Submitted for Consideration to:

Research Proposal

Developmental Entrepreneurship in Sub-Saharan Africa:

Identifying and Assessing Microenterprise Opportunities

Dale S. Fickett

16th

June 2010

This document contains the preliminary research proposal for identifying developmental

entrepreneurship opportunities that will generate both social and financial value. It includes a broad

discussion of contextual factors associated with this research, and it proposes a methodology for

developing a casual theory for predicting these social and financial returns a given entity would generate

when addressing a given opportunity. Lastly, it delineates a range of benefits associated with the

intended findings – foremost of which is enhancement of the alleviation of global poverty. Those living

in embryonic markets, especially those in extreme poverty, will benefit from a powerful lever to improve

standards of living, increase incomes and employment opportunities, and propagate a range of broader

societal and developmental benefits. It is for these people – those in greatest need – that this work has

the most value and why it is right that we undertake it.

2

Table of Contents

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

II. Research Context ....................................................................................................................... 3

Economics and Management Literature ........................................................................................ 3

Development Stakeholders ............................................................................................................ 5

Economic Development in Sub-Saharan Africa ............................................................................... 8

Private Investment & Economic Growth ...................................................................................... 11

Poverty Alleviation through Developmental Entrepreneurship .................................................... 12

Research on Addressing Developmental Entrepreneurship Opportunities ................................... 14

Required Research ....................................................................................................................... 17

Context Conclusion ...................................................................................................................... 18

III. Purpose ................................................................................................................................... 19

IV. Audience ................................................................................................................................. 20

V. Hypothesis ............................................................................................................................... 21

Poverty Alleviation ...................................................................................................................... 21

Commercial Viability .................................................................................................................... 23

VI. Methodology ........................................................................................................................... 26

Refine the Hypothesis (1) ............................................................................................................. 26

Assumptions & Preliminary Research Design (2) .......................................................................... 27

Determining a Representative Sample (3) .................................................................................... 27

Observation (4) ............................................................................................................................ 28

Interpretation & Categorisation (5 & 6) ....................................................................................... 29

Correlation (7) ............................................................................................................................. 29

Causal Framework (8) .................................................................................................................. 30

VII. Expected Outcomes ................................................................................................................. 30

VIII. Benefits ................................................................................................................................... 31

IX. Bibliography ............................................................................................................................ 32

3

I. Executive Summary There is a small, but growing body of research on developmental entrepreneurship, or the support of

small business in developing countries, as a tool to alleviate global poverty. This tool is utilised by a

cross-section of the global development community, and as such includes a number of stakeholders

from the public, private and civil sectors. Over the past 65 years this community has worked in various

capacities to help alleviate the poverty in Sub-Saharan Africa. This region, with 51% of the population

living under the global poverty line and having the largest cluster of countries with low development

indicators, is arguably the region in greatest need of these efforts. One of the key levers in fighting

poverty is the stimulation of private investment to generate economic growth, however not all

economic growth helps the poor. Developmental entrepreneurship is a method for economic growth

which does, and in Sub-Saharan Africa it is increasingly a key lever for building markets that include the

poor as employees, venture owners, and consumers.

An array of research is required to greater understand how to best apply the developmental

entrepreneurship tool. Currently, interventions take place on three levels: those which seek to shape

the enabling environment in which microenterprises operate (i.e. policy advocacy), those which seek to

build markets by providing support along a value chain, and those which seek to support the individual

microenterprise. The microenterprise sits at the centre of this research proposal, as she/he requires an

ability to: (1) identify and assess new venture opportunities; (2) design the right strategy to address the

selected opportunity; and (3) execute that strategy effectively. The subject of this research is point 1 –

identifying and assessing developmental entrepreneurship opportunities.

The findings of this research proposal will be utilised across the aforementioned global development

community in a range of ways so that effort and resources may be prioritised and applied to those

opportunities with the greatest likelihood of yielding financial returns and poverty alleviation outcomes.

The described methodology for conducting this research includes: gathering and analysing existing

research and data, observing and measuring existing microenterprises, and developing a causation

framework which ascribes deterministic characteristics to the developmental entrepreneurship

opportunities. It is expected that a small subset of all opportunities will be the outliers which have

highest financial and social potential, and thus most deserving of entrepreneurial attention, funding, and

other incubator-type supports. It is the pursuit of these opportunities which will have the win-win of

social outcomes without sole reliance on government or donation funding. Marshalling resources to

address these opportunities, those of highest potential, will produce significant benefits for those living

in abject poverty – higher standards of living, increased incomes and employment opportunities, and

more indirect societal and developmental benefits. It is for these people – those in greatest need – that

we undertake this work.

II. Research Context

Economics and Management Literature

“Developmental entrepreneurship”, or “enterprise development”, sits at the intersection of

development economics theory and entrepreneurship theory, of the economics and management

disciplines, respectively. From the economics literature, Naude summarises that both fields have

4

developed rapidly over the past fifty years, but did so in relative isolation from one another; and that it

is now widely recognised that it is “of great practical importance to understand if and when

entrepreneurship is a binding constraint on economic development...in developing countries.”16 Areas

of particular interest in relation to entrepreneurship within the development economics community

include: structural change and economic growth, income and wealth inequalities, welfare, poverty

traps, and market failures.17 From the management literature, Bruton et al summarise that although

there have been tremendous strides in the entrepreneurship literature, it is largely based on evidence

from developed country markets.18 With only 43 articles (of 7,482 published during 1990 – 2006 in the

defined ‘leading management journals’) addressing entrepreneurship in emerging economies, it remains

an area of great importance and “woefully under-examined.”19 In sum, development entrepreneurship

is the study of utilising the establishment of small businesses as a lever to alleviate poverty in countries

with low levels of economic development, and requires research attention.

Broadly, the existing research from both disciplines can be viewed within two categories – ‘top-down’

policy recommendations, such as those to foster environments more conducive to entrepreneurial

activity; or ‘bottom-up’ examinations seeking to describe various insights relating to the individual

entrepreneur, which tend to emanate from the management discipline. In the former, there have been

an array of findings, in relation to: developing country strategies to promote enterprise development20,

financial regulatory change to increase access to financial institution accounts (for the benefit of small

African firms)21, the growth effects of government strategies for pursuing trade and investment

liberalisation in Least Developed Countries (LDCs) and their concomitant effects on small firms22, social

entrepreneur development programmes to “attract back” developing country diaspora with

entrepreneurial competencies23, and policy mobilisation to capacitate greater access to domestic,

regional and global agro-markets as a poverty alleviation mechanism.24 These findings have generally

been promulgated by the development economists, as they fall near the core scope of the discipline –

providing policy recommendations regarding governance, utilisation of aid, trade, investment and

markets regulation.

Conversely, the ‘bottom-up’ research provides insights which are derived from examining the start-up

firm or the entrepreneur in a developing country context, including descriptive characteristics, success

determinants, work outputs, and social contributions. Examples of such work, include: Kiggundu’s

description of the African entrepreneur, typical start-up models, and the external contexts of which they

are a part25; Mbaku’s observations regarding corruption, and specifically entrepreneurs’ propensity for

trading bribes for political favours26; Jackson’s construction of a firm-level, rather than government- or

16

Naude, W. (2010), p. 1 17

ibid. 18

Bruton, G., Ahlstrom, D. and Obloj, K. (2008), p. 1 19

ibid., p. 3 20

Adeoti, J. (2000), p. 57 21

Honohan, P. and Beck, T. (2007), pp. 141-142 22

Siddiqi, M. (2008), pp. 42-43 23

Prieto, L., Osiri, J. and Gilmore, J. (2009), p. 53; Murphy, R. (1999), p. 661 24

Regnier, P. (2009), p. 121 25

Kiggundu, M. (2002), p. 239 26

Mbaku, J. (1999), p. 309

5

donor-level view of the market context (based on research of textile and garment entrepreneurs in

Zimbabwe)27; and Valliere’s & Peterson’s extension of the economic growth model to reflect differences

between developed and emerging markets as regards new venture impacts on Gross Domestic Product

(GDP) growth.28 In short, development entrepreneurship literature has shifted over the last two

decades from specific, supply-driven interventions for small enterprises, to broader market

development methods; as microfinance and business development services (BDS) are increasingly

demand-led and treated holistically through a value chain approach.29 Jones and Miehlbradt provide a

comprehensive timeline of the enterprise development literature (see figure 1).30

Stage Description

Beyond Credit

(early to mid-1990s)

� Support for small enterprise is understood to go beyond provision

of finance and includes ‘market development facilitation’, requiring

an understanding of the systems in which the enterprise exists

� Subsector analysis approach is developed and applied

Commercial Service

Delivery

(1995-2002)

� Business Development Services (BDS) paradigm evolved to formalise

a range of non-financial inputs to support indigenous entrepreneurs

– training, transportation, technology, market access and

information

� Renewed focus on monitoring, evaluation and impact assessment

Systems Approaches

(2002 – present)

� Under a range of names (e.g. pro-poor enterprise development,

value chain development, market development, and making

markets work for the poor31) focus began to shift to how community

and government organisations can play a role in promoting

entrepreneurial activity

� Subsector analysis and BDS are blended to achieve new insights on

industry competitiveness, value chain development, programme

design and market demand assessment

Developing Inclusive

Systems

(2004-present)

� Practitioners are starting to focus on the poor as producers,

consumers and workers

� Some agencies are focused on the enabling environment, or

external market context; and have greater integration of multiple

functions and multiple players – policy level, value chain / meso-

level, and micro-enterprise level interventions

� Current analytical frameworks focus on various aspects of poor

people’s lives, such as culture and economic incentives

Figure 1: Four Stages of Enterprise Development Theory and Practice

Development Stakeholders

Developmental entrepreneurship stakeholders are a subset of the broader global development

community. This community is comprised of: (1) inter-governmental organisations; (2) national and

local public sector policy makers in developed and developing countries; (3) civil society; (4) the private

sector; and (5) beneficiaries (see figure 2).

