CHAPTER 2

Literature Review

14

CHAPTER 2

LITERATURE REVIEW

2.0 Introduction

The idea that entrepreneurship and economic growth are very closely and positively linked

together has undoubtedly made its way since Schumpeterian early work of 1911 (Dejardin,

2000). Transforming ideas into economic opportunities is the crux of entrepreneurship.

History shows that economic progress has been significantly advanced by pragmatic people

who are entrepreneurial and innovative, able to exploit opportunities and willing to take

risks. They are risk-takers who pursue opportunities that others may fail to recognize or may

even view as problems or threats. Entrepreneurship is closely associated with change,

creativity, knowledge, innovation, generation of monetary gain and flexibility-factors that

are increasingly important sources of competitiveness in an increasingly globalize world

economy. Thus, fostering entrepreneurship means promoting the competitiveness of

businesses (Retrieved from http://www.unctad.org/en/docs/webiteteb20043_en.pdf, as on March, 2011).

For many developing countries, private sector development has been a powerful engine of

economic growth and wealth creation, and crucial for improving the quality, number and

variety of employment opportunities for the poor. Economically, entrepreneurship

invigorates markets. The formation of new business leads to job creation and has a

multiplying effect on the economy. Socially, entrepreneurship empowers citizens, generates

innovation and changes mindsets. These changes have the potential to integrate developing

countries into the global economy (Retrieved from http://www.unctad.org/ en/docs/webiteteb 20043_en.

pdf, as on March, 2011). A positive interaction between growth and entrepreneurship is

grounded on the innovation activity that entrepreneurs convey. Thus, a significant

entrepreneurial supply in the economy stirs up scholarly interest (Dejardin, 2000).

Entrepreneurship cerates a positive change in the external environment. Enterprises are

tripod for individual, society and nation.

15

The figure 2.1 indicates that enterprises are job spinners for masses as well as classes.

Enterprises generate greater earning opportunities for employees. Enterprises generate

income and share it in the form of tax with government thereby supporting the welfare state.

Enterprises create varied products and services for consumers, thus boost their standard of

living. Agrarian economy gets an opportunity to diversify to secondary and tertiary sector

with the support of enterprises. Shareholders are investors in enterprises who are rewarded

with capital appreciation and dividends when enterprises generates healthy bottom line.

The process of entrepreneurship results in enterprise creation. Setting up of enterprises

requires risk finance and VC. Friends, relatives, banks, FIs, angel investors, MFIs and VCs

provide a significant amount of leverage to MSMEs (Mayer, 2002). The role of bankers,

financial institutions, angel investors and informal sources are restricted to only providing of

funds to enterprises which have already proved to be successful. Diversity exists in the role

of VCs who not only provides funds at various stages but also provides mentoring,

managing and hand holding support to entrepreneurs (Davila et al., 2001). The study of VCs

is a sophisticated study guided by financial proposal, business plans and financial viability

of the project. The set of borrowers are also sophisticated who are qualified, skilled and are

attentive to the role of business plan. VCs have the onus of funding new ideas at urban level.

Entrepreneurship Creates Positive Change

Entrepreneurial Efforts

Employees Great Opportunities Greater Income

Government Additional Tax revenue Reduction in social benefit need

Consumers New Products, new services

General Economy Secondary and tertiary creation of opportunities

Shareholders

Increased Wealth

Figure.2.1 Entrepreneurship Creator of Positive Change

(Source: Retrived from http://www.aavishkaar.org/322,1,The

Situation, as on March, 2011)

16

Lot of research work is traced in the field of sophisticated VC. In this chapter, an attempt

has been made to trace the development of MVC (providers of finance to grassroots

innovators) literature an upcoming concept in today’s society.

2.1 Entrepreneurship

Entrepreneruship is a broader term. Researchers have studied entrepreneurship from various

perspectives, which is described as sub points in the forthcoming discussion.

(a) Definition and History of Entrepreneurship

Map of Literature Review

2.1 Entrepreneurship

2.1.1 Rural, Grassroots, Technopreneurs

2.1.2 Social Entrepreneurship

2.1.3 Invention, Innovation and

Incubation

2.1.4 Funding to Entrepreneurs

2.2 Role, Funding and Drawbacks of

Micro finance

2.3 Role, Funding and Drawbacks of

Venture Capital

2.4 Global Studies on Micro Venture

Capital Finance (MVCF)

2.5 Need, Emergence, and Importance

of Micro Venture Capital Finance

(MVCF) (Indian Perspective)

2.6 Regional Studies on Micro Venture

Capital Finance (MVCF)

Figure 2.2 Map of Literature Review (Source: Author’s Own Creation)

17

The word entrepreneur is derived from French word “Entreprendre” meaning to undertake.

J.S. Mill was the one who popularized the term in England (Paidi, 2006). Although the

concept of entrepreneurship was first defined more than 250 years ago, many have held it as

one of the mysterious forces of human nature. Even after 200 years, a commonly accepted

definition of entrepreneurship has failed to emerge. Earliest definition of entrepreneurship

arose in 1734 when it was said to be self employment with uncertain return (Sharma and

Chrisman, 1999) and about two hundred years later, the importance of innovation was

highlighted in entrepreneurship (Schumpeter, 1934).

A prominent definition in the contemporary literature considers it as ‘judgmental decision

making’ about the coordination of scarce resources under conditions of uncertainty (Casson,

1991, p.23; Casson and Godley, 2000). For some authors, innovating activities are more

important than market-equilibrating or management activities while for others the reverse is

the case. Some writers study entrepreneurial activity as an outcome of either individual

effort or organizational effort. It has also been assumed that entrepreneurial function may

take the shape of productive, unproductive or destructive activities, depending on whether

they add to, redistribute or subtract from net output (Cassis and Pepelasi, 2005).

The practice of entrepreneurship is, of course, as old as trading between tribes and villages.

The history of entrepreneurship can be segregated as follows:

Table 2.0 History of Entrepreneurship

Time

Line

Entrepreneurs

Referred as

Role of entrepreneur Result

Earliest Period (618-906 AD)

‘Trader’. Is viewed like an intermediary between manufacturer and consumers.

‘Stock and Sell’. Borrowed money from shroffs to stock goods and sell the same at profit to consumers.

Moneylenders (Shroffs) demanded share in profit. Trader did not profit but was profiteered.

Middle Ages

‘Constructor’- of palaces, forts etc.

‘Arrange and execute’. Arranged for labours and managed logistics needs.

Rewards were uncertain and unknown, it was at the discretion of kings.

14th Century

‘Agent’ Collected tax on behalf of state.

Reward, if taxes were in excess of auction fees.

(Contd.)

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Time

Line

Entrepreneurs

Referred as

Role of entrepreneur Result

17th Century

‘trader cum contracted supplier’

Individual contracted to supply the material to the state authorities at fixed price.

Reward if supplies were managed at a price lower than contract price.

18th Century

‘Manufacturer’ Inventions were commercialized.

Specialization seeped in and local modes of production grew sophisticated.

19th and 20th Century

‘Innovator’ A transformer of resources into unforeseen products.

Introduced new product, new technology or new market.

21st Century

‘Social entrepreneur’

Addressed the social issue along with functions of business entrepreneur.

Viewed as strong and significant force for social transformation.

(Source: Adapted from: Kedia, 2008)

From the table 2.0 it can be concluded that entrepreneurs played different role during

different time slots. It is also noted that with the change in time the role of entrepreneur

graduated from trader to innovator to social entrepreneur.

(b) Studies on Making of Entrepreneurs

‘Entrepreneurship’ has been studied from the diverse perspectives of economic theory,

sociology, psychology, anthropology, political science, business administration and history

(Cassis and Pepelasi, 2005). Much of the attention and effort in the entrepreneurship

literature has centered upon the development model of entrepreneurship. There are two main

schools of thought which divides the comprehension of the term as either a functional

approach or the trait approach. The functional approach focuses on the role of

entrepreneurship within the economy and the trait approach defines an entrepreneur with a

specific ‘set of personality traits and characteristics’ (Gartner, 1988). Within this subject

many studies have been conducted on the different aspects of entrepreneurship for example

creativity and innovation, entrepreneurial motivation, entrepreneurial networking and

entrepreneurial stress and coping mechanisms just to name a few (Retrieved from

http://www.oppapers.com/essays/Entrepreneurship/164832, as on, December, 2010).

Available literature on entrepreneurship theory can be grossly divided into two extensive

camps focusing on individuals and structure respectively (Martinelli, 1994; Thornton, 1999).

The individual approach explains that innate psychological traits and special characteristics

19

in social groups contribute in making of an entrepreneur. The structural approach shows

how social and cultural factors motivate entrepreneurs by providing opportunities for

entrepreneurship. Much of the literature seeks to explain entrepreneurial activity at micro

level, which is often contained with certain place or time (Reynolds, 1991). An early and

important contribution to the study of entrepreneurial individuals was first undertaken and

documented by psychologist David McClelland in the book ‘The Achieving Story’

(McClelland, 1961). Other researchers too supported McClelland views of cultural attitudes,

primary socialization and painful upbringing makes up an entrepreneur (Kets de Vries,

1977; Delmar, 2000).

Some authors argue that deviance and marginality encourage entrepreneurship whereas,

other authors emphasize that cultural and institutional support, and good access to resources

induces entrepreneurship (Martinelli, 1994). Busenitz, Gomez and Spencer (2000)

methodically breaks the factors in three sets viz., regulatory factors (e.g. institutions and

policies), cognitive factors (e.g. knowledge of how to start ventures and obtain financial

support), and normative factors (e.g. the perception of entrepreneurship as a career), which

contributes to explain both types and levels of entrepreneurship across countries (Berglund,

2005). The three broad approaches in entrepreneurship are represented in a nutshell in the

table below.

Table 2.1 Approaches in Entrepreneurship

Approach Behavioral Cognitive Discursive

Paradigm

of Inquiry Empiricism Rationalism Interpretivism

Goal of

Inquiry

Construct covering laws that reflect behavioral patterns and stable cause-effect relationships

Uncover formal rules in the form of cognitive scripts or processes

Produce a plausible and interesting account that makes sense of an action of process

Typical

Method

Mainly quantitative and inductive, collecting and statistically analyzing data from surveys and panel studies

Mainly quantitative and deductive, testing hypotheses about cognitions using questionnaires and attitude scales

Mainly qualitative and abdicative, generating plausible narratives that include individual action as part of a greater situation

(Contd.)

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Approach Behavioral Cognitive Discursive

Main contribution

to understanding

of entrepreneurial

action

Emphasizes the heterogeneous and open-ended nature of entrepreneurial processes

Emphasizes cognitions and thoughts as important drivers of entrepreneurial action

Emphasizes that entrepreneurial action must be understood in relation to its greater context

Main drawback

for understanding

entrepreneurial

action

Little attention is given to the subjective meanings of actions

Little attention is given to the entrepreneur as a situated and reflexive subject. Actions take place ‘behind the backs’ of entrepreneurs

Tends to downplay individual agency and initiative in favor of contextual influences and process descriptions

(Source: Retrieved from http://www.henrikberglund.com/thesis/index.htm as on December, 2010).

Sociologists like Cochran propagated cultural values, role expectations and social sanctions

are the suppliers of entrepreneurship (Singh, 1986). Max Weber emphasized that the driving

entrepreneurial energies were generated by the adoption of exogenously supplied religious

beliefs (Dhillion, 1996). Hoselitz (1952) provides importance of culturally marginal groups

in promoting economic development. Psychologists like McClelland associated achievement

motivation theory towards the inception of entrepreneurship as a career (Misra, 1987). A

clear absence of contribution was seen in definition of entrepreneurs and entrepreneurship

from Indian economist. Freeman (1986) explained that management researchers often

emphasized special influence of organization and prior job experience as a vital asset for

entrepreneurs. Audia and Rider (2005) extended the view of Freeman and explained the role

of organization in instilling confidence, exposure to general industry knowledge, guidance to

entrepreneurial opportunity and assist in developing social networks and access to critical

resources.

The individual and structural approach has been criticized hard by Gartner, 1988; Shaver

and Scott, 1991; Thornton, 1999 on account of reasons like single cause logic, insensitivity

to temporal dynamics, failure to account for contextual factors and failure to account for

human agency respectively. On the other hand authors like Gartner, Bird and Starr, 1992;

and Venkataraman, 1997 explains that the current trend underlines heterogeneity in terms of

knowledge, preferences, abilities, behaviours etc., as a requisite assumption for theory

building.

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(c) Economists View on Entrepreneur and Entrepreneurship

Individual traits have been linked to both neoclassical (Shane, 2000) and invariably

unarguable Schumpeterian elite entrepreneur (Gick, 2002). Schumpeter’s comprehensive

work on entrepreneurship, acted as a source for inspirational empirical research on

entrepreneurial behaviour (Ripsas, 1998; Aldrich, 2005). Schumpeter’s creative entrepreneur

provides charismatic leadership which inspires others both within firms (Witt, 1998) and on

markets (Langlois, 1998).

In economic theory ‘entrepreneurship’ has been defined in myriad ways (Herbert and Link,

1989; Blaug, 2000; Swedberg, 2000). Economist characterized entrepreneur as organizer

(Marshal), risk bearer (Cantillon, 1755), coordinator (Say, 1821), arbitrator (Kirzner, 1973),

innovator (Schumpeter, 1942), creative rebel (Schumpeter, 1942) and business managers..

A ‘creative rebel’, the Schumpeterian entrepreneur creates disequilibrium and plays a key

role in economic development, by breaking away from the path of routine and implementing

innovations (Cassis and Pepelasi, 2005). Economist also made a distinction between risk

(insurable) and uncertainty (uninsurable). British, Irish, French, Austrian and American

economists contributed to the traits of entrepreneur. Classical, Neo Classical and Modern

economists contributed to macro and micro theory building of entrepreneurship. However,

contribution from Indian economist in building of theory on entrepreneurship was not found.

Neoclassical economists (Baumol, 1968; Bianchi and Henrekson, 2005) explain that in the

event of disequilibrium the role of entrepreneurs emerge as a result of exogenous factors like

Public, R&D etc., (Schultz, 1980), for optimizing given problem framework (Demsetz,

1983; Caplan,1999) which is backed by ability to assume high risk propensity (Kihlstrom

and Laffont, 1979). These economists further puts that value of entrepreneurship is

proportional to development of ‘human capital’ (time allocated to build up entrepreneurship)

(Schultz, 1980; Becker, 1965) which motivates one to pursue existing opportunities (Schultz,

1980) or explore unknown opportunities (Fiet, 1996; Gifford, 2003; Langlois, 1998b).

(d) Analysis of Studies on Entrepreneurship

In the first stream of research, economists explored the impacts and results of

entrepreneurship. For example, Schumpeter (1934), in his seminal article, examined

entrepreneurship as a key process (Westhead and Wright, 1998) through which the economy

22

as a whole was advanced. The second stream of research has focused on the entrepreneurs

themselves i.e. the role of entrepreneurs (Bhidd, 2000); importance of entrepreneur

(Hirschman,1958; Libenstein, 1968; Leff, 1979; Sandberg, 1986); reasons for becoming

entrepreneur; results of entrepreneurship and task of entrepreneurs (Bygrave, 1989; Danhof,

1949) and causes of entrepreneurship (Evans and Jovanovic, 1989; Freeman, 1986).

Research in this stream examines entrepreneurship from a psychological and sociological

perspective (Collin and Moore, 1964; McClelland, 1961). Finally, the third stream has

focused on the entrepreneurial management process. This diverse literature includes research

on how to foster innovation within established corporations (Burgelman, 1983, 1984), start

ups and VC (Timmons and Bygrave, 1986), organizational life cycles (Quinn and Cameron,

1983), and predictors of entrepreneurial success (Cooper and Bruno, 1975; Dollinger, 1984)

(Austin, Stevenson and Wei-Skillern, 2006). Many different and useful approaches have

been used to analyze entrepreneurship. They have tended to fall within three main streams of

research, which include a focus on the causes of entrepreneurship, the results of

entrepreneurship and entrepreneurial management (Stevenson and Jarillo, 1991). Other

studies also include motivational study of entrepreneur (Martinelli, 1994) and contributions

by entrepreneur (Gartner,1988; Carland et al., 1984; Hoselitz, 1952).

Recent theories of economic growth viewed externalities, as opposed to scale economies, as

the primary engine of growth (Romer, 1986; Lucas, 1988). When economists began looking

for knowledge spillovers (Romer, 1986; Lucas, 1988), cities presented the clearest examples

of economic regions subject to local spillover benefits (Acs, 2002). Entrepreneurship leads

to economic growth because it is the mechanism by which knowledge spillovers develop

(Audretsch and Thurik, 2004; Carree and Thurik, 2005). New organizations played an

important role in taking advantage of knowledge externalities within a region, and that

entrepreneurship acted as the vehicle by which the knowledge spillovers contributed to

economic growth (Freeman and Hannan, 1989). Higher rates of entrepreneurial activity were

very strongly associated with faster growth of local economies (Retrieved from

http://www.babson.edu/entrep/fer/BABSON2002/XI/XI_P1/XI_P1.htm, as on July, 2009). Romer (1986)

posits that knowledge accumulated and innovations produced by one firm tend to help other

similar firms’ technologies, or improvement of products, processes, or marketing, without

appropriate compensation. The Jacobs model of externalities (1969) stresses knowledge

23

spillovers across industries. Author posits that the crucial externality in local economic areas

was due to cross-fertilization of ideas across different lines of business.

Finally, several theories, including those of Porter (1990) and Jacobs (1969), suggested that

local competition rather than monopoly promoted economic growth, which is further

empirically supported by Glaeser et al., (1992) and Feldman and Audretsch (1999). Smaller

entrepreneurial firms were crucial for the long run competitiveness of a country. Empirically,

the importance of entrepreneurial activity at the macroeconomic level had been established

by several studies. The entrepreneurial sector, for example, had been shown to contribute

significantly to the creation of employment. Also, results from several cross-country studies

of entrepreneurial activity suggested that, across nations, firm start-up rates accounted for a

significant portion of the variation in economic growth (Retrieved from http://www.babson.edu/

entrep/fer/BABSON2002/XI/XI_S3/XI_S3.htm, as on July, 2009). It can be concluded that

entrepreneurship stimulates economic growth firstly through creation and transformation of

knowledge, secondly through increased competition brought on by the creation of new

enterprises and thirdly by spawning diversity among firms in a specific location.

