Submitted for Consideration to:

Research ProposalDevelopmental Entrepreneurship in Sub-Saharan Africa: Identifying and Assessing Microenterprise Opportunities

Dale S. Fickett

3rd March 2010

Table of Contents

I. Executive Summary.......................................................................................................................3

II. 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.....................................13

Required Research...........................................................................................................................16

Context Conclusion..........................................................................................................................17

III. Purpose........................................................................................................................................18

IV. Audience......................................................................................................................................19

V. Hypothesis...................................................................................................................................20

Poverty Alleviation...........................................................................................................................20

Commercial Viability........................................................................................................................22

VI. Methodology...............................................................................................................................24

Refine the Hypothesis (1)................................................................................................................25

Assumptions & Preliminary Research Design (2).............................................................................25

Determining a Representative Sample (3).......................................................................................26

Observation (4)................................................................................................................................26

Interpretation & Categorisation (5 & 6)...........................................................................................27

Correlation (7).................................................................................................................................27

Casual Framework (8)......................................................................................................................28

VII. Expected Outcomes.....................................................................................................................28

VIII. Benefits........................................................................................................................................29

IX. Bibliography.................................................................................................................................29

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I. Executive SummaryThere is a small, but growing body of research on developmental entrepreneurship, or the support of small business in developing countries, as a tool to alleviate global poverty. This tool is utilised by a cross-section of the global development community, and as such includes a number of stakeholders from the public, private and civil sectors. Over the past 65 years this community has worked in various capacities to help alleviate the poverty in Sub-Saharan Africa. This region, with 51% of the population living under the global poverty line and having the largest cluster of countries with low development indicators, is arguably the region in greatest need of these efforts. One of the key levers in fighting poverty is the stimulation of private investment to generate economic growth, however not all economic growth helps the poor. Developmental entrepreneurship is a method for economic growth which does, and in Sub-Saharan Africa it is increasingly a key lever for building markets that include the poor as employees, venture owners, and consumers.

An array of research is required to greater understand how to best apply the developmental entrepreneurship tool. Currently, interventions take place on three levels: those which seek to shape the enabling environment in which microenterprises operate (i.e. policy advocacy), those which seek to build markets by providing support along a value chain, and those which seek to support the individual microenterprise. The microenterprise sits at the centre of this research proposal, as she/he requires an ability to: (1) identify and assess new venture opportunities; (2) design the right strategy to address the selected opportunity; and (3) effective execution of that strategy. 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 development community in a range of ways so that effort and resources may be prioritised and applied to those opportunities with the greatest likelihood of yielding financial returns and poverty alleviation outcomes. The described methodology for conducting this research includes: gathering and analysing existing research and data, observing and measuring existing microenterprises, and developing a causation framework which ascribes deterministic characteristics to the developmental entrepreneurship opportunities. It is expected that a small subset of all opportunities will be the outliers which have highest financial and social potential, and thus most deserving of entrepreneurial attention and supports. It is the pursuit of these opportunities which will have the win-win of social outcomes without sole reliance on government or donation funding. Marshalling resources to address these opportunities, those of highest potential, will produce significant benefits for those living in abject poverty – higher standards of living, increased incomes and employment opportunities, and more indirect societal and developmental benefits. It is for these people – those in greatest need – that we undertake this work.

II. Research Context

Economics and Management Literature“Developmental entrepreneurship”, or “enterprise development”, sits at the intersection of development economics theory and entrepreneurship theory, of the economics and management disciplines, respectively. From the economics literature, Naude summarises that both fields have

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developed rapidly over the past fifty years, but did so in relative isolation from one another; and that it is now widely recognised that it is “of great practical importance to understand if and when entrepreneurship is a binding constraint on economic development...in developing countries.”16 Areas of particular interest in relation to entrepreneurship within the development economics community include: structural change and economic growth, income and wealth inequalities, welfare, poverty traps, and market failures.17 From the management literature, Bruton et al summarise that although there have been tremendous strides in the entrepreneurship literature, it is largely based on evidence from developed country markets.18 With only 43 articles (of 7,482 published during 1990 – 2006 in the defined ‘leading management journals’) addressing entrepreneurship in emerging economies, it remains an area of great importance and “woefully under-examined.”19 In sum, development entrepreneurship is the study of utilising the establishment of small businesses as a lever to alleviate poverty in countries with low levels of economic development.

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 entrepreneurial activity; or ‘bottom-up’ examinations seeking to describe various insights relating to the individual entrepreneur, which tend to emanate from the management discipline. In the former, there have been an 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 small African firms)21, the growth effects of government strategies for pursuing trade and investment liberalisation in Least Developed Countries (LDCs) and their concomitant effects on small firms22, social entrepreneur development programmes to “attract back” developing country diaspora with entrepreneurial competencies23, and policy mobilisation to capacitate greater access to domestic, regional and global agro-markets as a poverty alleviation mechanism.24 These findings have generally been 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 and markets regulation.

Conversely, the ‘bottom-up’ research provides insights which are derived from examining the start-up firm or the entrepreneur in a developing country context, including descriptive characteristics, success determinants, work outputs, and social contributions. Examples of such work, include: Kiggundu’s description of the African entrepreneur, typical start-up models, and the external contexts of which they are a part25; Mbaku’s observations regarding corruption, and specifically entrepreneurs’ propensity for trading bribes for political favours26; Jackson’s construction of a firm-level, rather than government- or donor-level view of the market context (based on research of textile and garment entrepreneurs in Zimbabwe)27; and Valliere’s & Peterson’s extension of the

16 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. 30927 Jackson, P. (2004), p.769

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economic growth model to reflect differences between 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 two decades from specific, supply-driven interventions for small enterprises, to broader market development methods; as micro-finance and business development services (BDS) are increasingly demand-led and treated holistically through a value chain approach.29 Jones and Miehlbradt provide a comprehensive timeline of the enterprise development literature (see figure 1).30

Stage DescriptionBeyond Credit(early to mid-1990s)

Support for small enterprise is understood to go beyond provision of finance and includes ‘market development facilitation’, requiring an understanding of the systems in which the enterprise exists

Subsector analysis approach is developed and appliedCommercial Service Delivery (1995-2002)

Business Development Services (BDS) paradigm evolved to formalise a range of non-financial inputs to support indigenous entrepreneurs – training, transportation, technology, market access and information

Renewed focus on monitoring, evaluation and impact assessmentSystems Approaches (2002 – present)

Under a range of names (e.g. pro-poor enterprise development, 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 Systems (2004-present)

Practitioners are starting to focus on the poor as producers, consumers and workers

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 Practice

Development StakeholdersDevelopmental entrepreneurship stakeholders are a subset of the broader global development community. This community is comprised of: (1) inter-governmental organisations; (2) national and local public sector policy makers in developed and developing countries; (3) civil society; (4) the private sector; and (5) beneficiaries (see figure 2).

The subset of these stakeholders that participate in the utilisation of developmental entrepreneurship for poverty alleviation is shown in figure 3. Each of the five stakeholder groups is represented within the map. Within Inter-governmental organisations there are various efforts to develop economies by spurring the growth of inclusive markets through various market

28 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.”