27

Jackson, P. (2004), p.769 28

Valliere, D. and Peterson, R. (2009), p. 459 29

Steel, W. (2009), pp. 286-290 30

Jones, L. and Miehlbradt, A. (2009), pp.304-314 31

“Making markets work for the poor” is often abbreviated “M4P.”

6

The subset of these stakeholders that participate in the utilisation of developmental entrepreneurship

for poverty alleviation is shown in figure 3. Each of the five stakeholder groups is represented within the

map. Within inter-governmental organisations there are various efforts to develop economies by

spurring the growth of inclusive markets through various market

development programmes.32 In the public sector, government agencies sit on opposite sides of the

Official Development Aid (ODA) flow – those that provide funding, and those that receive it. In civil

society there are a range of organisations that prioritise sustainable livelihoods approaches in their

global poverty alleviation efforts, some of whom could also be classed as social entrepreneurs, based on

the maturity level of the organisation and their use of a not-for-profit model.33 Other social

entrepreneurs have grown their organisations to significant scale (as distinct from indigenous

microenterprise beneficiaries) and are making a contribution to poverty alleviation – such as Grameen

Bank and International Development Enterprises.34 These stakeholder groups have traditionally

marshalled private donations and government funding to address developing country poverty through

not-for-profit models, however new for-profit models are emerging.

New for-profit social entrepreneurs are harnessing competitive capital to scale their operations. As

these social entrepreneurs compete in private sector markets, so to are more traditional multi-national

corporates. For example, microfinance institutions span both for profit and not-for-profit models;

32

See Kinda, T. and Loening, J. (2008); UN Development Programme (2008) 33

See Coates, B. and Saloner, S. (2009); Ewalt, D. (2009); and O’Brien, J. (2008) 34

See Yanus, M. (2007) and Polak, P. (2008)

Pri

vate

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United Nations

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Donor Governments Recipient Governments

Nat

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Sec

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Labo

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Com

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Gro

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Non

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Inst

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Multi-national Corporates

Small-to-Mid-Sized Businesses

Micro-Businesses

Figure 2: Global Development Stakeholders

7

include start-ups and mature corporates; have core businesses in banking, retailing, and mobile

telecommunications; have local versus global footprints; centre on a double bottom line versus sole

commercial motive; and offer basic versus complex product ranges.35

Within the private sector, other for-profit models have been introduced to fight global poverty. As

mentioned, microfinance institutions, and other social entrepreneurs are using for-profit SME models

that provide finance, training, or other inputs required by the micro-entrepreneur. SKS Microfinance

stands as a good example of a microfinance provider, modelled as ‘for-profit’ from inception.36 These

social entrepreneurs are innovating ways to contribute to poverty alleviation, and there is increasingly a

body of research on social entrepreneurship which is relevant to its utilisation as a tool to achieve global

development outcomes.37 In the private sector, more mature multi-national corporates have launched

various Corporate Social Responsibility programmes which contribute to local entrepreneurship to

varying degrees. These programmes range from making traditional donations to the establishment of

foundations to leveraging core capabilities that achieve social outcomes as a pillar of corporate

strategy.38 These corporate philanthropic activities occur on an industry backdrop that includes

35

See Annibale, R. (2009), p. 263 36

See Akula, V. (2008) 37

See Harris, J., Sapienza, H. and Bowie, N. (2009); Prieto, L., Osiri, J. and Gilmore, J. (2009); Zahra, S., Gedajlovic,

E., Neubaum, D. and Shulman, J. (2009); Hockerts, K. and Wustenhagen, R. (2009); Dean, T. and McMullen, J.

(2007); Maier, J. and Schoen, O. (2007); and Dorado, S. (2006) 38

Porter, M. and Kramer, M. (2008), pp. 451-477

Figure 3: Map of Developmental Entrepreneurship Market Participants

Inter-governmental

Organisations

National & Local

Public Sector

Private Sector

Civil Society

Beneficiaries

Corporate Social

Responsibility

Leaders

Emerging Market

Programme Owners

Sustainable

Livelihoods

AdvocatesDeveloping Country

Finance Ministries

Developed

Country

ODA Agencies

Microenterprise and Market

Development Programme

Directors

Microfinance

Institutions &

Other Social

Entrepreneurs

Customers

Shareholders

Creditors

Suppliers

BDS Providers

Employees

Entrepreneurs

8

competition, amongst Western and (increasingly) emerging market multinational organisations, to tap

local pools of natural resources, talent and consumers in new markets.39

All of the participants may play a role in the process of developing indigenous entrepreneurs, and as

such may be included in the beneficiaries category (hence the overlap depicted in the Venn diagram).

Of course, core to the beneficiaries category are the poor themselves, who play different roles along the

value chain. The ‘beneficiaries’ category can be split into three sub-categories. First,

those that provide required input include the providers of debt and equity financing, those providing

capacity building training and other BDS services, employees that provide required labour, and goods

suppliers. Moving left to right, the entrepreneurs transform these inputs, through value-creating

activity, into outputs for indigenous populations. In so doing, these entrepreneurs improve their own

livelihood and those of their family through increased income and thus expanded economic choices.

Lastly, on the right, the end-users or customers, benefit through the availability of, and the direct

purchases of, a good or service which improves their standard-of-living.

Clearly, there is a set of complex relationships amongst global development community, especially as

various organisations play differing roles in various engagements. This complexity also applies for the

subset of stakeholders that participate in developmental entrepreneurship initiatives. Whether viewed

through the lens of the economist, management theorist, entrepreneur, corporate leader, policy-maker,

beneficiary, or global development practitioner – developmental entrepreneurship is a significant tool

for generating organic and pro-poor economic growth, building sustainable livelihoods, and alleviating

conditions of poverty in these embryonic markets where the benefits are most needed.

Economic Development in Sub-Saharan Africa

In 2005, 51% of the Sub-Saharan African (SSA) population was living below the global poverty line of

$1.25 per day (measured in purchasing power parity), the world’s highest regional poverty rate.40 Of the

1.4 billion people that live in this extreme state of poverty globally41, approximately 400M42 are in SSA,

or 28.5% of the global poor.43 In fact, despite having 11.4% of the world’s population, the region

produces only 0.023% of global GDP.44 Moreover, the region has the lowest average GDP per capita at

only $2,031.45

The hardships of extreme poverty in SSA are exacerbated by the lack of opportunities for improving

one’s standard of living. It is one thing to be extremely poor in an environment in which one has hope

due to the opportunities presented by his/her environment, but quite another when the environment

presents few opportunities to improve one’s condition. The UN has classified countries based on their

level of economic development, and SSA is the largest collection of ‘Low’ developed countries,46 or

39

Accenture (2009), p. 7 40

UN Development Programme (2009a), p.7 41

ibid 42

Based on calculations from UN Development Programme (2009a), Statistical Annex, pp. 191-194 43

ibid 44

UN Development Programme (2009a), pp. 191-194, 198; measured in PPP 45

UN Development Programme (2009a), p. 174; measured in PPP 46

Based on calculations from UN Development Programme (2009a), Statistical Annex, pp. 191-194

9

those with depressingly few opportunities to escape poverty. Globally, there are 385.1M living in these

24 countries, and 357.4M of them are in SSA. 401.6M of the SSA population lives in countries of

‘Medium’ development,47 or where conditions are somewhat better. SSA suffers the lowest

development rankings on every primary measure – the lowest overall human development index, lowest

life expectancy at birth, lowest adult literacy rate, and lowest educational enrolment rate.48 In sum, the

poor of Sub-Saharan Africa face the harshest living conditions, and most of these people lack

opportunities to escape this extreme poverty by nature of the low levels of indigenous economic

activity.

The causes of extreme poverty, or a lack of economic development, are highly debated; and the

prescribed solutions even more so (see section III – Audience). Interventions have ranged in size and

scope, and both ‘top-down’ and ‘bottom-up’ efforts have been driven by the stakeholder groups

mentioned. These efforts fall within an umbrella process that includes: (1) Harnessing required inputs –

human capital, financial capital, social networks, and intellectual capital; (2) Ensuring policy

effectiveness in input utilisation (primarily at national level), in setting development priorities, in

promoting and regulating markets conducive to inward foreign direct investment (FDI), in setting

domestic (e.g. agriculture, education, health) and international policy (e.g. security, trade, monetary);

and (3) Measuring and reporting the achievement of outcomes in the areas of poverty and hunger,

health, education, economic growth, gender equality, environmental sustainability, and governance.