(e) Analysis of Indian Research on Entrepreneurship

Almost without exception, academic studies on entrepreneurship are motivated by the

economic benefits of entrepreneurship. Most academic study showed that entrepreneurship

indeed leads to substantial benefits in terms of, for instance, employment generation or

innovations (Praag and Versloot, 2007). The researcher (Praag and Versloot, 2007)

conducted the study of entrepreneurial firms (which employed fewer than 100 employees,

new entrants and younger than 7 years old) and its counter parts. The research emphasized

that young and small firms created more employment with higher dissolution rate, which

negatively affected stability of labour market. The job quality and wages were lower but it

provided higher intangible benefits. Young firms commercialized the innovations but were

non-adoptive to innovations. It was also found that entrepreneur’s income was higher than

wage employees but it was highly variable (Praag and Versloot, 2007).

The Indian research on entrepreneurs studied mainly the requisites for successful

entrepreneurship, influence of socio-economic background, entrepreneurial characteristics

24

etc., which is discussed below. In a well documented report of Entrepreneurship

Development Institute of India (EDII) the work of various Indian researchers, in the field of

entrepreneurship was explored. Indian researchers conducted the regional specific study to

verify the theory advocated by other researchers. Gaikwad and Tripathi (1970), Nafziger

(1978), Bhatia (1974), Sharma (1976) and Deivasenapathy (1986) studied the prerequisites

for successful entrepreneurship. Factors like background of the entrepreneur, his economic

and family status, attitude towards industry, inter state climate, socio economic background

and problem faced by entrepreneur were significantly studied. Nandy (1973) and

Venkatapahty and Subramanian (1984) drew a comparison of culture and alienated feeling

between enterprising and non enterprising people.

Bhattacharya and Akhouri (1975) developed a profile of small industry entrepreneur.

Demographic characteristics contributing to entrepreneurship were studied by Deshpande

(1982) and Venkatapathy (1980). Researchers like Ventaktapaty (1989) compared the view

of first versus second generation entrepreneur. Kanitkar (1994), Pareek and Rao (1995) and

Awasthi and Sebastian (1996) contributed to development of entrepreneurs through

extension approach, counseling and contribution through Entrepreneurship development

programmes (EDPs).

The outcome of the Indian research revealed that entrepreneurs are initiator and hard worker.

Longer gestation period of business kept entrepreneurs away from industrial

entrepreneurship (Gaikwad and Tripathi, 1970). Need for achievement, need for power,

independence, risk taking and sense of efficacy are the factors which are statistically

supported (Nandy,1973) and other set of factors like autonomy, aggression, conformity,

recognition which are statistically unsupported (Bhattacharya and Akhouri, 1975), family

tradition, family support, previous job experience and dissonance on account of exploitation

by employers boosted entrepreneurship (Deivasenapathy, 1986).

Lack of information forced entrepreneurs to diversify (Bhatia, 1974). Status and caste

played important role in promotion of entrepreneurship (Nafziger, 1975). Every state’s

industrial climate played variations in the entrepreneur and economic performance; it either

supported or uprooted entrepreneurship. Age and risk taking behaviour were not found to

25

have any association (Sharma, 1976). Failure to get appropriate job or time spent on degree

education was the main reason for late entry into the career of entrepreneurship (Deshpande,

1982). First generation entrepreneurs were influenced by father, they were less conventional,

adapted innovation and ventures into entrepreneurship for self-employment. Second

generation entrepreneurs were self doers, believed in managing existing firms, not

influenced by anybody and undertook venture to avoid unemployment (Ventaktapaty, 1989).

Entrepreneurs who chose entrepreneurship career by choice were self satisfied and less

alienated compared to non-entrepreneurs (Venkatapahty and Subramanian, 1984). Lack of

‘extension approach’ was a major cause of failure of trainees (Kanitkar, 1994). Professional

counseling acted as stress reliever for entrepreneurs. EDPs stood the test of cost benefit

criteria (Awasthi and Sebastian, 1996).

(f) Importance of Entrepreneurship

Recent interest in entrepreneurship is the growing realization of the significance of new

businesses in a society increasingly concerned with the problem of unemployment

(Swedberg, 2000, pp.7-8; Amatori, Colli and Toninelli, 2002). Recent studies emphasized

entrepreneurship as a driver of economic development and some authors included

entrepreneurship as a fourth production factor in the macroeconomic production function

(Audretsch and Keilbach, 2004). Entrepreneurship was the factor that created wealth by

combining existing production factors in new ways. Entrepreneurs experimented with new

combinations of which the outcomes were uncertain, but in order to make progress, many

new variations were tried in order to find out which ones will improve (economic) life

(Rosenberg and Birdzell, 1986).

Other authors have argued that entrepreneurship would only unlock economic development

if a proper institutional setting was in place (Baumol, 1990; Powell, 2008; Boettke and

Coyne, 2003). The institutional setting comprised of informal as well as formal institutions

(North, 1990). An essential formal institution, for welfare enhancing, entrepreneurship was

property rights. Insecure property rights had been an important constraint on the investments

by entrepreneurs in transition countries, even more so than capital market constraints

(Johnson et al., 2000). It might be said that the production factors, capital, labour,

technology, and entrepreneurship are the proximate causes of economic development, while

26

institutions were a fundamental cause of economic development (Acemoglu, Johnson and

Robinson, 2004) (Stam and Stel, 2009).

Referring more particularly to economies that are developing or in transition, Dutz, Ordover

and Willig (2000) stressed the primordial role that could be played by governments by

creating (or reinforcing) the institutions that foster entrepreneurship. Douglass North (1990)

had described the individual entrepreneur as an ‘agent of change’, while Jones (1991, 1993)

had discussed the importance of encouraging entrepreneurship for economic growth. In

modern era entrepreneurship had been neglected at theoretical level but it was crucial for the

‘vitality’ of capitalist society and the market economy (Baumol, 1968, p.64; Casson, 1991).

As per the neoclassical approach ‘theoretical’ firm is entrepreneurless and within

macroeconomics there is a tendency to assume that economic progress is automatic

(Swedberg, 2000, p.21). Thus, entrepreneurs are risk bearers, coordinators and organizers,

gap fillers, leaders and innovators or creative imitators (Cassis and Pepelasi, 2005).

The development of entrepreneurial activity is essential not only to solve the problems of

unemployment, unbalanced areas of development, concentration of economic power and

diversion of profits from traditional avenues of investment. Entrepreneurship has been a

major factor in the economic growth of the West, of the Union of Soviet Socialist Republics

(USSR) and of Japan in Asia and it seems to be of rapidly growing importance in country

like India.

Traditionally, there are at least two basic understandings of entrepreneurship shared by

scholars across different disciplines, namely; First the recognition of the individual as an

important or even vital element in the creation of new value in an entrepreneurial event

(Carland et al., 1984; Busenitz and Barney, 1997; Baron, 2000; Francis and Sandberg, 2000;

Littunen, 2000; Kreiser, Marino and Weaver, 2002; Shook, Preim and McGee, 2003) and

second the belief that the resources in the environment play an important role in increasing

entrepreneurial activities in a society (Stevenson and Jarillo, 1990; Douglas and Shepherd,

1999; Robinson, 1999; Busenitz, Gomez and Spencer, 2000; Chirsman, Chua and Steier,

2002; Davidsson and Honig, 2003; Brockner, Higgins and Low, 2004).

27

From the examination of above mentioned literature review it is concluded that major

literary work were centered at behavioural aspect of entrepreneurs. Various prominent

economist and researchers defined and upgraded the conceptual definition of entrepreneurs.

Various attempts were made by researchers to link the importance of entrepreneurs with

economic development. The notable contributions came from Schumpeter. Renowned

economist like J.R. Horris, G.F. Papanck and I.M. Kirzner are the main advocates of school

of thought which argues that entrepreneurial supply will be associated more or less with the

provision of economic incentives and support system of the society.

(g) New Focus in Entrepreneurship Research

The new stream of research has started to shift the focus towards the interactions between

individual entrepreneurs, their entrepreneurial processes and the environment in which they

operate. Other stream of research which has emerged includes international entrepreneurship

(McDougall, 1989; Hordes, Clancy and Baddaley, 1995; Oviatt and McDougall, 1995;

McDougall and Oviatt, 2000; Zahra, Ireland and Hitt, 2000; Yeung, 2002), strategic

entrepreneurship (Shan, 1990; Stevenson and Jarillo, 1990; Hitt et al., 2001) and

technological (high tech) entrepreneurship (Roberts, 1991; Christensen and Rosenbloom,

1995; Berry, 1996; Phan, 2004). This indicates that social scientist have started to include

entrepreneurial activities in their research agenda and entrepreneurship scholars have started

to consider different aspects in their traditional studies (McDougall, Scott, and Oviatt, 1994;

McDougall and Oviatt, 2003; Zhang and Dodgson, 1968).

Interest in social, political and cultural entrepreneurship is highly flourishing these days.

Ancient economic theory (especially Austrian economist theory; Venkataraman, 1997;

Shane, 2003) of earlier researchers is still used as a base for defining the phenomenon,

guidance to empirical research and legitimacy in new theory development (Ogbor, 2000;

Steyaert and Katz, 2004).

Above literature talked about entrepreneurship in a broader sense. It can be learnt that

enterprises are must for growth of nation. The literature explained the concept of

development from urban perspective. For sustainable development growth of entrepreneurial

initiatives amongst the poorest socio-economic groups at the bottom of the pyramid was

28

essential (Retrieved from http://www.aavishkaar.in/ as on June, 2011). To find the importance of

collective economic development importance of welfare economics was comprehended.

The concept of welfare economics was untouched for many years when noble prize winner

economist of India Prof. Sen explained it in the year 1970. He explained that economic

development should be viewed in the context of human development. Development is a

broad concept entailing the raising of human capabilities (Sen, 1999). One of the central

challenges in improving economic development is to increase the standards of living for

individuals and growth of the economy as a whole. Even though economic growth in itself is

a rather narrow target, it is probably one of the most important targets for development

policies. It is also one of the measures that are most easy to access for analysts, and probably

the best measure to make cross-national (Barro, 1991; Sala-i-Martin, 1997) and historical

(Maddison, 2001) analysis of the development of economies (Stam and Stel, 2009).

The roots of SE and answer to ‘other than income’ can be dug out from the faculty of

welfare economics which is discussed as a forthcoming point under the emerging concept of

SE. However, the existing literature remains silent on importance of social entrepreneurs

who are basically gap fillers between the role of welfare state and commercial entrepreneur.

2.1.1 Rural, Grassroots and Technopreneurship

2.1.1.1 Rural Entrepreneurship

From the conventional literature on entrepreneurship it can be learnt that entrepreneurial

activity and new firm formation are unquestionably considered engines of economic growth

and innovation (Baumol, 1990; Murphy, Shleifer and Vishny, 1990). A developing country

or a region is tied by a chain whose main links are in general poverty, backward people,

underemployment, ignorance, low productivity, traditional culture and various static and

stagnating sets of conditions (Soundarapandian, 2001).

Rural development as defined by Sauer (1986) includes issues like encouragement of farm

related enterprises, technical and management assistance and infrastructural and ancillary

support to rural entrepreneurs. Wortman (1990, 1990a) defines rural entrepreneurship as the

creation of new organization that introduces a new product, serves or creates a new market,

29

or utilizes a new technology in a rural environment. Entrepreneurial orientation in rural

areas is based on stimulating local entrepreneurial talent and subsequent growth of

indigenous first generation entrepreneurs (Petrin, 1992) or companies, which could create

jobs and add economic value to region and country (Rena, 2007).

Researchers have found entrepreneurship to be highly correlated with economic growth both

at national and regional level. Yet, research analyzing the impact of entrepreneurship on

rural economic growth in United States (US) is sparse (Henderson, 2006). Research by

Boden (2000) found the survival duration of new establishment differed across metropolitan

status. Audretsch and Kielbach (2005) analyzed the entrepreneurship impact of growth in

rural West Germany. Both found that the impact of entrepreneurial activity was weaker in

rural regions. Acs and Armington (2004) and Camp (2005) suggest that the impacts of

entrepreneurship on economic growth could differ in rural locations (Henderson, 2006, p. 6).

Soo and Phan (2008) studied the work of various researchers like if counseling activities

produced different results when provided to rural and urban entrepreneurs; differential

policies, actions and means to support rural entrepreneurship, ideas stimulating rural

entrepreneurship and requirement of conceptual framework (Wortman, 1990) triggering the

growth of micro and rural enterprises. Rural entrepreneurship has been advocated to reduce

pressure on agriculture, curb migrations of rural people, disperse large scale industrialization,

reduce investment cost and generate employment on mass scale for skilled and unskilled

persons of the community and reduce regional disparity (Bhat, 2005).

Referring to the genesis of rural entrepreneurship in India, the country is a rich in locally

available resources. The development of local (rural) entrepreneurship is a must to harness

the rich potentialities of available local resources to support sound economic development

through industrialization (Verma, 2005). Mahatma Gandhi had expressed that India being

land of villages inhibits its true spirit in rural India. He opposed heavy industrialization and

machines as it can increase production but it cannot provide employment to crores of poor

rural Indians. He promoted ‘charkha’ as a symbol of self employment for rural households

and advocated rural entrepreneurship (Siddiqui, 2003). Self employment has emerged as a

major source of employment creation in rural India.

30

The significant rise in rural entrepreneurship is due to rural literacy rates, increase in

government grant for rural development and village and small industries. Siddiqui

articulated that rural poverty can be removed by promoting entrepreneurship at rural level.

Downward trend in agriculture can be restrained by boosting ‘Agripreneurship’ (Siddiqui,

2003; Sinh and Krishna, 1994; Verma and Thakur, 2005; Harper and Vyakarnam, 1988;

Heredero, 1979).

Indian researchers studied various parameters in the context of rural entrepreneurship like

risk taking (Matthai, 1979), effect of cultural issues (Vyakarnam and Fiafor, 1991),

necessity of group entrepreneurship (Bogaert and Das, 1989; Awasthi, 1993), preference for

borrowings (Moulik et al., 1978), push and pull factors for rural entrepreneurs (Tovo, 1991;

Pai Parandiker and Sud, 1986), transition of worker to rural entrepreneur (Subramaniam,

1989), support of cooperatives to rural entrepreneurs (Harper and Vyakarnam, 1988),

evaluation studies of rural entrepreneurship (Tripathi et al., 1985) and support system for

rural entrepreneurs (Taori and Singh, 1991; Kashyap, 1990; La Towsky and Grierson, 1992;

Kanitkar, 1995).

In a brief note to the Rural Entrepreneurship Development Experiment (REDE) undertaken

by EDII, it was found that various government, semi-government and non government

organizations are engaged in task of rural development. Rural programmes were input

oriented (in terms of money) rather than output oriented. Removal of poverty syndrome and

income generation activity was often bypassed in the programme (Awasthi, 1993).

In the literary work Bhat (2005) expressed that failure of anti poverty, self employment

programmes sponsored by government like Prime Minister’s Rozgar Yojana (PMRY),

Training of Rural Youth for Self Employment (TRYSEM), Jawahar Rozgar Yojana (JRY),

Jawahar Gram Samridhi Yojna (JGSY), Integrated Rural Development Programme (IRDP),

Development of Women and Children in Rural Areas (DWCRA) etc., was due to minimum

imparting of entrepreneurial qualities and training in entrepreneurial activity by

governmental agencies to the beneficiaries. To grab the opportunity to entrepreneurise the

lesser known target groups Non Government Organizations (NGOs) played a role distinct

from its traditional role. NGOs like National Alliance of Young Entrepreneurs (NAYE),

31

World Assembly of Small and Medium Entrepreneurs (WASME), Xavier Institute for

Social Studies (XISS), SEWA, Self Employment of Kolkata (Y), Association of Women

Entrepreneurs of Karnataka (AWAKE) and Rural Development and Self Employment

Training Institute (RUDSETI) supported government in entrepreneurship programmes by

developing true entrepreneurial qualities among the beneficiaries of the schemes.

Excessive reliance on poverty alleviation, employment generation and negligence in raising

the productivity of non farm activities were responsible factors for failure of rural

industrialization (Soundarapandian, 2001). The schemes for employment generation or self

employment have not yielded expected results of adequate employment and reduction in

social and economic disparities due to lackadaisical approach in their implementation. As a

part of self employment stimulators in rural areas, of late, the conventional EDPs were

modified to train youth, poor, women and other disadvantaged sections of the society (Bhat,

2005).

Verma and Gupta (2005) on examining the study of researchers on rural entrepreneurship

highlighted that there was a need of cluster approach in which the facilities or ownership is

shared for development of rural entrepreneurship to solve the problems of value additions,

technological innovations, logistic problems etc. Verma and Gupta (2005) appreciates the

role played by Cooperatives in boosting rural entrepreneurship through Primary Agriculture

Credit Societies (PACs), Dairy Cooperatives (based on Anand Milk Union Limited (AMUL)

Model) Sugar Cooperatives, Fertilizer Cooperatives (Indian Fertilizer of Farmer Co-

Operation (IFFCO) and Krishak Bharati Cooperative Limited (KRIBCHO) etc.

Rural entrepreneur plays a twin role of producer and seller in which he takes certain decision

differentiated from exclusive producers and sellers. He emphasized rural based women

entrepreneurship for increasing production, proper wealth distribution and optimum

utilization of resources (Paidi, 2006). Innovating entrepreneurs are rarely found in under-

developed countries, which in fact are a necessity for promoting entrepreneurship (Verma,

2005).

32

Siddiqui (2003) highlighted that Swarna Jayanti Gram Swarozgar Yojana (SGSY) scheme

aims at establishing a large number of micro enterprises in rural areas. It is a credit cum

subsidy scheme in which the beneficiary can be individuals or self help groups (SHGs). The

programme has positively affected entrepreneurship among youth and women in rural areas.

From the literary work of other researchers Siddiqui concluded that poverty, dissatisfaction

from job, education and government assistance acts as compelling as well as motivational

factors for promotion of self employment or entrepreneurship. These set of similar factors

were earlier established by researchers in their study of entrepreneurship at urban level.

In the same study Siddiqui (2003) recommended that developmental plans should be based

on vocational pattern, emphasis on rural industrialization, minimal political interference,

coordination of programmes for funds management, encouragement of private investment

avoidance of restructuring plans and encouragement of rural entrepreneurship was

advocated. Bhat (2005) also explored that primary level NGOs, Intermediate NGOs and

Grassroots level NGOs contribute in developmental activities, imparting training and field

actions for promoting self employment in rural areas. The role of NGOs has assumed critical

significance primarily at the grassroots level. A few NGOs in India have succeeded largely

in imparting skills of income generation and micro entrepreneurship development among the

weaker sections of the society like women, tribal’s and others (Bhat, 2005).

