- Knowledge base
- Policy question
Policies to promote entrepreneurship among poor and marginalised groups are politically appealing but generally not the most effective. For inclusive development increased efforts should be made to help promising and established enterprises expand, produce higher quality goods and connect to global markets.
Entrepreneurship is said to be a key strategy in fostering economic growth and development. Yet there is a large heterogeneity in entrepreneurs with different groups facing different constraints. Here we discuss opportunities for three distinct groups, each of which has (some) potential to promote the interests and needs of disadvantaged and marginalised people.
The first group comprises micro-enterprises, generally run by a single individual (but could be up to 10 employees) with no, or limited wage and salary employment opportunities. Setting up their own enterprise provides these individuals with an often unique, opportunity to earn cash income for themselves and their families. Targeting marginalised groups (e.g. women or youth) to help them set up their own firm through skills training and (micro)finance could be a viable route to empowerment and direct poverty alleviation. Indeed, some studies suggest positive impacts of such interventions on business start-ups and survival, although the evidence is less robust with respect to increased incomes. Besides, recent studies have shown that cultural factors may be an important barrier to business start-ups, especially for women.
The second group comprises ‘latent gazelles’ which are able to expand their business, add value and provide for wider employment opportunities, generating the majority of formal sector jobs. Yet this group is considerably smaller than the first: some 3-12 per cent of micro and small enterprises are able to expand and move beyond ‘owner-only’ enterprises. Recent evidence shows that this group is typically less constrained by ‘internal factors’ such as education, cultural values and business skills. Rather they are remarkably similar to the limited number of very successful entrepreneurs in this respect, yet bounded by external factors such as access to finance, business location and poor infrastructure. Mitigating such barriers through tailored interventions can tap their potential, generating larger-scale businesses that absorb excess labour from the informal sector and channel it into more productive employment.
The third and smallest group covers ‘success story’ entrepreneurs, who are able to tap into profitable opportunities in high-margin international markets. Studies have shown the positive impact of adherence to international standards on employment creation in the manufacturing sector and on direct poverty alleviation in the agricultural sector. In Senegal, for example, tightening standards on fruits and vegetables produced for export to the EU induced a shift from small-holder farming to more integrated agro-industrial production, reducing poverty among poor farm households. They subsequently earned a higher income from contract farming and waged employment within larger agro-establishments.
In order to be successful these firms need to develop capacity (learn how) to meet a growing body of internationally agreed standards related to the product itself, the production process, labour conditions and the environment. Private sector collaborations in donor and recipient countries are key to increasing such capacity, helping firms to access global markets and to join global value chains. Initiatives like the New Development Bank may foster such collaborations.
In sum, we believe that the private sector can benefit poor and marginalised groups in a number of distinct ways. Paradoxically, direct targeting, while attractive from a political point of view, may be the least rewarding strategy: its benefits tend to be modest, there is doubt on whether benefits sustain in the long run, and they are typically limited to the micro-entrepreneurs themselves. By contrast, interventions directed at high-potential SMEs and ‘top’ performers can generate positive impacts for the larger economy and may be more successful when aiming for inclusive development.
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