47

ibid 48

UN Development Programme (2009a), p. 174; measured in PPP

Th

eme

Sector

Economic Management

Financial & Private Sector Development

Human Development

Public Sector Governance

Rule of Law

Rural Development

Social Development, Gender & Inclusion

Social Protection & Risk Management

Trade & Integration

Urban Development

Environmental & Natural Resource Mgt.

Agricu

lture, F

ishing &

Forestry

Edu

cation

En

ergy & M

inin

g

Fin

ance

Health

& O

ther S

ocial Services

Indu

stry & Trade

Inform

ation &

Com

mu

nication

Law, Ju

stice & P

ublic A

dmin

istration

Transportation

Water, S

anitation

& F

lood Protection

Figure 4: World Bank Lending Activity Categorisation

10

The sheer breadth of the World Bank’s lending activity provides a useful framework for categorising

global development initiatives (see figure 4).49

Interventions also occur within a complex and dynamic development environment (see figure 5). There

are a range of existing economic, demographic, geo-political and socio-cultural factors to consider.

These change over time, and vary across countries and regions. To some extent, this change is driven by

external ‘globalisation effects’. Placed on the backdrop of the increasing pervasiveness of connective

technologies, propagation of corporates’ expansive global operating models, and the increasing

prevalence of open market policies, this set of effects impacts the country-specific factors mentioned.

Moreover, this dynamic has been recently impacted by the extent of the 2008-09 financial markets crisis

and resultant global economic recession (labelled ‘current economic disruption’). A range of

development challenges remain, and these Millennium Development Goals (MDGs) were agreed upon

by the international community in 2000, with a set of specific targets for improvements by 2015.50

Figure 5: Complexity of Development Challenges

49

See World Bank (2009a), pp. 33, 37, 41, 45, 49 and 53; this categorisation is derived from the World Bank’s

method of classifying their lending activity from 2004 to 2009 50

See United Nations (2009)

Globalisation Effects

Increased

Resources

Constraints

Growth in

Emerging Market

Consumers

War for TalentNew Pockets of

Innovation

Multi-directional

Capital Flows• Capital constraints

– national debt,

aid and

investment

• Commodity price

volatility

• Weakening global

trade

• Credit Constraints

and Banking

Sector Re-

regulation

• Asset Devaluations

(e.g. Equities, Real

Estate)

• USD Currency

Devaluation and

Monetary

Implications

• Unemployment

Growth

• Slowing Economic

Output

Current

Economic

Disruption

Complexity of Country-Specific Development Factors

Eco

no

mic

De

mo

-

gra

ph

ic

Ge

o-

po

liti

cal

So

cio

-

cult

ura

l

History of Aid

Dependency

Tribal and Community

Norms

Pockets of Armed

Conflict

Religious &

Spiritual Beliefs

Population Profile

& Growth Rate

Democracy &

Human Rights

Progress Levels

ODA

Reductions

Rural to Urban

Migration

Constraints on

New Inward FDI

Growth in

outward FDI to

Developed

Countries

Diversification of

Export Base

Climate Change

Vulnerability

Wealth

Distribution /

Inequality

Degree of

Commodity

Dependency

Food

Crises

Under-

Employment

Poverty

Reduction Trends

Improvements in

Agricultural

Productivity

Improvements in

Macro-economic

Stability

Variability in

Fiscal Health and

Current Accounts

Attitudes Shaped

by Disaster

Survival

Health &

Education

Levels

Emigration /

Immigration

Trends

Life

Expectancy

National

Identity

• Extreme Poverty &

Hunger

• Primary Education

• Gender Equality

• Child Mortality

• Maternal Health

• HIV/AIDS, Malaria

and other Diseases

• Environmental

Sustainability

• Global Partnership

for Development

Continuing

Development

Challenges

11

On balance, it’s encouraging to note that since the establishment of the MDGs, progress in SSA has been

made in certain areas (see figure 6).51 Between 2002 and 2007 SSA economic growth topped 6.5% - the

highest rate in 30 years. For 2009, growth is expected to have slowed to 1%, as demand abroad for

traded goods decreases and capital flows shrink on the back of the global economic downturn. The

International Monetary Fund’s (IMF) outlook includes growth of 4% in 2010 and 5% thereafter. There

are a number of downside risks to the estimate, and policy recommendations centre on the continuance

of fiscal measures to promote countercyclical stimuli and additional monetary loosening until recovery

gains momentum. In the medium term, recommendations focus on maintaining sustainable budget

deficits, spending on infrastructure and human capital development, and programmes to improve public

sector effectiveness.52

Private Investment & Economic Growth

One of the key factors of developing countries’ economic growth, and an environment conducive to the

developmental entrepreneurship opportunity, is the ability to attract FDI and deploy it for productive

use within the private sector.53 Countries need a sound business environment in the form of good

government regulations to benefit from FDI; however excessive regulation can discourage foreign

investment.54 Necessary conditions to attract FDI also include infrastructure relevant to the proposed

project, stability of property rights, and democracy insofar as it provides a deterrent to expropriation

51

ibid 52

IMF (2009), pp. 1-3 53

OECD (2006a), pp. 11-14 54

Busse, M. and Groizard, J. (2006), p. 1

� Percentage of people living on less than $1/day has

decreased from 58% in 1999 to 51% in 2005

� Proportion of undernourished population has

decreased from 32% for 1990-92 to 29% in 2008,

despite the challenges of severe food price spikes

� Proportion of children under five that are underweight

decreased from 31% in 1990 to 28% in 2007

� Enrolment in primary education has increased from

58% in 2000 to 74% in 2007

� Gender parity in primary education is improving, but

worsening at secondary level; and women’s

representation in national parliament has doubled

� Child mortality has decreased from 183 deaths per

1000 births in 1990 to 145 in 2007

� Only marginal improvements in maternal deaths

� New HIV infections have decreased since 1996, but

two-thirds of the 33M infected live in SSA

� Continued rise in greenhouse gas emissions, and

increased effects of drought

� Aid to Least Developed Countries falls far short of the

2010 target

Figure 6: Sub-Saharan Africa Millennium

Development Goal Progress

12

and corruption.55 There is also research indicating a correlation between good governance and

economic performance.56 Furthermore, the Organisation for Economic Co-operation & Development

(OECD) recommends that in order to attract increased investment, developing countries should foster a

diversified financial sector, lower the costs of investment, reduce risks, improve competition, and

develop capacity.57 In order that developing countries harness financial capital and other inputs as

productive means towards economic growth ends, policies must focus on creating climates most

conducive to inward investment. “What ultimately count are the productivity gains that result from

product and process innovations brought about through investments, as well as the extent to which jobs

and capital flow from declining industries to expanding ...economic activities.”58

Fox and Sekkel Gaal summarise that SSA growth was stimulated by policies in the 1980s and 1990s that

provided macro-economic stability and expansion of the domestic sector.59 However, SSA remains the

least attractive region for inward investment, based upon the World Bank’s Doing Business 2010 ranking

of business-related regulation (i.e. ease of obtaining a business license, ability to enforce contracts, etc.).

Importantly, this does not capture other factors related to investment climate, such as the robustness of

physical and financial infrastructure or regulation of the markets in which the entrant would compete.

On the basis of business regulation alone, SSA as a region has one of the lowest rates of reform, with

63% of countries instituting a regulatory change. However, this is up substantively from 22% in 2005;

and with 12 reforms in place, Rwanda has instituted the most change of any country, globally.60 As the

poorest region in the world, and despite relatively poor physical infrastructure, Sub Saharan Africa has

made large progress in promoting economic growth, in large part, through macro-economic stability,

political reforms, and, increasingly, regulatory changes – all aimed at improving investment

attractiveness. Consequently, the environment for developmental entrepreneurship opportunities is

improving.

Poverty Alleviation through Developmental Entrepreneurship

Economic growth does not equal economic development, or improvements in the alleviation of poverty,

health services, education, etc. Income is one of the primary metrics used in economic analysis.

Economists utilise several methods for measuring income distributions – size distribution of income, as

measured by the Gini coefficient; functional distributions, or factor share distributions (i.e. returns to

land, labour, capital); and measures of absolute poverty, as measured by the Human Poverty Index.61

These measures provide insight into the nature of economic growth, and specifically who is benefiting

from that growth. Economic growth may alleviate poverty and address income inequalities, but not

necessarily. For example, historic growth constrained within extractive industry segments in developing

countries led to increased gross national incomes, and with constant demographics, per capita incomes

55

Khan, M. (2005), pp.77-82 56

See Hall, R. and Jones, C. (1999) 57

OECD (2006a), pp. 15-17 58

ibid 59

Fox, L. and Sekkel Gaal, M. (2008), pp. 1-2 60

World Bank (2009b), pp. 1-5 61

Todaro, M. and Smith, S. (2006), pp. 195-207

13

naturally rose as a mathematical consequence; but this income was highly concentrated and relatively

few people escaped poverty as a result, hence growth without development.62

The economic growth which does assist in poverty alleviation for broad portions of the population has

been termed ‘pro-poor growth’ or the development of ‘inclusive markets.’ There is a significant body of

research supporting the assertion that entrepreneurial activity is critical to developing economies, and

that it contributes to poverty alleviation. The OECD promotes the “central role” of the private sector in

poverty alleviation, and provides an analytical framework and set of policy recommendations to

facilitate pro-poor growth, including providing incentives for entrepreneurship and investment by

fostering: (1) low market entry and exit barriers; (2) predictable rules of exchange; (3) secure and

transferrable property rights; (4) enforceability of contracts; and (5) low levels of corruption.63 Azmat

and Samaratunge found that a range of factors brought about the prevalence of small-scale individual

entrepreneurs (i.e. microenterprises), which form a major part of the informal workforce and contribute

significantly to economic growth in developing countries.64 Debrah concludes that SSA governments

should promote the informal sector as a significant source of employment.65 Furthermore, Lado &