Verma and Thakur (2005) explored in their literary work that rural entrepreneurs face

technical, economic, social and environmental risks. The policies and programmes initiated

by the Government are mostly politically motivated which fails to generate entrepreneurship

in the specific pockets and therefore entrepreneurial growth tends to be lopsided and

inequitable. They suggested that the focus of rural entrepreneurship programmes should not

be on achieving time bound quantitative targets but on developing the villagers risk taking

and innovative capabilities.

Verma and Jiloka (2005) pointed out that in the context of India, entrepreneurial activity in

small towns and rural areas to a large extent is based on a small scale, less sophisticated

technology and most importantly depends on local material and human resources.

Developing entrepreneurship involves a triangular approach of development of individual,

33

social and group. It was further discovered that government, non government, and

supporting services like financial, commercial and consultancy etc., plays a predominant

role in development of entrepreneurship.

The biggest limitation to rural entrepreneurship research is the lack of data on entrepreneurs

at country level. The empirical results indicate that to increase the understanding of rural

economic growth, researchers could extend their analysis of rural entrepreneurship by

analyzing the factors supporting entrepreneurship development in rural places (Henderson,

2006). As rural communities search for new engines of growth, entrepreneurs can act as

mechanism that transforms opportunity into prosperity (Henderson, 2006, p.26). US

researchers explained that traditional attempts to stimulate economic growth by luring big

businesses to rural communities have largely failed. Other programmes aimed at creating

local small businesses have similarly failed. A unified public-private organizations must

work together to stimulate entrepreneurship in rural regions. Researchers also pointed out

those developmental strategies targeted to turnaround US rural economies had not been

successful and rural poverty continues to be a nagging problem even in US (Retrieved from

http://usasbe.org/knowledge/proceedings/proceedingsDocs/USASBE2005proceedings-Heriot%2030.pdf, as on

June, 2011).

Lyson (1995) emphasized the creation of rural enterprise as those businesses will provide

products for local consumption that are not readily available in the mass market. Technically,

sophisticated micro enterprises would be able to fill the niche markets in the national

economy that are too small for mass producers. Rural entrepreneurship is more likely to

flourish in those rural areas where the ‘bottom up’ and the ‘top down’ approach complement

each other (Rena, 2007). Based on the summary of REDE undertaken by EDII, last year, it

suggested that promoting rural poor as well-rounded and successful entrepreneurs, (who

perceive economically viable opportunities, convert them into a sound business plan, exploit

the local resources and tap vast rural market) might provide an alternative strategy for rural

development.

Zhang Liyan, professor at Tianjin University of Finance and Economics, China explained

that villages in countries like India and China are centers of traditional wisdom, where

34

innovations have been on since ages. The need of the hour is to tap into traditional talent and

convert it into rural entrepreneurship. Government should provide institutional framework,

infrastructure facility and funds to develop rural entrepreneurship, so that the talent of Indian

villagers is not restrained (Retrieved from http://www.tjwbi.com/system/2007/07/16/000195715.shtml., as

on August, 2011).

The research in rural entrepreneurship comprises of emergence of rural entrepreneurship,

factors boosting rural entrepreneurship, necessity of rural development and scrutinizing

reasons for failure of government sponsored programmes. All researchers have broadly

suggested the need for recognizing traditional talent of rural poor and transform rural

knowledge and talent into rural entrepreneurship. In other words they have advocated the

idea of establishing rural enterprise based on the innovative ideas and talent of rural poor.

Till date no research supporting this view has been found in the literature. The importance of

rural entrepreneurship at the bottom of the pyramid (BOP) refers to creating rural

employment, stimulating rural growth, improving local economic activity, enhancing

productivity and efficiency at local level, evolving regional role models for others to

emulate and spawning multilayered economic development (Retrieved from

http://www.aavishkaar.org/ 322,1, ICC-UNDP-IBLF World Business Awards 2006, 9 May 2006, New York,

as on March, 2011).

2.1.1.2 Grassroots Entrepreneurship

Ample research is found in the area of entrepreneurship and types of entrepreneurship. The

literary work on grassroots entrepreneurship is not available. Grassroots social entrepreneurs

are defined as citizens with an innovative idea to solve a social problem, but without an

existing organization backing them. Despite these difficulties, research shows (Meroni,

2007) that there are numerous examples of citizens developing such grassroots social

ventures and collaboration networks successfully. These grassroots initiatives focusing on

sustainable solutions to social problems “are an opportunity to learn from their common

success factors and to be alerted to cross-cutting obstacles they encountered. It will help us

to develop, initiate and test new policies, aimed at enabling and empowering individuals or

“creative communities” to do better and to do more” (Meroni, 2007).

35

There are a number of studies available examining the emergence of rural entrepreneurs and

owners of village based micro enterprises (Kanitkar, 1995). A village entrepreneur is a

person from local, indigenous, or native population who decides to become self-employed in

the village or its surroundings, by starting on his own a shop, trade etc. He is an innovator as

he is the first in his community to imitate a profession that people in town practice. He

invests his own funds or obtains it from banks, relatives, money lender, or government and

assumes risk of the venture. Rural industrialization can make a significant contribution to

rural development by way of increasing rural production and productivity and also by

improving the human resource base of rural areas. Rural industries which require less capital

and simpler technology are best suited to the managerial and organizational ability available

in rural areas. The success of rural industrialization depends not only on the drive and

initiative of the rural folk but also on the provision for adequate financial assistance, supply

of raw materials, machinery and equipment and the stupendous task of providing the

marketing assistance.

The study conducted by Rao and Mohan (1988) revealed that the main problem of small

entrepreneurs were capital shortage, scarcity of raw materials and marketing. The same

study also indicated that a well planned effort by the concerned agencies and organizations

is a must if efforts to promote grassroots entrepreneurship are to succeed. Development of

micro entrepreneurship at the grassroots level is perceived as a powerful medium to

ameliorate several socio-economic problems such as poverty reduction, balanced regional

development, provision of goods and services appropriate to the local needs, redistribution

of income and opportunities in the community (Bhat, 2005). At the grassroots level, there

are two types of rural innovation support models that support innovation and existing

knowledge, practices and resources, which are discussed later in the incubator head (Sonne,

2010).

Recently in the inauguration of international conference of three days held on 15th

Decemeber, 2010, on ‘Challenges to Inclusive growth in the emerging economies’ at Indian

Institute of Management-Ahmedbad (IIM-A) Ratan Tata, the renowed business tycoon

explained that around 50 to 60 crores of people are living at the bottom of the pyramid and

there is a, potential market, for companies if they innovate or rebuild their existing product

through technology and cater to the unmet needs of grassroots people.

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2.1.1.3 Technopreneurship

According to Schumpeter (1976), the function of entrepreneurs is to reform or revolutionize

the pattern of production by exploiting an invention or, more generally, an untried

technological possibility for producing a new commodity or producing an old one in a new

way, by opening up a new source of supply of materials or a new outlet for products, by

reorganizing an industry and so on.

Since the end of the 1980s, the development of the knowledge-based economy, globalization

and international competitive pressure has increased the importance of innovation in local

economies (Camagni, 1995; Feldman, 1994; Malmberg, 1997; Porter, 1990; Ritsila, 1999;

Storper, 1995) and also the importance of entrepreneurship, especially technological

entrepreneurship, as one of the most important factor in the creation of both individual and

regional wealth has recently generated considerable interest (Venkataraman, 2004).

The reason why some regions are more advanced than others lies in successful fostering of

technological entrepreneurship, which acts as catalyst (Rothwell and Zegveld, 1982) in the

process of growth of advanced regions. Schumpeter was the first (Schumpeter, 1976;

Venkataraman, 2004) to clearly posit the centrality of the entrepreneur to economic progress.

Techno-entrepreneurship is a recent field which has its roots in the well established field of

entrepreneurship. It leads to rapid development of new products, which leads to key success

for an industry creation and development (Schoonhoven et al., 1990).

New breed of entrepreneur with background of science and technology and having zeal of

entrepreneurship are commonly referred as ‘Technopreneur’. However, looking at available

literature, it was found that research in the field of technology-based entrepreneurship is still

in infancy, and there are only a handful of studies that directly targets high-tech new venture

and its founder (Slatter, 1992; Roberts, 1991; Roure and Maidique, 1986; Cooper and Bruno,

1977). Dorf and Byers (2005) defined technological entrepreneurship as a style of business

leadership that involves identifying high-potential, technology-intensive commercial

opportunities, gathering resources such as talent and capital, and managing rapid growth and

significant risk using principled decision making skills. Shane and Venkataraman (2000)

highlighted the function of technopreneur to assemble organizational resources, technical

37

systems and strategies to pursue opportunities. The Canadian Academy of Engineering

(1998) defined technological entrepreneurship as the innovative application of scientific and

technical knowledge by one or more person who operates the business and assumes the

financial risk. In fact, techno-preneurs faces ‘squared risk’ i.e. one associated with

entrepreneurship and other technology risk.

Technopreneurs are aimed at creating; capturing economic value through the exploration

and exploitation of new technology based solutions and hence treated as important sources

of economic value creation and development in Europe. As technology is involved in such

ventures it brings important changes into the market as compared to traditional

entrepreneurship. The process of technopreneurship like traditional entrepreneurship starts

with sensing of a need for change and ends with innovative solution which is clear enough

and externally recognized (Blanco, 1998).

Many researches have made motivational study of technopreneurs (Blanchflower and

Oswald, 1998; Roberts, 1988; Reid and Smith, 2000; Isaiah and Cristopher, 1974; Litvak

and Maule, 1971; Henry and Kahtleen, 1989; Cooper, 1973; Akbar, 2005; Arulraj, 2004;

Smith and Miner, 1984) and found that need for achievement, alternative to unemployment,

accepting challenges, becoming one’s own boss, competency to start own enterprise, certain

push and pull factors were responsible for starting a techno enterprise. Oza, Trivedi and

Savalia (2009) made a comparison of internally motivated and externally influenced

technopreneurs. Manimala (1999) compared motives of British NTBFs versus Indian

NTBFs to become technopreneurs. Colombo and Delmastro (2001) identified that internet

based entrepreneur’s foremost motivation to start the venture was higher income.

Phan and Foo (2004) briefed that high tech entrepreneurship research is a complicated

subject because it occurs at many levels like individual level, organizational level and at

societal level. Thus, research in this field is highly interdisciplinary. Dodgson and Rothwell

(1989) found that technopreneurs lack in formal aspects of management tasks like financial

control, reporting systems etc.

To encourage entrepreneurial spirit among the Science and Technology (S&T) persons, the

Government of India established the National Science and Technology Entrepreneurship

Development Board (NSTEDB) in 1982 under the Department of Science and Technology

38

(DST). NSTEDB initiated instruments such as Science and Technology Entrepreneur’s

Parks (STEPs) in collaboration with all India FIs and Entrepreneurship Development Cells

(EDCs) in and around academic institutions to encourage promotion and growth of

technology based enterprises through S&T persons. It also provided various services to the

existing SMEs (Singh, 2000).

Science Parks, Innovation Centers, Technology Business Incubators and similar initiatives

are recent developments in the evolutionary line to create an environment for innovation and

techno enterprise. As a result of number of institute such as Small Industries Service

Institutes (SISIs), Industrial and Technical Consultancy Organizations (ITCOs), National

Institute of Small Industry Extension and Training (NISIET), EDII, National Institute of

Entrepreneurship and Small Business Development (NIESBUD) and state level Centers for

Entrepreneurship Development (CEDs) started to actively work in the field of

entrepreneurship education, training and research (Singh, 2000).

The conception was that by virtue of their (S&T person) academic qualification, the

technical entrepreneurs possessed varying degree of traits associated with creativity and thus

were well suited for promoting new ventures. S&T persons having adequate degree of

entrepreneurial traits, if identified and trained properly, could prove to be better

entrepreneurs (Singh, 2000). Thus, training is imparted to the students of universities who

are pursuing a technical course. It can be concluded that NSTEDB has almost left out

grassroots technical people (who are not professional degree holders) in imparting

entrepreneurship training.

In a book by Singh (2000), the author has published 25 selected cases of first generation

S&T techno entrepreneurs; it was found that all technopreneurs were educationally well

qualified. Not a single case study was found on grassroots, illiterate, first generation

technopreneur. Technological entrepreneurship is a relatively unexplored topic (Shane and

Venkataraman, 2000) and is one of the most important factors of regional development; key

elements of technological entrepreneurship should be determined to know how to foster

technopreneurship. In India, Technology Business Incubators (TBIs) are now being

promoted based on success in China, Malaysia, USA etc. Mechanisms such as Innovation

Centre are also being tried (Singh, 2000). Lack of institutional support, patenting need and

non innovative funding support from traditional bankers are the major roadblocks faced by

39

S&T entrepreneurs (Singh, 2000). None of the literary work is found in the field of

grassroots technopreneurs, which are equally competent to support economic development.

2.1.2 Social Entrepreneurship (SE)

The term of “social entrepreneurship” was first coined in 1980 by Bill Drayton of Ashoka

which is the global association of the world’s leading social entrepreneurs. David Gergen,

Harvard Professor, described social entrepreneurs as the “new engines of reforms”. In an

environment where traditional providers such as the charitable and voluntary sectors have

been criticized as bureaucratic and resistant to change and the public sector has become

overstretched and hampered by resource constraints, SE has been identified as an innovative

way of tackling unmet socio-economic needs (Leadbeater, 1997; Mulgan and Landry, 1995).

The term SE has emerged as a new label for describing the work of community, voluntary

and public organizations, as well as private firms working for social rather than for-profit

objectives (Shaw and Carter, 2004). They gather together the necessary resources and use

these to “make a difference” (Thompson, 2000). The job of a social entrepreneur is to

recognize when a part of society is stuck and to provide new ways to get it unstuck. He or

she finds what is not working and solves the problem by changing the system. The concept

of SE has become the buzzword only in the recent past, backed by the economic boom in

late 1990s and the government’s inability to solve social problems. By the end of 20th

century, social entrepreneurs became a part of the development lexicon and played a

significant role in the social, political and economic contexts for poor and marginalized

groups (Prahalad, 2006).

The Social Entrepreneurship Initiative (SEI) based at Stanford University has developed a

comprehensive description of social enterprise that reflects the diversity. They argue that

social enterprises can be classified in one of the three ways:

� as for-profit organizations which use their resources to creatively address social

issues;

� as not- for- profit organizations which help individuals establish their own small,

for- profit businesses, or

� as not-for-profit ventures which create economic value to fund their own

programmes or to create employment and training opportunities for their client

population (Eleanor and Carter, 2004).

40

As found in Hindustan Times (4th November, 2008), in the words of Klaus Schwab, “SE is

about applying practical, innovative and market-oriented approaches to benefit the

marginalized and the poor.” Social entrepreneurs can structure their organizations as non-

profit or for-profit entities. In case of the latter, profits are re-invested in strengthening and

growing the social mission (Schwab, 2008).

Most of the literature pertaining to SE draws on the business entrepreneurship literature.

Large number of scholars are making efforts to bridge the literature of SE with other streams

of research like social movement theory (Alvord, Brown and Letts, 2004), sustainable

development (Seelos and Mair, 2005) or institutional entrepreneurship (Dorado, 2005). One

of the problems in researching this field is that there is no consensus on nonprofit and/ or SE

(Shockley, Frank and Stough, 2008). A great deal of attention is paid to defining what

exactly these entrepreneurs do. As a result, this entrepreneurial behaviour that is outside of

purely market driven purposes is called as social enterprise, SE, social innovation or

nonprofit entrepreneurship. As cited by Stevenson and Jarilo (1991) Durcker in his famous

book “Innovation and Entrepreneurship,”notes that the social entrepreneur changes the

performance capacity of society. Social entrepreneurs are perceived as change agents who

create and sustain social values without being limited by the resources currently at hand.

Robinson, Kirzner and fellow Austrian economists believe that social entrepreneurial

opportunities exist, but they cannot be seen by everyone (Johanna, Robinson and Hockerts,

2006). Their activity is valued by their ability to maximize social rather than economic

returns (Sullivan, Weerawardena and Carnegie, 2003). In addition, the norms effective in

social markets do not go parallel to those governing economic markets (Emerson and

Twersky, 1996). One negative aspect was social ventures that open up new areas of activity

must often contend with an environment that does not recognize or appreciate their worth or

inherent contribution. Growth aptitude in SE is mainly determined by the extent to which the

innovation is scalable, and that scalability is one criterion for assessing the potential success

of a socially oriented project (Perrini, 2006).

SE is seen as a response to diminishing government involvement in the economy and society

(Nicholls, 2006) and it is extended rapidly to the private and public sector (Johnson, 2000).

Corporate Social Responsibility (CSR) emerged in a corporate context, whereas SE

41

originated from the non-profit sector (Dees, 1998, 1998a; Johnson, 2000; Sullivan,

Weerawardena and Carnegie, 2003; Emerson, 2003). The CSR literature and the SE

literature share a primary interest in the creation of social values, but its fundamental

assumptions are distinct. Socially responsible companies are those, whose primary goal is

profit, whereas, social entrepreneurs emphasize social value and economic value creation as

a necessary condition to ensure (financial) viability (Dorado, 2005). To date, there are

different approaches to SE (Mair and Marti, 2006; Dorado, 2005) and there has not been a

universally accepted definition of what constitutes a social entrepreneur (Shaw and Carter,

2004; Dorado, 2005). Therefore, the literature on SE still hearts around two main themes;

the level of analysis and the locus of SE. Regarding the level of analysis, the field

potentially embrace individual, organizational and inter-organizational levels of analyses. At

the individual level, definitions of social entrepreneurs focus on the founder of the initiative

(Mair and Marti, 2006), who is generally referred to as a ‘change maker’ (Barendsen and

Gardner, 2004; Shaw and Carter, 2004; Van Slyke and Newman, 2006), acting upon an

opportunity and gathering resources to exploit it.

At the(inter) organizational level, definitions of SE typically refer to the process of value

creation, including opportunity recognition, adopting a mission to create social value,

engaging in a process of continuous innovation, adaptation, and learning (Dees, 1998;

Roberts and Woods, 2005). The second debate addresses the issue of where or in which

contexts SE occurs (Mair and Marti, 2006) and contests the views that SE is limited to the

non-profit sector on one hand or to socially responsible actions of mainstream business

practice on the other. They conclude that SE refers as means to tackle social problems and

catalyze social transformation, irrespective of the for-profit or not-for-profit status of the

organization (Mair and Marti, 2006; Roberts and Woods, 2005; Austin, Stevenson and Wei-

Skillern, 2006; Nicholls, 2006; Korosec and Berman, 2006).

