, led to the identification offive common constraints that microenterprises face and well as five strategies that are used with varyingincidence to address them (see figure 7).101 The UNDP provide a summary of solutions within each of93 See Ibeh, K. (2004)94 Zhu, H., Hitt, M. and Tihanyi, L. (2007), pp. 1-295 Bernard et al (2008), pp. 2188-219096 Ayers, S. and Harman, P. (2008), p. 1297 See Tulchin, D. and Jones, L. (2009)98 See Akula, V. (2008)99 See Aldonas, G. (2008); Williams, D. (2008); Mai Thi Thanh Thai and Li Choy Chong (2008); Brettel, M., Engelen,A. and Heinemann, F. (2008); and Ratten, V. (2008)100 See Frishammar, J. and Anderssen, S. (2009); and Porteous, D. (2008)101 UN Development Programme (2008), p. 6 16
  • 17. the five strategies, and summarises that the solutions are not mutually exclusive, and are, in fact,commonly used in combination to overcome the challenges inherent in operating businesses indeveloping markets.102 Additionally, work from the Monitor Group has provided four business modelson servicing poor countries – “A pay per use approach”, “No frills service”, “Para-skilling”, and “Sharedchannels”; and three on engaging low-income suppliers – “Contract production”, “Deep procurement”,and “Demand-led training”.103 In combination, these studies provide significant insight into strategiesthat developmental entrepreneurs should consider in addressing the opportunities which sit at thecentre of this research.Of course, microenterprises must marry the opportunity, the resources, and the strategy with effectiveexecution. The area of micro-enterprise implementation has also benefited from research:Kodithuwakku’s and Rosa’s conclusions regarding the importance of creativity and perseverance inmobilising scarce resources in Sri Lankan village enterprises104; Liedlolm’s findingss regarding theimportance of location in small firm survival105; Hung Manh Chu et al on entrepreneurial motivations,challenges faced, and success determinants in Ghana and Kenya106; Bear and Field on micro-enterpriseparticipation within industry development and contributions to value chain competitiveness107; Bekkerset al on internal monitoring and knowledge management systems, as well as external reporting fordevelopmental entrepreneurship projects108; and Thassanabanjong’s, Miller’s and Marchant’s researchin relation to employee training.109Required ResearchMany developmental entrepreneurship researchers have provided their views regarding future researchrequired to either advance the insights of their work, or more generally, regarding what would bebeneficial for the field as a whole. Recently Jones and Miehlbradt identified several areas for futureresearch on developmental entrepreneurship110, some of which lead to several key questions thatsurface as a result: How can we distil best practice into a set of common industry approaches and tools?How can we determine and combine the most appropriate intervention level for a given community –value chain interventions or macro-business enabling environment interventions? How can we harnessthe productive capacity of rural Sub-Saharan Africa to alleviate102 Ibid, pp. 8-10103 Karamchandani, A., Kubzansky, M. and Frandano, P. (2009), pp. 3-7104 See Kodithuwakku, S. and Rosa, P. (2002)105 See Liedholm, C. (2002)106 See Hung Manh Chu, Benzing, C. and McGee, C. (2007)107 See Bear, M. and Field, M. (2008)108 See Bekkers, H., Miehlbradt, A. and Roggekamp, P. (2008)109 See Thassanabanjong, K., Miller, P. and Marchant, T. (2009)110 Jones, L. and Miehlbradt, A. (2009), pp.315-318 17
  • 18. Strategies Invest in Combine Engage in Adapt Leverage the removing resources and policy dialogue products and strengths of market capabilities with processes the poor constraints within others government Market information Regulatory environment Constraints Physical infrastructure Knowledge and skills Access to financial services High Incidence Medium Incidence Low Incidence Figure 7: Growing Inclusive Markets Strategy Matrixpoverty and to meet increasing global demand for food and biofuels? What are the connections,overlaps, and synergies between developmental entrepreneurship and sustainable livelihoodsapproaches? Similarly, Zezza et al call for research required to identify mechanisms to promoteproductive investment, as opposed to social investment, especially in non-farming activities in ruralareas.111 Also, Sievers and Vanderberg look to future research that examines the synergies to be gainedby combining BDS and microfinance.112 Other areas cited for future research, include: understandingthe current state of developing country markets’ size and structure, strategies for successful inclusivebusiness model deployment, driving projects to scale and overcoming short budgetary timelines,technological innovations pertinent to the poor, reaching the extreme poor with no assets, topicsaround areas of overlap with environmental sustainability research, and the effects of migration.Context ConclusionDevelopmental entrepreneurship, or enterprise development, is a powerful lever for lifting the globalpoor from extreme poverty by supporting their efforts to build businesses. Research on the topic hascome from two directions – the development economists that have identified small business as onemethod for improving livelihoods, and entrepreneurship theorists that have identified globaldevelopment challenges as a place in which to apply their knowledge of start-up management forsocietal good. Aside from these academics, many practitioners engage within enterprise developmentinitiatives, including those in the public, private and civil sectors.111 Zezza et al (2008), p. 1297112 Sievers, M. and Vanderberg, P. (2007), p. 1341 18
