Entrepreneurship in the Informal Economy

Entrepreneurship in the Informal Economy

Although entrepreneurship in the informal economy occurs outside state regulatory systems, informal commercial activities account for an estimated 30% of economic activity around the world. Informal entrepreneurship goes unmonitored despite the fact that it significantly contributes to poverty reduction and economic development. As a result, the informal sector is open to unethical practices including corruption, worker exploitation and natural environment abuse, to name just a few. In the media, debates have formed around whether informal entrepreneurship should be assisted or legitimized. Hence, a deep understanding of the phenomenon is vitally important. This book is the first on the market to offer models and approaches to informal entrepreneurship as well as to its prospects for economic development. Offering an in-depth examination of informal entrepreneurship in many different countries, it reveals the motivations for engaging in entrepreneurship in the informal economy, characteristics of informal entrepreneurship and informal entrepreneurs’ response to ethical issues. This volume illustrates the relationship between formal and informal economies and the conditions for the benefits of informal entrepreneurship to outweigh its disadvantages. And finally, it gives recommendations about when and how the informal economy can be formalized, which sectors should be formalized and which ones can remain informal. This book offers much-needed guidance for stakeholders involved in economic development programs and scholars and entrepreneurs interested in the field of informal entrepreneurship as it is developing around the globe. Mai Thi Thanh Thai is assistant professor in the Department of International Business, HEC Montreal, Canada. Ekaterina Turkina is assistant professor in the Department of International Business, HEC Montreal, Canada.

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Routledge Studies in Entrepreneurship Edited by Jay Mitra (Essex University, UK) & Zoltan Acs (George Mason University, USA) This series extends the meaning and scope of entrepreneurship by capturing new research and enquiry on economic, social, cultural and personal value creation. Entrepreneurship as value creation represents the endeavors of innovative people and organizations in creative environments that open up opportunities for developing new products, new services, new firms and new forms of policy making in different environments seeking sustainable economic growth and social development. In setting this objective, the series includes books which cover a diverse range of conceptual, empirical and scholarly topics that both inform the field and push the boundaries of entrepreneurship. 1 Entrepreneurial Learning Conceptual Frameworks and Applications Edited by Richard T. Harrison and Claire M. Leitch 2 Enterprise, Deprivation and Social Exclusion The Role of Small Business in Addressing Social and Economic Inequalities Edited by Alan Southern 3 Entrepreneurship in the Informal Economy Edited By Mai Thi Thanh Thai and Ekaterina Turkina

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Entrepreneurship in the Informal Economy Models, Approaches and Prospects for Economic Development Edited by Mai Thi Thanh Thai and Ekaterina Turkina

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First published 2013 by Routledge 711 Third Avenue, New York, NY 10017 Simultaneously published in the UK by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 Taylor & Francis The right of the editors to be identified as the author of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging in Publication Data [CIP data] ISBN: 978-0-415-81382-2 (hbk) ISBN: 978-0-203-06677-5 (ebk) Typeset in Sabon by Apex CoVantage, LLC

Printed and bound in the United States of America on acid-free paper.

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Contents

List of Figures List of Tables Foreword Acknowledgments

ix xi xiii xvii

PART I Determinants of Informal Entrepreneurship 1

Determinants of Informal Entrepreneurship: A CrossCountry Analysis

3

MAI THI THANH THAI AND EKATERINA TURKINA

2

Informal versus Formal New Ventures: A Choice Analysis and Some Policy Implications

19

BERNARD SINCLAIR-DESGAGNÉ

3

Evaluating the Competing Explanations for Informal Entrepreneurship: Some Lessons from Brazil

34

COLIN C. WILLIAMS AND YOUSSEF YOUSSEF

4

Motivations of Entrepreneurs in the Informal Economy: Examples from Cambodia

50

SCOTT A. HIPSHER

PART II Financial Aspects of Informal Entrepreneurship 5

Informal Venture Capital Investing in Emerging Asian Economies

65

WILLIAM SCHEELA, EDMUNDO ISIDRO AND THAWATACHAI JITTRAPANUN

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vi

Contents

6

Alternative Financial Services: An Essential Tool for Informal Entrepreneurs

83

LES DLABAY

PART III Organizational Forms of Informal Entrepreneurship 7

Informal Online Entrepreneurship in South Korea

99

AMANDA MIN CHUNG HAN

8

Institutional Entrepreneurship in the Informal Economy: The Case of the Zambia National Marketeers Association

114

MARCUS MØLLER LARSEN

9

Informal Entrepreneurs in Central America: A Labor of Love or Survival?

127

MICHAEL J. PISANI

PART IV Institutional Environment for Informal Entrepreneurship 10 Unbundling Institutional Reform: The Case of a Garment Cluster in Lima, Peru, 1988–2008

145

MATTHEW BIRD

11 Tackling Informal Entrepreneurs: Tailoring Policy Measures to the Varieties of Informal Entrepreneurship

161

COLIN C. WILLIAMS

PART V Sociocultural Contexts of Informal Entrepreneurship 12 The Feminine Paradigm of Entrepreneurship in the Informal Economy

177

MARSHA A. TONGEL

13 Enterprise Education for Small Artisanal Businesses: A Case Study of Sokoban Wood Village, Ghana

192

BERNARD A. OBENG, RICHARD K. BLUNDEL AND AHMED AGYAPONG

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Contents vii 14 When Religion Meets Capitalism: A Study of the Role of Islam among North African Entrepreneurs in Montreal

208

JAMEL STAMBOULI AND SÉBASTIEN ARCAND

PART VI The Role of Informal Entrepreneurship in Economic Development 15 Informal Economy and Women Entrepreneurs: A Case Study of Senegal in Africa

225

ALPHA AYANDÉ

16 Enhancing Well-Being at the Household Level: The Impact of Informal Economy Activity on Poverty Reduction in the Traditional Ankole Kingdom of S.W. Uganda

241

EMMANUEL MUTUNGI AND TONY GHAYE

PART VII Concluding Remarks 17 Informal Economy Entrepreneurship and Policy Implications

259

LÉO-PAUL DANA

Contributors Index

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269 279

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Figures

2.1 2.2 2.3 2.4 2.5 5.1 7.1 10.1 10.2 13.1 13.2 16.1 16.2

The basic model The case   1/2 The case  > 1/2 Most opportunity (necessity) entrepreneurs choose the formal (informal) sector Higher and lower aspirations: a + > a, b + < b Thai business angel investment—selected quotes Conceptual model of the determinants of informal economy entrepreneurs Overlapping business environment reforms in Peru Years of operation (% of firms in Gamarra) Sokoban Wood Village: First field visit to Sokoban and view of a woodworking shed Piloting the marketing course at Sokoban (A) Spears (amacumu) and (B) Panga (omuhoro gw’orunana) (A) Pounding mortar (enshekuru), (B) Winnowing tray (orugari,) (C) Serving baskets (endiiro), (D) Milk pots (ebyanzi), (E) Milk platform (orugyeegye)

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20 22 23 27 29 72 101 152 155 195 199 247

248

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List of Tables

1.1 1.2 1.3 3.1 5.1 5.2 5.3 5.4 7.1 7.2 9.1 9.2 9.3

13.1 14.1 15.1 15.2 16.1 16.2 17.1

Determinants of entrepreneurship across countries Factor analysis of independent variables—Rotated Component Matrix Multiple regression of cultural and non-cultural factors on the levels of entrepreneurship Reasons for starting an informal business venture, Brazil, 2003 Institutional analysis Business angel profiles Challenges for BA investing and Investment Performance in Thailand and the Philippines Recommendations to improve BA investing Motivation Blog income Characteristics of Central American Tienditas by (in)formality and gender Characteristics of (in)formal Tienditas (in US$) by country and gender Determinants of Central American informal female tienditas micro-entrepreneurs and business rationale (logistic regression) Initial needs assessment—summary of responses Basic explanatory theories of ethnic entrepreneurship Structure validity and reliability statistics Analysis of findings Incomes of families engaged in material culture production for three months in Ug.shs Incomes of the sample for three months Forms of Enterprise

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5 7 12 41 68 71 73 77 107 109 132 135

136 198 209 230 232 250 251 262

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Foreword

Informal economies are large and ubiquitous, and they are not disappearing. In fact, they are growing, especially in the developing world where they often engage one half or even two-thirds of the economically active population. These facts should suffice to enhance and focus reader interest in the informal economy; the difficulty of measuring and defining the informal economy tempts researchers to avoid the whole subject in favor of subjects more easily measured and defined. These subjects lie in the formal sector, not in the informal. Unfortunately, when that temptation triumphs, as it often does, researchers present a distorted image of social and economic reality to the world. A tidy world without informality comes into existence in textbooks that ignore or implicitly deny the untidy reality outside. Unwary readers accept the textbook image and act on it. Chaos ensues because the formal sector is only part of the economy, not the whole, as their textbooks assured them it was. This frustrating but recurrent situation reminds one of the ludicrous drunk who persistently looks inside for the watch he dropped outside because “it’s cold and dark out there.” Six decades ago, researchers were already impressed by the size of informal economy, but they supposed that modernization would enable the formal sector to absorb the informal. Banks would absorb rotating credit associations, shopping malls would absorb bazaars and factories would absorb artisans. That has happened to some extent in the upscale zones of the world’s largest cities, but it has not happened outside them, where most of the world’s people live. Unfortunately, most readers, researchers and students live in the upscale zones of the world’s largest cities, where their personal-lived reality is globally unrealistic. That mismatch makes reality still harder for them to perceive. But let us not be premature. Possibly the long-awaited final absorption of the informal sectors into the formal will take place in another six decades, as rural birthrates level out over the globe; but there is no sign of that now. Under the circumstances, it behooves us to hitch up our britches and undertake the nettlesome task of understanding the complex reality we confront rather than continuing forlornly to hope that the reality will go away.

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xiv

Foreword

The informal economy is complex in several ways. Most of its participants are self-employed individuals, preponderantly women, who struggle to piece together a meager livelihood in labor-intensive pursuits. This is survivalist self-employment. Curiously, these people may be poor and even wretched, but they are not exploited in a technical sense. However, of participants in the informal economy, a minority is wage employees of formal sector firms, often large and profitable, that by hook or by crook have gained access to a cheap labor pool. These informal workers are technically exploited, even if, as often is the case, their economic standard significantly exceeds that of the larger, self-employed component of the informal economy. Another complexity arises from market regulations. Informal economies exist because governments regulate markets. Regulation takes the form of taxation, safety and health certification, property-rights attestation, old age and pension requirements, zoning requirements, fire prevention standards, sanitation standards, toxic discharge and waste controls and legal protection of the environment and population against negative externalities. All these regulations are important, even essential to the public interest, but they impose costs on business, thus conferring competitive advantage on any business firms that can evade the regulations. When the cost of bribery and pay-offs to public officials, which routinely accompany government regulation in many countries, is added to these legitimate costs, the incentive to evade the regulatory eye of government is increased. The informal economy offers a haven from all that regulation and thereby the opportunity to employ the least productive workers, whom the formal sector cannot absorb. Here is a societal dilemma. Government regulation of business is essential to the public interest, but regulation breeds problems only slightly less serious than total nonregulation. If governments turn to harsh police measures to suppress the informal economy, a possible remedy for its illegality, they strip vast throngs of unfortunate people of their jobs, income and housing, rendering homeless and destitute those who were only poor and ill-housed before. When the informal economy has been quite large, the economy then implodes for lack of consumer demand, and a general business depression occurs amid rumbles of social unrest and revolution. Moreover, if left alone, some of the marginal self-employed in the informal economy will start small businesses that grow and then mature, creating wealth and fully supported employment in the formal sector. Harsh police measures directed at the informal economy suppress the entrepreneurial innovation that percolates there along with the pervasive despair. Therefore, governments are constrained to tolerate the evasion of legal standards that informal economies require and presuppose, but tolerating rampant illegality opens the door to official corruption. Here is a vicious circle, the exit from which is not easily prescribed. The dangerous illusion is to suppose that the informal economy is all this or all that, always this or always that. This illusion is dangerous because it breeds clumsy policy interventions that fail to remedy or even exacerbate

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Foreword

xv

troubled social and economic conditions. Informal economies are complex outcomes of often quite different causes and are in that sense quite idiosyncratic. For example, just because the informal economy in Peru confronts vast bureaucratic indifference to business licensing, resulting in year-long delays in start-ups, we cannot assume that every city’s informal economy confronts the same, massive obstacle. Instead of a unitary theory of disease that yields a single remedy for all ailments, a quest allopathic medicine abandoned long ago, informal economy researchers have to tailor their policy prescriptions to the specific causal scenarios in different places. This requirement makes one-size-fits-all policy recommendations hard to craft and unsafe to implement. The right course, of course, is the hard work, sensitivity to detail and location-specific research that animates volumes like this one. This course will one day yield typologies of informal economies from which better policy prescriptions can be derived. By Ivan Light

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Acknowledgments

We would like to thank the following 31 reviewers, who significantly contributed to this book through their constructive reviews and detailed suggestions to help authors improve their chapters: Abiola Olukemi Ogunyemi, Ahmed Agyapong, Alpha Ayandé, Amanda Min Chung Han, Bernard A. Obeng, Bernard Sinclair-Desgagné, Colin C Williams, Dinh Nguyen Pham, Edmundo Isidro, Ekaterina Turkina, Emmanuel Mutungi, Gjalt de Jong, Hans Van Ees, Jamel Stambouli, Les Dlabay, Mai Thi Thanh Thai, Marcus Møller Larsen, Marsha Tongel, Mathew Bird, Michael J. Pisani, Oxana Karnaukhova, Phan Anh Tu, Raja Kali, Richard K. Blundel, Scott A. Hipsher, Sébastien Arcand, Sheila Cristina Ferreira Leite, Thawatachai Jittrapanun, Tony Ghaye, William Scheela, Youssef Youssef.