Vozikis posit, “That entrepreneurship is vitally important to economic development of a nation is

indisputable.”66; and Morris concludes that sustainable economic development does not occur without

entrepreneurship, and higher levels of entrepreneurship are directly correlated with increases in GDP,

societal wealth, and quality of life.67

Fox and Sekkel Gaal observe that most poor households derive income through the sale of their labour

to themselves or to others, and that earning more money faster is the key factor in increasing the

impact of economic growth on poverty reduction. Furthermore, to overcome existing challenges to job

creation, African economies need to be more globally competitive, by focusing policy initiatives on

creating climates attractive for investment. Finally, they conclude that the high growth in the informal

sector (or micro-enterprises) is a supply-side response to weak demand for labour amongst medium and

large enterprises; and prospects for increasing productivity in small hold agribusiness provides a viable

route for working out of poverty.68 According to the UNDP, “The poor harbour a potential for

consumption, production, innovation, and entrepreneurial activity that is largely untapped.”69 They also

site many examples of businesses that are creating “value for all” by buying from, and selling to, the

poor.70 Benefits are significant, as businesses have enjoyed profits (microfinance institutions earning

23% return on equity, as an industry average), growth potential in new markets, innovation capability

enhancements, and an expanded labour pool. Likewise they reference a range of benefits for the poor –

income, improved standards of living, higher productivity and increased empowerment.71 Challenges

associated with conducting business in SSA are noteworthy – infrastructure shortfalls, difficulties

62

Ibid, pp. 15-20 63

OECD (2006a), pp. 14-15, 20 64

Azmat, F. and Samaratunge, R. (2009), p. 437 65

Debrah, Y. (2007), p. 1063 66

Lado, A. & Vozakis, G. (1997), p. 55 67

See Morris, M. (2001) 68

Fox, L. and Sekkel Gaal, M. (2008), pp. 1-2 69

UN Development Programme (2008), pp. 1-12 70

ibid 71

ibid

14

enforcing contracts, lack of market information, and skills gaps. In some instances, these challenges can

be overcome through the utilisation of the five strategies provided (see figure 7).72

Although there are a range of entrepreneurial activities that are likely to contribute to poverty

reduction, private investment in the agriculture sector is one of the highest priorities.73 Agricultural

growth is now thought possible in SSA, as high growth rates in certain regions have fostered hope that it

can be replicated, and as food prices have risen, there is increasingly a realisation that new

opportunities may be opening to utilise land and labour as global agriculture supply is near full

capacity.74 Also, the World Bank determined that, “Private investment reduces poverty when

investment rates are high and occurs in sectors that intensively use factors owned by the poor. In Sub

Saharan Africa that means land and unskilled labour.”75 Lastly, Competitive Commercial Agriculture for

Africa (CCCA) found that opportunities abound for African small hold farmers, especially given rising

demand forecasts due to changes in food consumption patterns and demographic shifts.76

In short, development entrepreneurship in Sub Saharan Africa is thus a key lever for poverty alleviation,

as it develops inclusive markets that utilise land and labour to alleviate conditions of extreme poverty.

Moreover, those opportunities with the highest correlation to poverty alleviation in SSA are believed to

be agricultural and set within a conducive regulatory environment.

Research on Addressing Developmental Entrepreneurship Opportunities

Microenterprises require a set of resources, which differ from their developed world counterparts, and

leverage those resources differently, as a function of the substantive constraints of their environment.

Trulsson categorises these constraints as: access to finance, financial management competencies,

market orientation, human resources, physical infrastructure, policies & regulations, and information &

networks.77 Duncombe & Heeks find that poor rural entrepreneurs also rely heavily on informal, social

and local information systems, especially shared telephony services. Nichter & Goldmark find small firm

growth factors in four areas – the entrepreneur, the firm, relationships & networks, and context &

environment.78 Similarly, Okpara concludes that an entrepreneur’s pro-activity in engaging in export

markets, and related financial commitments, cause higher firm profitability and growth.79 Micro-

entrepreneurs must use innovative techniques to garner required inputs in contexts of significant

constraints, and in the pursuit of profit they leverage those scarce resources in unique ways that are

predominantly context driven.

Access to finance is a key obstacle for the micro-entrepreneur. Overall trends indicate a significantly

constrained flow of capital to emerging markets – decreasing from $890B in 2007 to $390B in 2008 and

$140B projected for 2009.80 Micro-entrepreneurs, especially in this environment, find it difficult to

72

ibid 73

World Bank (2009c), pp. 1-3, 5-7 74

ibid 75

Kochendörfer-Lucius, G. and Pleskovic, B. (2005), p. 1 76

World Bank (2009c), pp. 2-4 77

Turlsson, P. (2002), p. 331 78

Nichter, S. and Goldmark, L. (2009), p. 1453 79

Okpara, J. (2009), pp. 1281-1282 80

Cline, W. (2009), p. 2

15

access credit and equity financing to expand their ventures. Mushinski & Pickering observe that

microenterprises have virtually no access to formal credit markets.81 Microfinance provides a

substantial form of debt financing for the micro-entrepreneur. Hossain and Knight argue in favour of

microcredit due to its role in expanding micro-enterprises and fighting rural poverty.82 However, there

is a debate regarding microfinance’s effectiveness. Smith & Thurman in A Billion Bootstraps argue for

the expansion of micro-credit, while Amsden & Ha Joon Chang argue against such expansion in some

over-supplied markets as new entrants may displace existing enterprises and have net worsening

effects. 83 Datar et al levy another attack on microfinance providers, concluding that in their push to

alleviate poverty, they should focus on assisting their clients build sustainable enterprises, rather than

on providing greater volumes, and ever larger loan amounts.84 Financial capital is a primary input for

the microenterprise, and microfinance providers are well positioned to providing this crucial step out of

poverty.

Microenterprises are also dependent on other facets of the enabling environments, including regulatory

support from their governments. Such supports include: efficiency in acquiring business permits or

closing a business, property rights and contract enforcement protections, efficiency in taxation

administration, and the regulations applicable to the market in which a given entrepreneur operates.

Other domestic regulatory supports are often more indirect, but of consequence – financial sector

stability, domestic infrastructure and human capacity investments, fiscal sustainability, public sector

governance, and stances on human rights. Indirect international policy is often more remote to the

entrepreneur, but still relevant based on the entrepreneur’s competitive market (e.g. extent of

importing/exporting). These factors include: ODA expenditures, trade agreements, security, and

monetary stability. Examples of related research, include: Beck et al on financial market policy to

broaden access85; the World Bank’s Doing Business series covering cross-border comparisons of reforms

related to improving efficiency in operating businesses86; Aubert on promoting developing world

innovation87; Ayele on investment incentives and resultant market distortions88; the World Bank working

paper on regulatory conditions required to attract FDI89; Phillips et al on policy recommendations to

foster entrepreneurial activity90; and Bennett’s argument for government support of informal firms.91

Social capital, or relationship networks, is also a critical input for micro-entrepreneurs. Wheeler

observes that developing world entrepreneurs who build sustainable, successful enterprises rely upon

informal networks that include other private sector players, non-governmental organisations (NGOs),

and other community groups, as developed with the Sustainable Local Enterprise Network Model.92

81

Mushinski, D. and Pickering, K. (2007), p. 567 82

Hossain, F. and Knight, T. (2008), p. 155 83

See Smith, P. and Thurman, E. (2007); Amsden, A. (2007); Ha-Joon Chang (2007) 84

Datar, S., Epstien, M. and Yuthas, K. (2008), pp.38-45 85

Beck, T., Demirgüç-Kunt, A. and Honohan, P. (2009), p. 119 86

See World Bank (2009b) 87

See Aubert, J. (2005) 88

See Ayele (2006) 89

See Busse, M. and Groizard, J. (2006) 90

See Phillips, C. and Bhatia-Panthaki, S. (2007) 91

See Bennett, J. (2009) 92

Wheeler et al (2005), pp. 36-37

16

Networks can also facilitate the recruitment of the start-up team recruitment, and Ibeh posits that these

firms can overcome barriers to entry to international markets through recruitment.93 Likewise, Zhu et al

found that developing country SMEs can increase their internationalisation capabilities by leveraging

embedded networks with local governments and business groups.94 Conversely, Bernard et al

demonstrate the limitation of certain network nodes, as market-oriented and community-oriented

organisations in rural settings are constrained by geographical remoteness, social conservatism, lack of

access to resources, and limited management capacity.95

Incubators and other BDS providers supply microenterprises with a range of services, including access to

mentors, management advisory services, training, increased access to financing (especially routes to

equity financing), and access to technology and process innovations. These providers stretch across the

referenced stakeholder groups, and include not-for-profit and for-profit models. The effectiveness of

incubators in spurring developmental entrepreneurship is currently debated. Ayers & Harman report

the findings of infoDev, a network of 300 such incubators: (1) successful incubators were led by

visionary leaders with influence on policy; (2) important contributions were made by universities,

foundations and corporations in mentoring, sharing facilities, research access and board memberships;

and (3) most clients had difficulty accessing private investment.96 Tulchin and Jones debated the

effectiveness of microenterprise incubators in addressing poverty, with Tulchin in favour of the support

incubators provide, and Jones arguing that most developing world incubators are structured to support

ventures with high growth potential, and benefit relatively few people. However, Jones also comments,