  • 19. These stakeholder groups have built over 65 years of development experience in Sub-Saharan Africa,arguably the poorest region on earth. Here conditions of extreme poverty, or living below the globalpoverty line, are the daily reality for 51% of the population. This situation is exacerbated by the severelimits to personal opportunities to escape this poverty, due to the overall low level of developmentacross most of these countries. The development efforts have, in some instances, focused on incomegrowth. However, not all national income growth translates to improvements in living conditions forthe poor. Developmental entrepreneurship is demonstrating that microenterprises play an importantrole in grass roots initiatives to sustain livelihoods. This is especially true in SSA, one of the regions ingreatest need, where opportunities for agri-business and aquaculture look particularly attractive.Further research is required in this fledgling field, to bolster the effectiveness of such initiatives. Theseinitiatives focus on supporting the microenterprise at three levels: enabling environment / policy space,value chain or markets development, and the micro-entrepreneur him/herself. As described below, thisresearch will focus at the level of the individual enterprise. III. PurposeThere are currently three primary schools of thought related to developmental entrepreneurship: (1)Systems Approaches (e.g. pro-poor market development, M4P and others); (2) Inclusive MarketsApproaches; and (3) Sustainable Livelihoods Approaches – each with its own focus and related tools.113First, systems approaches focus on community and government institutions, and the requiredcapabilities they must command to foster entrepreneurial activity. Second, inclusive marketsapproaches promote interventions at various levels (government, value chain, and individual micro-enterprise) to build markets from the ground up using subsector analysis and BDS. Third, sustainablelivelihoods approaches are people-centric, holistic methods for creating means of income for the poorthrough sustainable and productive work.As opposed to building an entire value chain or enhancing institutional efficacy in promotingentrepreneurship: How can we identify and assess those opportunities for the individual entrepreneur that will lead to poverty alleviation outcomes and provide sufficient financial returns?How might we look across markets for these opportunities, so that we can direct entrepreneurialattention, funding and other resources to them? How can we help an existing microenterprise focustheir efforts on these opportunities to supplement existing operations? What are the specificmeasurable characteristics of these opportunities? Under what conditions do they develop? Once anopportunity is identified as having the potential to meet both criteria, how might we screen it to ensureviability?This research proposes to address these questions in SSA through the methodology described below,and in part, will leverage the tools of the approaches described above. Namely, this will include: the113 See Jones, L. and Miehlbradt, A. (2009); Johnson, S. (2009); UN Development Programme (2008); and Elliot, D.,Gibson, A. and Hitchins, R. (2008) 19
  • 20. value chain mapping frameworks to define market systems (of the systems approach); frameworks fordetermining intervention level and frameworks for markets impacts on the lives of the poor (of theinclusive markets approach); and sustainable livelihood methodologies on identifying individual andcommunity competitive strengths. IV. AudienceAs set out in section I – Development Stakeholders, there are a range of stakeholders within thedevelopmental entrepreneurship landscape. Views regarding the right priorities and approaches varyacross the groups (see figure 8). These positions are useful when considering the use of the findings ofthe proposed research. First, for inter-governmental agencies providing policy advice and makingfunding decisions on related projects, this research will provide a useful tool for assessing thedesirability of funding development entrepreneurship projects. For example, when making a decision toprovide funding for a proposed entrepreneurial intervention, the decision-maker will have a tool toassess the opportunities that the micro-enterprises are pursuing – the likelihood of sustainability basedon profit potential and a robust method for projecting poverty alleviation outcomes. Second, within thepublic sector, the research will provide developing world policy makers a tool to foster economic growthby focusing entrepreneurship efforts on those activities that yield strong financial performance. Whenefforts are correctly aligned on prioritised opportunities, this activity will also yield concurrent socialimprovements. For public sector aid agencies in the developed world facing budgetary constraints,funding developmental entrepreneurship or sustainable livelihoods programmes is becoming moredifficult. The tool resulting from this research can contribute to the process criteria set for prioritisingfunding. It provides a method for evaluating