Cho (referred by Mair, Robinson and Hockerts, 2006) has narrated the concept of SE by

augmenting the social objectives with the pursuit of financial objectives. The same study has

quoted a most all-inclusive explanation on social entrepreneur that was given by Perrini

(referred by Mair, Robinson and Hockerts, 2006) and also by Vurro (referred by Mair,

Robinson and Hockerts, 2006) which says that social entrepreneur is change promoters,

42

pioneer innovator, inspects quality of idea and measures its social impacts. Robinson

(referred by Mair, Robinson and Hockerts, 2006) has specifically correlated the process of

social problem solution with its impact in terms of evaluation either as venture created for

profit or nonprofit or double bottom line. Haugh (referred by Mair, Robinson and Hockerts,

2006) explained social enterprise as an organization which is the outcome of business led

solutions to achieve social aims. Singh (2007) concludes that there is an urgent need to draw

boundaries so as to delimit scope and clarify whether SE is really an independent field of

research, and the need to identify the different levels of analysis, disciplines and literatures.

It has enormous scope as it poses a challenge to rethink central concepts and assumptions.

SE refers to innovative activity with a social objective in either the for-profit sector, such as

in social purpose commercial ventures (Dees and Anderson, 2003; Emerson and Twersky,

1996) or in corporate SE (Austin et al., 2004); or in the non-profit sector, or across sectors

such as hybrid structural forms which mix for-profit and nonprofit approaches (Dees, 1998).

It refers to the phenomenon of applying business expertise and market-based skills in the

nonprofit sector such as when nonprofit organizations develop innovative approaches to earn

income (Reis, 1999; Thompson, 2002). One theory behind the existence of social-purpose

organization is that they emerge where there is social market failure i.e. commercial market

forces do not meet a social need, such as in public goods (Weisbrod, 1975) or in contract

failure (Nelson and Krashinsky, 1973). Thus, a problem for the commercial entrepreneur is

an opportunity for the social entrepreneur.

In addition to innovative not-for-profit ventures, SE can include social purpose business

ventures, such as for-profit community development banks, and hybrid organizations mixing

not-for-profit and for-profit elements, such as homeless shelters that start businesses to train

and employ their residents. Though the concept of SE is gaining popularity, it means

different things to different people, at times confusing. Some people use it to describe

anyone who starts a not-for-profit organization. Still others use it to refer to business owners

who integrate social responsibility into their operations (Khoja and Kangad, 2009). A social

entrepreneur must identify business ideas, should not depend on grants permanently and

make profit to give back to the society. The NGOs pay well today and even corporate set

aside a huge amount under CSR. Social entrepreneurs, operating outside of the constraints of

43

government, significantly enhance the ability to find and implement effective solutions to

social problems.

The existing academic research in this field, greatly agree to recognize two main macro-

dynamics as decisive in the emergence of social entrepreneurial ventures. They are the crisis

of traditional welfare state (Johnson, 2000; Cook, Doods and Mitchell, 2001; Borzaga and

Defourny, 2004) and the increase in competitive pressure within the nonprofit sector (Dees,

1998; Reis, 1999). The desire to change society and discomfort with the status quo are the

main stimuli for social entrepreneurs to innovate (Prabhu, 1999). This makes them more

sensitive to entrepreneurial opportunities that deal with social problems and unsatisfied

social needs (Mair and Noboa, 2003a) and they create value by building portfolios or

resources to address unmet social needs. The current literature on SE focuses at a

preliminary ‘definitional level’. Roberts and Woods blend the academic and practitioner

perspectives on SE to define it as “the construction, evaluation, and pursuit of opportunities

for transformative social change carried out by visionary, passionately dedicated

individuals” (Chand, 2009).

But what underlines all these definitions is that there are individuals who take the initiative

to spot and address important social problems. They are bent upon creating social value and

exhibit the vision, innovativeness and drive to implement their ideas for change. Dart (2004),

describes a social enterprise as a radical innovation in the non-profit sector. Alvord, Brown

and Letts (2004) identified three forms that a social enterprise can take: augmenting local

capacities, disseminating packages to solve local problems and social movements. But the

form that the enterprise can take depends, as Townsend and Hart (2008) note, on the relative

strength of the two aspects of the double bottom line that is creation of economic value and

creation of social value (Chand, 2009).

A continuum of business mentioned below explains that a business may have market or

social driven orientation and may or may not operate for profit.

44

Figure 2.3: The SE Matrix

(Source: Massetti, 2008)

From the above figure the quadrant which has market-driven orientation and profit

orientation, applies to traditional entrepreneurship. But individuals here, when the

marketplace attaches values to a social cause, become social entrepreneurs so as to be

considered socially responsible. In the second quadrant traditional non profits are driven by

a social mission but do not need to make a profit. If social entrepreneurs arise in this

category, they use surpluses for efficiency and growth. The third quadrant, responding to

market needs but not driven by profits, depend on grants and must continually adapt to

market forces and such organization are not driven by need to create new but they create

solution path for a complex social problem. The final quadrant, which Massetti (2008) terms

as the Tipping Point Quadrant, is represented by organizations that are driven by social

missions, and must make profits to survive. These organizations have goals that benefit

society and see to it that profits are not wasted. While there is financial independence, the

entrepreneurs are free to accept funding from traditional social support systems as well.

Thus, impact is more important than sustainability of organizational form. This form is most

suitable for social entrepreneurs.

SE has its origins in the 21st century when philanthropic business owners and industrialists

demonstrated a concern for the welfare of employees by improving their working, education

and cultural lives. Since, then SE has been associated with community enterprise and

development, education, churches, charities, the not-for-profit sector and voluntary

organizations (Eleanor and Carter, 2004). Thus, emergence of social economy or “third

sector” has expanded on account of failure of efforts of traditional public, voluntary or

community mechanisms. Historically, social enterprise organization has been defined in the

negative as nonprofit or nongovernmental organization. Today, they are understood as the

“independent sector”, “nonprofit sector”, “third sector” or “citizen sector” (Bornstein, 2005).

SE has emerged from practice rather than academic debate. The basic thesis is that many

Traditional Tipping Point Social Entrepreneurship Entrepreneurship

Organization Traditional Running on growth non-profits

organization

Profit

Yes

No

Market Driven Social Driven

45

social problems, if viewed through an entrepreneurial lens, create the opportunity to launch a

venture that generates profits by alleviating a specific social problem. This sets in motion a

virtuous cycle; the entrepreneur is propelled to generate more profits and in so doing, the

more profits made, more the problem is alleviated (MacMillan and McGrath, 2000; Prahalad,

2004; Prahalad and Hammod, 2005; Perrini 2006).

The studies of social entrepreneurs have received little attention. Historically, they have

been cast as humanitarians or saints, and stories of their work have been passed down more

in the form of children’s tales than case studies. While the stories may inspire, they fail to

make social entrepreneurs’ methods comprehensible. The question arises that one can

analyze the entrepreneur but how can one analyze a saint?

SE is conceptualized from organizational level. A first perspective could be described as

commercializing a nonprofit organization. It means it brings a ‘for profit’ philosophy to the

many not for profits that experienced a financial crunch and found it difficult to sustain

without donations and grants. Second perspective is of efficient nonprofit management by

way of brining expertise and market-based skills to the nonprofit sector (Johnson, 2000). A

base for third perspective suggests that there also exists a tradition to link a specific

ownership structure to social enterprises. For example, the cooperatives and other mutually

owned organizations are often referred to as social enterprises. A fourth view suggests social

entrepreneurs as social purpose business ventures (Campbell, 1998; Larson, 2000; Foryt,

2002; Schaltegger, 2002; Volery, 2002; Hockerts, 2003; Mair and Noboa, 2003a). In this

case an emerging social innovation is seen as a business opportunity and turned into a

commercial for-profit business creating, in the process, new market space is created while

attaining a social objective. At the societal level SE is often understood as networks for

social entrepreneurs and venture philanthropy. And in this case, information and practical

support, as well as charitable donations or equity capital, are made available to

entrepreneurial individuals and organizations that have a clear social mission and require a

targeted amount of funds to realize it (Christopher, 2000; EMKF, 2002; Joshua Venture,

2002; Orloff, 2002). Ashoka and Schwab Foundations are examples of this type.

The concept of SE is still poorly defined and its boundaries are still open for future

researchers to study. One group of researchers understands it as the socially responsible

46

practice of commercial business engaged in cross- sector partnerships. Other group views

SE as means to alleviate social problems and catalyze social transformation (Alvord et al.,

2004). Singh (2007) expresses that SE is a process of creating social value by combining

resources which they themselves do not possess in a new way to explore and exploit

opportunities for the purpose of social change or meeting social needs, which results in

offering of services and products. The literature on SE describes a set of behaviours that are

exceptional. These behaviours should be encouraged and rewarded in those that have the

capabilities and temperament for this kind of work. Hence, according to Dees (1998)

everyone should not aspire to be a social entrepreneur. Various motivations for SE are

identified in the literature. Cannon (2000) recognizes three general types of people who

become social entrepreneurs. The first are individuals who have made a lot of money and

are interested in giving some of it back to further social goals. The second are ‘recovering

social workers’ who are disenchanted with the existing social support system and looking

for a more effective approach. The third type is a new breed who has gone to business

schools (or along a similar path) with social enterprise in mind. Catford (1998) summarizes

social entrepreneurs as those who combine street pragmatism with professional skills,

visionary insights with pragmatism, an ethical fiber with tactical thrust. Bornstein (1998)

characterizes a social entrepreneur as a path breaker with a powerful idea, who combines

visionary and real world problem-solving creativity who has a strong ethical fiber and who

is totally possessed by his or her vision for change.

SE can be further divided into two parts namely techno-based SE and non-techno-based

entrepreneurship. Aim of techno-based SE is to incubate and boost entrepreneurship based

on rural innovations, so that such innovation can be commercialized and patented and

targeted to Tier-IV market; for example: GIAN, NIF, Aavishkaar. Aim of non-techno based

SE is to promote self-employment at rural level as seen the cases like SEWA, AMUL, etc.

Social entrepreneurs are emerging breed of entrepreneurs, whose primary interest is the

social development, at the same time ensuring sustainability of the organization and

replication of the ideas. They are transformative forces. They are restless people who search

for solving a problem in unique way, which is untried. They are change makers in the

society, as they set new path to solve traditional problems. They play the role of developer

47

of economy which is basically played by government and business entrepreneurs. Social

entrepreneurs play analogous roles in the field of education, health care, environmental

protection, disability, MF, micro venture capital finance and many more fields. They try to

devise cost-effective ways to deliver basic services. They undertake both public and private

sector functions alongside and work with people whom the governments have been unable

to reach effectively, with basic goods and services. They address market failures effectively

by providing access to private goods and services to markets where business does not

operate because the risks are too high and rewards are very low. Social entrepreneurs

identify resources where people only see problems. They view the villagers as the solution,

not the passive beneficiary. They begin with the assumption of competence and unleash

resources in the communities they are serving. The role of social entrepreneur is of a

‘Reliever’. They provide new ways to unstick the society. They find what is not working and

solve the problem by changing the system, spreading the solution and persuading society to

take new leaps. Social entrepreneurs produce measurable impact for the marginalized and

disadvantaged sector of the society (Retrieved from http://www.pbs.org/opb/ thenewheroes/whatis/, as

on December, 2009).

As per the definition from Stanford University, a social entrepreneur is non profit

organizations which help individuals establish their own small, for- profit businesses. As per

this definition a social venture capital fund (which works for non-profit) which helps the

individuals to establish their own small for-profit businesses is necessary to stimulate

grassroots rural techno entrepreneurship. The grassroots innovators can also be treated as

social entrepreneur, as they find a new solution to unstuck the society, for which the

commercial enterprises were hesitant to initiate and solve the problem and the government

did not think to venture for solution of such problems.

2.1.3 Invention, Innovation and Incubation

2.1.3.1 Invention and Innovation

Idea is the genesis of entrepreneurship. Ideas may be rational or wild. In either case, they

need to be filtered and those which have probability to generate a business needs to be

nurtured (Sahay, 2011). Innovation despite being as old as mankind itself, in spite of its

obvious importance, it has not received adequate scholarly interest (Fagerberg, 2003).

48

Economists see a direct relationship between technology change and economic growth.

Economist dealt with the allocation of resources to innovation and its economic effects,

while the innovation process itself has been more or less neglected (Fagerberg, 2003).

Management gurus base their theories of competitive advantage on innovation. The World

Bank spreads the gospel of social development driven by knowledge adoption. Altogether,

the role of innovation in a national economy is getting increasing attention (Rao, 2007).

Research on the role of innovation, economic and social change has proliferated in recent

years, particularly within social sciences and cross disciplinarily (Fagerberg, 2003).

Different authors have defined innovation and invention in various ways.

According to Durcker, innovation is the means by which the entrepreneur either creates new

wealth-producing resources or provides existing resources with enhanced potential for

creating wealth. Firms in developed countries of West are in the forefront of innovation and

change, whereas developing world finds it hard to compete on the technology plank

(Selvanayakam, 2007). Innovation is the use of new knowledge to offer a new product or

service that customers want. It is invention plus commercialization. It is a new way of doing

things. It is new knowledge which can be either technological or market related. Often the

new product or service itself is called as an innovation, if its cost is lower, its attributes are

improved or now it has new attributes it never had before, which reflects the creation of new

technological or market knowledge. To be an innovation, an idea must be converted into a

product or service (Selvanayakam, 2007, p.15). Innovation is the developmental process. It

is the translation of an idea into application (Ghosh, 2000).

Schumpeter (1939) differentiated between the three types of creative activities- Invention,

Innovation and Imitation. Accordingly, Invention is the act of creating or developing a new

product or process or new idea. Innovation is the process of creating a product or service

from an invention. It is the commercial exploitation of the invention. Imitation is the

adoption of an innovation by similar firm (Manimala, 1992a; Selvanayakam, 2007). Thus,

an invention may be a scientific discovery; innovation is its economic application.

49

Schumpeter has identified five major forms of innovation i.e. introduction of a new product

or service (or improvement in quality of an existing good); introduction of a new method of

production; development of new market; exploitation of a new source of supply or raw

materials or semi-manufactured goods; reorganization of the operation of an industry.

Schumpeter’s concept of innovation is much wider as it covers the doing of any new thing,

or old thing in a new way (Glaister, 1989). The modern concept of innovation is that it is a

process, one of the early stages of which is invention (Glaister, 1989).

Expanding the work of Schumpeter author Manimala (1992a) identified ten types of

innovation viz., market innovation, product innovation, process innovation, R&D

management innovation, supply innovation, personnel innovation, financial innovation,

cultural innovation, structural innovation and government relations innovation. The most

important is product innovation which relates mainly to modifications of existing products

and or introduction of locally new products. Process innovation refers to the change or

modification in the method of the product’s production. Author created the sub types within

high innovation group as inventor/tinkerer, adventurer, problem solver, gap filler, social

visionary, opportunity grabber and specialist pioneer. In the category of low innovation

group, a sub category of innovators were found and those were like; chance entrant, agent

turned producer, concession grabber, obsessed producer, imitator and niche holder

(Manimala, 1992a, 2005).

Schumpeter (1939) defined innovations as the commercial use of scientific discovery or

invention. A major difficulty with this definition is that it fails to distinguish between

commercial and non-commercial innovation. The definition provided by Rogers (1962)

overcame the difficulty of definition. It also introduced the idea of perception of an

Invention Creation of something new

Results in new knowledge

Innovation Transformation of an idea into

useful applications

Results in new products, services

or processes

Figure 2.4: Conceptualization of Invention and Innovation

(Source: Own Creation)

50

innovation as “an idea, a practice or objective perceived as new by an individual or other

unit of adoption”. This definition emphasized “newness” dimension and not the

“productivity” dimension as highlighted by Schumpeter. Combining the views of

Schumpeter and Rogers, Pastakia (1998) describes the features of innovation as follows:

(a) Innovation involves a new and significantly better way of doing things.

(b) It is inevitably associated with improved productivity or savings in costs, effort or time.

(c) An idea, a practice or a product may be perceived as an innovation by the innovator or

by an external observer.

(d) Perception of innovation is influenced by the context and world views of the people

involved.

‘India Innovation Survey’ jointly conducted by Confederation of Indian Industry (CII) and

Boston Consulting Group (BCG) found that innovation is a top strategic focus for most

Indian Companies. As high as 89% respondents, explained the importance of innovation

over last ten years. A 39% of the respondents felt that innovation today has become critical

to their organization and as high as 91% said innovation was amongst the top three strategic

priorities. Gupta explained that creativity in India particularly in science and technology is

grossly underestimated. On accessing the Information and Library Network’s (INFLIBNET)

National Online Union Catalogue (which houses database of Indian doctorate research

studies) no significant work is found on innovation and its requirement in generating

entrepreneurship and initiatives and challenges of education system to generate innovative

entrepreneurship. Foreign researchers focused more on innovative practices and its impact

on performance of the company. Broader research work includes interdisciplinary theory of

entrepreneurship, incubators, innovative internationalization etc., (Rathod, 2010).

Rathod explored other researchers empirical research work and found that strategic human

resources management (SHRM) is seen as crucial for innovation and entrepreneurship in

China leading to the synergy between entrepreneurship and innovation. The study found that

entrepreneurship and innovation are complementary for organizational success, they are not

confined to the initial stages of a new venture, rather they are dynamic and holistic processes

in entrepreneurial and innovative organizations. Very fewer studies are found on

innovativeness of Indian Entrepreneurs particularly in India.

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In the same study by Rathod (2010) found that entrepreneur’s ordinal ratings were

technological, marketing, process, business, strategic and organizational innovation.

Entrepreneurs of large scale industries were more innovative compared to small and medium

scale industries and thus their innovation positively correlated with their performance.

Researcher concluded that small scale organizations are found on a higher scale in terms of

marketing innovation.

Gupta et al., (2001) has made a remarkable contribution in explaining the concept and

importance of grassroots innovations. According to Gupta et al., (2001) invention and

innovation are differentiated terms. Invention means a new, first hand discovery, whereas

innovation refers to incremental changes or improvement in the existing product, which may

result in higher production, or lowers cost or increases efficiency or results in different

application of same technology. In other words innovation is a solution which is aimed

either to increase work efficiency or improves the product efficiency or helps in reducing

drudgery, or lowers the cost or leads to generation of additional income or reduction or

prevention of possible losses (Gupta, 1996).

While searching for literature on creativity of common people and their ability to solve

problem, a huge gap was found (Gupta, 2007). With respect to grassroots innovator only one

study was found in the form of student project at IIM-Ahmedabad, which explained the

difference between the types of grassroots innovators. Karan and Saha (2003) distinguished

the grassroots innovator in two forms viz. the problem solver and designer innovator. The

features of both the form of innovators are given below.