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development programmes.32 In the public sector, government agencies sit on opposite sides of the Official Development Aid (ODA) flow –those that provide funding, and those that receive it. In civil society there are a range of organisations that prioritise sustainable livelihoods approaches in their global poverty alleviation efforts, some of whom could also be classed as social entrepreneurs, based on the maturity level of the organisation and their use of a not-for-profit model.33 Other social entrepreneurs are crhave grown their organisations to significant scale (as distinct from indigenous microenterprise beneficiaries) are also making a contribution to poverty alleviation – such as Grameen Bank and International Development Enterprises.34 These three stakeholder groups have traditionally marshalled private donations and government funding to address developing country poverty through not-for-profit models, however new for-profit models are emerging.

New for-profit social entrepreneurs are harnessing competitive capital to scale their operations. As these social entrepreneurs compete in private sector markets, so to are more traditional multi-national corporates. For example, microfinance institutions span both for profit and not-for-profit models; include start-ups and mature corporates; have core businesses in banking, retailing, and mobile telecommunications; have local versus global footprints; centre on a double bottom line versus sole commercial motive; and offer basic versus complex product ranges.35

Within the private sector, other for-profit models have been introduced to fight global poverty. As mentioned, microfinance institutions, and other social entrepreneurs are using for-profit SME

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)35 See Annibale, R. (2009), p. 263

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models that provide finance, training, or other inputs required by the micro-entrepreneur, such as SKS Microfinance.36 These social entrepreneurs are innovating ways to contribute to poverty to its utilisation as a tool to achieve global development outcomes.37 In the private sector, more alleviation, and there is increasingly a body of research on social entrepreneurship which is relevant utilisation as a tool to achieve global development outcomes.38 In the private sector, more mature multi-national corporates have launched various corporate social responsibility (CSR) programmes which contribute to local entrepreneurship to varying degrees. These programmes range from traditional donations or foundations, which are unrelated to core businesses operations, to leveraging core capabilities that achieve social outcomes as a pillar of corporate strategy.39 These multi-nationals, and increasingly those originating in emerging markets themselves, are competing in emerging markets to tap these pools of natural resources, talent and consumers.40

All of the participants may play a role in the process of developing indigenous entrepreneurs, and as such 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, that play different roles along the value chain. The ‘beneficiaries’ category can be split into three sub-categories. First,

36 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 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)39 Porter, M. and Kramer, M. (2008), pp. 451-47740 Accenture (2009), p. 7

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Figure 3: Map of Developmental Entrepreneurship Market Participants

Inter-governmental Organisations

National & LocalPublic Sector

Private Sector

Civil Society

Beneficiaries

Corporate SocialResponsibilityLeaders

Emerging MarketProgramme Owners

SustainableLivelihoodsAdvocatesDeveloping Country

Finance Ministries

DevelopedCountryODA Agencies

Microenterprise and Market Development ProgrammeDirectors

Microfinance Institutions & Other Social Entrepreneurs

CustomersShareholdersCreditors

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BDS ProvidersEmployees

Entrepreneurs

those that provide required input include the providers of debt and equity financing, those providing capacity building training and other BDS services, employees that provide required labour, and goods suppliers. On the opposite side of the value chain, sit the customers of those offerings which increasing standards of living, especially the end users, or the poor. Lastly, the entrepreneurs benefit through the increased earning capacity provided by a successful venture.

Clearly, there is a set of complex relationships amongst global development community, especially as various organisations play differing roles in various engagements. This complexity also applies for the subset of stakeholders that participate in developmental entrepreneurship initiatives. Whether viewed through the lens of the economist, management theorist, entrepreneur, corporate leader, policy-maker, beneficiary, or global development practitioner – developmental entrepreneurship is a significant tool for generating organic and pro-poor economic growth, building sustainable livelihoods, and alleviating conditions 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.41 Of the 1.4 billion people that live in this extreme state of poverty globally42, approximately 400M43 are in SSA, or 28.5% of the global poor.44 In fact, despite having 11.4% of the world’s population, the region produces only 0.023% of global GDP.45 Moreover, the region has the lowest average GDP per capita at only $2,031.46

The hardships of extreme poverty in SSA are exacerbated by the lack of opportunities for improving one’s standard of living. It is one thing to be extremely poor in an environment in which one has hope due to the opportunities presented by his/her environment, but quite another when the environment presents few opportunities to improve one’s condition. The UN has classified countries based on their level of economic development, and SSA is the largest collection of ‘Low’ developed countries,47 or those with depressingly few opportunities to escape poverty. Globally, there are 385.1M living in these 24 countries, and 357.4M of them are in SSA. 401.6M of the SSA population lives in countries of ‘Medium’ development,48 or where conditions are marginally better. SSA suffers the lowest development rankings on every primary measure – the lowest overall human development index, lowest life expectancy at birth, lowest adult literacy rate, and lowest educational enrolment rate.49 In sum, the poor of Sub-Saharan Africa face the harshest living conditions, and most of these people lack opportunities to escape this extreme poverty by nature of the low levels of indigenous economic activity.

41 UN Development Programme (2009a), p.742 ibid43 Based on calculations from UN Development Programme (2009a), Statistical Annex, pp. 191-19444 ibid45 UN Development Programme (2009a), pp. 191-194, 198; measured in PPP46 UN Development Programme (2009a), p. 174; measured in PPP 47 Based on calculations from UN Development Programme (2009a), Statistical Annex, pp. 191-19448 ibid49 UN Development Programme (2009a), p. 174; measured in PPP

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The causes of extreme poverty, or a lack of economic development, are highly debated; and the prescribed solutions even more so (see section III – Audience). Interventions have ranged in size and scope, and both ‘top-down’ and ‘bottom-up’ efforts have been driven by the stakeholder groups mentioned. These efforts fall within an umbrella process that includes: (1) Harnessing required inputs – human capital, financial capital, social networks, and intellectual capital; (2) Ensuring policy effectiveness in input utilisation (primarily at national level), in setting development priorities, in promoting and regulating markets conducive to inward foreign direct investment (FDI), in setting domestic (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. The sheer breadth of the World Bank’s lending activity provides a useful framework for categorising global development initiatives further (see figure 4).50

Interventions also occur within a complex and dynamic development environment (see figure 5). There are 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 by external ‘globalisation effects’. Placed on the backdrop of the increasing pervasiveness of connective technologies, propagation of corporates’ expansive global operating models, and the increasing prevalence 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 2007-09 financial markets crisis and resultant global economic recession (labelled ‘current economic disruption’). A range of development challenges remain, and these Millennium Development Goals (MDGs) were agreed upon by the international community in 2000, and set specific targets for improvements by 2015.51

50 See World Bank (2009a), pp. 33, 37, 41, 45, 49 and 53; this categorisation is derived from the World Bank’s method of classifying their lending activity from 2004 to 200951 See United Nations (2009)

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Figure 4: World Bank Lending Activity Categorisation

Globalisation EffectsIncreased Resources

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ConsumersWar for Talent New Pockets of

InnovationMulti-directional

Capital Flows• Capital constraints – national debt, aid and investment

• Commodity price volatility

• Weakening global trade

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• Asset Devaluations (e.g. Equities, Real Estate)

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• Primary Education

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• HIV/AIDS, Malaria and other Diseases