whether a given project will meet the dual requirements ofdemonstrably alleviating poverty and doing so in a financially sustainable way. Third, within civil society,social entrepreneurs will have a tool to properly assess developing world new venture Inter-governmental National & Local Private Organisations Public Sector Civil Society Sector Beneficiaries • Economic downturn is • Tightening of aid • Building sustainable • CSR should move • Local ownership of set to reverse years of budgets due to fiscal livelihoods rectifies from philanthropy to self-sustaining progress, and requires constraints102 inequalities and the utilisation of core businesses is critical access to funding99 • Entrepreneurial provides access to capabilities to serve to poverty relief112 • Food crises are likely solutions offer a tool choices105 higher purposes108 • Aid dependency to re-emerge due to to build cross-border • Private sector • Progressive players distorts incentives, population growth ties103 contributes to establish CSR at their exacerbates and climate change • African governments development, core, and from corruption, creates impacts100 must be accountable especially indigenous inception109 debt burdens and • Inclusive private for leading the small business 106 • NGOs must improve weakens indigenous sector solutions must solutions to eradicate • Social investors use to collaborate on businesses113 be fostered within a poverty104 VC methodology and global issues110 • New positive images supportive public patient capital to spur • Emerging markets of Africa must be policy context101 development provide vast pools of used to counter outcomes107 resources, talent and negative consumers111 stereotypes114 Figure 8: Current Positions of Development Stakeholder Groupsopportunities, and social investors will have a way to assess an opportunity’s likelihood of achievingsocial value core to their mission. Existing NGO practitioners that utilise developmental 20
  • 21. entrepreneurship to alleviate poverty will leverage the research insights to gauge the effectiveness ofexisting interventions, and to prioritise future endeavours. Fourth, from the private sector for-profitmicrofinance providers, and incubators will have a tool for assessing market opportunities and threats,again strengthening a critical step in the due diligence process in capital allocation decisions. For themicro-entrepreneur, it should enable focus on the most viable opportunities, and inform thedevelopment of businessstrategy. For larger corporates it may serve as a useful tool for analysing developing marketopportunities, and thus informing market entry decisions. In the case of emerging market growthprogrammes, it will provide a tool for determining those grass roots opportunities in which financialvalue is to be attained, and indicators of opportunity alignment to existing core strategy and capabilities.For CSR programmes in related countries, the tool will provide a method for demonstrating projectedfinancial and social returns, and for reporting outcomes. Fifth, beneficiaries, including the micro-entrepreneur, BDS providers, and value chain partners will utilise the outputs of the research to focustheir efforts on developing the most viable opportunities. V. Hypothesis Developmental entrepreneurship opportunities exist which will alleviate poverty and generate sufficient profitability; and the levels of resultant social and financial returns can be projected with validity.As a key lever of pro-poor, inclusive economic activity, developmental entrepreneurship should beembraced for its capacity, to not only alleviate poverty, but to do so in a substantively scalable waythrough the generation of profit. Therefore, efforts to address these opportunities are inherently notentirely dependent on donation-based or public sector funding. To harness this lever, research atmicroenterprise level to address the extreme poverty of SSA, should provide insight into: (1) theidentification of opportunities for poverty alleviation and financial returns; (2) the strategy the localentrepreneur should take to achieve both outcomes; and (3) the set of implementation tools a givenentrepreneur needs to execute that strategy. The research of this proposal seeks to address point 1.Considering the entire landscape for developmental entrepreneurship opportunities, it could beassumed that these opportunities would vary across a number of dimensions – size of investmentrequired, industry sector, extent of labour utilisation, size of the target market, extent of standard ofliving improvements, etc. These dimensions fall into two categories: (1) the extent of povertyalleviation attributable to the given venture which addressed the opportunity, or the social return; and(2) the extent of the financial return generated for creditors and shareholders in the given venture. Foreach of the two dimensions, there is a body of research referenced that demonstrates the prima facievalidity of this hypothesis.Poverty AlleviationAs discussed, developmental entrepreneurship opportunities, when effectively addressed, providepoverty amelioration outcomes. It is believed that the extent of these outcomes for a given venture 21
