Who Are The Entrepreneurs And What Constraints Do They Face?

Who are the entrepreneurs andwhat constraints do they face?Labor Markets Core CourseYoon Y. ChoLabor Markets Team, HDNSP

Who are the entrepreneurs? (1) Which person comes to your mind first?2

Who are the entrepreneurs? (2) What about these people?3

Who are entrepreneurs? (3)What makes them entrepreneurs? New ideas/innovation RisksAre they an engine of growth? Yes: for Steve Jobs Sorry, but no: for cotton candy makersCan everyone be entrepreneurs? No: not everyone can be Bill Gates Yes: as long as you improve a bit in what you aredoing --- a self employed person entrepreneur4

Can/Should entrepreneurship bepromoted?Can entrepreneurship be promoted? Yes: a bit of capital, a bit of skills, a bit of knowledge, abit of networks No: it depends on the innate ability and traits--willingness to take risks and try out new things.Should entrepreneurship be promoted (with publicfunding)? No: those who are born with the entrepreneurialabilities would become one even without anypromotion, and investing public funds is waste. Yes: there are a number of market failures andinefficiencies such as limited access to credits thatrequire government intervention.5

8060AGRICULTURALWORKERS40SALARIED WORKERS20SELF-EMPLOYED0Percent of workers Wage and salary employment is lessprevalent in the developing world Many people whose primary job isfor a salary or agriculture have a selfemployment activity as a secondaryrevenue source. MSEs (Micro and Small Enterprises)remain the main source of jobs inthe developing world When jobs are needed butemployers are not creating them,self-employment andentrepreneurship is a way for peopleto create their own jobs100Should we promote entrepreneurship?It seems that we don’t have any other choice.300 50010002500 5000 10000Per Capita GDPNon-ag unpaidNon-ag employerAll agricultural workers2500050000Non-ag own accountNon-ag wage and salaried6

Even with the best case scenario,wage jobs wouldn’t be sufficientBased on simulation with the Sub Saharan African countries, even with anannual wage job grow rates at 8 percent, wage employment share would bebetween 8-25 percent.7

Then the questions are HOW?FOR WHOM?WHAT?8

To answer these A conceptual frameworkProfilesConstraintsPolicy tools9

A Conceptual framework for understandingself-employment and entrepreneurshipNOCurrently selfemployed?Wants to startup a business?NOWAGEEMPLOYMENTYESYESYESWants toexpand?Economicallyviable?PROGRAM (to enablereorientation to analternative sector)NONOYESIs happy withstatus quo?YESHas ssessmentYESNOWants to moveinto other selfemployment?ENDYESConstraintsassessmentPROGRAM (tofacilitate growth/ Startup in sector selectedby individual)NOWAGEEMPLOYMENT10

But the world is not withoutconstraints The wage and salary jobs that people want may not be available The entrepreneur may want to expand but lack access to capital A business that is not viable initially might be profitable if theindividual were better at it An individual may lack ideas about what to do, but giving a goodplan could make it work A person may be located in an environment where he/she is cut offfrom profitable value chains etc.11

Profiles of the self employed andentrepreneurs(based on Gindling and Newhouse, 2012)12

Are the entrepreneurs better orworse off than wage employees?Comparing household income:100All Low and Middle Income 25352827012Wage and SalaryNon-Paid EmployeeEmployertercile1tercile3Own AccountAgricultureNot Employedtercile2 Wage employees live in wealthier households than own-account workers Employers live in wealthier households than wage or own-account Agricultural workers live in poorest households13

must be correlated witheducation Table 5: Mean years of education completed by education category, by region and income groupNon-agricultureWageandSalariedWorkerAll CountriesNon-paidEmployeesEmployerNotAgriculture .59.812.87.510.55.710.08.510.2Latin America and Caribbean9.88.510.47.74.87.7Middle East and North AfricaSouth AsiaSub-Saharan 23.94.16.54.96.28.814East Asia and PacificEurope and Central AsiaLow IncomeLower Middle IncomeUpper Middle Income

What kind of jobsare they doing cesretailconstructionmanufacturingwage andsalarynon paidemployeeemployerown accountholder Wage and salary --- tend to be concentrated around the service sector Own account holder --- retail Caution --- huge variation across regions 15

Is youth entrepreneurshipa reality today?00.02.05.04.1.06.15.08.1Female.2Male2040Age Yearsown accountnon paid employee60employer2040Age Yearslown accountnon paid employee60employer16

Lessons from profiling Differences in observable characteristics – Compared to wage and salaried workers, self employedworkers tend to be older, less educated, and engage in theretail sector.– Huge heterogeneity in successful vs. less successfulentrepreneurs (successful being employers, wealthy) Differences in observable characteristics are not all thatexplains one’s success in business– Profiles of the successful vs. less successful– Calculate the probability of success based on their profiles– There are many individuals who have exactly the sameobservable features [such as gender, age and education] withthe successful entrepreneurs, but are not successful.