• Environmental Sustainability

• Global Partnership for Development

ContinuingDevelopment

Challenges

Figure 5: Complexity of Development Challenges

On balance, it’s encouraging to note that since the establishment of the MDGs, progress in SSA has been made in certain areas (see figure 6).52 Between 2002 and 2007 SSA economic growth topped 6.5% - the highest rate in 30 years. For 2009, growth is expected to have slowed to 1%, as demand abroad for traded goods decreases and capital flows shrink on the back of the global economic downturn. The International Monetary Fund’s (IMF) outlook includes growth of 4% in 2010 and 5% thereafter. There are a number of downside risks to the estimate, and policy recommendations centre on the continuance of fiscal measures to promote countercyclical stimuli and additional

52 ibid10

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 Progress

monetary loosening until recovery gains momentum. In the medium term, recommendations focus on maintaining sustainable budget deficits, spending on infrastructure and human capital development, and public sector effectiveness.53

Private Investment & Economic GrowthOne of the key factors of developing countries’ economic growth, and an environment conducive to the developmental entrepreneurship opportunity, is the ability to attract FDI and deploy it for productive use within the private sector.54 Countries need a sound business environment in the form of good government regulations to benefit from FDI; however excessive regulation can discourage foreign investment.55 Necessary conditions to attract FDI also include infrastructure relevant to the proposed project, stability of property rights, and democracy insofar as it provides a deterrent to expropriation and corruption.56 There is also research indicating a correlation between good governance and economic performance.57 Furthermore, the Organisation for Economic Co-operation & Development (OECD) recommends that in order to attract increased investment, developing countries should foster a diversified financial sector, lower the costs of investment, reduce risks, improve competition, and develop capacity.58 In order that developing countries harness financial capital and other inputs as productive means towards economic growth ends, policies must focus on creating climates most conducive to inward investment. “What ultimately count are the productivity gains that result from product and process innovations brought about through investments, as well as the extent to which jobs and capital flow from declining industries to expanding ...economic activities.”59

Fox and Sekkel Gaal summarise that SSA growth was stimulated by policies in the 1980s and 1990s that provided macro-economic stability and expansion of the domestic sector.60 However, SSA remains the least attractive region for inward investment, based upon the World Bank’s Doing Business 2010 ranking of 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 of physical 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, with only 63% 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.61 As the poorest region in the world, and despite relatively poor physical infrastructure, Sub Saharan Africa has made large progress in promoting economic growth, in large part, through macro-economic stability, political reforms, and, increasingly, regulatory changes – all aimed at improving investment attractiveness. Consequently, the environment for developmental entrepreneurship opportunities is improving.

53 IMF (2009), pp. 1-354 OECD (2006a), pp. 11-1455 Busse, M. and Groizard, J. (2006), p. 156 Khan, M. (2005), pp.77-8257 See Hall, R. and Jones, C. (1999)58 OECD (2006a), pp. 15-1759 ibid60 Fox, L. and Sekkel Gaal, M. (2008), pp. 1-261 World Bank (2009b), pp. 1-5

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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, as measured by the Gini coefficient; functional distributions, or factor share distributions (i.e. returns to land, labour, capital); and measures of absolute poverty, as measured by the Human Poverty Index.62 These measures provide insight into the nature of economic growth, and specifically who is benefiting from that growth. Economic growth may alleviate poverty and address income inequalities, but not necessarily. For example, historic growth constrained within extractive industry segments in developing countries led to increased gross national incomes, and with constant demographics, per capita incomes naturally rose as a mathematical consequence; but this income was highly concentrated and relatively few people escaped poverty as a result, hence growth without development.63

The economic growth which does assist in poverty alleviation for broad portions of the population has been termed ‘pro-poor growth’ or the development of ‘inclusive markets.’ There is a significant body of research supporting the assertion that entrepreneurial activity is critical to developing economies, and that it contributes to poverty alleviation. The OECD promotes the “central role” of the private sector in poverty alleviation, and provides an analytical framework and set of policy recommendations to facilitate pro-poor growth, including providing incentives for entrepreneurship and investment by fostering: (1) low market entry and exit barriers; (2) predictable rules of exchange; (3) secure and transferrable property rights; (4) enforceability of contracts; and (5) low levels of corruption.64 Azmat and Samaratunge found that a range of factors brought about the prevalence of small-scale individual entrepreneurs (i.e. microenterprises), which form a major part of the informal workforce and contribute significantly to economic growth in developing countries.65 Debrah concludes that SSA governments should promote the informal sector as a significant source of employment.66 Furthermore, Lado & Vozikis posit, “That entrepreneurship is vitally important to economic development of a nation is indisputable.”67; and Morris concludes that sustainable economic development does not occur without entrepreneurship, and higher levels of entrepreneurship are directly correlated with increases in GDP, societal wealth, and quality of life.68

Fox and Sekkel observe that most poor households derive income through the sale of their labour to themselves or to others, and that earning more money faster is the key factor in increasing the impact of economic growth on poverty reduction. Furthermore, to overcome existing challenges to job creation, African economies need to be more globally competitive, by focusing policy initiatives on creating climates attractive for investment. Finally, they conclude that the high growth in the informal sector (or micro-enterprises) is a supply-side response to weak demand for labour amongst medium and large enterprises; and prospects for increasing productivity in small hold agribusiness provides a viable route for working out of poverty.69 According to the UNDP, “The poor harbour a potential for consumption, production, innovation, and entrepreneurial activity that is largely

62 Todaro, M. and Smith, S. (2006), pp. 195-20763 Ibid, pp. 15-2064 OECD (2006a), pp. 14-15, 2065 Azmat, F. and Samaratunge, R. (2009), p. 43766 Debrah, Y. (2007), p. 106367 Lado, A. & Vozakis, G. (1997), p. 5568 See Morris, M. (2001)69 Fox, L. and Sekkel Gaal, M. (2008), pp. 1-2

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untapped.”70 They also site many examples of businesses that are creating “value for all” by buying from, and selling to, the poor.71 Benefits are significant, as businesses have enjoyed profits (microfinance institutions earning 23% return on equity, as an industry average), growth potential in new markets, innovation capability enhancements, 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.72 Challenges associated with conducting business in SSA are noteworthy – infrastructure shortfalls, difficulties enforcing contracts, lack of market information, and skills gaps. In some instances, these challenges can be overcome through the utilisation of the five strategies provided (see figure 7).73

Although there are a range of entrepreneurial activities that are likely to contribute to poverty reduction, private investment in the agriculture sector is one of the highest priorities.74 Agricultural growth is now thought possible in SSA, as high growth rates in certain regions have fostered hope that it can be replicated, and as food prices have risen, there is increasingly a realisation that new opportunities may be opening to utilise land and labour as global agriculture supply is near full capacity.75 Also, the World Bank determined that, “Private investment reduces poverty when investment rates are high and occurs in sectors that intensively use factors owned by the poor. In Sub Saharan Africa that means land and unskilled labour.”76 Lastly, Competitive Commercial Agriculture for Africa (CCCA) found that opportunities abound for African small hold farmers, especially given rising demand forecasts due to changes in food consumption patterns and demographic shifts.77

In 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 to be 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, and leverage 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.78 Duncombe & Heeks find that poor rural entrepreneurs also rely heavily on informal, social and local information systems, especially shared telephony services. Nichter & Goldmark find small firm growth factors in four areas – the entrepreneur, the firm, relationships & networks, and context & environment.79 Similarly, Okpara concludes that an entrepreneur’s pro-activity in engaging in export markets, and related financial commitments, cause higher firm profitability and growth.80 Micro-entrepreneurs must use innovative techniques to

70 UN Development Programme (2008), pp. 1-1271 ibid72 ibid73 ibid74 World Bank (2009c), pp. 1-3, 5-775 ibid76 Kochendörfer-Lucius, G. and Pleskovic, B. (2005), p. 177 World Bank (2009c), pp. 2-4 78 Turlsson, P. (2002), p. 33179 Nichter, S. and Goldmark, L. (2009), p. 145380 Okpara, J. (2009), pp. 1281-1282

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garner required inputs in contexts of significant constraints, and in the pursuit of profit they leverage those scarce resources in unique ways that are predominantly context driven.