  • 22. addressing one such opportunity is based on a number of contributing factors. First, there are a rangeof primary benefits that will result to varying degrees – income increases for the entrepreneurs that owna new business, standard-of-living improvements for customers that purchase goods or services, andincreased employment/livelihood opportunities. Second, there are several secondary benefits, whichare relevant based on the nature of the opportunity – purchases of locally procured goods and servicesfrom value chain partners, improvements in life expectancy and child/maternal mortality rates,increased educational enrolment, improved gender equality, improvements to food supplies, and newbenefits related to environmental sustainability. Third, the tertiary benefits include skills and knowledgespillovers in target communities (or the building of human capacity); the growth in social capital, or localnetworks that attract future investment, trade, and mentorship; benefits associated with future uses ofnew intellectual property resulting from new technologies/innovations; and cultural benefits ofproducing models worth highlighting to influence policy changes and attract people to entrepreneurialundertakings.A number of examples in the literature demonstrate the validity of the hypothesis’ reliance on thereferenced primary benefits. Tamvada documents that increases in income for micro-entrepreneurs,and the route out of poverty that entrepreneurship provides.114 Similarly, Morris draws broaderconclusions related to the importance of entrepreneurship to an economy and shows correlations inGDP increases, improvements to societal wealth, and quality of life enhancements. 115 Research by theUNDP provides evidence regarding standards of living improvements for those availing of the offeringsmicro-entrepreneurs provide.116 Regarding labour utilisation associated with a given developmentalentrepreneurship opportunity, Koo provides evidence regarding the upward social mobilityentrepreneurship and related employment opportunities provide, Ahmed and Peerlings find that labourproductivity, incomes and welfare are all correlated to improved working conditions in related SMEs,and Kellogg develops a scorecard to measure employee poverty rate improvements in the smallbusiness customers of a non-profit microfinance provider.117Regarding the secondary benefits Milder provides evidence of the benefits related to value chainpartnering.118 Broader economic development, such as effects related to improvements in health,education and hunger are also documented, such as the World Bank on household welfare related torural infrastructure projects, Reardon on the impacts of the agribusiness on rural poverty alleviation forsmall hold farmers, and Mair & Marti on the poverty reduction impacts related to those entrepreneursthat work to fill “institutional voids”.119 de Mel, Benzing & Chu, and Prasad all separately address therole of gender in micro-entrepreneurship and its impacts.120 Lastly, Tremblay & Neef, as well as Dean &114 Tamvada, J. (2010), p. 65115 Morris, M. (2001), p. v116 See UN Development Programme (2008); and Milder, B. (2008), pp. 301, 316117 See Koo H. (1976), Ahmed, N. and Peerlings, J. (2008); and Kellog, C. (2009)118 Milder, B. (2008), pp. 301, 316119 See Songco, J. (2002); Reardon, T. et al (2009); and Mair, J. & Marti, I. (2008)120 See de Mel, S., McKenzie, D. and Woodruff, C. (2008); Benzing, C. and Chu, H. (2009); and Prasad, R. (2009) 22
  • 23. McMullen, examined the role of micro-entrepreneurship, and related opportunities for environmentalsustainability improvements.121The tertiary benefits related to micro-entrepreneurship are also covered in the literature. Papagiandiset al discuss the role of innovation and technology, and social networks, as they relate to spurringentrepreneurial activity.122 Endeavor, a U.S. based not-for-profit in the developmental entrepreneurshipspace, documents outcomes related to their engagements, including outputs related to knowledgecapital transfer, cultural capital benefits, and social networks development.123 Regarding policy impacts,in 2007 the World Bank documented outcomes related to pro-poor aquaculture in rural Asia, includingpolicy influence, adaptive technologies and knowledge dissemination.124The poverty alleviation outcomes are apparent, and as shown, well documented. One of the primarychallenges of this research is in the area of effective measurement, and then the extrapolation thereofin defining a valid casual framework that can be used to predict the outcomes of a given venture’seffective utilisation of resources to address the opportunity. Measurement of social returns is notablydifficult, but possible. Early work in this area was undertaken by Jed Emerson, Melinda Tuan and FayTwersky, as they developed the social return on investment framework. Also, balanced scorecards havebeen used to gauge social outcomes by Acumen Fund and New Profit; while Venture PhilanthropyPartners and Robin Hood are noted for blending quantitative and qualitative measurements to assessproject efficacy. Also, Kramer synthesized a number of evaluation techniques in “Measuring Innovation:Evaluation in the Field of Social Entrepreneurship” to define practical and balanced measures of impact.125Commercial ViabilityThe second leg of the hypothesis is the dimension of financial returns. Developmental entrepreneurshipis inherently concerned with leveraging the growth of small, private sector ventures to lift people frompoverty. In many instances, larger corporate undertakings, namely those in extractive industries and inmanufacturing, have been criticised for their exploitive practices in developing markets. For these andother reasons, and despite the advances in CSR agendas in a significant number of organisations, manystakeholders outside the private sector are loathe to engage private sector partners in jointundertakings. However, it is precisely the generation of profit that enables these ventures to bebrought to scale, without sole reliance on donation or public sector funding, and thus expand the reachof their socially beneficial activity.121 See Tremblay, A. and Neef, A. (2009); Dean, T. and McMullen, J. (2007)122 Papagianndis, S., Li, F., Etzkowitz, H. and Clouser, M. (2009), p. 215123 Endeavor (2008), pp. 26-31124 See World Bank (2007)125 Trelstad, B. (2008), pp. 116-117 23