Why aren’t those who have highpotential successful Unobservable characteristics & constraints

Constraints19

What sorts of constraints can affectentrepreneurial success?Three broad typesSkills / Individual Level:– No Business knowledge – No basic skills– Illiteracy– Language Barriers– Insufficient Education – No entrepreneurial traitsBusiness Environment–––––Excessive BureaucracyRestricted Access to FinanceUncertain Regulatory EnvironmentCorruptionRestricted Access to ServicesSocial Environment–––––No MentorsCultural factorsSocietal StigmasNo safety net (in case of failure)No Exposure to“Entrepreneurship”

How to assess the constraints? Individual constraints––––Psychometric TestsHousehold SurveysStandardized Assessments (PISA/TIMSS)Educational Administrative Records Business Environment– ICA / Informal Sector Employer Survey– Doing Business Legal Framework Analysis– NGO / Consultancy Reports Social Environment––––Household SurveysFocus GroupsSociological ResearchNGO / Consultancy Reports

Example: individual constraint – entrepreneurialtraits (Kauffman Foundation)1) Desire and passion: I have a fervent drive to succeed and zeal forthe tasks required2) Energy: I have stamina to tackle problems3) Ability to Thrive on Uncertainty: I can prosper in an environmentwith many questions and few answers4) Persuasiveness: I convincingly communicate with others –bankers, vendors, employees5) Self Discipline: I can do the tasks necessary to succeed, whetherpleasant or unpleasant

Example: individual constraint – entrepreneurialtraits (Kauffman Foundation)6) Self confidence: I believe that somehow I can solve whateverproblems arise7) Ethics: I deal with others with honesty and integrity8) Problem solving: I have an ability to anticipate and troubleshootproblems9) Networking: I connect with others and build strategicrelationships10) Business knowledge: I have a basis for making effective,profitable business decisions

Example: business environment24

Example: Assessing social constraints: socialnetworks1. Is there a2. Are you an3. How much input do[GROUP] in your active member of you have in makingcommunity?this [GROUP]?decisions in this[GROUP]?Yes 1Yes .1No.2No 2Self-help group, non-credit relatedFormal trade, business, or professional associationsMicro-finance groupInformal savings or loan group

Multiplicity & Diversity ofConstraints Of course, none of the tools are perfect – suggestive evidence,but more info is better than less E.g., business environment: requirement of collateral & individualconstraints: access to finance Interventions need to target the relevant and commonconstraints: some constraints are common to allE.g. Mexico (Bruhn 2012): the number of procedures 15 , days 67 toregister a business Reform in 2002 to the number of procedure 2, days 3 number of new firms significantly increased Some populations face specific constraints Women/YouthRural / RemoteFragile States / DemobilizedLower Castes Profile the binding constraintsDesign tailored programs

Entrepreneurship Programs27

Tools to address sIndividual : Lack of SkillsTrainingVocational and/or business training oftencombined with financing and counseling(Uganda, Malawi, Liberia, etc)A large knowledge gap exists: emerging patternsare that youth benefit most especially fromtechnical skills training with counseling; (relativelyshort) business training can make difference.Comprehensive entrepreneurship modellike BRAC, IRCBusiness environment:Limited access to financeMicrofinanceand grantsMicrofinance: Many countries includingBangladesh, Pakistan, India, Morocco,Mongolia, etc.Grants/in-kind transfer: Sri Lanka, Mexico,GhanaSocial: Lack ofnetwork/informationAdvisoryservice aspart oftraining orvalue chainintegrationCounseling, psycho-social support,mentoring, role model setting, andconsultingMixed results between different target group withdifferent goals (setup vs. expansion); Usuallylarger effects on prospect than existingentrepreneurs; can be more effective forfinancially constrained enterprises.Useful to complement trainingAshoka, Endeavor, SEWA28

Examples: Training Vocational training: addressing lack of technical skills- Malawi (Cho et al. 2013) -- apprenticeship training for vulnerable youth- Uganda (Blattman et al. 2012) – training grants for vulnerable youth- Liberia -- AGI Business training: addressing lack of managerial and businessskills- ILO– KAB (Know about business) etc Financial training: addressing lack of financial literacy andaccounting- Usually among existing entrepreneurs, microcredit clients, etc. who havebasic knowledge and skills- Bosnia & Herzegovina29

Examples: Access to finance Based on global inventory Various approaches Combinations of themAccess to FinancialMarketsCrowdfundingAccess to Fixed AssetsEquity InvestmentsPrizes, GrantsScholarshipsIn-kind creditsLoans guaranteesLoans, credits (financial)0%20% 40% 60%30

Examples: Consulting/advisoryservice India: business advisory service (Bloom et al. 2011)- Significantly improved profits- Caveat: experimented for large firms- Experiments being conducted in MSMEs 31

Yarn inventory management before advisory serviceYarn without labeling,order or dampprotectionDifferent typesand colors of yarnlying mixedYarn piled up so high anddeep that access to backsacks is almost impossibleA crushed yarn cone, which isunusable as it leads to irregularyarn tension32

Yarn inventory storage system after advisory serviceStock is organized, labeled,and entered into anElectronic ResourcePlanning (ERP) systemwhich has details of thetype, age and location.Bagging and racking yarnreduces waste from rotting(keeps the yarn dry) andcrushingComputerized inventorysystems help to reducestock levels.33

Improved yarn inventory storage system after advisoryserviceShade cards nowproduced for allsurplus yarn. These aresent to the designteam in Mumbai to usein future products34

Among these menu of options what programs to implement? Maybe those that are proven to be effective – But only limited evidence exists – After the break: (based on Cho and Honorati, 2012) “Whatdo we know about the impact of Self-employmentprograms?” Monday morning: discuss most commonly used tools– “How to Provide Access to Finance to the Self-employedand Small Entrepreneurs”– “Entrepreneurship Training” Tuesday morning: discuss innovative andcomprehensive approaches– “Inclusive Value Chains”– “microfranchising”35

THANK YOU!36

E.g., business environment: requirement of collateral & individual constraints: access to finance Interventions need to target the relevant and common constraints: some constraints are common to all E.g. Mexico (Bruhn 2012): the number of procedures 15 , days 67 to register a business