Access to finance is a key obstacle for the micro-entrepreneur. Overall trends indicate a significantly constrained flow of capital to emerging markets – decreasing from $890B in 2007 to $390B in 2008 and $140B projected for 2009.81 Micro-entrepreneurs, especially in this environment, find it difficult to access credit and equity financing to expand their ventures. Mushinski & Pickering observe that microenterprises have virtually no access to formal credit markets.82 Microfinance provides a substantial form of debt financing for the micro-entrepreneur. Hossain and Knight argue in favour of microcredit due to its role in expanding micro-enterprises and fighting rural poverty.83 However, there is a debate regarding microfinance’s effectiveness. Smith & Thurman in A Billion Bootstraps argue for the expansion of micro-credit, while Amsden & Ha Joon Chang argue against such expansion in some over-supplied markets as new entrants may displace existing enterprises and have net worsening effects. 84 Datar et al levy another attack on microfinance providers, concluding that in their push to alleviate poverty, they should focus on assisting their clients build sustainable enterprises, rather than on providing greater volumes, and ever larger loan amounts.85 Financial capital is a primary input for the microenterprise, and microfinance providers are well positioned to provide this crucial step out of poverty.

Microenterprises are also dependent on other facets of the enabling environments, including regulatory support from their governments. Such supports include: efficiency in acquiring business permits or closing a business, property rights and contract enforcement protections, efficiency in taxation administration, 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 sector stability, domestic infrastructure and human capacity investments, fiscal sustainability, public sector governance, and stances on human rights. Indirect international policy is often more remote to the entrepreneur, but still relevant based on the entrepreneur’s competitive market (e.g. extent of importing/exporting). These factors include: ODA expenditures, trade agreements, security, and monetary stability. Examples of related research, include: Beck et al on financial market policy to broaden access86; the World Bank’s Doing Business series covering cross-border comparisons of reforms related to improving efficiency in operating businesses87; Aubert on promoting developing world innovation88; Ayele on investment incentives and resultant market distortions89; the World Bank working paper on regulatory conditions required to attract FDI90; Phillips et al on policy recommendations to foster entrepreneurial activity91; and Bennett’s argument for government support of informal firms.92

81 Cline, W. (2009), p. 282 Mushinski, D. and Pickering, K. (2007), p. 56783 Hossain, F. and Knight, T. (2008), p. 15584 See Smith, P. and Thurman, E. (2007); Amsden, A. (2007); Ha-Joon Chang (2007)85 Datar, S., Epstien, M. and Yuthas, K. (2008), pp.38-4586 Beck, T., Demirgüç-Kunt, A. and Honohan, P. (2009), p. 11987 See World Bank (2009b)88 See Aubert, J. (2005) 89 See Ayele (2006)90 See Busse, M. and Groizard, J. (2006)91 See Phillips, C. and Bhatia-Panthaki, S. (2007)92 See Bennett, J. (2009)

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Social capital, or relationship networks, is also a critical input for micro-entrepreneurs. Wheeler observes that developing world entrepreneurs who build sustainable, successful enterprises rely upon informal networks that include other private sector players, non-governmental organisations (NGOs), and other community groups, as developed with the Sustainable Local Enterprise Network Model.93 Networks can also facilitate the recruitment of the start-up team recruitment, and Ibeh posits that these firms can overcome barriers to entry to international markets through recruitment.94 Likewise, Zhu et al found that developing country SMEs can increase their internationalisation capabilities by leveraging embedded networks with local governments and business groups.95 Conversely, Bernard et al demonstrate the limitation of certain network nodes, as market-oriented and community-oriented organisations in rural settings are constrained by geographical remoteness, social conservatism, lack of access to resources, and limited management capacity.96

Incubators and other BDS providers supply microenterprises with a range of services, including access to mentors, management advisory services, training, increased access to financing (especially routes to equity financing), and access to technology and process innovations. These providers stretch across the referenced stakeholder groups, and include not-for-profit and for-profit models. The effectiveness of incubators in spurring developmental entrepreneurship is currently debated. Ayers & Harman report the findings of infoDev, a network of 150 such incubators: (1) successful incubators were led by visionary 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.97 Tulchin and Jones debated the effectiveness of microenterprise incubators in addressing poverty, with Tulchin in favour of the support incubators provide, and Jones arguing that most developing world incubators are structured to support ventures 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 catalyse pro-poor economic advancement.” She also proposes that they would have to demonstrate clear connection to pro-poor impacts, be well monitored and the models tested. Moreover, these incubators would focus on the creation of labour intensive businesses, or accelerate equitable growth across the value chain.98

Given the appropriate opportunity, and provided access to needed resources, what strategy should a micro-entrepreneur employ to successfully launch and grow his/her enterprise? There is a new and growing body of research on micro-enterprise strategy, including: Akula’s summarisation of micro-finance institutions’ recommendations on what businesses should do that serve the poor99; several research findings in relation to market definition and international trade by micro-enterprises100; and Porteous, as well as Frishammar & Anderssen, provide insights in relation to market access and marketing strategy.101 Lastly, significant work by the UNDP, released in 2008, led to the

93 Wheeler et al (2005), pp. 36-3794 See Ibeh, K. (2004) 95 Zhu, H., Hitt, M. and Tihanyi, L. (2007), pp. 1-296 Bernard et al (2008), pp. 2188-219097 Ayers, S. and Harman, P. (2008), p. 1298 See Tulchin, D. and Jones, L. (2009)99 See Akula, V. (2008)100 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)101 See Frishammar, J. and Anderssen, S. (2009); and Porteous, D. (2008)

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identification of five common constraints that microenterprises face and well as five strategies that are used with varying incidence to address them (see figure 7).102 The UNDP provide a summary of solutions within each of 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 in developing markets.103 Additionally, work from the Monitor Group has provided four business models on servicing poor countries – “A pay per use approach”, “No frills service”, “Para-skilling”, and “Shared channels”; and three on engaging low-income suppliers – “Contract production”, “Deep procurement”, and “Demand-led training”.104 In combination, these studies provide significant insight into strategies that developmental entrepreneurs should consider in addressing the opportunities which sit at the centre of this research.