“I do believe that it might be possible for certain new models of incubators to exist that could catalyse

pro-poor economic advancement.” She also proposes that they would have to demonstrate clear

connection to pro-poor impacts, be well monitored and the models tested. Moreover, these incubators

would focus on the creation of labour intensive businesses, or accelerate equitable growth across the

value chain.97

Given the appropriate opportunity, and provided access to needed resources, what strategy should a

micro-entrepreneur employ to successfully launch and grow his/her enterprise? There is a new and

growing body of research on micro-enterprise strategy, including: Akula’s summarisation of micro-

finance institutions’ recommendations on what businesses should do that serve the poor98; several

research findings in relation to market definition and international trade by micro-enterprises99; and

Porteous, as well as Frishammar & Anderssen, provide insights in relation to market access and

marketing strategy.100 Lastly, significant work by the UNDP, released in 2008, led to the identification of

five common constraints that microenterprises face and well as five strategies that are used with varying

incidence to address them (see figure 7).101 The UNDP provide a summary of solutions within each of

93

See Ibeh, K. (2004) 94

Zhu, H., Hitt, M. and Tihanyi, L. (2007), pp. 1-2 95

Bernard et al (2008), pp. 2188-2190 96

Ayers, S. and Harman, P. (2008), p. 12 97

See Tulchin, D. and Jones, L. (2009) 98

See Akula, V. (2008) 99

See Aldonas, G. (2008); Williams, D. (2008); Mai Thi Thanh Thai and Li Choy Chong (2008); Brettel, M., Engelen,

A. and Heinemann, F. (2008); and Ratten, V. (2008) 100

See Frishammar, J. and Anderssen, S. (2009); and Porteous, D. (2008) 101

UN Development Programme (2008), p. 6

17

the five strategies, and summarises that the solutions are not mutually exclusive, and are, in fact,

commonly used in combination to overcome the challenges inherent in operating businesses in

developing markets.102 Additionally, work from the Monitor Group has provided four business models

on servicing poor countries – “A pay per use approach”, “No frills service”, “Para-skilling”, and “Shared

channels”; and three on engaging low-income suppliers – “Contract production”, “Deep procurement”,

and “Demand-led training”.103 In combination, these studies provide significant insight into strategies

that developmental entrepreneurs should consider in addressing the opportunities which sit at the

centre of this research.

Of course, microenterprises must marry the opportunity, the resources, and the strategy with effective

execution. The area of micro-enterprise implementation has also benefited from research:

Kodithuwakku’s and Rosa’s conclusions regarding the importance of creativity and perseverance in

mobilising scarce resources in Sri Lankan village enterprises104; Liedlolm’s findingss regarding the

importance of location in small firm survival105; Hung Manh Chu et al on entrepreneurial motivations,

challenges faced, and success determinants in Ghana and Kenya106; Bear and Field on micro-enterprise

participation within industry development and contributions to value chain competitiveness107; Bekkers

et al on internal monitoring and knowledge management systems, as well as external reporting for

developmental entrepreneurship projects108; and Thassanabanjong’s, Miller’s and Marchant’s research

in relation to employee training.109

Required Research

Many developmental entrepreneurship researchers have provided their views regarding future research

required to either advance the insights of their work, or more generally, regarding what would be

beneficial for the field as a whole. Recently Jones and Miehlbradt identified several areas for future

research on developmental entrepreneurship110, some of which lead to several key questions that

surface as a result: How can we distil best practice into a set of common industry approaches and tools?

How can we determine and combine the most appropriate intervention level for a given community –

value chain interventions or macro-business enabling environment interventions? How can we harness

the productive capacity of rural Sub-Saharan Africa to alleviate

102

Ibid, pp. 8-10 103

Karamchandani, A., Kubzansky, M. and Frandano, P. (2009), pp. 3-7 104

See Kodithuwakku, S. and Rosa, P. (2002) 105

See Liedholm, C. (2002) 106

See Hung Manh Chu, Benzing, C. and McGee, C. (2007) 107

See Bear, M. and Field, M. (2008) 108

See Bekkers, H., Miehlbradt, A. and Roggekamp, P. (2008) 109

See Thassanabanjong, K., Miller, P. and Marchant, T. (2009) 110

Jones, L. and Miehlbradt, A. (2009), pp.315-318

18

Figure 7: Growing Inclusive Markets Strategy Matrix

poverty and to meet increasing global demand for food and biofuels? What are the connections,

overlaps, and synergies between developmental entrepreneurship and sustainable livelihoods

approaches? Similarly, Zezza et al call for research required to identify mechanisms to promote

productive investment, as opposed to social investment, especially in non-farming activities in rural

areas.111 Also, Sievers and Vanderberg look to future research that examines the synergies to be gained

by combining BDS and microfinance.112 Other areas cited for future research, include: understanding

the current state of developing country markets’ size and structure, strategies for successful inclusive

business model deployment, driving projects to scale and overcoming short budgetary timelines,

technological innovations pertinent to the poor, reaching the extreme poor with no assets, topics

around areas of overlap with environmental sustainability research, and the effects of migration.

Context Conclusion

Developmental entrepreneurship, or enterprise development, is a powerful lever for lifting the global

poor from extreme poverty by supporting their efforts to build businesses. Research on the topic has

come from two directions – the development economists that have identified small business as one

method for improving livelihoods, and entrepreneurship theorists that have identified global

development challenges as a place in which to apply their knowledge of start-up management for

societal good. Aside from these academics, many practitioners engage within enterprise development

initiatives, including those in the public, private and civil sectors.

111

Zezza et al (2008), p. 1297 112

Sievers, M. and Vanderberg, P. (2007), p. 1341

Combine

resources and

capabilities

within others

Engage in

policy dialogue

with

government

Leverage the

strengths of

the poor

Invest in

removing

market

constraints

Adapt

products and

processes

Market

information

Regulatory

environment

Physical

infrastructure

Knowledge and

skills

Access to

financial

services

Co

nst

rain

ts

Strategies

High Incidence Medium Incidence Low Incidence

19

These stakeholder groups have built over 65 years of development experience in Sub-Saharan Africa,

arguably the poorest region on earth. Here conditions of extreme poverty, or living below the global

poverty line, are the daily reality for 51% of the population. This situation is exacerbated by the severe

limits to personal opportunities to escape this poverty, due to the overall low level of development

across most of these countries. The development efforts have, in some instances, focused on income

growth. However, not all national income growth translates to improvements in living conditions for

the poor. Developmental entrepreneurship is demonstrating that microenterprises play an important

role in grass roots initiatives to sustain livelihoods. This is especially true in SSA, one of the regions in

greatest need, where opportunities for agri-business and aquaculture look particularly attractive.

Further research is required in this fledgling field, to bolster the effectiveness of such initiatives. These

initiatives focus on supporting the microenterprise at three levels: enabling environment / policy space,

value chain or markets development, and the micro-entrepreneur him/herself. As described below, this

research will focus at the level of the individual enterprise.

III. Purpose There are currently three primary schools of thought related to developmental entrepreneurship: (1)

Systems Approaches (e.g. pro-poor market development, M4P and others); (2) Inclusive Markets

Approaches; and (3) Sustainable Livelihoods Approaches – each with its own focus and related tools.113

First, systems approaches focus on community and government institutions, and the required

capabilities they must command to foster entrepreneurial activity. Second, inclusive markets

approaches promote interventions at various levels (government, value chain, and individual micro-

enterprise) to build markets from the ground up using subsector analysis and BDS. Third, sustainable

livelihoods approaches are people-centric, holistic methods for creating means of income for the poor

through sustainable and productive work.

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

entrepreneurship:

How can we identify and assess those opportunities for the individual entrepreneur that

will lead to poverty alleviation outcomes and provide sufficient financial returns?

How might we look across markets for these opportunities, so that we can direct entrepreneurial

attention, funding and other resources to them? How can we help an existing microenterprise focus

their efforts on these opportunities to supplement existing operations? What are the specific

measurable characteristics of these opportunities? Under what conditions do they develop? Once an

opportunity is identified as having the potential to meet both criteria, how might we screen it to ensure

viability?

This research proposes to address these questions in SSA through the methodology described below,

and in part, will leverage the tools of the approaches described above. Namely, this will include: the

113

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

Gibson, A. and Hitchins, R. (2008)

20

value chain mapping frameworks to define market systems (of the systems approach); frameworks for

determining intervention level and frameworks for markets impacts on the lives of the poor (of the

inclusive markets approach); and sustainable livelihood methodologies on identifying individual and

community competitive strengths.