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Part I

Determinants of Informal Entrepreneurship

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1

Determinants of Informal Entrepreneurship A Cross-Country Analysis Mai Thi Thanh Thai and Ekaterina Turkina

Entrepreneurship is one of the most important forces shaping the changes in the economic landscape (Baumol 1968). It enhances economic growth (Carree and Thurik 2010), stimulates regional development (Chiles et al. 2007), increases productivity and job creation (Hitt et al. 2001), contributes to increases in tax revenue, decreases in welfare costs (Davidsson et al. 1995) and fosters innovation (Luke et al. 2007). Previous research has shown that the level of entrepreneurship varies systematically across countries (see Wennekers et al. 2002 for a detailed review) and that a significant amount of entrepreneurship takes place informally outside state regulatory systems (Williams and Nadin 2010). The phenomenon of entrepreneurship in the informal economy cannot be ignored because informal commercial activities account for a sizeable share of economic activity around the world—over 30% on average and in many countries it reaches as high as 70% (Schneider et al. 2010), and the percentage is increasing (World Bank 2007). Moreover, informal entrepreneurship is a world phenomenon, the prevalence of which has spread to both post-Soviet economies as well as Western economies (see Williams and Nadin 2010 for further details). Therefore, it is necessary to understand the factors that drive entrepreneurship in the informal economy. Although the topic has been acknowledged to be important, little empirical research has been conducted to understand this phenomenon. In this light, this chapter attempts to make an important contribution by explaining variations in entrepreneurship in the informal economy across countries and evaluating the impact of informal entrepreneurship drivers on total entrepreneurship. To meet this objective, it first presents factors identified in the literature as entrepreneurship drivers. Secondly, it explains how these factors can be grouped into three higher-order cultural dimensions (human orientation, goal orientation and patriarchy) and five dimensions related to a given country’s socioeconomic, political and technological conditions (efficiency of regulatory environment, national economic advancement, level of economic integration, population growth and personal economic security). Thirdly, it presents our empirical analysis of the relationship between these eight dimensions and national rates of informal

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4

Mai Thi Thanh Thai and Ekaterina Turkina

entrepreneurship and then compares this relationship to the relationship between these eight dimensions and total entrepreneurship. It concludes with a discussion of informal business creation across countries and prospects for policies aimed at entrepreneurship development.

LITERATURE REVIEW

Determinants of Entrepreneurship Overarching, macro-level models of entrepreneurship can be found in a number of conceptual papers (e.g., Freytag and Thurik 2007; Verheul et al. 2002; Wennekers et al. 2002; Morrison 2000). They posit that entrepreneurship is driven by several groups of factors such as culture, economic conditions, institutions and technology advancement (Table 1.1), which influence the supply of and demand for entrepreneurship. Since some of the factors within and among these groups of factors are expected to overlap and correlate, we have to identify variables that can be used in the same study in order to build an empirically-based, overarching model of entrepreneurship. When evaluating cultural factors (see Table 1.1), we found that GLOBE dimensions embrace some of the dimensions put forth by Hofstede and the World Value Survey due to conceptual overlap and high correlation (Inglehart and Oyserman 2004; Hechavarria and Reynolds 2009; Venaik and Brewer 2010; Brewer and Venaik 2011). It is for this reason that we decided to examine both GLOBE variables and cultural variables that do not overlap with GLOBE variables. Consequently, our study analyzes the following 12 cultural factors: future orientation, power distance, uncertainty avoidance, in-group collectivism, performance orientation, assertiveness, institutional collectivism, human orientation, gender equality, external locus of control, personal influence and attitude towards competitiveness. In line with several other studies (House et al. 2004; Schneider et al. 2010; Stephan and Uhlaner 2010), we decided to use GLOBE’s cultural practice variables rather than cultural value variables because “people do not necessarily act in line with their expressed personal preferences” (Stephan and Uhlaner 2010, 4) and cultural practices are related to answers by respondents concerning typical behavior in their culture vs. personal preferences. In keeping with Stephan and Uhlaner (2010), we grouped highlycorrelated cultural variables together in order to use them in the same study. Theoretically, the cultural dimensions can be grouped into 3 categories: (1) Goal–oriented competitive culture focuses on goal achievement, favors competition, supports individual development and progress, and encourages self-expression while lacking hierarchy and in-group collectivism; (2) Human–oriented cooperative culture favors institutional collectivism and human orientation, promotes traditionalism, and spurs external locus of control, while discouraging assertiveness; and (3) Patriarchal culture can

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Determinants of Informal Entrepreneurship 5 Table 1.1

Determinants of entrepreneurship across countries

Variable

Data

Empirical studies

Power distance

GLOBE, Hofstede

McGrath et al. 1992; Mitchell et al. 2002; Stephan and Uhlaner 2010

Uncertainty avoidance

GLOBE, Hofstede

McGrath et al. 1992; Mueller and Thomas 2000; Baughn and Neupert 2003; Wennekers et al. 2007; Stephan and Uhlaner 2010

Individualism

GLOBE, Hofstede

McGrath et al. 1992; Shane 1993; Mueller and Thomas 2000; Mitchell et al. 2002; Stephan and Uhlaner 2010

Masculinity

GLOBE, Hofstede

McGrath et al. 1992; Thomas and Mueller 2000

Human orientation

GLOBE

Stephan and Uhlaner 2010

Institutional collectivism

GLOBE


Assertiveness

GLOBE


Gender

GLOBE

Minniti and Nardone 2007

Future orientation

GLOBE


Performance orientation

GLOBE

Suddle et al. 2010; Stephan and Uhlaner 2010

Locus of control

World Values Survey Mueller and Thomas 2000; Suddle et al. 2010;

Personal influence

World Values Survey Granato et al. 1996; Suddle et al. 2010;

Achievement motivation

World Values Survey Suddle et al. 2010;

Attitudes towards Lynn 1991 competitiveness

Suddle et al. 2010;

Well-being

World Value Survey

Hechavarria and Reynolds 2009

Authority

World Value Survey

Hechavarria and Reynolds 2009

GDP

World Economic Bjørnskov and Foss 2008; Klapper Outlook database et al. 2007

GDP per capita

World Economic Kuznets 1971; Lucas 1978; Schultz Outlook database 1975; Yamada 1996; Klapper et al. 2007 (Continued)

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6


Table 1.1

(Continued)

Variable

Data

Empirical studies

Financial structure

World development indicators database

Black and Strahan 2002; Klapper et al. 2007; Evans and Jovanovic 1989; Black and Strahan 2002; Parker 2004; Bjørnskov and Foss 2008

Unemployment

World Bank data

Evans and Leighton 1989; Meager 1992; Parker and Robson 2004; Bjørnskov and Foss 2008

Social security arrangement

ILO Social Security Inquiry (SSI)

Parker and Robson 2004; Wennekers et al. 2005; Hessels et al. 2007

Technological readiness

Global Competitiveness Report

Shane 1996; Freytag and Thurik 2007

Innovation

Global Competitiveness Report

Shane et al. 1991

Economic globalization

Swiss Institute database

Shane 2005; Audretsch and Sanders 2007; Bjørnskov and Foss 2008

Urbanization

UN data

Audretsch and Sanders 2007; Bjørnskov and Foss 2008; Freytag and Thurik 2007

Governance

World Bank indicators

Bjørnskov and Foss 2008

Population growth UN statistics

Schultz 1980; Kaufmann et al. 2006; Kaufmann et al. 2006; Klapper et al. 2007; Bjørnskov and Foss 2008; Dreher and Gassebner 2007; Storey 1994; Blanchflower et al. 2001

Ease of doing business

World Bank indicators

Kaufmann et al. 2006; Klapper et al. 2007; Nyström 2008

Human development index

Delmar and Davidsson 2000; Uhlaner Worldwide Trends and Thurik 2007; Bjørnskov and in the Human Foss 2008 Development Index 1970–2010

be described as viewing the male as the primary authority figure and central to social organization. Confirmatory factor analysis (Table 1.2) supported our theoretical grouping. We grouped the socioeconomic, technological and institutional factors (see Table 1.1) into five categories based on previous literature. First, since we expect ease of doing business and governance indicators to overlap, we

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.215 .074 .296

.844 .095 .108

.012

.897

Competitiveness

.929

Rotation Method: Varimax with Kaiser Normalization. a .Rotation converged in four iterations.

.901

Personal influence

External locus of control

.074

.037

.032

Gender equality

.791

.168

.011

.053

Human orientation

.831

.861

.035

.423

.417

.391

.536

.182

.270

.150

.164

3

Institutional collectivism

Assertiveness

Performance orientation

.251 .010

.826

.782

Uncertainty avoidance

.269

.829

In-group collectivism

Power distance

.215

2

Component

.882

1

. 298 .312

Social security

.188

.096

.904

.918

.167

.429

.836

.992

.186

.005

.425 .105

.234

.304

.122

.793

.079

.805

2

.201

.287

.299

.026

.171

.184

1

HDI

Innovation

GDP

Ease of doing bus.

Governance

Unemployment

Urbanization

Economic globalization

GDP per capita

Financial development

Population growth

Technological readiness

Factor analysis of independent variables—Rotated Component Matrixa

Future orientation

Table 1.2

.056

.103

.097

.055

.193

.169

.069

.659

.788

.232

.389

.028

.137

3

.521 .608

.219

.051

.028 .146

.023

.314

.201

.127

.140 .023

.961 .283

.216

.170

.218 .007

.867

.095

.144 .375

.011

.278

.049 .940

5

4

Component

8


group them into the efficiency of regulatory environment dimension. Second, because financial advancement can help improve technological readiness, which is a means to being innovative and then to economic growth, we group these factors into economic advancement since in addition to economic and financial indicators, economic advancement in modern times is highly dependent on technological development and innovation. Third, economic globalization and urbanization can be grouped into economic integration because urbanization occurs naturally from efforts by individuals and organizations to integrate people into living and working in cities to exploit advantages of proximity, diversity and marketplace competition, whereas globalization is a process by which a country integrates itself into the global network. Fourth, unemployment reduces personal income and thus has a negative impact on standard of living. Therefore, we group GDP per capita, social security, human development index and employment into personal economic security because in countries with full employment and high level of income, people tend to have better education opportunities, better access to health-care services, and more developed social security programs. Lastly, population growth stands alone. Confirmatory factor analysis (Table 1.2) supported our theoretical grouping. Therefore, these higher-order components become independent variables for our analysis.

Hypotheses Goal-Oriented, Competitive Culture and Informal Entrepreneurship A number of studies on the influence of culture on entrepreneurship suggest that goal-orientation and competitiveness hamper entrepreneurial orientation (Kreiser et al. 2010) due to difficulties in attracting human resources (Baughn and Neupert 2003). Moreover, societies that are explicitly focused on goal achievement and competition foster the development of efficient formal institutions, which create increased competition among firms and squeeze out new firms (Stephan and Uhlaner 2010). At the same time, goal achievement requires sufficient trust and enough stability to enable partners to move forward, formalized organization allows for enhanced enforcement of commitment and goal-oriented people tend to seek formality (Wiewel and Lieber 1998). Consequently, entrepreneurs in this culture have incentives to register their businesses rather than remaining informal. Hypothesis 1: Goal-oriented, competitive culture discourages informal entrepreneurship.

Human-Oriented, Cooperative Culture and Informal Entrepreneurship Stephan and Uhlaner (2010) observe that human-oriented cooperative culture pushes people to do business to help others. They argue that in these cultures, entrepreneurship often arises out of necessity rather than opportunity. Since collectivist cultures place a lower value on individual accomplishments,

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Determinants of Informal Entrepreneurship 9 self-reliance and independent action (Mueller and Thomas 2000), people tend to rely on informal networks and public morality (House et al. 2004). When conflicts arise, they can use social norms and nongovernment forces to resolve problems. Therefore, entrepreneurs in this culture type do not have strong incentives to register their businesses with the government. Hypothesis 2: Human-oriented, cooperative culture encourages informal entrepreneurship.