Of course, microenterprises must marry the opportunity, the resources, and the strategy with effective execution. The area of micro-enterprise implementation has also benefited from research: Kodithuwakku’s and Rosa’s conclusions regarding the importance of creativity and perseverance in mobilising scarce resources in Sri Lankan village enterprises105; Liedlolm’s findingss regarding the importance of location in small firm survival106; Hung Manh Chu et al on entrepreneurial motivations, challenges faced, and success determinants in Ghana and Kenya107; Bear and Field on micro-enterprise participation within industry development and contributions to value chain competitiveness108; Bekkers et al on internal monitoring and knowledge management systems, as well as external reporting for developmental entrepreneurship projects109; and Thassanabanjong’s, Miller’s and Marchant’s research in relation to employee training.110

Required ResearchMany developmental entrepreneurship researchers have provided their views regarding future research required to either advance the insights of their work, or more generally, regarding what would be beneficial for the field as a whole. Recently Jones and Miehlbradt identified several areas for future research on developmental entrepreneurship111, some of which lead to several key questions that surface 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 harness the productive capacity of rural Sub-Saharan Africa to alleviate

102 UN Development Programme (2008), p. 6103 Ibid, pp. 8-10104 Karamchandani, A., Kubzansky, M. and Frandano, P. (2009), pp. 3-7105 See Kodithuwakku, S. and Rosa, P. (2002) 106 See Liedholm, C. (2002)107 See Hung Manh Chu, Benzing, C. and McGee, C. (2007)108 See Bear, M. and Field, M. (2008)109 See Bekkers, H., Miehlbradt, A. and Roggekamp, P. (2008)110 See Thassanabanjong, K., Miller, P. and Marchant, T. (2009)111 Jones, L. and Miehlbradt, A. (2009), pp.315-318

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Combine resources and capabilities within others

Engage in policy dialogue with government

Leverage the strengths of the poor

Invest in removing market constraints

Adapt products and processes

Market information

Regulatory environment

Physical infrastructure

Knowledge and skills

Access to financial services

Cons

trai

nts

Strategies

High Incidence Medium Incidence Low Incidence

Figure 7: Growing Inclusive Markets Strategy Matrix

poverty and to meet increasing global demand for food and biofuels? What are the connections, overlaps, and synergies between developmental entrepreneurship and sustainable livelihoods approaches? Similarly, Zezza et al call for research required to identify mechanisms to promote productive investment, as opposed to social investment, especially in non-farming activities in rural areas.112 Also, Sievers and Vanderberg look to future research that examines the synergies to be gained by combining BDS and microfinance.113 Other areas cited for future research, include: understanding the current state of developing country markets’ size and structure, strategies for successful inclusive business model deployment, driving projects to scale and overcoming short budgetary timelines, technological innovations pertinent to the poor, reaching the extreme poor with no assets, topics around 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 global poor from extreme poverty by supporting their efforts to build businesses. Research on the topic has come from two directions – the development economists that have identified small business as one method for improving livelihoods, and entrepreneurship theorists that have identified global development challenges as a place in which to apply their knowledge of start-up management for societal good. Aside from these academics, many practitioners engage within enterprise development initiatives, including those in the public, private and civil sectors.

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 global poverty line, are the daily reality for 51% of the population. This situation is exacerbated by the severe limits to personal opportunities to escape this poverty, due to the overall low level of

112 Zezza et al (2008), p. 1297113 Sievers, M. and Vanderberg, P. (2007), p. 1341

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development across most of these countries. The development efforts have, in some instances, focused on income growth. However, not all national income growth translates to improvements in living conditions for the poor. Developmental entrepreneurship is demonstrating that microenterprises play an important role in grass roots initiatives to sustain livelihoods. This is especially true in SSA, one of the regions in greatest need, where opportunities for agriculture and aquaculture look particularly attractive.

Further research is required in this fledgling field, to bolster the effectiveness of such initiatives. These initiatives 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, this research 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 Markets Approaches; and (3) Sustainable Livelihoods Approaches – each with its own focus and related tools.114 First, systems approaches focus on community and government institutions, and the required capabilities they must command to foster entrepreneurial activity. Second, inclusive markets approaches 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, sustainable livelihoods approaches are people-centric, holistic methods for creating means of income for the poor through sustainable and productive work.

As opposed to building an entire value chain or enhancing institutional efficacy in promoting entrepreneurship:

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 entrepreneurial attention and resources to them? How can we help an existing microenterprise focus their efforts on these opportunities to supplement existing operations? What are the specific measurable characteristics of these opportunities? Under what conditions do they develop? Once an opportunity is identified as having the potential to meet both criteria, how might we screen it to ensure viability?

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: the value chain mapping frameworks to define market systems (of the systems approach); frameworks for determining intervention level and frameworks for markets impacts on the lives of the poor (of the inclusive markets approach); and sustainable livelihood methodologies on identifying individual and community competitive strengths.

114 See Jones, L. and Miehlbradt, A. (2009); Johnson, S. (2009); UN Development Programme (2008); and Elliot, D., Gibson, A. and Hitchins, R. (2008)

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IV. AudienceAs set out in section I – Development Stakeholders, there are a range of stakeholders within the developmental entrepreneurship landscape. Views regarding the right priorities and approaches vary across the groups (see figure 8). These positions are useful when considering the use of the findings of the proposed research. First, for inter-governmental agencies providing policy advice and making funding decisions on related projects, this research will provide a useful tool for assessing the desirability of funding development entrepreneurship projects. For example, when making a decision to provide funding for a proposed entrepreneurial intervention, the decision-maker will have a tool to assess the opportunities that the micro-enterprises are pursuing – the likelihood of sustainability based on profit potential and a robust method for demonstrating projected poverty alleviation outcomes. Second, within the public sector, the research will provide developing world policy makers a tool to foster economic growth by focusing entrepreneurship efforts on those activities that yield strong financial performance. When efforts are correctly aligned on prioritised opportunities, this activity will also yield concurrent social improvements. For public sector aid agencies in the developed world facing budgetary constraints, funding developmental entrepreneurship or sustainable livelihoods programmes is becoming more difficult. The tool resulting from this research can contribute to the process criteria set for prioritising funding. It provides a method for evaluating if a given project will meet the dual requirements of demonstrably alleviating poverty and doing so in a financially sustainable way. Third, within civil society, social

• Economic downturn is set to reverse years of progress, and requires access to funding99

• Food crises are likely to re-emerge due to population growth and climate change impacts100

• Inclusive private sector solutions must be fostered within a supportive public policy context101

Private Sector

Inter-governmental Organisations

National & Local Public Sector Civil Society

• CSR should move from philanthropy to the utilisation of core capabilities to serve higher purposes108

• Progressive players establish CSR at their core, and from inception109

• NGOs must improve to collaborate on global issues110

• Emerging markets provide vast pools of resources, talent and consumers111

• Local ownership of self-sustaining businesses is critical to poverty relief112

• Aid dependency distorts incentives, exacerbates corruption, creates debt burdens and weakens indigenous businesses113

• New positive images of Africa must be used to counter negative stereotypes114

• Building sustainable livelihoods rectifies inequalities and provides access to choices105

• Private sector contributes to development, especially indigenous small business 106

• Social investors use VC methodology and patient capital to spur development outcomes107

• Tightening of aid budgets due to fiscal constraints102

• Entrepreneurial solutions offer a tool to build cross-border ties103

• African governments must be accountable for leading the solutions to eradicate poverty104