Table 2.2 Distinction between Problem Solver Versus Designer Innovator

Problem Solver Designer Innovator

For a Problem solver the need for innovation arises from a first hand experience with the problem that an innovator has faced in his career or in his environment.

Designer innovator is excited by new ideas and develops new products to satisfy their creative urge.

Problem solver focus on a single product and on building a business around that product.

Multiple products can be expected from designer innovator.

Problem Solver can be expected to have sufficient drive to improve upon and market their product.

Designer Innovator may be keener on giving shape to his creative ideas than on converting one such idea into a successful business enterprise.

(Contd.)

52

Problem Solver Designer Innovator

Problem Solver if given their business orientation and focus, it is expected that he may be unwilling to sell his technology.

Designer Innovator needs not only a financial backing at the time of development of a product but also a proper management and strategic guidance in commercializing their product.

In the case of problem solver it is expected that innovator would have developed a prototype and tested it. The support they need would be more for commercialization and improvement in their product.

In the case of designer innovator since they do not focus on commercializing, they may not be in a comfortable financial position and may be willing to sell their technology on reasonable terms.

Problem Solver are “Type1” Innovators Designer Innovator are “Type2” Innovators.

Note: There could be a third category, “Business Driven Innovators” whose business needs drive innovations. They are included under “Problem Solver”.

(Source: Karan and Saha, 2003)

Baumol (2002) believes that the largest contribution to economic welfare is due not to major

breakthroughs but, rather, to routine improvements in the existing products and processes.

He emphasized the importance of systematized R&D activities and fails to recognize the

contribution of independent inventors/ innovators (often entrepreneurs) to a technological

development process. People believed that the fire of creativity had extinguished in Indian

society, because it relied more on borrowed concepts and instruments, which lead to losing

of ability to scout and spawn innovations at grassroots (Gupta, 1998).

The fundamental assumption behind most developmental approaches aimed at poverty

alleviation is that poor people are too poor to be able to think and plan on their own. The

result is that most interventions are designed by externally learned and qualified people

(Gupta, 1998). In fact many odd balls in villages have tried to experiment and do things

differently in a very creative and innovative manner. Often such innovations remain

localized sometimes unknown to farmers in the same village. Lack of diffusion causes

validity of these innovations. SRISTI, GIAN and NIF have scouted many technological,

socio-cultural, institutional and educational innovations from rural India (Gupta, 1998).

Large mass of poor people had no choice but to be inventive in order to just survive. Present

time demands that given the increasing pressure of global competitiveness, Indian

entrepreneurs have to develop new products, services which have an edge in the field of

environment as well as efficiency. Technological and institutional innovations by grassroots

people and farmers in disadvantaged regions can spur huge revolution (Gupta, 1998).

53

Grassroots creativity can harness global capital and entrepreneurial support for decentralized

development (Gupta et al., 2001). Knowledge, innovation and practices are produced by

people in the course of exploring new habitats, new materials, new needs and new

institutional conditions (Gupta, 2007). Poor people are potentially rich in knowledge,

creativity and invention as they learn majority of their lessons in laboratories of life. Poor

are at the bottom of the economic pyramid but they are at the top of ethical, innovations and

knowledge pyramids (Retrieved from http://www.sristi.org/anilg/papers/Augmenting innovations.doc, as

on June, 2007). The institutes which work for grassroots innovators who are engaged in

conserving biodiversity and developing eco-friendly solutions to local problems are

Honeybee Network, SRISTI, GIAN and NIF, which is discussed at length in the

forthcoming chapter. The innovation in entrepreneurship has always helped countries by

changing with the times and producing new products and services from ones that already

exist, being innovative has helped one to become successful in all endeavors (Shukla, 2011).

Grassroots technological innovations can overcome the inertia and improve the efficiency at

grassroots level (Gupta et al., 2001).

2.1.3.2 Incubation

Small start up firms assists in job creation, employment growth and development of

innovative products and services. Technology based companies tend to emphasize R&D

investments and a firm with a new ‘high tech’ product wants to achieve proof of concept or

to build a prototype. Incubators assist such firms in the pre-seed and seed phase (Christian,

2007). The concept of incubators is applied more to project ideas which have a high degree

of uncertainty in new business creation or development. Incubator facilitates the survival of

companies and nurtures them for growth and success by providing the inputs, shares the risk

and provides credibility to an idea as it progresses from idea to some kind of product or

service. Un-inclined innovator may not like to develop a business enterprise; he would

instead like to concentrate on innovations. Here, incubator acts a link between the golden

triangle (as advocated by GIAN) of innovation, investment and enterprise. Incubator

encourages the idea to be converted into an enterprise, perhaps by a different person

(Selvanayakam, 2007). Lack of incubators in developing countries hinders the process of

converting innovation into product (Gupta, 1999).

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According to National Business Incubation Association, business incubation is “a business

support process that accelerates the successful development of start-up and fledging

companies by providing entrepreneurs with an array of targeted resources and services.

Critical to the definition of an incubator is the provision of management guidance, technical

assistance and consulting tailored to young growing companies. The definition highlights

the imperative role played by the incubator (Retrieved from http://www.nbia.org/ resource_library/

what_is/,as on June, 2011).

The incubation work can be divided into theoretical work which primarily explains the

concept of incubation and incubator (Bhabra-Remedios and Cornelius 2003; Aernoudt,

2004; Hackett and Dilts, 2004a). Practical work consists of summarizing the services of

incubator, success of incubator (Bergek and Norrman, 2008; Chan and Lau, 2005; Hansen et

al., 2000; Von Zedtwitz 2003; Haapasalo and Ekholm, 2004). Evaluation work of incubator,

in terms of incubatee survival and growth was also studied (Aerts, Matthyssens, and

Vandenbempt 2007; European Commission 2002; Hackett and Dilts 2008; Lalkaka, 1996).

Researching further, it was found that business incubators can be private or public. Private

incubators are for-profit firms that take equity or receive a fee for the business services

provided to clients; on the other hand public incubators are focused on high-tech industries

(Sahay, 2011). The most important work of Voisey et al., (2006) stressed that although

business incubators are sometimes structured as traditional companies, the majority of

incubators are non-profit entities.

The formal concept of business incubation began in the US in the 1960s. It later developed

in the UK and Europe through various related forms (e.g. innovation centers, pepinieriesd’

enterprises, technopoles/science parks) during the 1980s. As per United Kingdom Business

Incubation’s (UKBI) survey as on 2005 there are 270 incubation environments across the

country UK, as per European Commission in 2002 identified 900 incubation centers in

Western Europe and National Business Incubation Association (NBIA) estimated 1,500

incubators in US.

The first incubators supporting start-up companies were set up in USA. The oldest incubator

in the world is Student Agencies Inc from Ithaca, New York. There is a lack of academic

research on business incubation focusing on university based incubators. In particular, there

55

are almost no recommendations, best practices and guidelines coming out of the research for

practicing technology transfer from university by an incubator (Christian, 2007). In US,

VCFs, companies and even city governments have their own incubators (Singh and Singhal,

2002). An incubator provides infrastructural, technical and business mentorship to start ups,

handholding guide, access to investors and vibrant eco system (Retrieved from

http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm as on May, 2011).

The incubator assists the innovator like in business plan development, enterprise start up,

external finance, entrepreneurship education, market research, sales assistance, research and

development, accounting, tax and legal assistance, human resource consulting, providing

seed financing (Christian, 2007), industry cluster development, promoting innovation and

technology transfer (Sahay, 2011). Incubator operates at three level viz., fundamental level,

operational level and policy development (Retrieved from: http://www.dare.co.in/strategy/business-

essentials/how-do-business-incubators-help-you.htm as on May, 2011).

US based researcher explained that incubators are another means of economic assistance in

rural areas. Incubators nurture young firms, help them to survive and grow during the start

up period when they are most vulnerable. It provides hands-on management assistance,

access to financing and orchestrated exposure to critical business or technical support

services. Research on incubators has emerged as one of the topical debates among business

schools, business leaders and policy makers. However, very few studies have evaluated rural

incubators. 30 percent of all incubators in the US are located in rural areas (Retrieved from

http://usasbe.org/knowledge/proceedings/proceedingsDocs/USASBE2005proceedings-Heriot%2030.pdf, as on

June, 2011).

Business incubators is a relatively new concept in India and unlike in other Brazil, Russia,

India and China (BRIC) countries such as Brazil or China, even now concept is not so well

developed in India as a support system for engineering technology- based entrepreneurs. The

idea is very recent in India (Nagayya, 2005). Business incubation in India goes back to 1984,

when the DST set up the first scheme to help entrepreneurs bootstrap their business (Retrieved

from http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm, as on May,

2011). The history of business incubator could be traced to 1985 when Tiruchirappalli

Regional Engineering College at Tiruchi. India is a prime destination for incubation centers.

The Technology Development Board has sponsored around 60 plus incubators and another

56

30 to 40 incubators run privately (Retrieved from http://www.dare.co.in/strategy/business-

essentials/how-do-business-incubators-help-you.htm, as on May, 2011).

There are three types of incubators set up in India, viz., incubators set up under the aegis of

leading institutions of engineering, technology and management (e.g. IIMs and Indian

Institute of Technology, IITs), within STEPs (e.g. Technoparks in Trivandrum), by leading

private sector enterprises (e.g. Nirma labs, NCL, Pune). The first phase was from 1986

through late 1990s when incubators were set up under STEPs and the second phase from late

1990s which focused on incubation set up under private sector enterprises (Mani, 2009).

India has unmatched diversity of incubators ranging from agro-based technologies,

biotechnology, nanotechnology, energy and power electronics (Retrieved from

http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm, as on May,

2011). The Technology Development Board (TDB) of India provides financial assistance to

industrial concerns and research institutes for commercial application of indigenous

technology or adopting imported technology for wider domestic applications (Sahay, 2011).

It provides assistance in the form of equity, soft loans or grants. The assistance provided by

TDB is positioned to create techno-entrepreneurs and to act as a bridge between

development and commercialization of the technologies (Sahay, 2011). The business ideas

selected are typically those that are considered either too risky or too long term by regular

venture capitalists (Nagayya, 2005).

To spur entrepreneurship, NSTEDB took the unprecedented step of providing seed capital to

start ups. Until sometime back, all entrepreneurs were dependents on external finance for the

initial amount of `5 to 10 lakhs. To encourage entrepreneurs, a seed support system in 2004

was started in which a crore of rupees were placed with incubators as a grant from NSTEDB,

from which the incubators could disperse money as an investment by way of soft loans,

terms loans and equity participation etc., (Retrieved from http://www.dare.co.in/strategy/business-

essentials/how-do-business-incubators-help-you.htm, as on May, 2011).

Innovation in India is still largely led by multinationals and it has more than a fair share in

the ICT domain. Incubators are still a new concept in India as compared to the First World

countries. So, the process and time required to get funds is slower than the benchmark.

57

Incubators helps the incubates to complete the prototype stage and reach the level where

their business plan complements user feedback and market response during pilot testing

(Retrieved from http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm,

as on May, 2011). It can be a great place for entrepreneurs, especially for those who are in the

initial stages of their ventures, anywhere from conceptualization to early stage operations

(Retrieved from http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm,

as on May, 2011).

The idea behind the incubation initiative was to ensure that technopreneurs are not hindered

for the want of initial funds required for market research and for bridging the financing

needs between the time, the business venture floats and the time when venture financing is

attracted (Mani, 2009). Since the incubator idea itself is new and evolving, there are no

detailed studies on the effectiveness of these as an instrument for promoting

technopreneurship at urban areas (Mani, 2009).

In the recent article on ‘How do Business Incubators Help you’, featured in Cyber Media’s

publication, a monthly magazine Dare (Vol.4, Issue Nos.5, February, 2011), highlighted the

thrust areas of Indian incubators like life sciences, agro business, pharmacy, biotechnology,

renewable energy, telecom, education, healthcare, dairy technology, arterial science centric

products, herbal, Information Communication and Technologies (ICT), information

technology (IT) etc., which clearly depicted that none of the existing incubators worked on

ideas of innovative rural entrepreneurs. The same set of sectors being favoured by

incubators was highlighted in the study carried out by Sahay (2011) on incubation and

innovation. From this the grassroots level incubation gap is highlighted. Rural Innovations

Network (RIN, now known as Villgro) based at Chennai incubates grassroots innovations,

which can have a significant impact on rural lives and lie untapped, in spite of their potential

to transform lives. RIN has, from inception, focused on forging ties with VC firms that

operate with rigorous commercial discipline. RIN has signed a Memorandum of

Understanding (MoU) with AIMVCF. Aavishkaar, under the MoU, considers investment in

RIN-enabled, innovation-based micro enterprises.

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With respect to Gujarat only one grassroots level technology incubator is found, which

focuses on incubating and commercializing grassroots innovations. The delivery functions

like project appraisal, disbursement, monitoring and mentoring and recovery are being taken

care by the regional arms of NIF e.g. GIANs and collaborators. GIAN-West (Ahmedabad),

GIAN-North-East (Guwahati), GIAN-North (Jaipur) is operational to help NIF to disburse

MVIF. With respect to incubation in the rural areas only one study was found which was

undertaken by Sonne (2010). At the grassroots level, there are two types of rural innovation

support models that support innovation, existing knowledge, practices and resources.

Firstly, there are innovative organizations in rural areas who innovate for poor with new

technology, innovative ways of organizing production, innovative ways of reaching markets,

using natural resources, provide extensive non-financial support in implementing small scale

business models. This kind of model needs grants for preliminary studies, project settings

and building up local institutions. As the intervention matures it is managed by poor through

internal profits, or bank loans. The government’s department of Science and Technology is

involved in grassroots innovation support through its Science and Society Programme,

whilst NGOs those connected through All India People’s Science Network, and Delhi based

Center for Technology Development Sonne (2010).

In the second type of grassroots organizations which acts as incubators for rural entrepreneur

with exciting ideas with focus on creating a viable venture around the new product or

service. Limited financial support is provided to test an idea, to build a prototype, to

research markets and establish network contacts. Governmental and non-governmental

organizations are involved in rural incubation. DST has been involved in rural innovation

through its incubator GIAN together with IIM-Ahmedabad, Honeybee, and SRISTI. At

international level, the World Bank has recently started incubator programmes in India

through its InfoDev initiative though it focused specifically on pro-poor incubation in the

ICT related areas (Sonne, 2010).

Recently held IIM-Ahmedbad Conclave, the chief minister of Gujarat expressed that Gujarat

was the first state in the country to have formed an innovation commission, was now in the

process of setting up a world class incubation center on public private partnership mode

(Retrieved from http://www.expressindia.com/latest-news/Narendra-Modi-flays-PM-over-Indias- solar-

59

woes/729880/, as on December, 2010). Incubators can go a long way in creating an ecosystem in

India, which is lacking at present. It provides a system to entrepreneur to fall back on for

help in times of crisis. At the outset, incubators help a lot to budding entrepreneurs, firm up

their courage to start up, remove the fear of failure and lack of support; hence there is an

urgent need to promote incubation activity in India (Retrieved from

http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm, as on May,

2011). Educational and R&D organization, associations can play a leading role in promoting

the incubator culture for supporting the young first generation professionals, innovators and

entrepreneurs. Experiences of developed countries like USA and UK and developing

countries like China, Taiwan and Israel, present a highly encouraging picture to be emulated

by Indian organizations (Nagayya, 2005).

2.1.4 Funding to Entrepreneurs

Entrepreneurs are often technical experts and investors such as banks have an arm’s length

in understanding the risk and possibilities of such investments, which is where the

intermediaries such as expert professional venture capital have a role to play (Sonne, 2010).

The manner in which the business is financed depends on the type of company established,

its creditworthiness, and entrepreneur’s risk taking ability, organizational structure and

entrepreneurial capabilities (Prodan, 2007). The availability of external risk capital has often

been a constraining factor for financing company formation in India (Mani, 2009). Firms in

India rely on internal and external sources of funds for their growth.

Founders, Families

and Friends

Private

Investors

VC Financing

Equity

Market

Commercial Banks

Initiation Start-up Early Growth Maturity

L

o

w

H

i

g

h

Figure 2.5: Technopreneurship and Financial Capital

(Source: Adapted from Mayer, 2002)

60

As shown in the figure 2.5, technopreneurs acquire some of the required limited capital at

establishment (initiation) stage from friends, relatives or acquaintances. For further growth

of the company, technopreneurs rely on corporations, private investors, angels (at start up

stage) venture capitalists (at early growth stage), public stocks, government grants and banks

(at maturity stage). Besides, equity financing, technopreneurs can also apply for debt

financing. This kind of financing is quite limited at first stage since the technopreneurs may

not have enough high-quality guarantees to offer to banks for availing loans (Prodan, 2007,

Mayer, 2002).

Private investors and VCs often have complementary roles in the high tech entrepreneurship

firms, with private investors (business angels) investing mostly at the early growth stage and

VCs financing the later (fast growth) stage (Manigart and Struyf, 1997). In the high tech

entrepreneurial setting, venture capital firms are the most dominant source of finance in the

global network economy (Chesbrough, 2003; Hsu, 2004). The sources that provide the

largest amount of funds at the early developmental stage are private investors and business

angels. VC plays a role later (Mayer, 2002). Business angels (the wealthy individuals) are

considered one of the most significant sources of funding and advice on management

practices for start up firms, especially in providing seed financing to firms at the growth

stage (Elitzur and Gavious, 2003). VCs are institutional investors following principal agent

relations, however, business angels are actively and directly involved in the start ups

management activities, exerting more control (Jeng and Wells, 2000; Mayer, 2002; Davila,

Foster and Gupta, 2003). VCs are focused on exit, but business angels are much less so.

According to Mayer (2002), the transition from the personal funds of the entrepreneurs to

private investors to venture capital financing to the stock market represents a ‘gradual

broadening of the investor base’. This evolutionary progress of a high-tech start-up firm

often implies a ‘strategic re-orientation’. Universally, private equity and venture capital has

been the main source of risk capital for technopreneurs. VC is an important source of

finance for new companies in developed countries and in India the sector has grown

exponentially in the last few years with plenty of domestic and international funds investing

in high growth enterprises in India. VCs invest in already developed ventures compared to

those of the rural innovative entrepreneurs. VCs preferred investment choices are IT and

Information Technology Enabled Services (ITes) (Seven percent), manufacturing (12%),

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healthcare and life sciences (Three percent), banking, financial services and insurance (28%),

media and entertainment (four percent), Engineering and Construction (11%), Shipping and

Logistics (Five percent), Energy (Eight percent), Telecom (13%) and others (nine percent)

(National Knowledge Commission, 2008).