IV. Audience As set out in section I – Development Stakeholders, there are a range of stakeholders within the

developmental entrepreneurship landscape. Views regarding the right priorities and approaches vary

across the groups (see figure 8). These positions are useful when considering the use of the findings of

the proposed research. First, for inter-governmental agencies providing policy advice and making

funding decisions on related projects, this research will provide a useful tool for assessing the

desirability of funding development entrepreneurship projects. For example, when making a decision to

provide funding for a proposed entrepreneurial intervention, the decision-maker will have a tool to

assess the opportunities that the micro-enterprises are pursuing – the likelihood of sustainability based

on profit potential and a robust method for projecting poverty alleviation outcomes. Second, within the

public sector, the research will provide developing world policy makers a tool to foster economic growth

by focusing entrepreneurship efforts on those activities that yield strong financial performance. When

efforts are correctly aligned on prioritised opportunities, this activity will also yield concurrent social

improvements. For public sector aid agencies in the developed world facing budgetary constraints,

funding developmental entrepreneurship or sustainable livelihoods programmes is becoming more

difficult. The tool resulting from this research can contribute to the process criteria set for prioritising

funding. It provides a method for evaluating whether a given project will meet the dual requirements of

demonstrably alleviating poverty and doing so in a financially sustainable way. Third, within civil society,

social entrepreneurs will have a tool to properly assess developing world new venture

Figure 8: Current Positions of Development Stakeholder Groups

opportunities, and social investors will have a way to assess an opportunity’s likelihood of achieving

social value core to their mission. Existing NGO practitioners that utilise developmental

• Economic downturn is

set to reverse years of

progress, and requires

access to funding99

• Food crises are likely

to re-emerge due to

population growth

and climate change

impacts100

• Inclusive private

sector solutions must

be fostered within a

supportive public

policy context101

Private

Sector

Inter-governmental

OrganisationsNational & Local

Public Sector Civil Society

• CSR should move

from philanthropy to

the utilisation of core

capabilities to serve

higher purposes108

• Progressive players

establish CSR at their

core, and from

inception109

• NGOs must improve

to collaborate on

global issues110

• Emerging markets

provide vast pools of

resources, talent and

consumers111

• Local ownership of

self-sustaining

businesses is critical

to poverty relief112

• Aid dependency

distorts incentives,

exacerbates

corruption, creates

debt burdens and

weakens indigenous

businesses113

• New positive images

of Africa must be

used to counter

negative

stereotypes114

• Building sustainable

livelihoods rectifies

inequalities and

provides access to

choices105

• Private sector

contributes to

development,

especially indigenous

small business 106

• Social investors use

VC methodology and

patient capital to spur

development

outcomes107

• Tightening of aid

budgets due to fiscal

constraints102

• Entrepreneurial

solutions offer a tool

to build cross-border

ties103

• African governments

must be accountable

for leading the

solutions to eradicate

poverty104

Beneficiaries

21

entrepreneurship to alleviate poverty will leverage the research insights to gauge the effectiveness of

existing interventions, and to prioritise future endeavours. Fourth, from the private sector for-profit

microfinance providers, and incubators will have a tool for assessing market opportunities and threats,

again strengthening a critical step in the due diligence process in capital allocation decisions. For the

micro-entrepreneur, it should enable focus on the most viable opportunities, and inform the

development of business

strategy. For larger corporates it may serve as a useful tool for analysing developing market

opportunities, and thus informing market entry decisions. In the case of emerging market growth

programmes, it will provide a tool for determining those grass roots opportunities in which financial

value is to be attained, and indicators of opportunity alignment to existing core strategy and capabilities.

For CSR programmes in related countries, the tool will provide a method for demonstrating projected

financial and social returns, and for reporting outcomes. Fifth, beneficiaries, including the micro-

entrepreneur, BDS providers, and value chain partners will utilise the outputs of the research to focus

their efforts on developing the most viable opportunities.

V. Hypothesis

Developmental entrepreneurship opportunities exist which will alleviate poverty and generate

sufficient profitability; and the levels of resultant social and financial returns can be projected

with validity.

As a key lever of pro-poor, inclusive economic activity, developmental entrepreneurship should be

embraced for its capacity, to not only alleviate poverty, but to do so in a substantively scalable way

through the generation of profit. Therefore, efforts to address these opportunities are inherently not

entirely dependent on donation-based or public sector funding. To harness this lever, research at

microenterprise level to address the extreme poverty of SSA, should provide insight into: (1) the

identification of opportunities for poverty alleviation and financial returns; (2) the strategy the local

entrepreneur should take to achieve both outcomes; and (3) the set of implementation tools a given

entrepreneur needs to execute that strategy. The research of this proposal seeks to address point 1.

Considering the entire landscape for developmental entrepreneurship opportunities, it could be

assumed that these opportunities would vary across a number of dimensions – size of investment

required, industry sector, extent of labour utilisation, size of the target market, extent of standard of

living improvements, etc. These dimensions fall into two categories: (1) the extent of poverty

alleviation attributable to the given venture which addressed the opportunity, or the social return; and

(2) the extent of the financial return generated for creditors and shareholders in the given venture. For

each of the two dimensions, there is a body of research referenced that demonstrates the prima facie

validity of this hypothesis.

Poverty Alleviation

As discussed, developmental entrepreneurship opportunities, when effectively addressed, provide

poverty amelioration outcomes. It is believed that the extent of these outcomes for a given venture

22

addressing one such opportunity is based on a number of contributing factors. First, there are a range

of primary benefits that will result to varying degrees – income increases for the entrepreneurs that own

a new business, standard-of-living improvements for customers that purchase goods or services, and

increased employment/livelihood opportunities. Second, there are several secondary benefits, which

are relevant based on the nature of the opportunity – purchases of locally procured goods and services

from value chain partners, improvements in life expectancy and child/maternal mortality rates,

increased educational enrolment, improved gender equality, improvements to food supplies, and new

benefits related to environmental sustainability. Third, the tertiary benefits include skills and knowledge

spillovers in target communities (or the building of human capacity); the growth in social capital, or local

networks that attract future investment, trade, and mentorship; benefits associated with future uses of

new intellectual property resulting from new technologies/innovations; and cultural benefits of

producing models worth highlighting to influence policy changes and attract people to entrepreneurial

undertakings.

A number of examples in the literature demonstrate the validity of the hypothesis’ reliance on the

referenced primary benefits. Tamvada documents that increases in income for micro-entrepreneurs,

and the route out of poverty that entrepreneurship provides.114 Similarly, Morris draws broader

conclusions related to the importance of entrepreneurship to an economy and shows correlations in

GDP increases, improvements to societal wealth, and quality of life enhancements. 115 Research by the

UNDP provides evidence regarding standards of living improvements for those availing of the offerings

micro-entrepreneurs provide.116 Regarding labour utilisation associated with a given developmental

entrepreneurship opportunity, Koo provides evidence regarding the upward social mobility

entrepreneurship and related employment opportunities provide, Ahmed and Peerlings find that labour

productivity, incomes and welfare are all correlated to improved working conditions in related SMEs,

and Kellogg develops a scorecard to measure employee poverty rate improvements in the small

business customers of a non-profit microfinance provider.117

Regarding the secondary benefits Milder provides evidence of the benefits related to value chain

partnering.118 Broader economic development, such as effects related to improvements in health,

education and hunger are also documented, such as the World Bank on household welfare related to

rural infrastructure projects, Reardon on the impacts of the agribusiness on rural poverty alleviation for

small hold farmers, and Mair & Marti on the poverty reduction impacts related to those entrepreneurs

that work to fill “institutional voids”.119 de Mel, Benzing & Chu, and Prasad all separately address the

role of gender in micro-entrepreneurship and its impacts.120 Lastly, Tremblay & Neef, as well as Dean &

114

Tamvada, J. (2010), p. 65 115

Morris, M. (2001), p. v 116

See UN Development Programme (2008); and Milder, B. (2008), pp. 301, 316 117

See Koo H. (1976), Ahmed, N. and Peerlings, J. (2008); and Kellog, C. (2009) 118

Milder, B. (2008), pp. 301, 316 119

See Songco, J. (2002); Reardon, T. et al (2009); and Mair, J. & Marti, I. (2008) 120

See de Mel, S., McKenzie, D. and Woodruff, C. (2008); Benzing, C. and Chu, H. (2009); and Prasad, R. (2009)

23

McMullen, examined the role of micro-entrepreneurship, and related opportunities for environmental

sustainability improvements.121

The tertiary benefits related to micro-entrepreneurship are also covered in the literature. Papagiandis

et al discuss the role of innovation and technology, and social networks, as they relate to spurring

entrepreneurial activity.122 Endeavor, a U.S. based not-for-profit in the developmental entrepreneurship

space, documents outcomes related to their engagements, including outputs related to knowledge

capital transfer, cultural capital benefits, and social networks development.123 Regarding policy impacts,

in 2007 the World Bank documented outcomes related to pro-poor aquaculture in rural Asia, including

policy influence, adaptive technologies and knowledge dissemination.124

The poverty alleviation outcomes are apparent, and as shown, well documented. One of the primary

challenges of this research is in the area of effective measurement, and then the extrapolation thereof

in defining a valid casual framework that can be used to predict the outcomes of a given venture’s

effective utilisation of resources to address the opportunity. Measurement of social returns is notably

difficult, but possible. Early work in this area was undertaken by Jed Emerson, Melinda Tuan and Fay

Twersky, as they developed the social return on investment framework. Also, balanced scorecards have

been used to gauge social outcomes by Acumen Fund and New Profit; while Venture Philanthropy

Partners and Robin Hood are noted for blending quantitative and qualitative measurements to assess

project efficacy. Also, Kramer synthesized a number of evaluation techniques in “Measuring Innovation:

Evaluation in the Field of Social Entrepreneurship” to define practical and balanced measures of impact. 125

Commercial Viability

The second leg of the hypothesis is the dimension of financial returns. Developmental entrepreneurship

is inherently concerned with leveraging the growth of small, private sector ventures to lift people from

poverty. In many instances, larger corporate undertakings, namely those in extractive industries and in

manufacturing, have been criticised for their exploitive practices in developing markets. For these and

other reasons, and despite the advances in CSR agendas in a significant number of organisations, many

stakeholders outside the private sector are loathe to engage private sector partners in joint

undertakings. However, it is precisely the generation of profit that enables these ventures to be

brought to scale, without sole reliance on donation or public sector funding, and thus expand the reach

of their socially beneficial activity.