Beneficiaries

Figure 8: Current Positions of Development Stakeholder Groups

entrepreneurs will have a tool to properly assess developing world new venture opportunities, and social investors will have a way to assess an opportunity’s likelihood to achieve social value core to their mission. Existing NGO practitioners that utilise developmental entrepreneurship to alleviate poverty will leverage the research insights to gauge the effectiveness of existing interventions, and to prioritise future endeavours. Fourth, from the private sector for-profit microfinance 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 the micro-entrepreneur, it should enable focus on the most viable opportunities, and inform the development of business

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strategy. For larger corporates it may serve as a useful tool for analysing developing market opportunities, and thus informing market entry decisions. In the case of emerging market growth programmes, it will provide a tool for determining those grass roots opportunities in which financial value 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 projected financial 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 focus their 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 be embraced for its capacity, to not only alleviate poverty, but to do so in a substantively scalable way through the generation of profit. Therefore, efforts to address these opportunities are inherently not entirely dependent on donation-based or public sector funding. To harness this lever, research at microenterprise level to address the extreme poverty of SSA, should provide insight into: (1) the identification of opportunities for poverty alleviation and financial returns; (2) the strategy the local entrepreneur should take to achieve both outcomes; and (3) the set of implementation tools a given entrepreneur 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 be assumed that these opportunities would vary across a number of dimensions – size of investment required, industry sector, extent of labour utilisation, size of the target market, extent of standard of living improvements, etc. These dimensions fall into two categories: (1) the extent of poverty alleviation 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. For each of the two dimensions, there is a body of research referenced that demonstrates the prima facie validity of this hypothesis.

Poverty AlleviationAs discussed, developmental entrepreneurship opportunities, when effectively addressed, provide poverty amelioration outcomes. It is believed that the extent of these outcomes for a given venture addressing one such opportunity is based on a number of contributing factors. First, there are a range of primary benefits that will result to varying degrees – income increases for the entrepreneurs that own a new business, standard-of-living improvements for customers that purchase goods or services, and increased employment/livelihood opportunities. Second, there are several secondary benefits, which are relevant based on the nature of the opportunity – purchases of locally procured goods and services from value chain partners, improvements in life expectancy and child/maternal mortality rates, increased educational enrolment, improved gender equality, improvements to food supplies, and new benefits related to environmental sustainability. Third, the tertiary benefits include skills and knowledge spillovers in target communities (or the building of

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human capacity); the growth in social capital, or local networks that attract future investment, trade, and mentorship; benefits associated with future uses of new intellectual property resulting from new technologies/innovations; and cultural benefits of producing models worth highlighting to influence policy changes and attract people to entrepreneurial undertakings.

A number of examples in the literature demonstrate the validity of the hypothesis’ reliance on the referenced primary benefits. Tamvada documents that increases in income for micro-entrepreneurs, and the route out of poverty that entrepreneurship provides.115 Similarly, Morris draws broader conclusions related to the importance of entrepreneurship to an economy and shows correlations in GDP increases, improvements to societal wealth, and quality of life enhancements. 116 Research by the UNDP provides evidence regarding standards of living improvements for those availing of the offerings micro-entrepreneurs provide.117 Regarding labour utilisation associated with a given developmental entrepreneurship opportunity, Koo provides evidence regarding the upward social mobility entrepreneurship and related employment opportunities provide, Ahmed and Peerlings find that labour productivity, 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 small business customers of a non-profit microfinance provider.118

Regarding the secondary benefits Milder provides evidence of the benefits related to value chain partnering.119 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 to rural infrastructure projects, Reardon on the impacts of the agribusiness on rural poverty alleviation for small hold farmers, and Mair & Marti on the poverty reduction impacts related to those entrepreneurs that work to fill “institutional voids”.120 de Mel, Benzing & Chu, and Prasad all separately address the role of gender in micro-entrepreneurship and its impacts.121 Lastly, Tremblay & Neef, as well as Dean & McMullen, examined the role of micro-entrepreneurship, and related opportunities for environmental sustainability improvements.122

The tertiary benefits related to micro-entrepreneurship are also covered in the literature. Papagiandis et al discuss the role of innovation and technology, and social networks, as they relate to spurring entrepreneurial activity.123 Endeavor, a U.S. based not-for-profit in the developmental entrepreneurship space, documents outcomes related to their engagements, including outputs related to knowledge capital transfer, cultural capital benefits, and social networks development.124 Regarding policy impacts, in 2007 the World Bank documented outcomes related to pro-poor aquaculture in rural Asia, including policy influence, adaptive technologies and knowledge dissemination.125

115 Tamvada, J. (2010), p. 65116 Morris, M. (2001), p. v117 See UN Development Programme (2008); and Milder, B. (2008), pp. 301, 316118 See Koo H. (1976), Ahmed, N. and Peerlings, J. (2008); and Kellog, C. (2009)119 Milder, B. (2008), pp. 301, 316120 See Songco, J. (2002); Reardon, T. et al (2009); and Mair, J. & Marti, I. (2008)121 See de Mel, S., McKenzie, D. and Woodruff, C. (2008); Benzing, C. and Chu, H. (2009); and Prasad, R. (2009)122 See Tremblay, A. and Neef, A. (2009); Dean, T. and McMullen, J. (2007)123 Papagianndis, S., Li, F., Etzkowitz, H. and Clouser, M. (2009), p. 215124 Endeavor (2008), pp. 26-31125 See World Bank (2007)

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The poverty alleviation outcomes are apparent, and as shown, well documented. One of the primary challenges of this research is in the area of effective measurement, and then the extrapolation thereof in defining a valid casual framework that can be used to predict the outcomes of a given venture’s effective utilisation of resources to address the opportunity. Measurement of social returns is notably difficult, but possible. Early work in this area was undertaken by Jed Emerson, Melinda Tuan and Fay Twersky, as they developed the social return on investment framework. Also, balanced scorecards have been used to gauge social outcomes by Acumen Fund and New Profit; while Venture Philanthropy Partners and Robin Hood are noted for blending quantitative and qualitative measurements to assess project 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. 126

Commercial ViabilityThe second leg of the hypothesis is the dimension of financial returns. Developmental entrepreneurship is inherently concerned with leveraging the growth of small, private sector ventures to lift people from poverty. In many instances, larger corporate undertakings, namely those in extractive industries and in manufacturing, have been criticised for their exploitive practices in developing markets. For these and other reasons, and despite the advances in CSR agendas in a significant number of organisations, many stakeholders outside the private sector are loathe to engage private sector partners in joint undertakings. However, it is precisely the generation of profit that enables these ventures to be brought to scale, without sole reliance on donation or public sector funding, and thus expand the reach of their socially beneficial activity.