Compared to various developing countries like Brazil, Mexico, China, Malaysia and Korea,

India has a strong financial system both at urban and rural areas. Apart from private and

state owned banks there are cooperative banks which are particularly important in rural areas,

huge post office network, non banking financial institutions such as savings societies and

credit societies like PACs that have a vast network in rural areas are important in rural

development (Basu and Srivastava, 2005). That formal credit is more difficult to obtain in

rural areas is confirmed by the National Sample Survey (NSS) round in 2003 which

indicates that whilst 75% of households access formal credit in urban areas, only 57% of

rural households do likewise. Instead, moneylenders still play a significant role, providing

about 30% of credit in rural areas (Basu, 2006). To bridge the lacunae of formal credit in

rural areas government and Reserve Bank of India (RBI) pursued the so-called “social

banking” to provide lending and subsidized credit in rural areas.

Several banks, financial institutional and non-institutional rural credit and rural schemes and

programmes are provided to improve the economic conditions and economic ability of rural

entrepreneurs. The various sources from which the entrepreneurs procure loans are non-

institutional agencies (local village moneylenders, agents and landlords) and institutional

agencies (cooperative societies, commercial banks, regional rural banks, land development

banks, farmers service societies, National Bank for Agriculture and Rural Development

(NABARD) etc). A bank concentrate upon MF to meet the credit needs of the rural

entrepreneurs and provides augmenting support by providing Kisan Credit Card to the

farmers. The Local Area Banks (LABs) in private sector and Differential Rate of Interest

(DRI) scheme are also implemented to promote rural savings and rural credit (Paidi, 2006).

Government tried to address various gaps through schemes specially focused on agriculture

like ‘Advancement of Rural Technologies Scheme (ARTS) ‘Women in Science and

Technology” scheme that provide subsidized credit for facilitating agriculture (for e.g.

machinery, fertilizers or seeds) (Sonne, 2010). It was noted that such scheme was not

62

conducive to enterprise growth or innovation. In recent years most discussions surrounding

rural and pro-poor entrepreneurship and innovation have rarely moved beyond MF and

micro credit disbursed through SHG-bank-linkage models.

Pro poor innovation in rural areas is more likely to occur through small scale ventures and

entrepreneurs than industrial research and development (Sonne, 2010). Government schemes

that provide finance and support for innovation and entrepreneurship generally focus on

high technological innovation and large scale projects than entrepreneur-based innovative

activities that take place in rural areas. To promote innovative entrepreneurship DST’s

National innovation fund together with Small Industries Development Bank of India

(SIDBI) called MVCF is established to bridge the financing gap for micro enterprises, which

is discussed further (Sonne, 2010).

2.2 Role, Funding and Drawbacks of Micro Finance

The level of growth-oriented entrepreneurship in a country is a more relevant driver of

economic growth than the mostly used indicators of entrepreneurship like the self-

employment and new firm formation. In contrast to rich countries, entrepreneurship in low

income countries is mainly driven by necessity (Bosma et al., 2008). Most entrepreneurs in

these economies do not start a firm because they desire independence or because they want

to increase their income as compared to being an employee, which are the dominant motives

in rich countries. Most new businesses in low income countries are started out of necessity,

in contrast to high income countries, where entrepreneurship is most often opportunity

driven. This is reflected in the finding that in poor countries self-employed are less happy

than employees, while the reverse is true in high income countries (Blanchflower and

Oswald 1998; Graham, 2005). Entrepreneurs in low income countries most often start a

business because they have no other way of earning a living. These entrepreneurs are not

likely to be involved in a process of self-discovery; their actions are not likely to have an

effect on the restructuring and diversification of the poor economies (Rodrik, 2007).

Within the groups of transition and developing economies there are substantial differences

in entrepreneurship rates. Chile stands out because of a particularly high rate of growth-

oriented entrepreneurship, while Mexico has a particularly low rate of growth-oriented

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entrepreneurship. In contrast to rich countries, entrepreneurship in developing economies is

mainly driven by necessity: self-employment is often the only occupational choice given a

paucity of other sources of employment (necessity-based entrepreneurship; Acs and Amoros,

2008; Bosma et al., 2008). The actions of most of the entrepreneurs in low income countries

are not likely to have an effect on the restructuring and diversification of the poor economies.

This would be the whole story if the rates of growth-oriented entrepreneurship would also be

marginal in these economies. This is only the case for Mexico. Next to Chile— where

opportunity-driven entrepreneurship is dominant—Brazil, India, and Argentina perform

quite well with respect to growth-oriented entrepreneurship. This means that there still is a

substantial group of entrepreneurs in low income countries that might get involved in a

process of self-discovery.

The problem in practice is that in contrast to rich and transition economies, growth-oriented

entrepreneurship is less likely to be realized in developing economies, due to constraints on

the provision of capital and (skilled) labour. An additional constraint in low income

countries is that there is generally a lack of (foreign) larger companies, which could act as a

training ground for prospective growth-oriented entrepreneurs, and could open up

distributions channels for new fledgling enterprises (Knorringa, 1996). One should make a

distinction between productive (manufacturing) and resource extractive (mining, oil)

activities here, as the former will be a more useful for the development of entrepreneurship

than the latter. The presence of growth-oriented entrepreneurs seems to be more important

for achieving GDP growth than general entrepreneurship (Stam and Stel, 2009).

MF is the term that has come to refer generally to such informal and formal arrangements

offering financial services to the poor (Brau and Woller, 2004). It predates the rise of formal

financial system and it dates back to early mid 1980s, last four decades where global efforts

were made to formalize grassroots movement (Brau and Woller, 2004) of providing

financial service to an estimated 100-200 million of world’s poor (Christen et al,, 1995).

Scholarly interest in MF has lagged behind industry development, but since 1997 onwards it

is growing rapidly. Scholars started looking at the gamut of MF services as upcoming topics

of mainstream finance research (Brau and Woller, 2004). In ancient time the credit flowed

through ubiquitous money lenders, traders, friends, trade credit from local shops,

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pawnbrokers, local landowners, suppliers and extended family sources or through traditional

group based practices (Harper, 2003).

There is a rich body of literature, based on surveys, case studies, regional and cross-country

analysis, that explores how poor save, factors that propel or constrain savings. This fact has

considerable implications for policy and resource mobilization for national economies and

financial markets (Adams, 1973; Miracle, Diane and Lauire, 1980; Maloney and Ahmed,

1988; Meyer et al., 1988). Bankers do not have symmetric information of potential

consumers and unorganized private money lenders do not fall in the perimeter of

government regulations, which makes them stronger to fill the void of financing the poor

and are able to strongly decide the terms of credit (Harper, 2003).

A plethora of studies on MF exists at both national and international level in the form of

conceptual context (Singh, 2009; Lokhande, 2009; Patel, 2009; Sengupta, 2007; Roy, 2007;

Tripathy and Tripathy, 2007) and disbursement context (Hema et al., 2009). Conceptual

study in Latin America outlined that the relationship between MF and poverty reduction is

both complex and contextual (Gulli and Berger, 1999). There is no dearth on unidirectional

study aimed at evaluating success or failure of the most vital disbursement model of MF

through SHG and its role to empower women (Saha, 2007; Namboodiri and Shiyani, 2001;

Sreelakshmi and Shetty, 2008).

Majority of the literature on SHGs pertains to district/region specific impact oriented

investigation. Researchers are attracted to study the developmental strategies of SHGs from

empirical as well as conceptual perspective (Kumar and Sharma, 2007). Raikar (2007)

considered Bank-SHGs linkage model as important institutional mechanism for poverty

alleviation and Meeti (2008) treated SHGs as indispensable economic units for attacking

poverty and unemployment in economically backward states. Singh (2009a) treated SHGs

Bank linkage programme as a paradigm of rural and developmental financing. Many

researchers concluded that SHGs have succeeded in eliminating moneylenders. Reasons for

emergence of MF are slow economic growth, low connectivity, high poverty incidence, and

failure of formal financial institutions in densely populated areas (Sriram and Kumar, 2007).

65

A descriptive study on credit lending model of MF are associations, bank guarantees,

community banking, cooperatives, credit unions, Grameen, group, intermediaries, non

government organizations, peer pressure, rotating savings and credit associations, small

business and village banking (Jaiswal, 2007). Jackelen (1999) studied the classic

evolutionary Grameen model of Bangladesh has delineated, that savings is vital service and

an efficient alternative for transfer payments.

In an Indian book by P. Arunachalam (2011) describes a consolidated compilation of

various contributor researchers on topics like women empowerment, SHGs, Branchless

Banking, Impact of SHGs on rural development, NGOs and rural development, Corporate

Partnership, Role of banks in empowering women, financial promotion of rural banking

system in India etc. The study covers either conceptual or empirical or case based research.

Some studies are based on region specific areas of Tuticorin district, Kerala, Nepal, Chittor

district, Tamil Nadu, Andhra Pradesh, Kanyakumari district, Erode district, Karnataka,

Sikakulam district, Thoothukudi district, Nagercoil town and Salem District. Vol.II of the

same author inscribes the collection of research papers on women empowerment through

SHGs, economic empowerment of women, rural women entrepreneurs’ empowerment,

progress of SHGs, impact of women empowerment, MF delivery model, MF for solving

housing problem, gender budgeting etc. Study of SHGs were specifically done in various

regions like Tirunelveli, Nanjangud Taluk, Karnataka, Hassan district, Coimbatore district,

Rajasthan, Tirivannamali district etc.

People borrow for survival loans to meet the hardships, loans for socio cultural

commitments, loans for improving productivity, small loans to meet recurrent operating

needs- loans as small as `10 to `20 (Gupta and Shroff, 1987). They often shuffle capital

from one purpose to another depending upon seasonal activities. Banks consider such

shuffling as misutilization of funds. If a farmer cannot shuffle funds, he will have to

continue losing an activity or dispose it off at a loss. In either case he is forced to take a sub

optimal decision. What he needs is greater ability and flexibility in reallocating funds on a

long term basis (Gupta and Shroff, 1987).

66

Researcher Brau and Woller (2004) had done a comprehensive review of all available

research papers and articles on MF. They have segregated the research work under six

different heads. Under the first categorization of self sufficiency and sustainability of MFIs,

researcher found that MFIs are unable to offset their cost against their revenues. Most of the

MFIs rely on grants and donations with the objective of higher social return rather than

commercial return. MFIs considered lending to poor as a priority sector lending and they

undertook lending at the cost of their financial self sufficiency. Authors commented that if

feasibility study of MF in world capital market was done through commercial bank loans,

papers, bonds and equity, then it would be considered as a tailored study of finance.

Researchers under the second head of MFI products and services explained that MFI

provided services of savings, loans, insurance, emergency loans and at times tailored loans

to poor with social collateral and joint liability (Balkenhol, 2007). Forced savings served as

collateral and formal insurance scheme not only covered the risk but it also increased the

repayment rate.

Brau and Woller (2004) under the third head of best practices, involved determining optimal

interest rate, group or individual lending, commercialization of MFIs, loan size and growth,

credit scoring and customers lending relationships. The negative aspect in practices was

attributed to charging higher interest rates from poor borrowers. MFIs found that customer

loyalty was a prime key for its success. The fourth head constituted of client targeting of

MFIs, who were exclusively women. Gender based funding was emphasized as women were

treated more efficient managers than men. Only child bearing was treated as a differential

role of women. Overall client portfolio of MFIs consisted of poorest rural and poorest urban

borrowers. With respect to the fifth head of policy and microfinance researcher disagreed to

the notion of failure of MFI industry on account of its similarity with poverty alleviation

programmes. MFI movement was treated as different to rural credit agencies. MF was

treated as bottom up policy as against the top down approach of rural credit programmes.

Brau and Woller (2004) explained that the last head of, impact of MFI for poverty

alleviation is an un-researched area. Moreover, MFIs operate on double bottom line i.e.

financial and social. Financial return is easy to compute by borrowing concepts from formal

finance lingua, but measuring social impact is a tough task. Impact study of MF was found

67

to be a mixed one, the positive impact constituted of higher positive income for labour

intensive enterprises; women empowerment (Roy, 2007); improved healthcare, children

education and nutrition (Sengupta, 2007). Negative impact constituted of dominating male

controlling financial affairs thereby limiting woman’s ability to develop, increased assets

and income became vulnerable if borrowers over levearaged. School dropout rate among

young girls increased as they were made responsible to carry out household chores

(Balkenhol, 2007).

Sundaresan (2008) commented that micro enterprises ran with the due support of MF and

with flexible employees who were close associates or family members of entrepreneurs. A

notable observation was made by Brau and Woller (2004) that borrowers in a trade off

between future schooling returns and current return to child labour outweighed the schooling

benefits as compared to child labour. It was also commented that less jobs were created by

women who were of child bearing age. Sheokand, (2000) described that poverty perpetuated

in rural sector as poor were serviced by informal sector at a usurious interest rate. MC was

the basic lubricant for sustaining life, income generating activities and promoting rural

development, Kaur and Saini (2007). Basu and Srivastava (2005) explained that inadequate

finance lead to ancestral debt and denial from formal financial access pushing farmers to

accept extortionate terms of informal finance.

Ravindranath (2009) highlighted the pupose of borrowing. According to him Borrowers

took loan for income generating activities like livestock, dairy farming, agriculture, trade,

vegetable vending, weaving, pottery, beauty parlour and photography. Karalay (2005) came

out with the reason of borrowing with respect to squaring of the old debt or servicing the

medium/long term requirements. Balkenhol (2007) meant that MF was means to achieve

MDGs by disbursing loans for productive activities. Lokhande (2009) briefed that poverty

and unemployment were arrested by MF by boosting micro entrepreneurial activities and

employment generation. Basu and Srivastava (2005) believed that void of formal financial

access can be filled by MF which is a blend of formal finance (safety and reliability) and

informal finance (convenience and flexibility). Karmakar (1999) and Chavan (2002)

considered MF as a “silver bullet” as it dismantles the web of poverty by generating income

and employment for rural poor.

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Kaur and Saini (2007) briefed that MF enhanced qualitative areas of education, health

services, water and social services. Von Pischke (1991) described that MF pushed rural

areas from the frontier of financial sector pioneering where commercial institutions do not

yet dare to tread. The latest development in the field of MF is narrated in a CGAP report

(2007), which explained that the landscape of MF has dramatically changed, where capital

markets are being integrated with financing and investment needs of MF markets and NGOs

have remained at the mainstay for the poorest borrowers. Walker (2008) explained that non

profit organizations, governmental development agencies and individuals are contributing to

the surge of MF, since 2004 the novelty is with the private sector participation seeking full

market returns. Lard and Barres (2007) made a very important observation that MF does not

transform all clients into entrepreneur, but it prepares them to adapt to shocks. It can reduce

vulnerability of the poor but is not a poverty cure-all.

2.3 Role, Funding and Drawbacks of Venture Capital

The history of the VC industry in India can be traced to the late 1980s (Mani, 1997). The

history of the VC industry can be divided into four phases (Indian Venture Capital

Association, 2007): Phase I: Formation of TDICI in the 1980s and regional funds as GVFL

and Andhra Pradesh Industrial Development Corporation Ltd. (APIDC) in the early 1990s.

Phase II: Entry of Foreign Venture Capital Funds between 1995-1999, Phase III: (2000-07)-

Emergence of successful India-centric VC firms and Phase IV: (2007)-Global VCs and PE

firms actively investing in India (Mani, 2009).

Most of the research on informal investments has focused on business angels who invest

comparatively large sums of money in entrepreneurial ventures with the potential to become

substantial companies. Business angels often ignore micro-companies that are destined to

stay tiny. Informal investment is a crucial component of the entrepreneurial process. Small

investments primarily by family and friends are crucial in funding not only micro-companies

but also future superstars. In comparison, formal VC and business angel investments are

very rare at the seed stage of a new venture. For example, the GEM reports (Zacharakis et

al., 2002) indicate that literally several of million Americans are nascent entrepreneurs

attempting to start new ventures.

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In a typical year, however, only a few hundred of them have formal VC and another 10,000

or so have business angel investments in hand when they launch their businesses. (The

number of startups backed by business angels was derived by multiplying the number of

companies launched with formal venture capital by 40, which is Van (1999) “guesstimate”

of the ratio of the number of firms backed by business angels to the number backed by

formal VC.) Hence, it is guesstimated less than 0.5 percent of nascent entrepreneurs launch

their new ventures with formal VC or business angel investments. But in most developed

nations, formal VCs get a disproportionate amount of attention from policy makers, whereas

informal investors—other than business angels—are almost ignored. Therefore, it seems as

if public policy initiatives aimed at various sources of seed-stage financing are inversely

related to their importance for nascent entrepreneurs raising funds to launch their ventures

(Retrieved from http://www.babson.edu/entrep/fer/BABSON2002/XII/XII_P1/XII_P1.htm, as on December,

2010).

There has been plethora of literature on VC finance, which assists the practitioners like VC

finance companies and fund mangers for better understanding the role of VC in economic

development. Exhaustive study on the VC and activities of VCs in developed countries has

been undertaken. The analysis of VC in the literature proceeds from two directions –as a

financial asset class; and as a means of supporting new technology-based firms (NTBFs),

who in turn act as vehicles for the commercialization of innovative activity (Hughes and

Storey 1994; Denis, 2004). Small high tech firms are viewed as pillars of knowledge based

economy which emanates products and services for present and future markets through

higher levels of innovation and deployment of research and development (Sainsbury, 2007).

Connection of VC activity and economic development is strengthened by including VC

activity in public policy as a part for supporting and encouraging the supply of VC (Sharpe,

2009).

Theoretical research on VC comprises of comprehending the work undertaken by VC to add

value (Gorman and Sahlman, 1989; Hellman and Puri, 2000; and Lerner, 1994); to test the

theories of investor/ principal agent conflict (Kaplan and Stromberg, 2001, 2001a 2002; and

Gompers, 1995), to study the characteristics of VC investments (Macmillan, Zemann and

Subbanarasimha, 1987; Macmillan, Siegel and Subbanarasimha,1985 and Fried and Hisrich,

70

1994); to know VCs facing valuation uncertainty (Sahlman, 1990), to recognize facets like

staging capital, use of convertible securities and anti-dilution provisions, skewing the pay-

offs in favour of VC investor (Sahlman, 1990), to study on economic value of legal feature

in real option context (Cossin, Leleux and Saliasi, 2002), to know VCs right to liquidate bad

stage ventures (Kaplan and Stromberg, 2001), to learn about Ex-ante funding or contingent

pre contracting funding mechanism (Cossin, Leleux and Saliasi, 2002), to learn the increase

in financing rounds (Gompers, 1995) and to interpret variation in VC projects with respect

to innovator or imitator firms (Hellman and Puri, 2000). The extensive literature on VCs can

be categorized under different heads. Ample empirical study on VCs is undertaken by

various researchers like Sahlman (1990); Amit, Brander and Zott (1998); MacIntosh (1997);

Gompers and Lerner (1999); Jain (2001) and Kaplan and Strömberg (2001).