Patriarchal Culture and Informal Entrepreneurship Female self-employment rates are on the rise in Western countries (OECD 2000). This phenomenon may stem from the fact that women’s flexible time schedules attract them to self-employment (Buttner and Moore 1997). However, in countries where women do not have the same status as men, they are constrained by household and family responsibilities, and as such do not have time for entrepreneurial activities (Bruce 1999). Furthermore, they might not have as much access to financial capital provided by both formal and informal financial institutions (Riding and Swift 1990). Since women are discouraged from entrepreneurial activities, the pool of potential entrepreneurs is limited. In many cases, women engage in entrepreneurial activities out of necessity. In patriarchal cultures, women lack normative support to be entrepreneurs (Baughn et al. 2006). Therefore, this type of culture reduces the pool of potential entrepreneurs. Hypothesis 3: Patriarchal culture discourages informal entrepreneurship.

Regulatory-Environment Efficiency and Informal Entrepreneurship It has been well argued that entrepreneurship is fostered by solid laws and well-defined property rights, transparent and easy procedures for starting a business, good political and economic institutions and efficient regulation of the economy (Kaufmann et al. 2006). On the other hand, an institutional system that is not conducive to new business start-ups can offset the positive effects of a value system characterized by a strong emphasis on entrepreneurial behavior (Suddle et al. 2010). At the same time, a poor regulatory environment (bureaucratic barriers to legal property ownership, lack of legal structures that recognize and encourage ownership of assets, etc.) forces people to keep to underground activities (de Soto 2003). Hypothesis 4: Regulatory-environment efficiency discourages informal entrepreneurship.

Economic Advancement and Informal Entrepreneurship Statistics show that although entrepreneurship is very vibrant in developing countries, it usually takes an informal form (Yamada 1996). This phenomenon can be explained by the fact that when countries advance their

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economies, entrepreneurship becomes more difficult because of rising labor costs and opportunity costs of self-employment and the need for higher efficiency (Lucas 1978). Serviere (2010) suggests that economic advancement dramatically reduces informal entrepreneurship because it negatively affects necessity entrepreneurship. Hypothesis 5: Economic advancement discourages informal entrepreneurship.

Economic Integration and Informal Entrepreneurship A study by Grossman (1984) reveals that global integration negatively affects informal entrepreneurship, since opening the door to trade leads to decreased prices for the traded goods and lowers the attractiveness of entrepreneurship relative to wage working. At the same time, foreign firms can divert human resources from local entrepreneurship, since domestic human resources must be released in order to provide foreign-owned subsidiaries with the necessary labor force (Colantone and Sleuwaegen 2007). As a result, they can out compete with domestic entrepreneurs, and thus discourage the creation of new businesses in general. Hypothesis 6: Economic integration discourages informal entrepreneurship.

Population Growth and Informal Entrepreneurship Strong population growth leads to growth in the supply of entrepreneurs and labor as well as the growth of consumers, which creates more business opportunities (Verheul et al. 2002). Therefore, we expect population growth to drive entrepreneurship regardless of whether it is in the formal or informal sector. Hypothesis 7: Population growth encourages informal entrepreneurship.

Personal Economic Security and Informal Entrepreneurship Carree et al. (2002) find that unemployment is a significant push factor for entrepreneurship. When people are affected by an interruption, such as job loss or disappointment with their current job, they are pushed to entrepreneurship (Campbell 1992). In line with these findings, Robson (2010) confirmed that the rate of entrepreneurship is negatively related to an index of the generosity of the unemployment benefit system. When wage income increases, people become more reluctant to opt for self-employment (Iyigun and Owen 1998). In general, entrepreneurship is less likely when people are satisfied with the status quo or life in general (Shapero 1982). Hypothesis 8: Personal economic security discourages informal entrepreneurship.

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Determinants of Informal Entrepreneurship 11 METHOD AND DATA ANALYSIS

Sample The information for the variables employed in this study is available for 48 countries. These countries give a wide geographical basis for exploring global variance in entrepreneurship since they represent five continents: Africa (3 countries); Asia (12 countries, including three Middle Eastern countries); Australasia (2 countries); North (3) and South (7) America; and Europe (21). For each continent, the sample includes the largest countries in terms of population and territory (i.e., Russia, US, India, China, and Australia). The selected countries display marked cultural and socioeconomic diversities and also significant variations in institutions and level of technological development, thereby providing a good basis for exploring the effects of these different national contexts with regard to entrepreneurial activity. The data in the sample are weighted by population to mitigate the prevalence of European countries.

Variables Since informal entrepreneurship can be understood as unincorporated economic unit (Williams and Nadin 2010), we measure it by subtracting formal entrepreneurship (which is captured in the World Bank’s data on newly registered firms) from total entrepreneurship (which is captured in the Global Entrepreneurship Monitor’s Total Entrepreneurial Activity data). Our independent variables identified in the preceding section of this article were obtained by means of theoretical grouping and confirmatory factor analysis. We control for the share of the service sector in the economy (Van Stel and Carree 2004), operationalized by the percentage of contribution of services to total GDP. We also control for property rights protection because it is argued that it can alter entrepreneurial behaviors (McMullen et al. 2008). The data are from the CIA World Factbook, 2010 (CIA 2010).

Data Analysis First, we check the internal consistency of our dimensions with Cronbach’s alpha. Cronbach’s alpha reliabilities range from 0.68 to 0.95. Reliabilities are satisfactory for all variables. Second, we conduct the checks for heteroskedasticity and normality; these analyses also show satisfactory results. We next perform multiple regression analysis to test the hypotheses discussed above. We also conduct a multiple regression analysis of the effects of our eight dimensions on total entrepreneurship for comparative purposes. For each analysis, multicollinearity is tested using variance inflation factors (VIFs) to eliminate the risk of suppressor effects in multiple regression

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Table 1.3 Multiple regression of cultural and noncultural factors on the levels of entrepreneurship Informal entrepreneurship Total entrepreneurship (GEM-WB data) (GEM data) Goal-oriented competitive culture

0.22*** (0.001)

0.03** (0.015)

Human-oriented cooperative culture

0.30*** (0.003)

0.12*** (0.001)

Patriarchal culture

0.28 (0.315)

0.42 (0.491)

Regulatory environment efficiency

0.44*** (0.001)

0.38 (0.418)

Economic advancement

0.25** (0.017)

0.06** (0.029)

Economic integration

0.16 (0.178)

0.53 (0.544)

Population growth

0.38*** (0.001)

0.25*** (0.002)

Personal economic security

0.56*** (0.002)

0.42*** (0.045)

Property rights

0.09 (0.124)

0.31 (0.362)

Service sector

0.003*** (0.001)

0.20 (0.255)

R-squared

0.36

0.32

Note: *** p < .001, ** p < .01, * p < .05 (two-tailed).

analyses (Hair et al. 1998). VIF indexes measure how much the variance of an estimated regression coefficient is increased because of collinearity. In both tests, VIF indexes are well below the usually recommended cut-off score of 10 (Kutner et al. 2004). The VIF scores range from 1.71 to 5.2. The effects of the independent variables on the dependent variable are presented in Table 1.3. The analysis confirms most of our hypotheses except hypotheses 3 and 6. The analysis also demonstrates that our eight empirical dimensions have a stronger effect on informal entrepreneurship than on total entrepreneurship.

Results and Policy Implications This chapter has provided a systematic analysis of motivators and barriers to informal entrepreneurship. When comparing the effects of these factors

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Determinants of Informal Entrepreneurship 13 on informal entrepreneurship versus total entrepreneurship, we can come up with a number of policy implications (discussed below). We find that entrepreneurship is strongly driven by a culture of cooperation and human orientation and depressed by a culture of goal orientation and competition. Since entrepreneurship is a driver for economic development, particularly in poor countries, it is important for countries that need strong economic growth to look at measures to increase entrepreneurship. In particular, they should support human-oriented, cooperative values that encourage collaboration, sensitivity, friendship, tolerance, and support for others. Governments can create programs that support both entrepreneurial networking and general social networking and thereby increase the level of social capital. The effectiveness of these programs in promoting domestic and international entrepreneurial activities has been well argued and empirically supported (e.g., Tan and Tan 2002; Etemad and Lee 2003; Greve and Salaff 2003). Additionally, since culture is neither static nor rigid, it is feasible to influence cultural norms and attitudes related to entrepreneurship by elevating the status of entrepreneurs and increasing appreciation for the entrepreneurial lifestyle in society (Augé and Colleyn 2004; Douglas and Craig 2006). Our results reveal that these cultural factors have even much stronger effects on informal entrepreneurship. As such, policies aimed at modifying cultural norms to promote entrepreneurship will certainly lead to a greater incidence of informal entrepreneurship. Therefore, these measures must go hand in hand with other measures that encourage people to operate in the formal sector. Our analysis reveals that strong regulatory environment efficiency is an effective means of deterring informal entrepreneurship. This observation suggests that governments interested in formalizing entrepreneurship should work on improving the efficiency of their regulatory environment to encourage people’s trust in the formal systems to carry out their entrepreneurial activities in the formal economy. In countries where the regulatory environment is weak, people can gain legitimacy without government support. Moreover, since people may fear the government or have doubts about its ability to protect them, they are more likely to remain in the informal sector. It is also possible that the fluid flow of market forces may not be that important for informal entrepreneurship. Furthermore, when the role of women is officially recognized and their participation in economic activities is encouraged, they will be more willing to join the formal sector. Another strong driver of entrepreneurship (both informal and total) is population growth since it increases the pool of potential entrepreneurs as well as consumers. Therefore, countries with a dwindling birthrate are faced with an overall shortage of participants in entrepreneurship and are characterized by a declining reservoir of potential candidates. In order to overcome these deficiencies and continue to grow, these countries will have to implement programs that encourage immigrants to come to set up businesses in

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their countries. For example, Canada has a policy to encourage immigrant entrepreneurs by granting them permanent residence status, which entitles them to receive most of the social benefits that Canadian citizens receive. Another example is the Start-Up Chile program, in which the Chilean government attracts foreigners by offering them subsidies to start businesses in Chile. Since population growth has a stronger effect on informal entrepreneurship than on total entrepreneurship, policymakers should look into measures to stimulate growth of the population that is more likely to rely on the regulatory system. This could be done through education to help people understand the benefit of registering business activities (e.g., legal protection, access to more funding sources, etc.). Immigrant receiving countries can create programs to encourage immigration from countries where people have strong preferences towards formalized activities. Our study confirms that informal entrepreneurship is more vibrant in poorer countries and that economic advancement significantly discourages informal entrepreneurship. The effect on total entrepreneurship is milder but nevertheless negative. This observation suggests that countries with higher economic development should look into measures to enhance the quality of entrepreneurship. Since personal economic security reduces the attractiveness of entrepreneurship (both total and informal), governments wanting to boost entrepreneurship could limit their spending on unemployment benefits, relax workers’ protection policies and accept a certain level of unemployment. Interestingly, patriarchal culture and economic integration do not have a statistically significant impact on entrepreneurship, which suggests that policymakers should prioritize their tasks. Investing in gender-equity promotion programs or enhancing their country’s economic integration will not lead to immediate increase in entrepreneurship. At the same time, enlarging the population with desired characteristics, creating links between people, enforcing trust and cooperation can potentially elevate the level of entrepreneurship.