121

See Tremblay, A. and Neef, A. (2009); Dean, T. and McMullen, J. (2007) 122

Papagianndis, S., Li, F., Etzkowitz, H. and Clouser, M. (2009), p. 215 123

Endeavor (2008), pp. 26-31 124

See World Bank (2007) 125

Trelstad, B. (2008), pp. 116-117

24

Figure 9: Disaggregation of Total Return to Shareholders126

In order to attract sufficient competitive capital through debt and equity sources, a venture must

demonstrate its capacity to repay the debt, or the extent of returns on equity invested, including

appropriate risk premiums. For start-up businesses in these markets, access to microfinance is vital, and

lending criteria are typically based upon the size of the loan amount, collateral requirements, interest

rates and other service fees, compulsory savings or group contribution requirements, and other terms

and conditions.127 For the equity investor, the most holistic yardstick of firm performance is financial

returns as measured by total return to shareholders (TRS) – a measurement inclusive of spread (return

on invested capital less the weighted average cost of capital), and firm growth (see figure 9). This

measure of financial returns is a useful tool for understanding the projected ‘end result.’ However, a

range of underlying factors contribute to the new venture’s ability to perform. The due diligence

process undertaken by an angel investor, venture capitalist or creditor in considering a potential

investment would rely heavily upon the business plan, including a range of analyses and projections

related to market size, ability to differentiate, risk mitigation, and others. These analyses, although

separate to, are also closely related to the financial performance projections. In essence, these factors

for screening opportunities are the generally accepted indicators of the financial performance, as

measured by TRS. The underlying factors related to a venture’s ability to generate these financial

returns, and hence their attractiveness, is detailed in figure 10:128

126

Taken, in part, from Higgins, R. (2007), pp. 53-56, 294-296 127

Think Microfinance (2010) , p. 2 128

Timmons & Spinelli (2004), pp.91-103; Cochrane (2004), p.1

Total Return to

Shareholders /

Economic Value

Added

Spread =

(ROIC –

WACC)

Growth

Rate

Return on

Invested Capital

(ROIC)

Weighted

Average

Cost of Capital

(WACC)

Organic Growth

(CAGR)

Growth through

Mergers &

Acquisitions

EBIT (1 – t)

D + E

(1 – t) KDD + KEE

D + E

(Vn + Accumulated Draw)

V1

Vpost + Accumulated Dividends

Vpre

ˆ(1/n)

-1

-1

25

There are several studies related to the financial feasibility of developmental entrepreneurship. Ferh e

al utilise corporate finance techniques to estimate the difference between market rates of returns and

actual rates of return in determining the outcomes of microfinance initiatives.129 Finn provides a case

study on Village Enterprise Funds, a provider with over 9,000 micro-grants in developing countries, and

shows the prevalence of micro-entrepreneurs to repay loans and to start subsequent businesses.130 De

Mel et al calculated the real (i.e. net of inflation) return to capital at 5.7% per month for micro-

enterprises in developing countries.131 In 2009, Raiz published a case study on a for-profit incubator

based in South Africa, which is profitably investing in local start-ups.132 Similarly, Copeland provided a

case study on a new venture providing lighting solutions in India and Africa, which recently received

$6M in venture funding.133 Lastly, Masakure et al utilised the resource-based theory of the firm to

assess financial performance of Ghanaian SMEs.134

In support of the financial viability leg of the hypothesis, a number of studies have also been conducted

on developmental entrepreneurship opportunities, and those specific industry sectors and geographic

markets that are attractive due to their social benefits and investment returns. The World Bank

produced two relevant reports on opportunities in SSA – one on the opportunities associated with

129

Ferh, D. and Hishigsurren, G. (2005), p. 133 130

See Finn, B. (2005) 131

de Mel, S., McKenzie, D. and Woodruff, C. (2007), pp. 1-2 132

Raiz, A. (2009), pp.61-62 133

See Copeland, M. (2009) 134

See Masakure, O., Henson, S. and Cranfield, J. (2009)

Industry & Market

• Structure & size

• Growth rate

• Market capacity

• Market share attainable

• Cost structure

• Reach-ability of customers

• Durability of product life

• Strength of user benefits

Economics

• Time to break even

• ROIC potential

• Capital requirements

• Free cash flow projections

• Sale growth

• Asset intensity & Cap Ex

• Gross margins

• After-tax profits

Competitive Advantage

• Fixed and variable costs

• Value chain control

• Barriers to entry

• Strength of customer value

proposition

• Strategic flexibility

• Room for error

Harvest

• Valuation multiples &

comparables

• Exit mechanism and

strategy

• Capital market context

Management Team

• Complementary fit

• Relevance of experience

• Integrity

• Opportunity costs

• Desirability

• Risk / reward tolerance

• Stress tolerance

Risk

• Demand risk

• Payment risk

• Performance risk

• Political risk

• Regulatory risk

• Foreign exchange risk

• Liquidity risk

• Investment concentration

risk

Figure 10: Criteria for Evaluating Venture Opportunities

26

aquaculture, and another on agribusiness.135 In 2008, Milder described the opportunity presented by

providing venture funding in the finance gap between micro-credit and corporate finance.136 Likewise,

Eid provides insights regarding the opportunities for private equity in developing countries.137 Masakure

et al explore the financial performance of non-farm enterprises in Ghana138; and Ravallion stresses the

importance of productivity in small hold farming, and their likelihoods of success to increase food

supplies and utilise labour.139 Kirubi et al provided an analysis of the opportunity presented by

increasing village-level community electricity improvements.140 In short, there is currently a body of

research that supports the assertion that developmental entrepreneurship opportunities are

commercially attractive. In fact, Tambunan argues that “SMEs in LDCs can survive, and even grow in the

long run, as they create a niche market for themselves, they act as a ‘last resort’ for the poor, and they

will continue to grow alongside larger enterprises for whom they often supply required inputs.”141

The area of venture opportunity screening, including market analysis, financial analyses (e.g. sensitivity

and scenario planning), risk analysis, and others are well documented and provide a foundation from

which to commence the research. The key challenge for the financial returns dimensions, is not in

developing the appropriate methodology for calculating financial returns, but in collecting the required

inputs across a statistically significant number of microenterprises.

VI. Methodology

The methodology described in the sub-sections below, include (1) gathering the required instances of

existing research and finalising the hypothesis; (2) collecting and analysing the existing datasets on

global entrepreneurship and finalising the research design; (3) Determining a representative sample size

and desired microenterprise participants; (4) Observe and interview participants to collect information

(both qualitative and quantitative) required to validly describe micro-entrepreneurial activity; (5) Create

a mutually exclusive and collectively exhaustive categorisation of microenterprises based on the

opportunities they pursue (as opposed to their capabilities in addressing them); (6) Map datasets within

the categorisations determined; (7) Draw correlations for each category between opportunities pursued

and social and financial returns achieved; and (8) Study anomalous instances and develop a causation

framework which ascribes deterministic characteristics to the opportunities regarding their capacity to

produce social and financial value.

Refine the Hypothesis (1)

The review of the literature that was undertaken to complete this proposal represents the first step in

forming the final hypothesis. A review of over 200 sources was utilised in crafting this document, and

provides a basis for the research insofar as it describes the breadth of work in the developmental

entrepreneurship field. However, it is not an exhaustive review of all literature describing the depth of

135

See World Bank (2007); Larsen, K., Kim, R. and Theus, F. (2009) 136

See Milder, B. (2008) 137

See Eid, F. (2006) 138

See Masakure, O., Henson, S. and Cranfield, J. (2009) 139

Ravallion, M. (2008), p. 303 140

See Kirubi, C. et al (2008) 141

Tambunan, T. (2008), p. 147

27

research undertaken that is relevant to the aspect of opportunity analysis. There are a number of topics

to be further explored within the existing literature: measurement techniques used to gauge social

outcomes, tools for analysing value chain relationships and market demand (from the sustainable

livelihoods, systems, and inclusive markets approaches), valuation models and other measurement

techniques used in microfinance to gauge the financial performance of sole micro-entrepreneurs and

other developing world SMEs, other alternative investment decision approaches or methods for

screening venture opportunities, significant contextual differences for ventures in the developing world

that necessitate changes to the developed world techniques for screening venture opportunities.