Total Return to Shareholders / Economic Value

Added

Spread = (ROIC –WACC)

Growth Rate

Return on Invested Capital

(ROIC)

Weighted Average

Cost of Capital (WACC)

Organic Growth(CAGR)

Growth through Mergers &

Acquisitions

EBIT (1 – t)D + E

(1 – t) KDD + KEED + E

(Vn + Accumulated Draw)V1

Vpost + Accumulated DividendsVpre

ˆ(1/n)-1

-1

Figure 9: Disaggregation of Total Return to Shareholders127

126 Trelstad, B. (2008), pp. 116-117127 Taken, in part, from Higgins, R. (2007), pp. 53-56, 294-296

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In order to attract sufficient competitive capital through debt and equity sources, a venture must demonstrate its capacity to repay the debt, or the extent of returns on equity invested, including appropriate risk premiums. For start-up businesses in these markets, access to microfinance is vital, and lending criteria are typically based upon the size of the loan amount, collateral requirements, interest rates and other service fees, compulsory savings or group contribution requirements, and other terms and conditions.128 For the equity investor, the most holistic yardstick of firm performance is financial returns as measured by total return to shareholders (TRS) – a measurement inclusive of spread (return on invested capital less the weighted average cost of capital), and firm growth (see figure 9). This measure of financial returns is a useful tool for understanding the projected ‘end result.’ However, a range of underlying factors contribute to the new venture’s ability to perform. The due diligence process undertaken by an angel investor, venture capitalist or creditor in considering a potential investment would rely heavily upon the business plan, including a range of analyses and projections related to market size, ability to differentiate, risk mitigation, and others. These analyses, although separate to, are also closely related to the financial performance projections. In essence, these factors for screening opportunities are the generally accepted indicators of the financial performance, as measured by TRS. The underlying factors related to a venture’s ability to generate these financial returns, and hence their attractiveness, is detailed in figure 10:129

Industry & Market• Structure & size• Growth rate• Market capacity• Market share attainable• Cost structure• Reach-ability of customers• Durability of product life• Strength of user benefits

Economics• Time to break even• ROIC potential• Capital requirements• Free cash flow projections• Sale growth• Asset intensity & Cap Ex• Gross margins• After-tax profits

Competitive Advantage• Fixed and variable costs• Value chain control• Barriers to entry• Strength of customer value

proposition• Strategic flexibility• Room for error

Harvest• Valuation multiples &

comparables• Exit mechanism and

strategy• Capital market context

Management Team• Complementary fit• Relevance of experience• Integrity• Opportunity costs• Desirability• Risk / reward tolerance• Stress tolerance

Risk• Demand risk• Payment risk• Performance risk• Political risk • Regulatory risk• Foreign exchange risk• Liquidity risk• Investment concentration

risk

There are several studies related to the financial feasibility of developmental entrepreneurship. Ferh e al utilise corporate finance techniques to estimate the difference between market rates of returns and actual rates of return in determining the outcomes of microfinance initiatives.130 Finn provides a case study on Village Enterprise Funds, a provider with over 9,000 micro-grants in

128 Think Microfinance (2010) , p. 2129 Timmons & Spinelli (2004), pp.91-103; Cochrane (2004), p.1130 Ferh, D. and Hishigsurren, G. (2005), p. 133

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Figure 10: Criteria for Evaluating Venture Opportunities

developing countries, and shows the prevalence of micro-entrepreneurs to repay loans and to start subsequent businesses.131 De Mel et al calculated the real (i.e. net of inflation) return to capital at 5.7% per month for micro-enterprises in developing countries.132 In 2009, Raiz published a case study on a for-profit incubator based in South Africa, which is profitably investing in local start-ups.133 Similarly, Copeland provided a case study on a new venture providing lighting solutions in India and Africa, which recently received $6M in venture funding.134 Lastly, Masakure et al utilised the resource-based theory of the firm to assess financial performance of Ghanaian SMEs.135

In support of the financial viability leg of the hypothesis, a number of studies have also been conducted on developmental entrepreneurship opportunities, and those specific industry sectors and geographic markets that are attractive due to their social benefits and investment returns. The World Bank produced two relevant reports on opportunities in SSA – one on the opportunities associated with aquaculture, and another on agribusiness.136 In 2008, Milder described the opportunity presented by providing venture funding in the finance gap between micro-credit and corporate finance.137 Likewise, Eid provides insights regarding the opportunities for private equity in developing countries.138 Masakure et al explore the financial performance of non-farm enterprises in Ghana139; and Ravallion stresses the importance of productivity in small hold farming, and their likelihoods of success to increase food supplies and utilise labour.140 Kirubi et al provided an analysis of the opportunity presented by increasing village-level community electricity improvements.141 In short, there is currently a body of research that supports the assertion that developmental entrepreneurship opportunities are commercially attractive. In fact, Tambunan argues that “SMEs in LDCs can survive, and even grow in the long run, as they create a niche market for themselves, they act as a ‘last resort’ for the poor, and they will continue to grow alongside larger enterprises for whom they often supply required inputs.”142

The area of venture opportunity screening, including market analysis, financial analyses (e.g. sensitivity and scenario planning), risk analysis, and others are well documented and provide a foundation from which to commence the research. The key challenge for the financial returns dimensions, is not in developing the appropriate methodology for calculating financial returns, but in collecting the required inputs across a statistically significant number of microenterprises.

VI. MethodologyThe methodology described in the sub-sections below, include (1) gathering the required instances of existing research and finalising the hypothesis; (2) collecting and analysing the existing datasets on global entrepreneurship and finalising the research design; (3) Determining a representative sample size and desired microenterprise participants; (4) Observe and interview participants to

131 See Finn, B. (2005)132 de Mel, S., McKenzie, D. and Woodruff, C. (2007), pp. 1-2133 Raiz, A. (2009), pp.61-62134 See Copeland, M. (2009)135 See Masakure, O., Henson, S. and Cranfield, J. (2009)136 See World Bank (2007); Larsen, K., Kim, R. and Theus, F. (2009) 137 See Milder, B. (2008)138 See Eid, F. (2006)139 See Masakure, O., Henson, S. and Cranfield, J. (2009)140 Ravallion, M. (2008), p. 303141 See Kirubi, C. et al (2008)142 Tambunan, T. (2008), p. 147

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collect information (both qualitative and quantitative) required to validly describe micro-entrepreneurial activity; (5) Create a mutually exclusive and collectively exhaustive categorisation of microenterprises based on the opportunities they pursue (as opposed to their capabilities in addressing them); (6) Map datasets within the categorisations determined; (7) Draw correlations for each category between opportunities pursued and social and financial returns achieved; and (8) Study anomalous instances and develop a causation framework which ascribes deterministic characteristics to the opportunities regarding their capacity to produce social and financial value.

Refine the Hypothesis (1)The review of the literature that was undertaken to complete this proposal represents the first step in forming the final hypothesis. A review of over 200 sources was utilised in crafting this document, and provides a basis for the research insofar as it describes the breadth of work in the developmental entrepreneurship field. However, it is not an exhaustive review of all literature describing the depth of research undertaken that is relevant to the aspect of opportunity analysis. There are a number of topics to be further explored within the existing literature: measurement techniques used to gauge social outcomes, tools for analysing value chain relationships and market demand (from the sustainable livelihoods, systems, and inclusive markets approaches), valuation models and other measurement techniques used in microfinance to gauge the financial performance of sole micro-entrepreneurs and other developing world SMEs, other alternative investment decision approaches or methods for screening venture opportunities, significant contextual differences for ventures in the developing world that 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 which to design and conduct the research.