Analytical study on examination of the relationship between VCs and entrepreneurs was

carried by eminent scholars like Cooper and Carleton (1979); Chan (1983); Amit, Glosten

and Muller (1990); Admati and Pfleidere (1994); Gifford (1997); Bergemann and Hege

(1998); Neher (1999) and Elitzur and Gavious (2003). Another line of VC research deals

with the cause and effect relationship. Zacharakis and Meyer (2000) suggested that actuarial

model could improve the VCs screening process of prospective investments. It was found

that angel backed ventures helps the VCs to screen the investment options in a better way

(Zacharakis and Meyer, 2000). VCs, investment overconfidence negatively affects the

accuracy of their decision (Zacharakis and Shepherd, 2001). Higashide and Birely (2002)

analyzed the post investment conflicts between entrepreneurs and VCs with respect to UK

based investee firm. Disagreement between the VC and the entrepreneur resulted in positive

performance but personal friction between the two negatively affected the performance.

VC studies are examined from supply and demand cycle (Christofidis and Debande, 2001).

Studying the supply side via equity, (Sharpe, 2009) segments it into three broad categories

viz. start up or early stage finance, expansion finance and buyout finance. Business Angels,

VCF and corporate venture funds are primarily equated as providers of early stage or start

up capital (Sharpe, 2009). VC activities are guided by five phases (Fund raising, screening,

negotiating, monitoring and exiting) cycle (Gompers and Lerner, 2004; Sharpe, 2009).

Gompers and Lerner (2004) describe the activities of contract negotiation, decision on

71

management fees, disbursement timings and profit distribution as a part of fundraising phase.

Macmillan, Zemann and Subbanarasimha, 1987; Hisrich and Jankowicz, 1990; Diaz de

Leon and Guild, 2003; Lange et al.,2007 extensively contributed to the literature of second

phase i.e. screening and selection process. Intermediaries information (Shane and Cable,

2002), entrepreneur’s position and network status, entrepreneur’s experience (Hisrich and

Jankowicz, 1990) and funds investment objective are emphasized in order of screening

activity. Pandey (1996) adapted the work of Macmillan, Siegel and Subbanarasimha, (1985)

by adding new variables in evaluation criteria, adopted during screening new venture

proposal. Prominent criteria rated by VC were integrity, managerial skill and urge to grow.

Due diligence (De Clercq D et al., 2006) and informal as well as intangible methods of

screening (Macmillan, Zemann and Subbanarasimha, 1987; Hisrich and Jankowicz, 1990)

are deployed in negotiation process.

Researchers view in monitoring phases does not comply. Bygrave and Timmons (1992);

Lange et al., (2007) explore the role of VCs ‘more than money-providers’ that of mentors,

advisors, guide, recruiters and as seat occupant in board of directors (BODs). Berglund,

Hellstrom and Sjolander (2007) brought out unconscious and ill-considered behaviour of

portfolio firms. A set of commentators claim non-capital value as overstated whereas VCs

modest involvement was treated unmet by Berg-Utby, Sorheim and Widding, (2007).

Various researchers described the last phase of exit mechanisms of VCs had been described

through five varied forms that are initial public offering (IPO), trade sale, and secondary sale,

buy back by entrepreneur or write off by various researchers. Prominent work on exit

strategies can be credited to eminent scholars like Soderblom (2006); Manigart et al., (2002),

Gottschalg, Phalippou and Zollo (2004); Sharpe et al., (2009); Sharpe (2009) who described

IPO as celebrated and trade sale as successful (Soderblom, 2006) exit mechanism.

Pandey et al., (2003) observed that now a days VCs are playing safe by investing in those

companies, which are already well established, thus parting away from its core role of

providing seed capital. Elitzur and Gavious (2003) pointed out the commonalities and

difference between angel investor and VCs. They pointed out that angels are close associates

or wealthy individual who provides seed fund, advice and possess a tendency of ‘exit’ or

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‘cash out’ from the enterprise by referring at a later stage. The researcher highlighted three

player game consisting of entrepreneur, angel and VC, which was earlier explicitly ignored.

Jain (2001) explored that VC and managerial factors predict performance in which former is

a reliable predictor than latter. Sethi (1999) brought out generic parameters as viewed in

ordinal by VCs like professional team, potential idea, scalability, entry barriers and value

creation before qualifying a potentially winning investee company. Brand building was

treated critical for increased valuation. Sethi (1999) brought out a common fact that in

developed countries VCF took above 50 percent and up to 70 per cent stake in a seed stage

company, which was treated uncomfortable as ‘taking control’ among Indian entrepreneurs

who though brought best ideas, best teams but unfortunately had no capital.

Tyebjee and Bruno (1984) in an empirical research highlighted the parameters adopted by

VCs for taking funding decision. Market attractiveness, product differentiation and liquidity

preference were found to be the most critical factors. Macmillan, Siegel and

Subbanarasimha’s, (1985) study reported the importance of business plan for screening new

venture proposal. Macmillan, Zemann and Subbanarasimha’s (1987) stretched the

foundational screening criteria of Tyebjee and Bruno (1984) and Macmillan, Siegel and

Subbanarasimha (1985) to differentiate the patterns within successful and unsuccessful

ventures. Using the posteriori ratings five major risk management technique were found like

unqualified management team, inexperience management, viability doubt, competitive

threats and profits and lastly ventures which look at the investment for longer horizon,

played a role for demarcating between the two types of ventures.

Sandberg and Hofer (1987) adopted a qualitative technique called verbal protocol, borrowed

from Cognitive Psychology to access the criteria adopted by VCs at the time of screening

the funding proposal. Most important criteria were industry characteristics and management

track record. Hall and Hofer (1993) based on the similar technique of Sandberg and Hofer

extended the research to bring out the time consumed by VC. It revealed that 6 minutes and

21 minutes were taken to screen and assess the project or reject it respectively. Ventures

congruence with VCs long term growth and profitability was found to be vital criteria for

fund release. Zacharakis and Meyer’s (1998) study replicated Sandberg and Hofer’s (1987)

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research technique to comprehend the problem of venture screening. Research revealed that

policy capturing was a superior tool for overcoming the systematic biases which are capable

to hinder VC decision at screening stage. Shepherd (1999) compared ‘in use’ versus

‘espoused or self reported’ policies used by VC for taking decision. Research showed the

tendency of VCs to overstate least important criteria and understate very important criteria

respectively. Study pointed out the need for collecting real time data but failed to provide

real time criteria, which can pave the way for future research with newer findings.

Various scholars studied VCs across the globe. Ray and Turpin (1993) attempted bifurcating

criteria and methods for evaluating prospective portfolio clients as compared between the

US and the Japanese. The research explored that US VCs were stringent and Japanese VCs

were flexible and used wide range of information to evaluate prospective investments.

Pandey and Angela (1996) discussed the status of VC for financing technology in Taiwan.

Comparison between the perception of VC and the investee companies was made to draw

the relationship between the two.

Chotigetat, Pandey and David (1997) described VC development in Taiwan, Sri Lanka and

Thailand to analyze criteria used by VCF in each country for making investment. Kumar and

Kaura (2003) expressed that financial and management team is vital criteria for VC

companies in Sri Lanka and Taiwan, apart from management team, entrepreneurial

characteristics was found critical in Thailand. Pandey (1998) described the evolution of VC

firm Technology Development and Information Company of India Ltd. (TDICI) and

problems faced prior to the development of VC industry in India. Kumar (2002) attempted

to relate location and ownership preference of VCs vis-à-vis different funding stages. The

study reported that later stage funding dependent on the percentage of ownership offered to

VCs. Kumar and Kaura (2003) brought forth that early stage ventures were governed by

location preferences. Kumar (1996); Verma (1997) and Mitra (2000) used secondary data to

come up with pertinent issues which were to be addressed by future government policy. The

study highlighted the need for congenial government policy and lacked aspect of actual

practice. Lack of research to understand interaction process between VC and investee

companies in India can be attributed to lack of investee companies data and researchers

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laggardness to modify modern financial economic theory into VC investee firm research

(Kumar and Kaura, 2003).

Due to such reason researchers have not been able to evolve the criteria of success and

failure. Singhvi (1999) personified the take off of VCs as catalyst (Mukhopadhyay, 1995) in

the growth of Indian economy, which can back up ideas for wealth creation, by providing

start up capital. VCs awarded finance at first stage (seed capital to prove the concept),

second stage (for product development and research activities) and final stage (for expansion

programmes) and even bridge financing (when sanctioned finance is not disbursed due to

bureaucratic reasons) (Mukhopadhyay, 1995). A trend of minimizing investment risk was

explored across developing and developed countries by researchers who expressed that VCs

deviated from their original goals. VCs like TDICI, Canfina-VCF and GVFL etc., are

moving away from patronizing tech frontiers (Bygrave and Timmons, 1992). Pandey and

Dutta (1999) expressed that GVFL has a regional bias. Entrepreneur’s personality and

experience were the most emphasized evaluation criteria of VCFs in India and across the

globe (Pandey, 1996). With reference to specific entrepreneurial personality and experience

the Indian practice varies significantly from that in USA, Singapore, and Japan (Pandey and

Dutta, 1999). VCs favourite investment choices are in the sectors like healthcare, publishing,

tourism, IT and ITes, (Mukhopadhyay, 1995), software services, technology products,

internet retailing and e-CRM services (Rajadhyaksha and Rajshekhar, 2000).

From the above discussion it can concluded that researchers study comprises of the varied

funding criteria adopted by different VCs spread across the globe, VCs favoured investment

avenues and importance of VC funding. Studies of global researchers have been replicated

in India by the Indian researchers. Regional study of VCs in Gujarat is particularly case

based with respect to only one firm i.e. GVFL. No study pertaining to VC funding to

grassroots innovators have been found in the literature review.

2.4 Global Studies on Micro Venture Capital Finance (MVCF)

Pro poor entrepreneurs based innovation is essential to the continuous development of, and

poverty alleviation in, rural areas by creating employment, increasing income and providing

improved goods and services (Sonne, 2010). Much has been written on rural finance in

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general and micro finance in particular. Little has been written on how new innovations are

financed.

Two types of financial organizations provide support to small scale entrepreneur. Existing

MFIs, provide too small amount to productively upgrade an existing venture, which often

lacks in non financial support, resulting in severe financial constraints. Traditionally

different and notable MFIs like BASIX and SKS provide larger grants accompanied with

non financial support to rural ventures that provides employment to poor (Sonne, 2010).

Secondly, outside the MF movement financial organization like S3IDF work in

collaboration with local NGOs to provide infrastructure services and train local

entrepreneurs. S3IDF links technology with finance, suppliers, and markets and also

provides credit risk guarantee to encourage banks to local entrepreneurs. Ashoka is another

example that supports entrepreneurs with socially relevant ideas, and builds general capacity

through its research on pro-poor entrepreneurship (Sonne, 2010).

MVC initiatives are believed to empower local entrepreneurs and enterprises for a

sustainable way of improving rural incomes and distributing wealth (Retrieved from

http://www.aavishkaar.org/index.html, as on, July, 2011). From the perspective of entrepreneur it

means having more approachable sources of capital, after the use of own savings, as well as

money from family and friends has been exhausted (Retrieved from http://www.iccwbo.org/

WBA/id7023/index.html, as on, July, 2011).

Currently it has become extremely difficult for business start ups to attract the attention of

VCs and mostly unique business ideas and innovations with very high chances of long term

success are likely to get funded (Retrieved from http://www.iccwbo.org/WBA/id7023/index.html, as on,

July, 2011). MVC is a feasible tool for investments in small businesses and meets a need for

access to capital in poor neighbourhoods. The lack of access to capital in rural areas is

significant, and small investments can play a critical role in generating sustainable incomes

for proprietors and jobs for unemployed (Spoonheim, 1998).

In MVC’s feasibility study carried at Minneapolis by Spoonheim (1998), “described that

there are two key fields of knowledge critical for understanding the niche of MVC

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investment. The two fields are micro loans (extensively used all over the world) and

Community Development Venture Capital (CDVC) funds available in a few regions of the

US that seek to merge social and financial goals” (Spoonheim, 1998).

It was explained that MVC follows in the footstep of CDVC which seeks a “double bottom

line” in addition to the financial returns; investors also measure the social return on the

investment. Creating new jobs, moving people off the public assistance etc., are all

considered as “social returns”. CDVC industry seeks to combine traditional VC methods

with community development goals. It is a model for micro venture programmes. CDVCs

generally invest $50,000 or more, while micro investments range roughly between $5,000 to

$25,000. Like CDVC, MVCs may not exclusively focus on most profitable investments, but

rather choose among investments that meet its social goals (Spoonheim, 1998).

It was also observed that MVC investors assume a risk of not having collateral and not

achieving a set return, but they negotiate part ownership. Contrary to traditional VC

investments which seek to obtain a return within five years, many socially motivated

investments like CDVC and MVC will not mature quickly. Instead, investors may not see a

return for longer periods and thus their gain may be significantly less. Most VCs are directed

to larger, later scale, high tech investments, while the CDVC investments may have a larger

share of “development stage” companies in their portfolio (Spoonheim, 1998).

The report explained that the primary barrier to a MVC investment tool is identifying a

viable exit strategy, which some argue does not exist. Traditional VCs sell the firm through

IPO and generate good return. Micro and small firms rarely, if ever are sold publicly, this

forces MVC to find alternate methods. Some of the methods of investment and exit option

for MVC are described in the table below (Spoonheim, 1998).

Table 2.3 Model of Investment and Exit Option (MVC)

Mode Investment Exit

Receivable

Financing

Investor provides line of credit to the business and business sells invoice for a percentage of its face value (factoring) to an investor.

Investor is paid back upon receipt of payment, plus a percentage of the operating profit.

Purchase

Order

Financing

Investor pays to the supplier to create a product.

Investor can set a fee return or a percentage of profits from sales.

(Contd.)

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Mode Investment Exit

Equity Invests as equity for first three years.

Investors gets a return out of profits at an agreed upon rate. If investor is not paid off then balance outstanding can be converted to a loan which will be paid at ‘x’ percent return. (Loan can be availed from bank as business might have shown success and built collateral, similar to leveraged buy out).

Preferred

Stock

Money is invested at a fixed dividend rate.

Collection may be deferred for a year. It is subordinated to lenders as investor has rights for payment before the owner is paid. Deferred payment can be delayed until company becomes profitable at which time ‘x’ percent of all profits is paid to the investor.

Leasing Purchase equipment and lease to the business.

Investor is paid off over time by regular lease payments.

Adaptive

Limited

Liability

Company

Using legal structure that protects the limited partners who contribute cash, but have no involvement in management and cannot be sued.

(Adapted from: ‘MVC: A Feasibility Study at Minneapolis’, Spoonheim, (1998), Retrieved

from www.cura.umn.edu/publications/NPCR-reports/npcr1104.pdf, as on, July, 2011)

On review of literature it was found that a good idea often slipped away due to

unavailability of small sum of money. Dr. Prahalad’s perception for rapid growth of Indian

economy states to concentrate on Tier-IV market, which is peopled by low income masses.

Collectively, their buying power is enormous and they will buy products and services that

improve their lives. So there lies a potential for such products.

MF is not new, Micro Venture Fund (MVF) is a novel idea, it recognizes the creativity that

exists at the grassroots level and acknowledges that if these innovations are to reach their

potential as products or value added technology, the innovators need the support of VC

(Gupta, 2006). Democratization of innovations and reversing the value chain from

consumers to producers are two key features of people driven innovations which can act as

the basis for promoting innovations at the base of the pyramid (Gupta, 2005). Lately when

the models based on the conceptualization of poor people as consumers (Prahalad) became

dominant, large number of thinkers felt that this indeed was the model to work on.

Eventually theories on developing rural market for people at the bottom of the pyramid

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started taking shape, but supporting the grassroots innovative idea is still an un-researched

area.

MVC is a novel concept and note able innovation in itself. It refers to the idea of barefoot

venture capitalism. MVC is cousin to micro-credit and a down-sized approach to

professional VC. It is treated as a right sized business model catering to different sort of

entrepreneurs who are enriched with ideas but unfortunately have few skills to develop the

ideas for market. From this it could be inferred that MVC is an abridged version of VC

applying all modern management techniques to evaluate the ideas and then take up risk by

investing in the ideas. The literature on MVCF at global level pertains to preliminary

definition and concept level, organized study is not found in the literature.

2.5 Need Emergence and Importance of MVCF (Indian Perspective)

India is a land of paradox where urban sector is developing exponentially and rural sector

still remains backward, despite being blessed with great pool of natural resources. Paradox

reaches the climax when innovations of urban areas are appreciated and innovations of rural

areas are not even documented. Poor are considered sink and not source of rich ideas

(Retrieved from http://news.bbc.co.uk/2/hi/business/4603108.stm, as on, September, 2008).

Rural local products are unfamiliar in most of the world, their public infrastructure is weak

and their skills are unrecognized. Challenging subsistence forces them to induce creativity

and innovation in order to survive (Gupta, 2006). Keeping the poor engaged in the low value

adding activities will only perpetuate their poverty; a market for innovation will not emerge

(Gupta, 2005). Tremendous vibrancy at grassroots level needs to be recognized, respected

and rewarded. To overcome the grappling problem of unemployment, imbalanced growth

and poverty there is a need to boost entrepreneurial spirit and set up more enterprises.

Grassroots based enterprises can be supporting pillar of the economy which needs risk

finance to set up.

In the article by Shrivastava (2010) on ‘Social Entrepreneurship in India- The Complete

Guide to Funding, Profitable Sectors’ explained that social entrepreneurship space focuses

on and emerges from rural areas. Prestigious institutions like Stanford, MIT and Oxford

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have developed interest in the field of SE, VCs interest in funding to many social enterprises

have started picking momentum. Earlier organization solving social problems were often

assumed to be idealistic, philanthropic and lacking business acumen or the ability to be

entrepreneurial. As social sector has been coming in touch with the private sector, it was

realized that either or approach was not suitable to build sustainable institutions (Shrivastava,

2010).