  • 24. Return on EBIT (1 – t) Invested Capital D+E (ROIC) Spread = (ROIC – WACC) Weighted Average (1 – t) KDD + KEE Cost of Capital D+E Total Return to (WACC) Shareholders / Economic Value Added ˆ(1/n) Organic Growth (Vn + Accumulated Draw) -1 (CAGR) V1 Growth Rate Growth through Vpost + Accumulated Dividends Mergers & -1 Vpre Acquisitions Figure 9: Disaggregation of Total Return to Shareholders126In order to attract sufficient competitive capital through debt and equity sources, a venture mustdemonstrate its capacity to repay the debt, or the extent of returns on equity invested, includingappropriate risk premiums. For start-up businesses in these markets, access to microfinance is vital, andlending criteria are typically based upon the size of the loan amount, collateral requirements, interestrates and other service fees, compulsory savings or group contribution requirements, and other termsand conditions.127 For the equity investor, the most holistic yardstick of firm performance is financialreturns as measured by total return to shareholders (TRS) – a measurement inclusive of spread (returnon invested capital less the weighted average cost of capital), and firm growth (see figure 9). Thismeasure of financial returns is a useful tool for understanding the projected ‘end result.’ However, arange of underlying factors contribute to the new venture’s ability to perform. The due diligenceprocess undertaken by an angel investor, venture capitalist or creditor in considering a potentialinvestment would rely heavily upon the business plan, including a range of analyses and projectionsrelated to market size, ability to differentiate, risk mitigation, and others. These analyses, althoughseparate to, are also closely related to the financial performance projections. In essence, these factorsfor screening opportunities are the generally accepted indicators of the financial performance, asmeasured by TRS. The underlying factors related to a venture’s ability to generate these financialreturns, and hence their attractiveness, is detailed in figure 10:128126 Taken, in part, from Higgins, R. (2007), pp. 53-56, 294-296127 Think Microfinance (2010) , p. 2128 Timmons & Spinelli (2004), pp.91-103; Cochrane (2004), p.1 24
  • 25. Industry & Market Economics Competitive Advantage • Structure & size • Time to break even • Fixed and variable costs • Growth rate • ROIC potential • Value chain control • Market capacity • Capital requirements • Barriers to entry • Market share attainable • Free cash flow projections • Strength of customer value • Cost structure • Sale growth proposition • Reach-ability of customers • Asset intensity & Cap Ex • Strategic flexibility • Durability of product life • Gross margins • Room for error • Strength of user benefits • After-tax profits Harvest Management Team Risk • Valuation multiples & • Complementary fit • Demand risk comparables • Relevance of experience • Payment risk • Exit mechanism and • Integrity • Performance risk strategy • Opportunity costs • Political risk • Capital market context • Desirability • Regulatory risk • Risk / reward tolerance • Foreign exchange risk • Stress tolerance • Liquidity risk • Investment concentration risk Figure 10: Criteria for Evaluating Venture OpportunitiesThere are several studies related to the financial feasibility of developmental entrepreneurship. Ferh eal utilise corporate finance techniques to estimate the difference between market rates of returns andactual rates of return in determining the outcomes of microfinance initiatives.129 Finn provides a casestudy on Village Enterprise Funds, a provider with over 9,000 micro-grants in developing countries, andshows the prevalence of micro-entrepreneurs to repay loans and to start subsequent businesses.130 DeMel et al calculated the real (i.e. net of inflation) return to capital at 5.7% per month for micro-enterprises in developing countries.131 In 2009, Raiz published a case study on a for-profit incubatorbased in South Africa, which is profitably investing in local start-ups.132 Similarly, Copeland provided acase study on a new venture providing lighting solutions in India and Africa, which recently received$6M in venture funding.133 Lastly, Masakure et al utilised the resource-based theory of the firm toassess financial performance of Ghanaian SMEs.134In support of the financial viability leg of the hypothesis, a number of studies have also been conductedon developmental entrepreneurship opportunities, and those specific industry sectors and geographicmarkets that are attractive due to their social benefits and investment returns. The World Bankproduced two relevant reports on opportunities in SSA – one on the opportunities associated with129 Ferh, D. and Hishigsurren, G. (2005), p. 133130 See Finn, B. (2005)131 de Mel, S., McKenzie, D. and Woodruff, C. (2007), pp. 1-2132 Raiz, A. (2009), pp.61-62133 See Copeland, M. (2009)134 See Masakure, O., Henson, S. and Cranfield, J. (2009) 25