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Freytag, Andreas, and Roy Thurik. “Entrepreneurship and Its Determinants in a CrossCountry Setting.” Journal of Evolutionary Economics 17, no. 2 (2007): 117–31. Granato, J., R. Inglehart, and D. Leblang. “The Effect of Cultural Values on Economics Development: Theory, Hypotheses and Some Empirical Tests.” American Journal of Political Science 40, no. 3 (1996): 604–31. Greve, Arent, and Janet W. Salaff. “Social Networks and Entrepreneurship.” Entrepreneurship: Theory and Practice 28, no. 1 (2003): 1–22. Grossman, G. M. “International Trade, Foreign Investment, and the Formation of the Entrepreneurial Class.” American Economic Review 74, no. 4 (1984): 605–14. Hechavarria, Diana M., and Paul D. Reynolds. “Cultural Norms & Business StartUps: The Impact of National Values on Opportunity and Necessity Entrepreneurs.” International Entrepreneurship and Management Journal 5, no. 4 (2009). Hessels, S.J.A., A. J. van Stel, P. Brouwer, and A.R.M. Wennekers. “Social Security Arrangements and Early-Stage Entrepreneurial Activity.” Comparative Labor Law & Policy Journal 28, no. 4 (2007): 743–74. Hitt, Michael A., R. Duane Ireland, S. Michael Camp, and Donald L. Sexton. “Guest Editors’ Introduction to the Special Issue Strategic Entrepreneurship: Entrepreneurial Strategies for Wealth Creation.” Strategic Management Journal 22, no. 6/7 (2001): 479–91. House, Robert J., Paul J. Hanges, Mansour Javidan, Peter W. Dorfman, and Vipin Gupta, eds. Culture, Leadership, and Organizations. Thousand Oaks, CA: Sage, 2004. Inglehart, Ronald, and Daphna Oyserman. “Individualism, Autonomy, and SelfExpression: The Human Development Syndrome.” In Comparing Cultures: Dimensions of Culture in a Comparative Perspective, edited by Henk Vinken, Joseph Soeters and Peter Ester. 74–96. Leiden, The Netherlands: Brill, 2004. Iyigun, M. F., and A. L Owen. “Risk, Entrepreneurship, and Human-Capital Accumulation.” AEA Papers and Proceedings 88, no. 2 (1998): 454–57. Kaufmann, D., A. Kraay, and M. Mastruzzi. “Governance Matters V: Governance Indicators for 1996–2005.” Washington, DC: World Bank, 2006. Klapper, Leora, Raphael Amit, Mauro F. Guillén, and Juan Manuel Quesada. “Entrepreneurship and Firm Formation across Countries.” In World Bank Policy Research Working Paper No. 4313. Washington, DC: World Bank, 2007. Kreiser, Patrick M., Louis D. Marino, Pat Dickson, and Mark K. Weaver. “Cultural Influences on Entrepreneurial Orientation: The Impact of National Culture on Risk Taking and Proactiveness in SMEs.” Entrepreneurship: Theory & Practice 34, no. 5 (2010): 959–83. Kutner, Michael, Christopher Nachtsheim, and John Neter. Applied Linear Regression Models. Mcgraw Hill/Irwin Series: Operations and Decision Sciences. 4th ed. Boston, MA: McGraw-Hill Irwin, 2004. Kuznets, S. Economic Growth of Nations: Total Output and Production Structure. Cambridge, MA: Harvard University Press, 1971. Lucas, R. E. Jr. “On the Size Distribution of Business Firms.” Bell Journal of Economics 9, no. 2 (1978): 508–23. Luke, Belinda, Martie-Louise Verreynne, and Kate Kearins. “Measuring the Benefits of Entrepreneurship at Different Levels of Analysis.” Journal of Management and Organization 13, no. 4 (2007): 312–30. Lynn, Richard. The Secret of the Miracle Economy: Different National Attitudes to Competitiveness and Money. London, UK: Crowley Esmonde, 1991. McGrath, Rita Gunther, Ian C. MacMillan, and Sari Scheinberg. “Elitists, Risk-Takers, and Rugged Individualists? An Exploratory Analysis of Cultural Differences between Entrepreneurs and Non-Entrepreneurs.” Journal of Business Venturing 7, no. 2 (1992): 115–35.

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Determinants of Informal Entrepreneurship 17 McMullen, Jeffery S., D. Ray Bagby, and Leslie E. Palich. “Economic Freedom and the Motivation to Engage in Entrepreneurial Action.” Entrepreneurship: Theory and Practice 32, no. 5 (2008): 875–95. Meager, N. “Does Unemployment Lead to Self-Employment?” Small Business Economics 4, no. 1 (1992): 87–103. Minniti, Maria, and Carlo Nardone. “Being in Someone Else’s Shoes: The Role of Gender in Nascent Entrepreneurship.” Small Business Economics 28, no. 2–3 (2007): 223–38. Mitchell, Ronald K., J. Brock Smith, Eric A. Morse, Kristie W. Seawright, Ana Maria Peredo, and Brian McKenzie. “Are Entrepreneurial Cognitions Universal? Assessing Entrepreneurial Cognitions across Cultures.” Entrepreneurship: Theory & Practice 26, no. 4 (2002): 9–32. Morrison, Alison. “Entrepreneurship: What Triggers It?” International Journal of Entrepreneurial Behaviour & Research 6, no. 2 (2000): 59–71. Mueller, Stephen L., and Anisya S. Thomas. “Culture and Entrepreneurial Potential: A Nine Country Study of Locus of Control and Innovativeness.” Journal of Business Venturing 16, no. 1 (2000): 51–75. Nyström, Kristina. “The Institutions of Economic Freedom and Entrepreneurship: Evidence from Panel Data.” Public Choice 136, no. 3/4 (2008): 269–82. OECD. OECD Employment Outlook. Paris, France: OECD, 2000. Parker, S. C. The Economics of Self-Employment and Entrepreneurship. Cambridge, UK: Cambridge University Press, 2004. Parker, S. C., and M. T. Robson. “Explaining International Variations in SelfEmployment: Evidence from a Panel of OECD Countries.” Southern Economic Journal 71, no. 2 (2004): 287–301. Riding, A. L., and C. S. Swift. “Women Business Owners and Terms of Credit: Some Empirical Findings of the Canadian Experience.” Journal of Business Venturing 5, no. 5 (1990): 327–40. Robson, Martin. “Explaining Cross-National Variations in Entrepreneurship: The Role of Social Protection and Political Culture.” In Entrepreneurship and Culture, edited by Andreas Freytag and Roy Thurik. 245–67. New York, NY: Springer, 2010. Schneider, Friedrich, Andreas Buehn, and Claudio E. Montenegro. “Shadow Economies All over the World: New Estimates for 162 Countries from 1999 to 2007.” In Policy Research Working Paper Series # 5356. Washington, DC: World Bank, 2010. Schultz, Theodore W. “Investment in Entrepreneurial Ability.” The Scandinavian Journal of Economics 82, no. 4 (1980): 437–48. Schultz, Theodore W. “The Value of the Ability to Deal with Disequilibria.” Journal of Economic Literature 13, no. 3 (1975): 827–46. Serviere, Laura. “Forced to Entrepreneurship: Modeling the Factors Behind Necessity Entrepreneurship.” Journal of Business and Entrepreneurship 22, no. 1 (2010): 37–53. Shane, Scott. “Cultural Influences on National Rates of Innovation.” Journal of Business Venturing 8, no. 1 (1993): 59–73. Shane, Scott. Economic Development through Entrepreneurship: Government, University and Business Linkages. Northampton, MA: Edward Elgar, 2005. Shane, Scott. “Explaining Variation in Rates of Entrepreneurship in the United States: 1899–1988.” Journal of Management 22, no. 5 (1996). Shane, Scott, Lars Kolvereid, and Paul Westhead. “An Exploratory Examination of the Reasons Leading to New Firm Formation across Country and Gender.” Journal of Business Venturing 6, no. 6 (1991): 431–46. Shapero, A. “Social Dimensions of Entrepreneurship.” In The Encyclopedia of Entrepreneurship, edited by D. Sexton C. Kent and K. Vesper. 72–90. Englewood Cliffs, NJ: Prentice Hall, 1982.

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Stephan, Ute, and Lorraine M. Uhlaner. “Performance-Based vs. Socially Supportive Culture: A Cross-National Study of Descriptive Norms and Entrepreneurship.” Journal of International Business Studies 41, no. 8 (2010): 1347–64. Storey, D. J. Understanding the Small Business Sector. New York, NY: Routledge, 1994. Suddle, Kashifa, Sjoerd Beugelsdijk, and Sander Wennekers. “Entrepreneurial Culture and Its Effect on the Rate of Nascent Entrepreneurship.” In Entrepreneurship and Culture, edited by Andreas Freytag and Roy Thurik. 227–44. New York, NY: Springer, 2010. Tan, Wee-Liang, and Teck-Meng Tan. The Usefulness of Networks to SMEs: The Case of Singapore. Conference proceedings from the 2002 USASBE Annual National Conference: An Entrepreneurial Bonanza, Reno, NV, 2002. Thomas, Anisya S., and Stephen L. Mueller. “A Case for Comparative Entrepreneurship: Assessing the Relevance of Culture.” Journal of International Business Studies 31, no. 2 (2000): 287–301. Uhlaner, Lorraine, and Roy Thurik. “Postmaterialism Influencing Total Entrepreneurial Activity across Nations.” Journal of Evolutionary Economics 17, no. 2 (2007): 161–85. Van Stel, André, and M. Carree. “Business Ownership and Sectoral Growth: An Empirical Analysis of 21 OECD Countries.” International Small Business Journal 22, no. 4 (2004): 389–419. Venaik, Sunil, and Paul Brewer. “Avoiding Uncertainty in Hofstede and Globe.” Journal of International Business Studies 41, no. 8 (2010): 1294–315. Verheul, Ingrid, Sander Wennekers, David Audretsch, and Roy Thurik. “An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture.” In Entrepreneurship: Determinants and Policy in a European-US Comparison, edited by David Audretsch, Roy Thurik, Ingrid Verheul, and Sander Wennekers. Boston, MA: Kluwer, 2002. Wennekers, Sander, Roy Thurik, André Stel, and Niels Noorderhaven. “Uncertainty Avoidance and the Rate of Business Ownership across 21 OECD Countries, 1976–2004.” Journal of Evolutionary Economics 17, no. 2 (2007): 133–60. Wennekers, Sander, Lorraine M. Uhlaner, and Roy Thurik. “Entrepreneurship and Its Conditions: A Macro Perspective.” International Journal of Entrepreneurship Education 1, no. 1 (2002): 25–68. Wennekers, Sander, André van Wennekers, Roy Thurik, and Paul D. Reynolds. “Nascent Entrepreneurship and the Level of Economic Development.” Small Business Economics 24, no. 3 (2005): 293–309. Wiewel, Wim, and Michael Lieber. “Goal Achievement, Relationship Building, and Incrementalism: The Challenges of University-Community Partnerships.” Journal of Planning Education and Research 17, no. 4 (1998): 291–301. Williams, Colin, and Sara Nadin. “Entrepreneurship and the Informal Economy: An Overview.” Journal of Developmental Entrepreneurship 15, no. 4 (2010): 361–78. World Bank. Informality: Exit and Exclusion. Washington, DC: World Bank, 2007. Yamada, Gustavo. “Urban Informal Employment and Self-Employment in Developing Countries: Theory and Evidence.” Economic Development and Cultural Change 44, no. 1 (1996): 289–314.

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2

Informal versus Formal New Ventures A Choice Analysis and Some Policy Implications Bernard Sinclair-Desgagné

Entrepreneurship policy has two related objectives: to foster the supply of entrepreneurs and to direct the allocation of entrepreneurial effort and talent towards the best (from an economic and social viewpoint) ventures. Both objectives point to the economy’s infrastructure (i.e., transportation, telecommunication and credit markets) and underlying institutions (property rights, contracting rules, market regulations and the political process). The former calls attention as well to human and social capital, risk preferences and certain cultural traits, and the latter to relative rewards and incentives. Much attention has recently (and rightly) been devoted to institutions (see Acemoglu and Johnson 2005, Acs et al. 2008, Bowen and De Clercq 2008, Estrin et al. 2011; and Bird, Chapter 10, for a small sample). To be sure, de Soto’s (1986, 2000) earlier work was quite influential in stressing that well-designed and enforced property rights can make the most of entrepreneurial resources. Anticipating Baumol’s (1990) seminal article, de Soto’s (1986) policy recommendations largely aimed at influencing the allocation of entrepreneurship. Whereas Baumol focused on productive, unproductive and destructive entrepreneurial activities, de Soto sought instead to render more informal ventures formal. This chapter’s goal is to take some steps forward in the latter direction. Using a simple decision-theory model, I analyze an entrepreneur’s choice of entering the formal or the informal sector. This choice is influenced by external parameters, such as the cost of complying with official procedures (which de Soto 1986 emphasized), the relative benefits of going formal, and the level of social security measures, as well as what are commonly seen as key psychological attributes of the entrepreneur, such as her risk attitude (Kihlstrom and Laffont 1979, Shiller 2011), aspirations (e.g., Hessels et al. 2008) and confidence in succeeding.1 Taking these factors into account, I find notably that (1) more entrepreneurs choose the formal sector when the cost-advantage ratio of formalizing new ventures is lower (which is the case in the more developed economies), (2) the best or most optimistic entrepreneurs might actually choose the informal sector when the relative benefits of formal ventures are small (a situation which can be thought to happen more frequently in poor countries),3) better alternatives to self-employment

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Bernard Sinclair-Desgagné

tend to discourage formal new ventures, (4) more risk averse (risk seeking) entrepreneurs require stronger (weaker) prospects of success in order to formalize their business, and (5) higher aspirations make an entrepreneur more likely to go formal (because formality allows firms to grow more). These results are shown and discussed in the second and third sections. The final section sums up their respective implications for entrepreneurship policy and calls attention to some topics for future research. FORMAL VERSUS INFORMAL ENTREPRENEURS Let us conduct the following thought experiment. An entrepreneur contemplates a new venture that has a probability p of succeeding. This probability may be somewhat objectively given by the observed frequency with which similar ventures, run under comparable conditions by an entrepreneur with the same aptitudes, have succeeded in the past, or it may represent the entrepreneur’s subjective belief this peculiar venture will be successful.2 Although both interpretations are equally valid, in what follows I will generally stick to the latter one. The entrepreneur must now choose whether to create a formal business or to set up an informal firm. Figure 2.1 shows the consequences of each alternative. A successful informal venture yields a net discounted payoff I whereas the entrepreneur gets a status quo income equal to, say, 0 in case of failure. Going formal, on the other hand, first carries a cost c of complying with official procedures. Succeeding then brings a net