Capturing these insights will provide an improved lens with which to view the existing hypothesis –

potentially shedding light that enables an improvement thereof; and will provide better tools with which

to design and conduct the research.

Assumptions & Preliminary Research Design (2)

The preliminary research design, as proposed, is created in the absence of the additional insights

referenced above. As such, the present design rests upon several broad assumptions – qualitative

observation will be logistically possible and cover a representative sample of micro-entrepreneurs in

SSA142, the existing datasets available through the Global Entrepreneurship Monitor (GEM) and the

World Bank will contain the required information to extrapolate the findings of the representative

sample across the broader group of SSA entrepreneurs143, and interviewing and measurement

techniques (which themselves are currently evolving) for social value created by social entrepreneurship

will be sufficient to gauge the social and financial returns of the observed participants.144 Also, the

research is designed to collect information related to a micro-enterprise’s ability to reduce hunger,

increase incomes, compete within the given industry and market, price products to reach break-even

expeditiously, mitigate regulatory risk, and others (see section IV). This research design rests upon

these factors as the elements that will have to be captured to assess the opportunities (see figure 11).

These factors are assumed to be measurable, and are believed to constitute the elements of social and

financial returns. Also, note the proposed relationships between the extent of social return and the

extent of financial returns, and the outcomes expected (see further discussion in section VI).

The completion of step 1 is presumed to provide additional insight which may alter the research design

as proposed herein.

Determining a Representative Sample (3)

The contextual information provided in section I provides a broad view of the primary areas relevant to

the study of developmental entrepreneurship. This summarisation is a useful backdrop for determining

a sample of representative micro-entrepreneurs to study in depth. The existing scope of the research

necessitates consideration of three levels for representation within the selected sample (to avoid

sample bias). First, the countries in which the micro-entrepreneurs operate should reflect the four

142

See Fadahunsi, A. (2000). Argues in favour of utilising qualitative techniques, especially observation. 143

See Acs, Z., Desai, S. and Klapper, L. (2008) for a description of differences between that data available in the

Global Entrepreneurship Monitor and the World Bank Entrepreneurship Survey; and see OECD (2008b) for data on

entrepreneurship in OECD (i.e. developed) countries for comparative purposes. 144

See Trelstad, B. (2008). Provides an appendix on the development of related measurement techniques for

micro-entrepreneurs stimulating poverty alleviation outcomes in developing country contexts.

28

regions of SSA, should include countries of Low and Medium development, should cover the range of

‘ease of doing business’ metrics, and should cover countries that include various mixes of industry

activity.145 Second, mid-level considerations will cover the range of contextual conditions at community

and value chain levels. Here it is important to ensure that the sample covers the range of these

environmental conditions such as access to suppliers and customers, extent of arable land and water

resources, state of transportation infrastructure, urban versus rural footprint, etc. Third, the sample

should represent the range of contextual conditions at micro-enterprise level, including: entrepreneur’s

gender, previous livelihood or employment /opportunity costs, the product market or industry in which

the venture is competing, etc. Certainly, there are additional conditions to be considered at each level

that may influence an entrepreneur’s success, and will be necessary to consider when determining the

sample. For this reason it is necessary that the work regarding the refinement of the hypothesis

includes a surfacing of the existing conditions regarded as relevant to firm performance in developing

country microenterprises, so that a robust sample can be examined.

Observation (4)

The given sample will be examined across each of the contextual conditions decided as a part of step (3).

The examination will include a recording of these factors, for each microenterprise studied, to ensure an

understanding of the venture’s context. Also, those factors that are agreed within step (2) as necessary

factors contributing to the generation of social and financial returns will naturally be measured.

Questions asked by the interviewers will likely contain both quantitative and qualitative information, will

focus on separating the strength of the opportunity from the strength of the execution to address it, will

ensure validity, and reduce interviewer bias.146 Also, other considerations, such as cultural sensitivities,

language, and logistics in the developing country, will be taken into account when planning the on-site

observations. Lastly, a system (potentially electronic) for capturing and transmitting findings from the

field will be created to mitigate the risk of data loss in transit.

145

Note there are several methods for estimating the industry sector concentration of a given economy. One of

the more recently developed views on this topic is covered by Hidalgo et al and can be explored at

http://www.chidalgo.com/productspace/. 146

See Harrison, D. and Krauss, S. (2002) on interviewer cheating when engaging African entrepreneurs.

29

Interpretation & Categorisation (5 & 6)

A review of the data gathered will result in the determination of a number of primary attributes which

helps describe the opportunities that developmental entrepreneurs pursue. An examination of the data

gathered will be used to categorise the sample into natural groupings based on the contextual

conditions they operate within, the extent of their outcomes in the range of factors underpinning their

summary social returns generated, and the extent of the factors underpinning their financial returns

generated. In creating this grouping it is, of course, necessary to eliminate overlaps and gaps – meaning

that the categories should be mutually exclusive and comprehensively exhaustive.

The agreed upon categories will then serve as a framework within which the GEM and World Bank

datasets can be mapped. For example, if categories are determined to be driven primarily by industry

alignment, then it will be useful to create summary statistics on the number and size of those

entrepreneurs engaged within each given industry category.

Correlation (7)

Correlations will arise that will help describe the nature of the opportunities, and their ability to

generate social and financial returns. For example, when examining the category under the water and

sanitation industry group, we may find that firms generally produce a high level of both social and

financial returns (perhaps relative to a restaurateur or a textile manufacturer) due to their ability to

Financial Return Dimension

Not-for-Profit and

Public Sector Space

Most Attractive

Opportunities

Least Attractive

OpportunitiesPrivate Sector Space

So

cia

l Re

turn

Dim

en

sio

n

Illustrative

Figure 11: Mapping Social and Financial Returns

30

increase the entrepreneur’s income and those of his/her employees, improve health conditions for

customers, and reduce the amount of time children carry water and therefore increase educational

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

trends.

Causal Framework (8)

Utilising the correlations developed, a review of the observed sample and the dataset gathered, will

provide confirmatory examples which support the correlations, and anomalous instances which will

require adaptations to the theory under development. For example, if an instance within the water and

sanitation category does not result in high social returns, a further investigation of ‘why’ is required. It

would be at this stage we could observe that building latrines does not add to agricultural productivity

for small hold farmers, and therefore doesn’t generate significant scale. In this instance, the theory

could be improved upon to draw the casual link between an opportunity’s ability to generate income for

the customer through increased agricultural productivity, the venture’s scalability due to higher

demand, attractiveness for inward capital that makes scaling the business possible, and the growth of

the business has enabled significant standard of living improvements across communities reached.

VII. Expected Outcomes

The research is intended to provide a theory which explains the nature of developmental

entrepreneurship opportunities, in terms of their abilities to generate both social returns related to

decreasing poverty in Sub Saharan Africa and to provide financial returns to providers of capital. The

theory will provide a robust method for predicting these returns for a given developmental

entrepreneurship opportunity. A group of given opportunities could then be mapped to compare their

relative attractiveness (see figure 12). 147 Note that such a mapping is expected to result in

147

The map provides an illustrative example of the type of output envisaged as an output of the proposed

research. Each point on the map indicates an opportunity analysed.

31

Figure 12: Developmental Entrepreneurship Opportunity Mapping

three clusters of opportunities – one with low social returns and low financial returns, or the least

attractive opportunities; the second with high social returns but low financial returns, or those most

suited for not-for-profit or public sector initiatives; and the third with low social returns and high

financial returns, which are best addressed by traditional commercial activity. It is the outliers in the

upper-right quadrant that are most attractive for developmental entrepreneurship, as they provide high

levels of both social and financial returns. This mapping will enable effort and funding to be directed to

those ventures that have the highest likelihood to achieve the highest social returns, and to do so by

marshalling competitive capital to scale the venture.

VIII. Benefits The proposed research will increase the body of knowledge in developmental entrepreneurship, and

specifically in the aspect of opportunity analysis. The insights gained will enable microenterprise and

market development programme proponents in inter-governmental organisations, as well as sustainable

livelihoods advocates in not-for-profits, to prioritise their efforts on those entrepreneurial activities that

maximise social benefits and provide room for scaling outside donation or public sector funding.

Similarly, developing country and developed country agencies supporting entrepreneurship

programmes will have a tool with which to direct support and micro-entrepreneur interest to the higher

priority opportunities; and developing country governments will also benefit from increased tax revenue

generated from successful ventures addressing those opportunities with the greatest likelihood of

success. It will provide micro-finance institutions and other social entrepreneurs another tool for

evaluating social value and credit worthiness. Larger private sector players will benefit from the findings

by gaining an additional tool for analysing new market entry opportunities, and in forming CSR

programmes that maximise impact by optimising the balance between leveraging their core capabilities

Financial Return

Soci

al R

etu

rn

Least Attractive

Opportunities

Most Attractive

Opportunities

Illustrative

Private Sector Space

Not-for-Profit

and Public

Sector Space

32

and addressing the highest value opportunities with demonstrable social and financial value. Finally,

and most significantly, the people of developing countries, especially those living in conditions of

desperate poverty, will benefit from improved standards of living, increased incomes and employment

opportunities, and broader societal and developmental benefits. It is for these people – those in

greatest need – that this work has the most value and why it is right that we undertake it.

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