  • 26. aquaculture, and another on agribusiness.135 In 2008, Milder described the opportunity presented byproviding venture funding in the finance gap between micro-credit and corporate finance.136 Likewise,Eid provides insights regarding the opportunities for private equity in developing countries.137 Masakureet al explore the financial performance of non-farm enterprises in Ghana138; and Ravallion stresses theimportance of productivity in small hold farming, and their likelihoods of success to increase foodsupplies and utilise labour.139 Kirubi et al provided an analysis of the opportunity presented byincreasing village-level community electricity improvements.140 In short, there is currently a body ofresearch that supports the assertion that developmental entrepreneurship opportunities arecommercially attractive. In fact, Tambunan argues that “SMEs in LDCs can survive, and even grow in thelong run, as they create a niche market for themselves, they act as a ‘last resort’ for the poor, and theywill continue to grow alongside larger enterprises for whom they often supply required inputs.”141The area of venture opportunity screening, including market analysis, financial analyses (e.g. sensitivityand scenario planning), risk analysis, and others are well documented and provide a foundation fromwhich to commence the research. The key challenge for the financial returns dimensions, is not indeveloping the appropriate methodology for calculating financial returns, but in collecting the requiredinputs across a statistically significant number of microenterprises. VI. MethodologyThe methodology described in the sub-sections below, include (1) gathering the required instances ofexisting research and finalising the hypothesis; (2) collecting and analysing the existing datasets onglobal entrepreneurship and finalising the research design; (3) Determining a representative sample sizeand desired microenterprise participants; (4) Observe and interview participants to collect information(both qualitative and quantitative) required to validly describe micro-entrepreneurial activity; (5) Createa mutually exclusive and collectively exhaustive categorisation of microenterprises based on theopportunities they pursue (as opposed to their capabilities in addressing them); (6) Map datasets withinthe categorisations determined; (7) Draw correlations for each category between opportunities pursuedand social and financial returns achieved; and (8) Study anomalous instances and develop a causationframework which ascribes deterministic characteristics to the opportunities regarding their capacity toproduce social and financial value.Refine the Hypothesis (1)The review of the literature that was undertaken to complete this proposal represents the first step informing the final hypothesis. A review of over 200 sources was utilised in crafting this document, andprovides a basis for the research insofar as it describes the breadth of work in the developmentalentrepreneurship field. However, it is not an exhaustive review of all literature describing the depth of135 See World Bank (2007); Larsen, K., Kim, R. and Theus, F. (2009)136 See Milder, B. (2008)137 See Eid, F. (2006)138 See Masakure, O., Henson, S. and Cranfield, J. (2009)139 Ravallion, M. (2008), p. 303140 See Kirubi, C. et al (2008)141 Tambunan, T. (2008), p. 147 26
  • 27. research undertaken that is relevant to the aspect of opportunity analysis. There are a number of topicsto be further explored within the existing literature: measurement techniques used to gauge socialoutcomes, tools for analysing value chain relationships and market demand (from the sustainablelivelihoods, systems, and inclusive markets approaches), valuation models and other measurementtechniques used in microfinance to gauge the financial performance of sole micro-entrepreneurs andother developing world SMEs, other alternative investment decision approaches or methods forscreening venture opportunities, significant contextual differences for ventures in the developing worldthat necessitate changes to the developed world techniques for screening venture opportunities.Capturing these insights will provide an improved lens with which to view the existing hypothesis –potentially shedding light that enables an improvement thereof; and will provide better tools with whichto design and conduct the research.Assumptions & Preliminary Research Design (2)The preliminary research design, as proposed, is created in the absence of the additional insightsreferenced above. As such, the present design rests upon several broad assumptions – qualitativeobservation will be logistically possible and cover a representative sample of micro-entrepreneurs inSSA142, the existing datasets available through the Global Entrepreneurship Monitor (GEM) and theWorld Bank will contain the required information to extrapolate the findings of the representativesample across the broader group of SSA entrepreneurs143, and interviewing and measurementtechniques (which themselves are currently evolving) for social value created by social entrepreneurshipwill be