Succeed Formal

F-c

p Succeed

Fail 1-p

Informal

I-c

p Fail 1-p -c

Succeed

I

p Informal

Fail 1-p 0

Figure 2.1 The basic model

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Informal versus Formal New Ventures 21 discounted payoff F, while failing leaves the entrepreneur the prospect of trying again but in the informal sector. It seems natural to assume that F > I, so a formal venture’s net discounted payoff is always larger since informality certainly puts several limitations on new ventures, such as the obligation to deal exclusively in cash, lack of collateral for credit and guarantees to use an asset, trouble enforcing contracts and difficulties in hiring qualified labor (see Bird, Chapter 10). Let us now denote  = I/F the ratio of informal over formal net discounted payoffs from undertaking successful ventures. This ratio plays an important role in the upcoming analysis. Intuitively, a large (i.e., close to 1)  can mean that the tax burden on formal firms is very high or that institutions—property rights, contracting rules and regulations—are so weak that, in practice, doing business in the formal sector resembles doing business in the informal one. Weak institutions often coincide with the early stages of a country’s economic development. All in all, the size of  is expected to affect the entrepreneur’s incentives to go formal or not. Additional elements will soon be added to this rudimentary model in order to make it somewhat more realistic.3 At this point, some results are nonetheless worth noticing. Figure 2.1’s decision tree first suggests that the entrepreneur will choose to formalize her activity if and only if the expected payoff from doing so is higher; this happens when p·F + (1 – p)p·I – c  p·I After replacing I by  ·F and doing some algebra, this inequality transforms into p – ·p2  c/F

(1)

Clearly, at probability of success p and ratio  given, a higher cost-advantage ratio c/F will make it harder to satisfy the latter inequality, so an entrepreneur will be more likely to opt for the informal sector. This will happen, for instance, when F is small (in absolute terms, not relative to I) due to current economic conditions, or when bureaucracy, red tape and paperwork are so heavy they make the cost c of following official procedures prohibitive. This observation leads to a first proposition. PROPOSITION 1: Other things being equal, the higher the costs of complying with official procedures compared with the (absolute) benefits one will receive from launching a formal venture, the more likely an entrepreneur will prefer informal business.

This statement seems to capture a number of stylized facts. First, the informal sector is quite prevalent in poor countries where the net discounted

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payoff F is indeed low relative to c. Second, countries where bureaucratic hurdles, like those forcefully emphasized by de Soto (1986) and others, contribute to significantly raising the compliance cost c without necessarily improving F typically have a big informal sector. Note, furthermore, that F being a denominator, it would have to grow infinitely large in order to bring the ratio c/F to zero; the upshot is stated as a second proposition. PROPOSITION 2: Economic growth alone (so increasing F) will never suffice to eliminate all informal business, but the eradication of red tape (making c tend to zero), in principle, could.

Consider now the term on the left-hand side of inequality (1). Its value lies between 0 and 1, since p and  are fractions. If c > F, so the benefit of going formal, net of compliance costs, is negative, there will be no formal venture. Henceforward, let us assume that the ratio c/F is smaller than 1. The term p –  ·p2 is a parabola which reaches its peak at p = 1/2. Figure 2.2 depicts the situation when   1/2.4 In this case, if p* denotes the value at which p –  ·p2 = c/F and the parabola intersects the red line, then a new venture will be formalized if and only if its probability of success is that p  p*. In other words, only the best projects (or the most talented or upbeat entrepreneurs) will go formal whereas the others (those such that p < p*) will develop informally. One can also see that the threshold probability p* goes up, so the proportion of formal new ventures decreases, when the ratio c/F augments (as Proposition 1 states). When c/F > 1 – , no entrepreneur will choose the formal sector; this is obviously less likely to occur if  is small and informal ventures are significantly less lucrative than formal ones (which seems to be generally the case in advanced economies). These findings support another proposition.

1-α

c/F

Go Formal 0

p∗

p 1

Figure 2.2 The case   1/2

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Informal versus Formal New Ventures 23 PROPOSITION 3: Suppose that informal new ventures pay much less than formal ones. In this context, the larger the difference, the less likely it is that a larger ratio c/F will make all entrepreneurs choose the informal sector. Moreover, the better the probability of success of a new venture, the more likely it will take place in the formal sector.

Interestingly, the latter prediction may not hold when  > 1/2, so there is relatively little disparity in terms of net discounted payoff between formal and informal new ventures (a situation that may well characterize certain developing countries). To see this, note that the parabola p –  ·p2 reaches its maximum at the value p¯ = 1/2 which is positioned between 0 and 1 when  > 1/2. The red line corresponding to c/F might then cross this curve twice. Figure 2.3 illustrates such a situation, which will only happen when 1−  c/F  1/4. In this case, the worst ventures remain informal, as before, but the best ones, or those handled by the most talented or optimistic entrepreneurs, might also be carried out informally. An entrepreneur may then prefer the formal sector only when she deems her project to be just “okay”, that is, when the probability of success is greater than p* but smaller than p**. This yields a third proposition. PROPOSITION 4: Suppose that informal new ventures pay little less than formal ones. It may then happen that not only the least confident entrepreneurs but also the most confident ones will opt for the informal sector.

As  goes up, furthermore, the top of the parabola moves left, as does the range of success probabilities [p*, p**]. Other things being equal, therefore, the lower the relative rewards from formalizing a new venture, the more likely it is that ventures with the best prospects (not only the worst ones)

1/4α c/F 1-α

Go Formal 0

Figure 2.3

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p∗

p∗∗ 1

p

The case  > 1/2

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24


will be conducted informally. This behavior by the most upbeat entrepreneurs can be interpreted as follows. In this model, since a venture that fails in the formal sector can always be given another try in the informal sector, formal ventures have, so to speak, an option value. Low-skills or pessimistic entrepreneurs would not pay for this option. A large , meaning that I and F are quite similar, would also make entrepreneurs with the best prospects turn away from it since it has a positive cost c that does not justify seeking F instead of I. To be sure, the prediction that the most confident entrepreneurs might choose the informal sector in some (most likely developing) countries where the ratio  = I/F is high provides further justification for public policies aiming to reform institutions. One then hopes that, with better property rights, contracting rules and market regulations, the ratio  = I/F will move down, indicating that successful entrepreneurs are enabled to capture more effectively the value they generate compared to what normally takes place in the informal sector.5 EXTENDING THE ANALYSIS The model used so far leaves out many facets of an entrepreneur’s environment and personality that the literature often sees as important drivers of her activity. This section will now successively consider some of these components, such as improvements in alternatives to self-employment (including, for instance, the introduction of unemployment insurance and social security), diverging likelihoods of success across sectors, whether a new venture represents an opportunity or comes out of necessity, and the entrepreneur’s risk attitude and aspirations.

Alternatives to Self-Employment In their literature review, Acs et al. (2008, 220) report that “as the economy becomes more developed, we should find fewer people pursuing entrepreneurial activities . . . [since] marginal managers find they can earn more money when employed by somebody else.” As the economy grows, moreover, some potential entrepreneurs might also prefer to benefit from the expanded social welfare measures which normally follow. To see whether and how these outcomes are captured in the present model, let us assume that the net discounted payoff after a new venture fails is not 0 but some alternative level u¯ < I. An entrepreneur will now choose to go formal if and only if p·F + (1 – p)p·I + (1 – p)2 u¯ – c  p·I + (1 – p)u¯ . A little algebra reduces this inequality to

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Informal versus Formal New Ventures 25 p·F – p2 · I + (p2 – p)u¯  c.

(2)

Since p is smaller than 1, the term (p2 − p) is negative. As the benchmark payoff u¯ increases and becomes greater than 0, it is then more difficult to satisfy inequality (2), so fewer entrepreneurs will opt for the formal sector. This observation is restated as a fifth proposition. PROPOSITION 5: Other things being equal, the better the alternatives to selfemployment (hence, the outcome when a new venture fails), the less likely it is that entrepreneurial activities will take place in the formal sector.

This assertion may provide a rationale for the fact that many informal entrepreneurs in developed countries (where social security is normally strong) have no intention of formalizing their activity (a phenomenon highlighted and analyzed by Williams, see Chapter 11). The intuitive explanation that comes out here is that the option value attached to formal ventures decreases as the net discounted payoff from failing goes up; this makes formality unappealing to some entrepreneurs with borderline confidence. Policies that lower compliance cost c or boost formal income F might of course offset this effect.

Diverging Prospects In practice, factors such as the lack of social status or differing psychological support from relatives and friends (if an informal venture must be kept secret, for instance) might make an entrepreneur’s confidence level vary across sectors. Let us then denote p and q (p  q) a venture’s probability of success when it goes on in the formal or the informal sector, respectively. An entrepreneur will now prefer the formal way if and only if p·F + (1 – p)q·I – c  q·I. Straightforward manipulations will transform this inequality into p  c/(F – q·I).

(3)

The latter confirms that, other things being equal, a lower confidence q in succeeding in the informal sector, thereby making the right-hand side of (3) go down, will cause more entrepreneurs to go formal. Making the odds of success differ across sectors allows, moreover, examination of the case of a successful informal entrepreneur who considers entering the formal sector. Based on her past experience, this entrepreneur is likely to believe she will keep doing well in the informal sector with probability q, while she puts her chances to prosper in the formal sector at another

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level p  q. Inequality (3) then highlights again the importance of lowering the compliance cost c and increasing the expected formal income F in order to make this entrepreneur convert to formal activities. Raising the entrepreneur’s subjective confidence (as measured by p) through information and training might also constitute a valuable policy.

Opportunity versus Necessity Entrepreneurship Based on earlier work, Acs et al. (2008, 219) bring up the interesting distinction between opportunity and necessity entrepreneurships: “opportunity entrepreneurship, they recount, has a positive significant effect on economic development, whereas necessity entrepreneurship has no effect.” Ideally, one would like to see most opportunity ventures take place in the formal sector, where their private rewards and social spillovers can be much greater, while most necessity ventures can remain informal. This would save on scarce physical capital and human resources. Well-functioning markets and a sound entrepreneurship policy could actually make entrepreneurs selfselect in such a way. To see this, let us assume first that the net discounted incomes (Fo and Io) from an opportunity business carried out in either the formal or the informal sector—as determined by sensible markets—are always larger than the ones (Fn and In) derived from a necessity enterprise. Denoting now the corresponding payoff ratios as o = Io/Fo and n = In/Fn, respectively, inequality (1) says that an opportunity entrepreneur will go formal if and only if p – o·p2  c/Fo,

(4)

while a necessity entrepreneur will make the same choice when p – n·p2  c/Fn.

(5)

This situation is depicted in Figure 2.4, assuming that o < n.6 One can see that the combination of (a) discerning markets that magnify the gap between Fo and Fn, (b) official procedures which impose a positive (albeit small) cost c on all incoming ventures, and (c) policy measures (regressive income taxes, for example) that decrease the ratio o while increasing n could lead only the best (or none at all, as in Figure 2.4) necessity projects to go formal while only those opportunity ventures with the worst prospects (p < po* in Figure 2.4) will be done informally. Speaking the language of statistics, deterring some opportunity projects from the formal sector while drawing some necessity ones into it might be seen—from a policymaker’s perspective—as type 1 (false negative: some opportunity projects never formalize) and type 2 (false positive: some necessity projects end up in the formal sector) errors. Figure 2.4 suggests that properly adjusting Fn and n could avoid the latter. But the regulator will rarely

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Informal versus Formal New Ventures 27

1-αo

c/Fn 1-αn

c/Fo

0 po∗

p 1

Figure 2.4 Most opportunity (necessity) entrepreneurs choose the formal (informal) sector

have sufficient information to achieve this level of fine tuning. Additional leeway will exist, however, if official procedures can discriminate between ventures. Suppose co and cn represent the (different) costs of complying with rules and regulations for opportunity and necessity ventures, respectively. While the rule of law and lack of information might make it hard in general to set co relatively small and cn relatively large, this should at least be possible, for instance, when a necessity venture hinges on illegal activities; in this case, vigilant bureaucrats would normally make cn high enough to prevent such activities from even requiring formal approval.