Currently the focus is on enterprising micro groups which want to transform their own and

the community’s circumstances but can’t access any finance. Now–a-days the mainstream

financial institutions are entering social entrepreneurship. Various VC firms are investing in

for profit entities with social objectives. Specialized social investors provide capital,

networking, marketing and business expertise to such ventures. Now the Social Venture

Funds have started coming up which measure their investments on social, environmental and

the traditional financial returns. Mainstream VCs are also recognizing this as a business

opportunity (Shrivastava, 2010).

The growing breed of ‘social venture capital funds’ look to invest in companies that deliver

social benefits and generate decent financial returns. These VCs embody the new mantra of

doing well while doing good. Social capital is treated as an emerging trend globally and in

India. It is estimated that USD one billion will be coming into this space in the next five

years (Ghosh, 2010).

Unlike commercial VC who hold the investment for three to five years, Social Venture

Funds have a minimum lock in period of six to eight years (Shrivastava, 2010). Consultant

of Monitor group in the article of ‘The New Colours of Venture Capital’ opined that social

entrepreneurs are passionate about helping people, so the commercial returns aspect is

usually a secondary concern. The philosophy of social VCs is to make money by serving the

needs of people at the bottom of the pyramid (Ghosh, 2010).

Nageswaran (2003) mentioned that free availability of finance is a prime pre requisite for

innovation and entrepreneurship which in turn proposes growth. It was noted from the paper

that VCs normally supported a kernel of an idea. VCs supporting ideas and start ups in urban

and rural areas was equivalently required irrespective of developed nation or developing

nation.

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Traditional VCs are not fascinated to operate in rural places due to couple of reasons like

explored investment opportunities were found to be below profit potential, number of

investment opportunities were found to be few to provide adequate deal flow, greater

physical distance, inadequate infrastructure support, difficulty in viable exit strategy,

disinterested small entrepreneurs unwilling to accept the conditions set by venture fund for

recovery and hardships involved in attracting VC staff to the region (Nageswaran, 2003).

The absence of traditional VCF is made good by social or non traditional VCF. Although

few and small they offer a glimmer of hope to capital short underdeveloped areas. Social

VCs operate in areas to which traditional VCs does not flow. They accept return that are

lower than returns targeted by traditional VCs. They have a dual bottom line i.e. with

acceptable financial returns with social and economic benefits to the areas served

(Nageswaran, 2003).

According to Nageswaran (2003) social VCs can assume the status of Publicly funded and

Publicly managed institutions, Privately managed funds with Public Funding, Community

level Equity Programmes, Certified Capital Companies, Community Development Venture

Funds and Small Business Investment Companies. The concept of social VC was pioneered

by The Ford Foundation’s Program Related Investment in 1960s. They set up $100 Million

Local Initiative Support Corporation to fund local CDCs who worked in big metros of US.

The Quakers in UK, the Triodos Bank in Netherlands and the Blue Orchard Fund are the

examples of social venture funds in Europe (Nageswaran, 2003).

Debt, equity and VC are the major obstacles for rural and semi-urban places. In India VCs

unleashed the entrepreneurial spirit in urban educated youth by investing as high as above $

5,00,000 in high technology firms. Given the rampant poverty condition and its removal

requires the small amount of VC funding to be available to rural India also. Agriculture

being the mainstay for two third’s of Indian population requires that its productivity must

rise when compared to cross sector and same sector. Innovations in rural India are such that

the city born and bred VCs or banker has little empathy. Rural innovations are born out of

needs and affordability constraints. Rural innovations have a tremendous and obvious social

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value, but the professional VCs finds it difficult to capture private commercial value from

such innovations (Nageswaran, 2003).

As cited by Nageswaran (2003) that, according to C. K. Prahalad empowering local

entrepreneurs and enterprises is the key to develop Tier 4 market. Traditional VCF operating

in India typically make investments in categories less than USD 1Mn, USD 1-5Mn, USD 5-

10Mn and greater than USD 10Mn. As most funds are of private equity kind, size of

investments has been increasing, but the lacunae of funding to grassroots innovations still

persists.

The original assumption behind most developmental approaches aimed at poverty

alleviation is that poor people are too poor to think and plan on their own. As a result most

interventions are designed externally by civil servants, technocrats or NGOs, poor are

considered as liability and hands and mouth to feed. Poor are never involved in any

developmental activity. There are seldom an institutional window available to recognize,

respect and reward creativity and innovation underlying the solution by the people (Gupta,

1998).

Sonne (2010) observed that there are three types of organizations that provide support to

grassroots innovators namely; government sponsored programmes and council schemes

(MVC), private for profit investors (grassroots innovators and incubators) and NGO’s

targeting sustainable operations (small-scale finance providers). DSIR’s under its TePP

initiative has Micro Technopreneurship Support programme (TS) which invests up to `

75000. CSIR which mainly focuses on R&D offers technologies for rural sector fund. DST’s

effort in setting NIF was focused on supporting technologies for rural livelihood. The

government sponsored early stage VC funds invest in the range of USD 0.5 Million to USD

3 Million. In India DST sponsored national innovation fund together with SIDBI offered

MVC fund to bridge the financing gap for micro enterprises. Despite many venture funds, it

seems government and apex institutions are not able to breach the financing gap (Sonne,

2010).

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‘Angel funds’ which are an alternative to early stage VC financing are out of reach for rural

innovative entrepreneurs (Dutz and Dahlman, 2007). MVCF makes up a very small part of

seed funding. The fund operates on the dual bottom line which combines funding models of

classical VCs and adapts to maximize social as well as financial sides. It provides financial

and hand on non financial support. It assumes larger risk than classical VC, expects lower

returns with a pre condition of longer gestation period. As a part of risk mitigation strategy

MVCF adopts mechanism of royalty rather than equity, equity debt hybrids, or offers loans

on top of non debt investments (Sonne, 2010).

There is no VCF for small and scattered innovations any where in the developing world.

Thousands of programmes on MF are found, but no programme on micro venture finance is

found (Gupta, 2000). Gupta rightly pointed out that venture financing activity itself is highly

skewed in favour of innovators who may have collateral to offer or may already have done

some business development (Gupta, 2001a). TePP covers the financial need of innovations

only up to Rupees Five Lakhs and most venture funds do not touch investments less than

one crore. Thus, a gap between the range of Rupees Five Lakhs to One Crore exists. The set

up of GIAN demonstrates tremendous potential which exists for commercialization of

grassroots innovation with or without value addition from outside (Gupta, 2000a).

Gupta (1999) commented that no amount of registration or grant of patent will help to make

the local knowledge systems vibrant unless venture promotion grant are available to local

entrepreneurs at very low transaction cost. One finds a titled entrepreneurial progress in the

country. There are many Grameen Banks or Savings and Credit Self Help Groups, but there

are no venture promotion funds for small innovations anywhere in the world.

Policy makers are unable to conceptualize the nature of poverty in ecologically high risk

regions and the extent to which government policies in different sectors corresponds with it.

Viability for drought prone and well irrigated regions is treated to be same. IRDP

programme have no conceptual differentiation (Gupta and Shroff, 1987). The paradox has

been that bankers complain about lack of demand for credit. Greater pressure from top to

supply credit without change in basic framework often leads to distortions like fewer

branches in areas of high risk, less credit for purposes pursued by the poor, lesser number of

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small loans, shorter repayment schedule and lack of rescheduling and rehabilitation

measures even in the wake of drought (Gupta and Shroff, 1987). Poverty is oppressive in

regions with low population density, poor natural resources, high risk inherent (in crops,

livestock and craft enterprises), current level of farmers technology which leads towards risk

minimization rather than profit maximization, lack of local employment opportunity, social

and cultural networks are characteristically different from irrigated regions (Gupta and

Shroff, 1987).

In India there is a huge base of need based entrepreneurship due to its social structure. The

creation of MVC initiatives has forced the society to think in terms of entrepreneurship

where opportunity and innovations are treated as bedrock for growth (Retrieved from

http://www.aavishkaar.org/index.html. as on July, 2011). Aavishkaar (MVC provider) and Agora

Partnerships which is a counter part of Aavishkaar addresses the key bottleneck of

entrepreneurs who need more than few thousand dollars that MF offers in order to

effectively scale up, but don’t have the collateral to secure commercial loan. MVC models

aren’t charity based they generate profits for investors (Retrieved from http://www.articlesbase.com/

fundraising-articles/a-new-trend- micro-venturecapital-3174984.html., as on July, 2011).

Micro credit is too small and too restrictive to be used for true business creation.

Conventional VC focuses on businesses requiring US$ 1million plus that target urban

regions or service export. Businesses smaller in scale addressing rural and semi-urban India

cannot find the risk capital they need. Rural India devises new methods and means to ease

the burden of their daily lives, which not only improves the productivity and efficiency of

local farmers but also have significant environmental and social impact by developing eco

friendly appropriate solution to local problems.

Ned.com a global online co-working space for early stage social entrepreneurs and

collaborative social ventures highlighted that there is a huge need for MVF, small amounts

of resources that can be packaged for innovation and prototyping. MF is always concerned

with the delivery of the goods and services to market rather than promoting innovations

(Retrieved from http://www.ned.com/group/microfinance/news/14/., as on July, 2011). The literature

review indicates a huge scope to research on requirement of MVCF, models of MVCF,

repayment strategies and viability of MVCF funding.

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2.6 Regional Studies on MVCF

There are two causes of poverty, one is low productivity and other is unemployment.

Simultaneously there are two ways to remove poverty. One is generation of employment

oriented activities through starting of tiny or micro enterprises which has been possible for

rural poor with the due backing of microfinance. Other way in which poverty can be arrested

is increasing productivity. To increase productivity incremental innovations needs to be

made either in the product or process for which experimental funds are required.

Microfinance has helped to generate income, which is used for subsistence and consumption,

no fund is left for carrying out experiments or inventions. As a result poor are just able to

cross the poverty line but cannot reach to the heights of better standard of living. Low

productivity is the culprit for low income in their cases. Nobody till date have appreciated

and supported the resources in which the poor are rich. No enterprises based on the skills set

and knowledge of grassroots innovators have been found, on the contrary by imparting rural

people the skills and enforcing them to set up the enterprise in which either the person is not

interested or may not have complete skills to operate is often witnessed in rural areas.

A small fund of about One million dollars had been set up at NIF with the help of SIDBI for

ten years to help convert innovations into enterprises (Gupta, 2003b). The delivery functions

like project appraisal, disbursement, monitoring and mentoring and recovery are being taken

care by regional arms of NIF like the GIANs and the collaborators (Retrieved from

http://www.nif.org.in/bd_mvif, as on, July, 2011).

An alternative financial mechanism suggests developing an eco system to support rural

ventures, entrepreneurs and innovation. One such incubator organization which is intimately

involved with grassroots innovators is GIAN. It supports innovation with Micro Venture

Innovation Fund (MVIF), sustains different kind of entrepreneurship with diverse

mechanism or instruments of support. It provides a complementary financial support (Sonne,

2010). As GIAN is registered as a trust and not as a venture fund at SEBI the financial

support that it renders to innovators is treated as MVIF and not MVCF. Existing MVC

providers are quite professional and targets only commercially viable business plans

undertaken by well educated entrepreneurs. From this it can be inferred that the objective of

MVCF is more profit oriented as compared to social benefit (involved in providing goods

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for rural people) and the MVCF here connotes small amount of capital. Whereas the role of

NIF and GIAN is unique it holds the hand of illiterate innovator, who have ideas but no

finance, who have a vision but no business plan and who are capable to offer products at

much competitive price to bring luxury to villagers.

Based on the secondary study it was found that in 2000, GIAN was the first grassroots

incubator in India, before that no support mechanism existed in the country that supported

innovations which saved energy, improved efficiency and reduced drudgery of rural India.

The reasons for absence of such support could be attributed to guesses like non inclination

towards entrepreneurship or lack of financial support (Nageswaran, 2003).

GIAN is an exception as it does not have any provisions for venture promotion grant from

its own resources. It mobilizes funds for innovators from government programmes for the

purpose of supporting grassroots innovators (Gupta, 1999). Recently an article titled ‘NIF

tie-up to commercialize innovations’, featured in 15th December, 2010 of Times of India, it

narrated the work done by NIF. NIF has recently tied up with Future Group to

commercialize grassroots ideas by creating products to be sold at its outlets, under the label

‘India ka Idea’. The IPR of the product will be owned by the original creator who will also

get royalty in the range of three to five per cent. Article concluded that the tie up will benefit

the innovators and his community as the royalty will be shared between innovators, his

community and nature conservation. NIF being the bank or repository of over 1,75,000

innovations over the past 10-12 years wished to link innovations to the market by

commercialization, through an elaborate model. The ‘feed forward’ mechanism would help

the innovators to improve the product as well.

From one of the interview excerpt of Professor Gupta it was known that several hundred

grassroots innovators in India are using imagination and innovation to solve basic issues of

deprivation at the bottom of the pyramid. Such innovations are finding a market not just in

India but also in other emerging markets and even developed nations. A new reversal model

of grassroots to global is coming up which is emerging from India. As the study pertains to

Gujarat region and GIAN being the only provider of capital to grassroots people is taken for

study and all the cases are examined in the light of MVIF. Unless GIAN incubates

thousands of technologies every year, only a few hundred will mature into viable products,

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which can in turn help in spawning large number of enterprises (Gupta, 2001c). Thus, GIAN

despite not being MVC provider assumes the risk of VCs.

Without a product development, MVIF will only go some distance and not all that far. If

angel funds and VCs are useful for high tech revolution, then it should be even more crucial

for small innovations. It is more important to create a support system for social business i.e.

business which will not recover their entire or sometime any cost from consumers. MVIF is

for ideas and technologies for which markets does not yet exist, it has to be created (Retrieved

from http://www.ned.com/group/microfinance/news/14/, as on, July, 2011). The study pertains to

demand and supply side, of requirement of MVIF and method of supply of MVIF

respectively.

2.7 Research Gap

Despite MF is the best known type of non bank finance, flowing to rural areas, it does not

inevitably support innovative entrepreneurship. A reason for this is the small amounts of the

loans, often not amounting to more than `10,000. MFIs do not provide add on services that

differentiates them from banks at the same time they prefer to invest in proven business

models (Sonne, 2010). The seed sector fund VC, which is to a large extent urban based,

invests chiefly in innovative young ventures related to high tech firms. A critical observation

was made in the paper by Sonne (2010) that Indian banking system does not provide support

to pro-poor innovation, in fact the money dedicated for rural improvement are diverted to

urban areas or are parked in debt oriented safe investment avenues.

MF facilities are available all over the world, but MVCF is almost totally absent. Lack of

MVC prevents the transition of small innovations into enterprises. This gap indicates the

lack of appreciation by global and national public policy towards the abilities of grassroots

innovators to generate employment and overcoming poverty (Gupta et al., 2001). As

discussed above gap between the funds of Rupees Five Lakhs to One Crore, provides an

opportunity to set up MVC for grassroots people.

These funds can be provided which would cover the transition of an idea to innovation

(stage one), from innovation to product (stage two) and from product or service to

entrepreneurship (stage three). The stage one and two are much more risky and therefore

may require a more accommodative and sympathetic financial scheme (Gupta, 2000a). An

incubation fund to convert innovations to products remains to be set up (Gupta, 2003b).

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MVC makes up for the lack of bank finance for innovative entrepreneurs in rural areas

(Sonne, 2010).

A large network of MF initiatives is found but MVF is totally missing. The only implication

can be that either venture finance is not an engine of growth at micro level or that there are

not enough innovations at micro level for which such support is required (Gupta, 2001c).

Fact is there is no venture financing activity for innovations needing finance from few lakhs

to say a crore of rupees (Gupta, 2001c). The incubators for converting innovations to

enterprises are also missing for micro innovations (Gupta, 2001c). The research gap is

diagrammatically represented after conclusion in Figure 2.6.

2.8 Conclusion

Literary work on entrepreneurs and entrepreneurship can be classified into definition level,

its genesis, changing roles of entrepreneurs and importance of entrepreneurship. Economists,

sociologist, psychologist etc., have contributed to explain entrepreneurship in myriad ways.

Indian researchers have tested the theoretical work of researchers in the form of primary

study or case studies of entrepreneurs. Researchers have made an attempt to explain the

demarcating development of rural areas, its causes and reasons. Grassroots and social

entrepreneurship are unexplored areas of researchers. Academicians have started exploring

and appreciating a new combination of entrepreneurship and technology i.e.

Technopreneurship. It was learnt in the study that the true baramoeter of economic growth

and entrepreneurship is invention and innovation. The distinction between the terms and

importance of each is explained by Schumpeter and Manimala. The noteworthy thing is that

even renowned scholars have not contributed to the importance of grassroots innovations

and enterprises based on such innovations. Incubation and funding study just relates to

servicing the need of educated entrepreneurs, leaving the needs of grassroots rural

entrepreneurs being un-served.

It was found that banks and MFIs provide homogeneous model of support for the same

range of customers. MVC is an alternative finance sector that provides different kinds of

financial as well as non-financial services to different kinds of rural entrepreneur-based

innovation. It recognizes and appreciates the heterogeneity of rural innovation and provides

complementary services that form an eco system of financial support, which gives grassroots

innovators, a chance to move ahead with their unique innovation.

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Micro credit is about giving access to small loans whereas micro capital tries to bring the

benefits of VC to rural innovators. Micro capital is a tailored product offered to assist small

entrepreneurs who largely operate in the unorganized sector. Like SE, the role of micro

venture capital fund beings where the role of micro finance ends and the role of traditional

VC begins. Thus, it is a strong niche between MFI and VC firms, which till date was a

missing link. GIAN acts like a social enterprise which promotes entrepreneurs who have

profit motive or social motive or both. The role of social entrepreneur is to unstuck the

society from a problem, which till date has not been solved by commercial entrepreneur and

government. GIAN and its supportive institutions are making a serious attempt to support

social or commericial entrepreneurship.

Figure 2.6: Research Gap (Source: Author’s Own Creation)

Review of Entrepreneurship study

(Global and Indian perspective)

R

E

S

E

A

R

C

H

G

A

P

Existing studies by foreign authors are concept oriented and theory building on entrepreneurship at urban areas. Rural, Grassroots based entrepreneurship study (on problem and prospect) are not found.

Review of Social Entrepreneurship study

Concept is still poorly defined. Study on necessity and importance of social entrepreneur to unstuck the society is required.

Review of Micro finance and Venture capital

study No literature of MF and VC till date has addressed the gap of funding innovative ideas; it only focuses on prospects and problems of MF and VC

Review of Micro Venture Capital Finance

Study (Global and Indian Context)

Study is primarily related to understanding of concept. No study found on role played by how MVC supports grassroots innovations.

Review of Micro Venture Capital Finance

Study for Gujarat No study is found which highlights the problems faced by grassroots innovators and how it is overcomed with the assistance of MVC