sufficient to gauge the social and financial returns of the observed participants.144 Also, theresearch is designed to collect information related to a micro-enterprise’s ability to reduce hunger,increase incomes, compete within the given industry and market, price products to reach break-evenexpeditiously, mitigate regulatory risk, and others (see section IV). This research design rests uponthese factors as the elements that will have to be captured to assess the opportunities (see figure 11).These factors are assumed to be measurable, and are believed to constitute the elements of social andfinancial returns. Also, note the proposed relationships between the extent of social return and theextent of financial returns, and the outcomes expected (see further discussion in section VI).The completion of step 1 is presumed to provide additional insight which may alter the research designas proposed herein.Determining a Representative Sample (3)The contextual information provided in section I provides a broad view of the primary areas relevant tothe study of developmental entrepreneurship. This summarisation is a useful backdrop for determininga sample of representative micro-entrepreneurs to study in depth. The existing scope of the researchnecessitates consideration of three levels for representation within the selected sample (to avoidsample bias). First, the countries in which the micro-entrepreneurs operate should reflect the four142 See Fadahunsi, A. (2000). Argues in favour of utilising qualitative techniques, especially observation.143 See Acs, Z., Desai, S. and Klapper, L. (2008) for a description of differences between that data available in theGlobal Entrepreneurship Monitor and the World Bank Entrepreneurship Survey; and see OECD (2008b) for data onentrepreneurship in OECD (i.e. developed) countries for comparative purposes.144 See Trelstad, B. (2008). Provides an appendix on the development of related measurement techniques formicro-entrepreneurs stimulating poverty alleviation outcomes in developing country contexts. 27
  • 28. regions of SSA, should include countries of Low and Medium development, should cover the range of‘ease of doing business’ metrics, and should cover countries that include various mixes of industryactivity.145 Second, mid-level considerations will cover the range of contextual conditions at communityand value chain levels. Here it is important to ensure that the sample covers the range of theseenvironmental conditions such as access to suppliers and customers, extent of arable land and waterresources, state of transportation infrastructure, urban versus rural footprint, etc. Third, the sampleshould represent the range of contextual conditions at micro-enterprise level, including: entrepreneur’sgender, previous livelihood or employment /opportunity costs, the product market or industry in whichthe venture is competing, etc. Certainly, there are additional conditions to be considered at each levelthat may influence an entrepreneur’s success, and will be necessary to consider when determining thesample. For this reason it is necessary that the work regarding the refinement of the hypothesisincludes a surfacing of the existing conditions regarded as relevant to firm performance in developingcountry microenterprises, so that a robust sample can be examined.Observation (4)The given sample will be examined across each of the contextual conditions decided as a part of step (3).The examination will include a recording of these factors, for each microenterprise studied, to ensure anunderstanding of the venture’s context. Also, those factors that are agreed within step (2) as necessaryfactors contributing to the generation of social and financial returns will naturally be measured.Questions asked by the interviewers will likely contain both quantitative and qualitative information, willfocus on separating the strength of the opportunity from the strength of the execution to address it, willensure validity, and reduce interviewer bias.146 Also, other considerations, such as cultural sensitivities,language, and logistics in the developing country, will be taken into account when planning the on-siteobservations. Lastly, a system (potentially electronic) for capturing and transmitting findings from thefield will be created to mitigate the risk of data loss in transit.145 Note there are several methods for estimating the industry sector concentration of a given economy. One ofthe more recently developed views on this topic is covered by Hidalgo et al and can be explored at See Harrison, D. and Krauss, S. (2002) on interviewer cheating when engaging African entrepreneurs. 28