Risk Aversion Many people, economists in particular (e.g., Kirhlstrom and Laffont 1979, Shiller 2011), see the ability to handle risk as the key feature characterizing the entrepreneur. Accordingly, self-employed individuals should be less averse to risk than the average person, and cultures that foster risk taking should produce more and better entrepreneurs than those critical of opportunity seeking and experimentation. To be sure, risk attitudes have some bearing on the supply of entrepreneurs. The present model also makes it possible to explore their impact on the allocation of entrepreneurial activities. Pursuing a standard decision-theory approach (see, e.g., Eeckhoudt and Gollier 1995), let us assume that an entrepreneur’s risk preferences can be encoded in a utility function u. This means that the monetary outcomes F–c, I–c, –c, I, and 0 shown in Figure 2.1 will now be graded in utility units u(F–c), u(I–c), u(–c), u(I), and u(0); the larger the amount, the higher the utility. The entrepreneur will then opt for the formal sector if and only if

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Bernard Sinclair-Desgagné p·u(F – c) + (1 – p)[p·u(I – c) + (1 – p)·u(–c)]  p·u(I) + (1 – p)·u(0). (6)

Henceforward, suppose that F – c > I, so an entrepreneur always earns more from a successful formal venture than from a successful informal one. There must then exist some probability p~ analogous to the threshold p* shown in Figure 2.2, at which ~)[p ~·u(I – c) + (1 – p ~)·u(–c)] =p ~ ·u(I) + (1 – p̃)·u(0). (7) p̃·u(F – c) + (1 – p It is shown in the Appendix that this threshold increases with the entrepreneur’s risk aversion. This finding backs the following proposition. PROPOSITION 6: Other things being equal, more risk-averse entrepreneurs will need better odds of succeeding in order to choose the formal sector.

This statement seems to agree with conventional wisdom that it is rather unusual to see an entrepreneur who is strongly risk averse and lacks confidence. This view has its roots in the available data which come from observing mainly the formal sector, and the proposition indeed states that only the less-risk-averse entrepreneurs, or those more likely to succeed, dare to enter this sector. One might perhaps also infer from the proposition that the informal sector can thus serve as a training ground for the more inexperienced entrepreneurs who cope poorly with risk pressure and do not yet have the managerial skills that underlie success. The upshot is that policymakers should then refrain from putting too many impediments on informal entrepreneurship.

Aspirations In their empirical study of entrepreneurial motivations and their drivers, Hessels et al. (2008, 335) note that “countries with higher rates of economic growth tend to have higher proportions of increase-wealth-motivated entrepreneurs.” Policymakers should therefore promote entrepreneurs with such aspirations. As we shall see, a well-functioning formal sector might do just that, first by separating high-aspirations entrepreneurs from the rest, and, second, by allowing formal ventures to grow more than informal ones. High-aspiration entrepreneurs seek to generate and capture greater wealth through larger, fast-growing—often export-oriented—ventures (Hessels et al. 2008). Figure 2.5 depicts what might then be the respective preferences of a low- versus a high-aspiration entrepreneur (Sinclair-Desgagné 2002): with similar utility of gross income u such that u(0) = 0, let a high-aspiration type value more any increment in wealth w (so a+ > a) and feel greater discontent at the lowest wealth levels (so b+ < b). The parameters a, b can be presumed to vary according to a country’s rate of economic growth and current development level (Hessels et al. 2008) and the entrepreneur’s income and human

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Informal versus Formal New Ventures 29 Utility levels

Higher aspirations: U(w) = a+·u(w) + b+

Lower aspirations: U(w) = a·u(w) + b

Wealth

Figure 2.5 Higher and lower aspirations: a+ > a, b+ < b

capital (Autio 2005, Estrin et al. 2009). The higher these factors are, the larger a becomes and the smaller b gets. In the present framework, an entrepreneur whose aspirations are captured by the pair (a,b) will now decide to formalize her activity if and only if p[a·u(F) + b] + (1 – p){p[a·u(I) + b] + (1 – p)b} – c  p[a·u(I) + b] + (1 – p)b. A little algebra reduces this to p·u(F) – p2·u(I)  c / a.

(8)

Higher aspirations, which translate into a larger parameter a, would thus decrease the ratio c/a, thereby making it easier to satisfy inequality (8) and more likely for an entrepreneur will go formal. This constitutes a final proposition. PROPOSITION 7: Other things being equal, the greater an entrepreneur’s aspirations are, the more likely she is to enter the formal sector.

This assertion is intuitive since a well-functioning formal sector allows successful entrepreneurs to manage bigger businesses and earn significantly more than they would in the informal sector. One additional insight here is that the component of aspirations captured by the parameter b, that is, when someone feels more or less awful under bad circumstances, does not play a role in an entrepreneur’s decision. This suggests, for instance, that societies that stigmatize losers or cultivate frustrations (thereby making b smaller), as opposed to cultures that do not set individuals apart based on

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their economic situation, will actually have the same (minimal) impact on the allocation of entrepreneurs. SOME POLICY IMPLICATIONS AND CONCLUDING REMARKS This chapter considered the allocation of entrepreneurial resources between the formal and the informal sector. The approach was theoretical, using a standard choice model that turned out to be quite simple and yet rich enough to deliver new insights and seven propositions. Several policy implications were also drawn as the analysis developed. They are summarized in the following remarks: • To encourage more entrepreneurs to enter the formal sector, the cost of formalizing a new business must be kept low relative to the net payoff to be expected from a successful formal venture (Proposition 1). Not too low, however, for such a cost deters necessity ventures, unpromising projects, and low-aspiration or unskilled entrepreneurs from also doing business in the formal sector and thereby imposing a drag on scarce physical and human resources (Propositions 1, 6 and 7). • Provided it is properly limited, the informal sector brings some benefits to society. For instance, it can be used as training ground for inexperienced entrepreneurs to increase their managerial skills and gain confidence in their potential (Proposition 6). • However, the informal sector might sometimes attract the best ventures or most talented entrepreneurs (Proposition 3). It might also make some social welfare measures counterproductive as far as entrepreneurship policy and the promotion of formal businesses is concerned (Proposition 5). • One will foster formal entrepreneurship by either raising the absolute net income from a successful formal venture or changing the relative payoff levels from operating in the formal or the informal sector (Proposition 3). Rewards from a successful formal venture can be raised with respect to those of a successful informal one by lowering taxes on profit, enforcing property rights (intellectual property, in particular, so an entrepreneur going formal can capture more of the value she creates), improving contracting rules, and enhancing market regulation. A formal venture’s absolute income level, on the other hand, also depends on macroeconomic policy and economic growth (which might equally affect revenues in both the formal and the informal sectors). • Although economic growth alone will never suffice to eliminate all informal business, in principle, the eradication of red tape could (Proposition 2). • Finally, depending on local circumstances, the same policy applied in different countries can produce different results. Reducing red tape to a given level, for example, can have a much bigger influence on the

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Informal versus Formal New Ventures 31 allocation of entrepreneurial activity in a poor country, where returns on successful ventures are usually small than in a well-off country, where success brings large absolute rewards (Proposition 1). These conclusions rely on propositions that seem empirically testable, either in a laboratory setting or using statistical data. Empirical research would bring additional support and likely yield useful insights for implementation. It might also challenge the present model and suggest further developments. One might expect, for instance, that dealing properly with uncertainty (hence the fact that the entrepreneur cannot come up with subjective probabilities of success), learning (i.e., the possibility for an entrepreneur to acquire information and update her probabilities), imitation (allowing two entrepreneurs to observe each other), and competition (modeling industry structure) will be welcome extensions.

APPENDIX: PROOF OF PROPOSITION 6 Without disturbing the analysis in any way, it is always possible to set the ranking of monetary outcomes so that u(I – c) = 0.7 Equation (7) reduces then to p̃u(F – c)p̃ + (1 – p̃)2·u(–c) = p̃·u(I) + (1 – p̃)·u(0).

(A.1)

The right-hand side is the expectation, in utility units, of a gamble that yields monetary prizes I with probability p̃ and 0 with probability (1 – p̃). Call this gamble Lottery A. The analogous gamble on the left-hand side— call it Lottery B—would yield prizes F–c and –c with probabilities p̃ and (1 – p̃), respectively. Suppose p̃·(F – c) + (1 – p̃)·(–c)  p̃·I, so Lottery B does not bring more income on average than Lottery A. In this case, a risk-averse entrepreneur would clearly prefer Lottery A to Lottery B, hence p̃·u(F – c) + (1 – p̃)·u(-c) < p̃·u(I) + (1 – p̃) ·u(0),

(A.2)

because Lottery B inflicts strictly more volatility (its outcomes are farther apart) for a lower expected profit. Squaring the probability number (1 – p̃) is thus what makes equation (A.1) hold (recall that u(-c) < u(I-c) = 0). And the gap in (A.2) will be larger the greater the entrepreneur’s risk aversion is, meaning only a greater threshold p̃′ > p̃ can then satisfy equation (A.1).8

NOTES I wish to thank Raja Kali, Mai Thai, Ekaterina Turkina and an anonymous reviewer for comments and suggestions which helped me improve the content and presentation of this chapter. Residual shortcomings are mine.

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Bernard Sinclair-Desgagné 1. One may link aspirations and confidence to animal spirits, or the spontaneous optimism that Keynes and many followers (e.g., Marchionatti 1999; Akerlof and Shiller 2009) have seen until now as the main driver of entrepreneurial activity. 2. The present context is characterized by risk, that is, known (at least subjectively) probabilities, as opposed to uncertainty or unknown odds that some authors often associate with entrepreneurial ventures (see Blanchflower and Oswald 1998; Alvarez and Barney 2007). Following Baumol (1993, 198), one may argue that there are two kinds of entrepreneur: the one “who creates and then, perhaps, organizes and operates a new business firm” and “the entrepreneur as the innovator—as the one who transforms inventions and ideas into economically viable entities.” The latter situation typically exhibits significant uncertainty whereas the former may not. 3. The case of a successful informal entrepreneur who may decide to enter the formal sector, in particular, is dealt with in the next section (where the odds of succeeding in the formal and the informal sector are allowed to differ). 4. Numbers like 1/2 are obviously not to be taken literally. The analysis made throughout this chapter is meant to produce qualitative insights, only. 5. Other measures might also work here, which are not captured by the present model. Government-sponsored training or venture capital programs, for instance, might identify and channel the most talented entrepreneurs to the formal sector. I thank the editors for pointing this out. 6. Figure 2.4 covers the case where o and n are both smaller than 1/2. Similar conclusions apply to the other cases. 7. Utility numbers are like temperature levels. Whatever the scale that is chosen (say Fahrenheit or Celsius) and where the number 0 lies on it, a larger figure always means warmer and a smaller one colder. 8. The argument conveyed here is at best loose and incomplete. A rigorous (but longer and more mathematically demanding) proof can be obtained upon request.

REFERENCES Acemoglu, Daron, and Simon Johnson. 2005. “Unbundling Institutions.” Journal of Political Economy 113: 949–95. Acs, Zoltan J., Sameeksha Desai and Jolanda Hessels. 2008. “Entrepreneurship, Economic Development and Institutions.” Small Business Economics 31: 219–34. Akerlof, George A., and Robert J. Shiller. 2009. Animal Spirits—How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton, NJ: Princeton University Press. Alvarez, Sharon A., and Jay B. Barney. 2007. “Discovery and Creation: Alternative Theories of Entrepreneurial Action.” Organizações em Contexto 3: 123–52. Autio, Erkko. 2005. Global Entrepreneurship Monitor—Report on High-Expectation Entrepreneurship. London,UK: London Business School. Baumol, William J. 1990. “Entrepreneurship: Productive, Unproductive, and Destructive.” Journal of Political Economy 98: 893–921. Baumol, William J. 1993. “Formal Entrepreneurship Theory in Economics: Existence and Bounds.” Journal of Business Venturing 8: 197–210. Blanchflower, David G., and Andrew J. Oswald. 1998. “What Makes an Entrepreneur?” Journal of Labor Economics 16: 26–60. Bowen, Harry P., and Dirk De Clercq. 2008. “Institutional Context and the Allocation of Entrepreneurial Effort.” Journal of International Business Studies 39: 747–68.

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Informal versus Formal New Ventures 33 de Soto, Hernando. 1986. El Otro Sendero—La Révolución Informal. Lima, Peru: Instituto Libertad y Democracia. de Soto, Hernando. 2000. The Mystery of Capital. New York: Bantam Press/Random House. Eeckhoudt, Louis, and Christian Gollier. 1995. Risk: Evaluation, Management and Sharing. New York: Harvester Wheatsheaf. Estrin, Saul, Julia Korosteleva, and Tomasz Mickiewicz. 2011. “Which Institutions Encourage Entrepreneurs to Create Larger Firms?” Discussion Paper no. 5481. Bonn, Germany: IZA. Hessels, Jolanda, Marco van Gelderen, and Roy Thurik. 2008. “Entrepreneurial Aspirations, Motivations, and Their Drivers.” Small Business Economics 31: 323–39. Kirhlstrom, Richard E., and Jean-Jacques Laffont. 1979. “A General Equilibrium Theory of Firm Formation Based on Risk Aversion.” Journal of Political Economy 87: 719–48. Marchionatti, Roberto. 1999. “On Keynes’ Animal Spirits.” Kyklos 52: 415–39. Shiller, Robert J. 2011. “Innovations to Foster Risk-Taking and Entrepreneurship.” In Perspectives on the Performance of Continental Economies, edited by Edmund S. Phelps and Hans-Werner Sinn. Boston: Massachusetts Institute of Technology. Sinclair-Desgagné, Bernard. 2002. “Endogenous Aspirations and Economic Growth.” Mimeo, HEC Montréal.