Assumptions & Preliminary Research Design (2)The preliminary research design, as proposed, is created in the absence of the additional insights referenced above. As such, the present design rests upon several broad assumptions – qualitative observation will be logistically possible and cover a representative sample of micro-entrepreneurs in SSA143, the existing datasets available through the Global Entrepreneurship Monitor (GEM) and the World Bank will contain the required information to extrapolate the findings of the representative sample across the broader group of SSA entrepreneurs144, and interviewing and measurement techniques (which themselves are currently evolving) for social value created by social entrepreneurship will be sufficient to gauge the social and financial returns of the observed participants.145 Also, the research 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-even expeditiously, mitigate regulatory risk, and others (see section IV). This research design rests upon these 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 and financial returns. Also, note the proposed relationships

143 See Fadahunsi, A. (2000). Argues in favour of utilising qualitative techniques, especially observation.144 See Acs, Z., Desai, S. and Klapper, L. (2008) for a description of differences between that data available in the Global Entrepreneurship Monitor and the World Bank Entrepreneurship Survey; and see OECD (2008b) for data on entrepreneurship in OECD (i.e. developed) countries for comparative purposes.145 See Trelstad, B. (2008). Provides an appendix on the development of related measurement techniques for micro-entrepreneurs stimulating poverty alleviation outcomes in developing country contexts.

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between the extent of social return and the extent 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 design as proposed herein.

Determining a Representative Sample (3)The contextual information provided in section I provides a broad view of the primary areas relevant to the study of developmental entrepreneurship. This summarisation is a useful backdrop for determining a sample of representative micro-entrepreneurs to study in depth. The existing scope of the research necessitates consideration of three levels for representation within the selected sample (to avoid sample bias). First, the countries in which the micro-entrepreneurs operate should reflect the four 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 industry activity.146 Second, mid-level considerations will cover the range of contextual conditions at community and value chain levels. Here it is important to ensure that the sample covers the range of these environmental conditions such as access to suppliers and customers, extent of arable land and water resources, state of transportation infrastructure, urban versus rural footprint, etc. Third, the sample should represent the range of contextual conditions at micro-enterprise level, including: entrepreneur’s gender, previous livelihood or employment /opportunity costs, the product market or industry in which the venture is competing, etc. Certainly, there are additional conditions to be considered at each level that may influence an entrepreneur’s success, and will be necessary to consider when determining the sample. For this reason it is necessary that the work regarding the refinement of the hypothesis includes a surfacing of the existing conditions regarded as relevant to firm performance in developing country 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 an understanding of the venture’s context. Also, those factors that are agreed within step (2) as necessary factors 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, will focus on separating the strength of the opportunity from the strength of the execution to address it, will ensure validity, and reduce interviewer bias.147 Also, other considerations, such as cultural sensitivities, language, and logistics in the developing country, will be taken into account when planning the on-site observations. Lastly, a system (potentially electronic) for capturing and transmitting findings from the field will be created to mitigate the risk of data loss in transit.

146 Note there are several methods for estimating the industry sector concentration of a given economy. One of the more recently developed views on this topic is covered by Hidalgo et al and can be explored at http://www.chidalgo.com/productspace/. 147 See Harrison, D. and Krauss, S. (2002) on interviewer cheating when engaging African entrepreneurs.

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Financial Return Dimension

Not-for-Profit and Public Sector Space

Most AttractiveOpportunities

Least AttractiveOpportunities Private Sector Space

Soci

al R

etur

n D

imen

sion

Illustrative

Interpretation & Categorisation (5 & 6)A review of the data gathered will result in the determination of a number of primary attributes which helps describe the opportunities that developmental entrepreneurs pursue. An examination of the data gathered will be used to categorise the sample into natural groupings based on the contextual conditions they operate within, the extent of their outcomes in the range of factors underpinning their summary social returns generated, and the extent of the factors underpinning their financial returns generated. In creating this grouping it is, of course, necessary to eliminate overlaps and gaps – meaning that 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 Bank datasets can be mapped. For example, if categories are determined to be driven primarily by industry alignment, then it will be useful to create summary statistics on the number and size of those entrepreneurs engaged within each given industry category.

Correlation (7)Correlations will arise that will help describe the nature of the opportunities, and their ability to generate social and financial returns. For example, when examining the category under the water and sanitation industry group, we may find that firms generally produce a high level of both social and financial returns (perhaps relative to a restaurateur or a textile manufacturer) due to their ability to increase the entrepreneur’s income and those of his/her employees, improve health conditions for customers, and reduce the amount of time children carry water and therefore

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Figure 11: Mapping Social and Financial Returns

increase educational enrolment. Correlations, such as these will be developed across the categories to surface the primary trends.

Casual Framework (8)Utilising the correlations developed, a review of the observed sample and the dataset gathered, will provide confirmatory examples which support the correlations, and anomalous instances which will require adaptations to the theory under development. For example, if an instance within the water and sanitation category does not result in high social returns, a further investigation of ‘why’ is required. It would be at this stage we could observe that building latrines does not add to agricultural productivity for small hold farmers, and therefore doesn’t generate significant scale. In this instance, the theory could be improved upon to draw the casual link between an opportunity’s ability to generate income for the customer through increased agricultural productivity, the venture’s scalability due to higher demand, attractiveness for inward capital that makes scaling the business possible, and the growth of the 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 developmental entrepreneurship opportunities, in terms of their abilities to generate both social returns related to decreasing poverty in Sub Saharan Africa and to provide financial returns to providers of capital. The theory will provide a robust method for predicting these returns for a given developmental entrepreneurship opportunity. A group of given opportunities could then be mapped to compare their relative attractiveness (see figure 12). 148 Note that such a mapping is expected to result in

Financial Return

Soci

al R

etur

n

Least AttractiveOpportunities

Most AttractiveOpportunities

Illustrative

Private Sector Space

Not-for-Profit and Public

Sector Space

Figure 12: Developmental Entrepreneurship Opportunity Mapping

148 The map provides an illustrative example of the type of output envisaged as an output of the proposed research. Each point on the map indicates an opportunity analysed.

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three clusters of opportunities – one with low social returns and low financial returns, or the least attractive opportunities; the second with high social returns but low financial returns, or those most suited for not-for-profit or public sector initiatives; and the third with low social returns and high financial returns, which are best addressed by traditional commercial activity. It is the outliers in the upper-right quadrant that are most attractive for developmental entrepreneurship, as they provide high levels of both social and financial returns. This mapping will enable effort and funding to be directed to those ventures that have the highest likelihood to achieve the highest social returns, and to do so by marshalling competitive capital to scale the venture.

VIII. BenefitsThe proposed research will increase the body of knowledge in developmental entrepreneurship, and specifically in the aspect of opportunity analysis. The insights gained will enable microenterprise and market development programme proponents in inter-governmental organisations, as well as sustainable livelihoods advocates in not-for-profits, to prioritise their efforts on those entrepreneurial activities that maximise social benefits and provide room for scaling outside donation or public sector funding. Similarly, developing country and developed country agencies supporting entrepreneurship programmes will have a tool with which to direct support and micro-entrepreneur interest to the higher priority opportunities; and developing country governments will also benefit from increased tax revenue generated from successful ventures addressing those opportunities with the greatest likelihood of success. It will provide micro-finance institutions and other social entrepreneurs another tool for evaluating social value and credit worthiness. Larger private sector players will benefit from the findings by gaining an additional tool for analysing new market entry opportunities, and in forming CSR programmes that maximise impact by optimising the balance between leveraging their core capabilities and addressing the highest value opportunities with demonstrable social and financial value. Finally, and most significantly, the people of developing countries, especially those living in conditions of desperate poverty, will benefit from improved standards of living, increased incomes and employment opportunities, and broader societal and developmental benefits. It is for these people – those in greatest need – that this work has the most value and why it is right that we undertake it.

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