  • 29. Illustrative Not-for-Profit and Most Attractive Social Return Dimension Public Sector Space Opportunities Least Attractive Private Sector Space Opportunities Financial Return Dimension Figure 11: Mapping Social and Financial ReturnsInterpretation & Categorisation (5 & 6)A review of the data gathered will result in the determination of a number of primary attributes whichhelps describe the opportunities that developmental entrepreneurs pursue. An examination of the datagathered will be used to categorise the sample into natural groupings based on the contextualconditions they operate within, the extent of their outcomes in the range of factors underpinning theirsummary social returns generated, and the extent of the factors underpinning their financial returnsgenerated. In creating this grouping it is, of course, necessary to eliminate overlaps and gaps – meaningthat the categories should be mutually exclusive and comprehensively exhaustive.The agreed upon categories will then serve as a framework within which the GEM and World Bankdatasets can be mapped. For example, if categories are determined to be driven primarily by industryalignment, then it will be useful to create summary statistics on the number and size of thoseentrepreneurs engaged within each given industry category.Correlation (7)Correlations will arise that will help describe the nature of the opportunities, and their ability togenerate social and financial returns. For example, when examining the category under the water andsanitation industry group, we may find that firms generally produce a high level of both social andfinancial returns (perhaps relative to a restaurateur or a textile manufacturer) due to their ability to 29
  • 30. increase the entrepreneur’s income and those of his/her employees, improve health conditions forcustomers, and reduce the amount of time children carry water and therefore increase educationalenrolment. Correlations, such as these will be developed across the categories to surface the primarytrends.Causal Framework (8)Utilising the correlations developed, a review of the observed sample and the dataset gathered, willprovide confirmatory examples which support the correlations, and anomalous instances which willrequire adaptations to the theory under development. For example, if an instance within the water andsanitation category does not result in high social returns, a further investigation of ‘why’ is required. Itwould be at this stage we could observe that building latrines does not add to agricultural productivityfor small hold farmers, and therefore doesn’t generate significant scale. In this instance, the theorycould be improved upon to draw the casual link between an opportunity’s ability to generate income forthe customer through increased agricultural productivity, the venture’s scalability due to higherdemand, attractiveness for inward capital that makes scaling the business possible, and the growth ofthe business has enabled significant standard of living improvements across communities reached. VII. Expected OutcomesThe research is intended to provide a theory which explains the nature of developmentalentrepreneurship opportunities, in terms of their abilities to generate both social returns related todecreasing poverty in Sub Saharan Africa and to provide financial returns to providers of capital. Thetheory will provide a robust method for predicting these returns for a given developmentalentrepreneurship opportunity. A group of given opportunities could then be mapped to compare theirrelative attractiveness (see figure 12). 147 Note that such a mapping is expected to result in147 The map provides an illustrative example of the type of output envisaged as an output of the proposedresearch. Each point on the map indicates an opportunity analysed. 30
  • 31. Illustrative Not-for-Profit Most Attractive and Public Opportunities Sector Space Social Return Least Attractive Private Sector Space Opportunities Financial Return Figure 12: Developmental Entrepreneurship Opportunity Mappingthree clusters of opportunities – one with low social returns and low financial returns, or the leastattractive opportunities; the second with high social returns but low financial returns, or those mostsuited for not-for-profit or public sector initiatives; and the third with low social returns and highfinancial returns, which are best addressed by traditional commercial activity. It is the outliers in theupper-right quadrant that are most attractive for developmental entrepreneurship, as they provide highlevels of both social and financial returns. This mapping will enable effort and funding to be directed tothose ventures that have the highest likelihood to achieve the highest social returns, and to do so bymarshalling competitive capital to scale the venture. VIII. BenefitsThe proposed research will increase the body of knowledge in developmental entrepreneurship, andspecifically in the aspect of opportunity analysis. The insights gained will enable microenterprise andmarket development programme proponents in inter-governmental organisations, as well as sustainablelivelihoods advocates in not-for-profits, to prioritise their efforts on those entrepreneurial activities thatmaximise social benefits and provide room for scaling outside donation or public sector funding.Similarly, developing country and developed country agencies supporting entrepreneurshipprogrammes will have a tool with which to direct support and micro-entrepreneur interest to the higherpriority opportunities; and developing country governments will also benefit from increased tax revenuegenerated from successful ventures addressing those opportunities with the greatest likelihood ofsuccess. It will provide micro-finance institutions and other social entrepreneurs another tool forevaluating social value and credit worthiness. Larger private sector players will benefit from the findingsby gaining an additional tool for analysing new market entry opportunities, and in forming CSRprogrammes that maximise impact by optimising the balance between leveraging their core capabilities 31
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