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3

Evaluating the Competing Explanations for Informal Entrepreneurship Some Lessons from Brazil Colin C. Williams and Youssef Youssef

Since the turn of the millennium, a growing body of literature has begun to highlight how many entrepreneurs operate in the informal economy both in the global South (Bhatt 2006; Bhowmik 2007; Charmes 1998; Cross 2000; Cross and Morales 2007; Das 2003; Gurtoo and Williams 2009; Unni and Rani 2003) and the global North (Llanes and Barbour 2007; Small Business Council 2004; Venkatesh 2006; Webb et al. 2009; Williams; 2006; 2009). To understand the reasons for informal entrepreneurship, various competing perspectives have emerged which variously represent informal entrepreneurs as an historical legacy (the modernization perspective), necessity-driven (structuralist perspective) or voluntary entrants doing so either as a rational economic decision (neoliberal perspective) or as a lifestyle choice (poststructuralist perspective). This chapter critically evaluates the validity of these competing explanations of informal entrepreneurship through a discussion of a study of the motivations behind informal entrepreneurship in Brazil. The rationale for doing so is that different explanations tend to be associated with different policy approaches, so how one explains informal entrepreneurship has direct consequences for how one seeks to tackle it. By adopting a single explanation, as most commentators appear to do, the danger is that simplistic policy solutions that are applicable only to one group of entrepreneurs might be adopted. To develop more nuanced policy approaches that are tailored to different types of entrepreneurs, therefore, an appreciation is required of the heterogeneous motives of entrepreneurs. Firstly, this chapter will briefly review the range of competing explanations of informal entrepreneurship. Secondly, it will outline the methodology used to study the motives of informal entrepreneurs in Brazil as a means of critically evaluating the relevance of the competing explanations of informal entrepreneurship. Thirdly, a discussion of the findings will reveal that no one theorization is universally applicable and that different theorizations are applicable to varying informal entrepreneurs. Fourthly, possible policy options for tackling informal entrepreneurship will be outlined. The final section of this chapter will present some conclusions regarding both the theorization of informal entrepreneurship and policy approaches towards it.

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Evaluating the Competing Explanations 35 At the outset, however, it is necessary to define what is meant by informal entrepreneurship. Given that entrepreneurship has been a problematic and elusive concept for a long time and, as Anderson and Starnawska (2008, 222) state, “entrepreneurship means different things to different people,” a working definition is in order: an entrepreneur is somebody actively involved in starting a business or is the owner/manager of a business (Harding et al. 2006; Reynolds et al. 2003). For its part, the informal economy can be defined as those activities where monetary transactions are not declared to the state for tax, social security or labor law purposes but which are legal in all other respects (e.g., Evans et al. 2006; Williams 2006; Williams and Windebank 1998). PERSPECTIVES ON INFORMAL ENTREPRENEURSHIP A review of the literature reveals four competing perspectives on explaining entrepreneurship. Below, each is reviewed in turn.

Modernization Perspective: An Historical Legacy For most of the last century, it was widely assumed that there was an extensive and growing formal economy and a separate, small and gradually disappearing informal economy. Informal entrepreneurs were widely depicted as an historical legacy or residue from an earlier mode of production and as rapidly disappearing with the advent of the modern formal economy. In this perspective, the persistence of informal entrepreneurs represented underdevelopment, traditionalism and backwardness whilst the emergent formal economy represented progress, development and advancement (Bairoch 1973; Geertz 1963; Lewis 1959). In this perspective, therefore, the future is one of formalization. Informal entrepreneurs are deemed parasitic or at best inefficient, part of a premodern traditional economic order that survives only at the fringes of modern society and the antithesis of everything deemed modern. In the new millennium, however, this depiction of informal entrepreneurship as a residue from a premodern era has been transcended due to the growing number of studies that reveal the extensiveness and growth of the informal economy (Charmes 2009; ILO 2002a, 2002b; Jütting and Laiglesia 2009; Schneider 2008; Williams 2006) and informal entrepreneurship (de Soto 2001; Minard 2009; Small Business Council 2004; Venkatesh 2006; Volkov 2002; Webb et al. 2009; Williams 2006; 2009; Williams and Round 2009).

Structuralist Perspective: A Necessity-driven Endeavor With the recognition of the widespread persistence and even growth of informal entrepreneurship, a structuralist perspective has emerged, in which

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Colin C. Williams and Youssef Youssef

this endeavor is viewed as arising out of economic necessity by populations excluded from the formal economy. In this perspective, informal entrepreneurship is a by-product of the advent of a deregulated open world economy (Castells and Portes 1989; Gallin 2001; Portes 1994; Portes and Haller 2004; Portes and Roberts 2005; Sassen 1997), in which informal entrepreneurs are viewed as unwilling and unfortunate pawns in an exploitative global economic system. Viewed through this lens, informal entrepreneurship is an absorber of surplus labor, a provider of income earning opportunities for the poor, a provider of goods and services that are often unavailable in the formal sector, and a primary means of maintaining a low cost of living by providing cheaper goods and services than would otherwise be the case (Bhatt 2006; Nelson and Bruijn 2005; Tokman 2001). Consequently, and similarly to the modernist perspective, informal entrepreneurship is again represented as regressive and formal entrepreneurship as a progressive activity that “promotes the protection and incorporation of workers and economic units in the informal economy into the mainstream economy” (ILO 2007, 1), in the belief that “formalization and transition to the mainstream economy are desired goals” (ILO 2007, 18). Informal entrepreneurship is the opposite of “decent work,” and the policy solution is either to eradicate it or to formalize it (ILO 2002a, 2007). Such work is portrayed as highly insecure and unstable, characterized by long hours, poor conditions, no legal or social protection, limited access to credit and very limited bargaining power (ILO 2002a, Kapoor 2007).

Neoliberal Perspective: A Rational Economic Decision An alternative lens has been adopted by neoliberal commentators who view informal entrepreneurship as resulting from large numbers of people making a rational economic decision to voluntarily exit the formal economy. Informal entrepreneurs are thus cast in the role of heroes throwing off the shackles of a burdensome state, and informal entrepreneurship is viewed as a rational economic path taken to escape overregulation (Sauvy 1984; de Soto 1989). These entrepreneurs voluntarily operate in the informal economy to avoid the costs, time and effort of formal registration (Cross and Morales 2007; de Soto 1989, 2001; Perry and Maloney 2007; Small Business Council 2004). As de Soto (1989, 255) argues, “the real problem is not so much informality as formality.” Informal entrepreneurship is therefore viewed as a “spontaneous and creative response to the state’s incapacity to satisfy the basic needs of the impoverished masses” (de Soto 1989, xiv–xv), and emerges as a populist reaction to overregulation and government oppression. As such, it is argued that it offers potential benefits not found in formal economy, including flexible hours, job training, and entry to the labor force, opportunity for economic independence, better wages and avoidance of taxes and inefficient government regulation (Maloney 2004; Packard 2007). Informal

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Evaluating the Competing Explanations 37 entrepreneurship is a rational economic strategy pursued by entrepreneurs who feel stifled by state-imposed institutional constraints. Here, therefore, the normative hierarchy of the modernization and necessity perspectives is inverted. Informal entrepreneurship is the route to progress and an exemplar of how formal entrepreneurship, as well as the economy more generally, could be organized if it were deregulated.

Poststructuralist Perspective: A Lifestyle Choice A final perspective again depicts informal entrepreneurship as voluntarily chosen. However, rather than viewing it as a rational economic decision, it is seen more as a lifestyle choice. This perspective is inspired by a small tributary of critical, postcolonial, poststructuralist, postdevelopment and postcapitalist thought that moves beyond the conventional “thin” portrayal of economic endeavor as always purely market-like and profit-motivated, and instead adopts “thicker” portrayals of the participation in economic endeavor which recognize the complex mix of logics, including social logics, often involved (Bourdieu 2001; Chakrabarty 2000; Davis 1992; Zelizer 2005). In the context of the western world, this way of looking at things has resulted in a rereading of informal entrepreneurship as a largely voluntarily chosen activity which is: conducted largely for closer social relations, such as kin, neighbors, friends and acquaintances (Williams 2006); undertaken more for social and redistributive reasons rather than purely financial gain (Persson and Malmer 2006; Round and Williams 2008; Williams 2004); a resistance practice pursued in response to either waged work or the corruption and bribes that can be part and parcel of operating in the formal economy (Kudva 2009; Whitson 2007) or an alternative realm in which people transform their work identity and/or display their authentic identities such as by establishing “lifestyle” business ventures (Snyder 2004). In a global South context, this representation of informal entrepreneurs as social actors has also been adopted, but the emphasis has been slightly different. Here, the major thrust has been to depict informal entrepreneurship more as a “lifestyle” choice. Firstly, attention has been drawn not only to how the social relations between informal entrepreneurs differ from normal market relations in that business and friendship relations blur and there is greater community solidarity and reciprocity (Stillerman and Sundt 2007) but also to how exchange relations between informal entrepreneurs and their customers differ from mainstream market relations in that without recourse to a legal contract, interpersonal relations and trust become more important (Cross and Morales 2007). Secondly, there has been a focus on how informal entrepreneurship is pursued as a lifestyle choice because of the greater personal freedom and flexibility it affords and allows people to gain control over their lives (e.g., Cross 2000; Hart 1973). Lastly, attention has been paid to how informal entrepreneurship is often viewed by its

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participants as an expression of community support which allows customers to acquire goods they otherwise could not afford (Cross 2000).

Evaluating the Validity of the Rival Perspectives Until now, these four contrasting theorizations of informal entrepreneurship have been largely viewed as mutually exclusive rival explanations. Most commentators depict informal entrepreneurship as taking place according to a single “logic” or at best pay lip-service to other logics while contending that one particular explanation predominates (e.g., de Soto 2001; Snyder 2004). One of the few studies to evaluate the validity of these contrasting explanations, conducted in Ukraine (Williams et al. 2011), finds that although no one theorization is universally applicable, structuralist explanations are most relevant when discussing deprived populations, whilst neoliberal and poststructuralist explanations are more relevant when discussing relatively affluent groups. This chapter thus seeks to further advance our understanding of the relevance of these apparently competing explanations by evaluating which, if any, explains participation in informal entrepreneurship in Brazil. EXAMINING INFORMAL ENTREPRENEURSHIP IN BRAZIL In order to evaluate critically these competing explanations for participation in informal entrepreneurship, we turn to a discussion of a 2003 household survey conducted in Brazil by the Brazilian Institute for Geography and Statistics (IBGE, Instituto Brasileiro de Geografia e Estadística), which is the national census bureau. This survey of the urban informal sector (Pesquisa Economia Informal Urbana, ECINF) generated cross-section data representative of all the urban self-employed and microfirm owners with at most five paid employees, excluding domestic workers. The stratified, two-stage sampling design generated a representative sample of these entrepreneurs both geographically and in terms of the sectors in which they worked. The first stage involved deciding on the number of households to be interviewed in each of Brazil’s urban geographical areas. To achieve this representative sample, the 2000 census was used to identify the number of these entrepreneurs in the 26 Brazilian states, as well as federal districts, and also each of the 10 metropolitan areas (Belém, Fortaleza, Recife, Salvador, Belo Horizonte, Vitória, Rio de Janeiro, São Paulo, Curitiba and Porto Alegre) and the municipality of Goiânia. Having established the number to be interviewed in each area, the second stage involved generating a representative sample of these entrepreneurs according to the activity or sector in which they worked. Using the 2000 census of population to determine the number of these entrepreneurs operating across different economic activities in each urban area, the number of interviews required in each sector within each urban area was determined. The outcome was a representative sample of the population of microentrepreneurs in urban Brazil.

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Evaluating the Competing Explanations 39 To collect the data for ECINF, two surveys were undertaken. Firstly, the ECINF household questionnaire gathered background sociodemographic information on household members aged 10 or older, including their employment status. This included investigating whether they were self-employed or employers who employ up to five employees. If a household member was identified as being either self-employed or an employer with five employees or fewer, then the second survey was administered, that is, the ECINF individual questionnaire which investigated the characteristics of their entrepreneurial activities. Firstly, data were collected on the nature of the economic activity, classified according to the Brazilian National Classification of Economic Activities, which is an adaptation of the third revision of the International Standard Industrial Classification (ISIC) of economic activities of the United Nations. Secondly, data on the income generated, the expenses involved, equipment required, location of production and number of employees were collected. Thirdly, to evaluate the level of organization, formalization and/ or visibility of these economic units, the type of accounting adopted for recording the transactions, the status of the employees, whether the enterprise was registered with the authorities, had a license to trade, and whether they paid taxes and made social contribution payments was investigated. Fourthly, the main problems confronting the business were investigated, their plans for the future (expansion/retraction/maintenance of the level of activity or closing the business), and the difficulties involved in regularizing the business. Fifthly, their main reason for starting up the enterprise was investigated using a closed-ended list of reasons that reflects the contrasting rationales cited by the modernization, structuralist, neoliberal and poststructuralist perspectives. Sixthly, the characteristics of the entrepreneurs were investigated, such as whether they had other jobs, their education level and the prior work they undertook so as to reveal the origin of microentrepreneurs. Finally, data was gathered on their access to various services, such as credit, as well as on how they paid for goods or raw materials and the location of their customers. In total, 54,595 households were interviewed. Of the 40,235 individuals identified who reported being either self-employed or owners of businesses with a maximum of five paid employees, only 8% reported paying taxes and/or making social security contributions. Below, we present the results for the 37,016 individuals who were either self-employed or owners of a business with a maximum of five employees who reported that they did not pay either taxes and/or make social security contributions, that is, who were informal entrepreneurs. EXPLAINING INFORMAL ENTREPRENEURSHIP IN BRAZIL The finding of this survey, scaled up, is that there were 10,965,501 informal entrepreneurs in urban Brazil in 2003, of which 9,514,629 (86.7%)

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were simple traders and the remaining 1,448,284 operated businesses with five employees or less (13.3%). When we analyze the sociodemographic characteristics of these informal entrepreneurs, we can that two-thirds were men (66%) rising to three-quarters (73%) among those who have employees. Men, moreover, earned 67% more than women from their informal entrepreneurship (R$869 compared to R$520), which reveals that informal entrepreneurship reinforces the gender disparities in the wider labor market. Most informal entrepreneurs, moreover, were in the prime working age population (25–59 years old, 83% of all informal entrepreneurs), with nearly one-third (31%) having completed high school and 8% having a university degree. Only 9% had no or less than of schooling. Around one in five (18%) informal entrepreneurs with employees, moreover, had a university degree, a fact which calls into question the depiction of informal entrepreneurs as largely composed of the illiterate and uneducated. Turning to their work, over half (52%) of informal entrepreneurs worked for 40 hours or more each week, rising to 70% among those with employees. The vast majority worked for 21 days or more each month. On the whole, therefore, informal entrepreneurship in Brazil is not a part-time activity used to top-up other earnings, as has been found in advanced western economies (Williams, 2004, 2006). Indeed, only 19% worked fewer than 20 hours per week and 15% fewer than 15 days per month. Instead, there appears to be a segmented labor market of informal entrepreneurs with at one end, those engaged in informal entrepreneurship as their main means of livelihood and a full-time occupation and at the other end, those engaged in informal entrepreneurial activities on a more part-time basis as a means of topping up household earnings. Examining the activities in which they engaged, the most common sectors are commerce and repairs (33%), construction (17%), primary and manufacturing industry (16%), social and personal services (8%), transport storage and distribution (8%) and hospitality and food services (7%). Many of these businesses were long-established, with 31% being established for over 10 years and a further 26% for 5–10 years. What were their reasons, therefore, for starting their informal business venture? As the literature review revealed, four competing explanations have dominated the literature, variously viewing such endeavors as an historical legacy, economic necessity and choice pursued either as a rational economic decision or as social actors. To evaluate these explanations, this survey analyzed the 10 main reasons given for starting their entrepreneurial ventures: family tradition; could not find a formal job; to supplement my net income; opportunity presented by partner; experience in the area; promising business opportunity; it was a secondary job; it allowed me to have working time flexibility; and it gave me independence. As Table 3.1 displays, these 10 categories can be grouped according to whether they reflect the modernization, structuralist, neoliberal or poststructuralist explanations, so as to enable an evaluation of which is valid in Brazil. As we can see, less than half the respondents (48.7%) said that they started up either due to their exclusion from the formal economy or out of

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Evaluating the Competing Explanations 41 Table 3.1

Reasons for starting an informal business venture, Brazil, 2003 Simple traders

Entrepreneurs with employees

8.1

7.6

11.8

8.1

7.6

11.8

48.7

52.2

23.7

31.1 17.6

33.2 19.0

16.0 7.7

18.9

17.0

32.4

1.0 8.4

0.6 7.6

4.2 13.9

7.4 2.1

6.8 2.0

11.3 3.0

18.4

17.4

25.2

1.9

2.0

0.9

16.5

15.4

24.3

Other reasons

5.8

5.7

6.6

No response

0.2

0.2

0.3

% Modernist explanation: Family tradition Structuralist explanations: Could not find a formal job To supplement net income Neoliberal explanations: Opportunity presented by a partner Experience in the area Promising Business It was a secondary job Poststructuralist explanations: Work time flexibility Independence

All informal entrepreneurs

Source: IBGE, Diretoria de Pesquisas, Coordenação de Trabalho e Rendimento, Economia Informal Urbana, 2003

economic necessity as a survival practice. Indeed, all informal entrepreneurs who had started a business in the previous five years were asked for their reason for leaving their formal job. If the structuralist account is correct, then it should be the case that they involuntarily left their formal job and adopted informal entrepreneurship as a means of livelihood due to their exclusion from the formal economy. However, only 30% of those who had a formal job before starting an informal business had involuntarily left their formal employment because of redundancy. The remaining 70% had left their formal job and turned to informal entrepreneurship for other reasons: close to 20% had done so for familial or personal reasons, such as a desire for independence or to work with other family members; 13% due to the low income received in their formal employment and their belief that informal entrepreneurship would provide them with higher incomes; 3% due to their retirement and 33% for reasons other than redundancy. If exclusion from the formal economy was not their main reason for engaging in an informal entrepreneurial endeavor, then why did they do so? Although it has been common in recent decades to refute the modernization thesis which depicts the informal economy as a traditional, premodern

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mode of production and an historical legacy or residue of some previous regime of accumulation, this survey shows that 8.1% of informal entrepreneurs viewed this endeavor as a traditional and/or ancestral way of working handed down to them and which they continued to pursue despite the encroachment of the modern formal economy. It is a premodern way of working that they continue to pursue in the modern world. For many informal entrepreneurs, however, their engagement in this endeavor was a matter of choice. Why were their reasons for doing so? Some 18.9% reflected the neoliberal explanation inasmuch as they viewed themselves as voluntary informal entrepreneurs and rational economic actors; 8.4% stated that it was due to their experience or skills in the business; 7.4% because it represented a promising business opportunity and 1% because of an opportunity presented by their partner. A final group of informal entrepreneurs (18.4% of those surveyed) also viewed themselves as voluntarily engaging in informal entrepreneurship. However, they displayed a more poststructuralist perspective, viewing this endeavor as a lifestyle choice due to the flexibility they could have in their working lives and to the independence they got from pursuing this type of work. In this regard, these informal entrepreneurs could be viewed as “lifestyle entrepreneurs.” The overarching finding, therefore, is that no single explanation is universally valid in relation to all informal entrepreneurs. Instead, it is only by combining and using all these explanations that a more comprehensive and fuller explanation can be found for the complex, multifarious rationales for informal entrepreneurship. Consequently, rather than viewing these explanations as competing with one another, they should all be viewed as necessary to a more comprehensive understanding the range of reasons for informal entrepreneurship. POLICY OPTIONS FOR INFORMAL ENTREPRENEURSHIP In this section, we assess the implications of pursuing four different policy options, namely, the laissez-faire, eradication, deregulation and facilitating formalization approaches.

Laissez Faire A first option is to “do nothing.” One rationale is that for 8% of these informal entrepreneurs, they are pursuing a family tradition and should not be forced into the modern economy. Another rationale is that informal entrepreneurship is a seedbed for new enterprise creation and a survival tactic and should therefore be left alone. The problem with this approach, however, is that informal entrepreneurship also has negative impacts on formal businesses, those working informally, customers and governments.

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Evaluating the Competing Explanations 43 Formal businesses experience unfair competition from these enterprises, which force them into the informal economy to compete, thereby encouraging a “race to the bottom,” away from regulatory compliance (Evans et al. 2006; Renooy et al. 2004; Gallin 2001; Grabiner 2000; Williams and Windebank 1998). Informal entrepreneurs, meanwhile, who lack access to health and safety standards, cannot build up rights to the state pension and other contributory benefits, and access pension schemes, are pressured into entering into exploitative relationships with the formal sphere, lack legal protection relative to formal businesses, and are unable to develop and grow due to structural constraints to gaining access to capital and securing the support available to formal businesses (Evans et al. 2006; Gallin 2001; ILO 2002a). For their part, customers find themselves without: legal recourse if a poor job is done; insurance coverage; guarantees in relation to the work done; and assurances that health and safety regulations have been followed. Governments forego revenues in terms of nonpayment of taxes owed, are unable to pursue social integration and mobility due to reduced tax income and lose regulatory control over the quality of jobs and services provided. Moreover, if a significant segment of the population routinely engages in informal entrepreneurship, a more casual attitude towards the law could become more widespread (Renooy et al. 2004; Williams 2006). For those who view the negative impacts of doing nothing as outweighing the positive aspects of doing nothing, intervention is required.

Eradication Another policy option is to eradicate informal entrepreneurship. If informal entrepreneurs are viewed as “rational economic actors,” evading taxes because the payoff is greater than the expected cost of being caught and punished (Allingham and Sandmo 1972), then the cost/benefit ratio confronting those engaged or thinking about participating in informal entrepreneurship can be changed (e.g., Grabiner 2000; Richardson and Sawyer 2001). This can be achieved by concentrating on the cost side and increasing the perceived or actual likelihood of detection (not least by improving the coordination of strategy, operations and data sharing) and the penalties and sanctions for those caught. Whether this “negative reinforcement” approach that seeks to elicit behavior change using “sticks” that punish those engaged in “bad” behavior is practical and desirable is questionable. Some conclude that “it is not sensible to penalize illicit work with intensified controls and higher fines” (Schneider and Enste 2002, 192) because it alienates informal entrepreneurs, decreases their willingness to comply and amplifies informality by reducing their belief in the fairness of the system (Murphy 2005). Moreover, not all informal entrepreneurs are rational economic actors. As such, changing the cost/benefit ratio may have little impact on the behavior of social actors or those pursuing it as a family tradition.

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Eradication is also perhaps not desirable. Given that informal entrepreneurship can be a seedbed for entrepreneurship, its eradication would stamp out precisely the entrepreneurship and enterprise culture that governments otherwise wish to nurture. The resulting challenge for government is to “join up” its policies on the informal economy and entrepreneurship. In failing to do so, governments attempting to eradicate the informal economy will destroy the very entrepreneurship and enterprise culture they are seeking to create.

Deregulation Rather than eradicating informal entrepreneurship, another option is to deregulate the formal economy (de Soto 1989, 2001). The objective is to give the market free reign by liberating it from external interference. As de Soto (1989, 255) argues, “the real problem is not so much informality as formality.” Castells and Portes (1989, 13) argue that “[in] an ideal market economy, with no regulation of any kind, the distinction between formal and informal would lose all meaning since all activities would be performed in the manner we now call informal.” However, this approach assumes that deregulation reduces informality. Yet there is growing evidence that deregulating does not formalize the economy (Kus 2010). Indeed, even if deregulation were to do so, the outcome appears to be greater social polarization and poorer quality work conditions (Peck 1996). One can thus only agree with Peck (1996, 2) that “the hidden hand of the market is not an even hand” and that the result seems to be a leveling down rather than up of working conditions (Williams 2006). In sum, even if deregulation were to reduce the magnitude of informality, the impact would be to widen inequalities and reduce working conditions compared with more regulated states.

Facilitating Formalization A final option is to legitimize informal entrepreneurship rather than eradicate it (Dekker et al. 2010; European Commission 2007; Renooy et al. 2004; Small Business Council 2004; Williams 2006; Williams and Renooy 2009). How might this be achieved? Firstly, preventative measures can be adopted to prevent informality from the outset. These might include: simplifying regulatory compliance; introducing new categories of formal work; providing provision of business support and advice; direct and indirect tax incentives, and developing initiatives to smooth the transition to self-employment (Williams and Renooy 2009). Secondly, curative measures can be used to help those already participating in informal entrepreneurship to transfer into the formal realm. These measures include: offering amnesties on either a societal or individual level to informal entrepreneurs who put their affairs in order; offering business

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Evaluating the Competing Explanations 45 advisory and support services to those formalizing their business ventures and providing a range of targeted direct or indirect tax incentives encouraging customers to use formal rather than informal enterprises (Williams and Renooy 2009). Thirdly, commitment measures can be adopted to encourage adherence to formality among entrepreneurs and enterprises (Torgler 2003; Williams 2006; Williams and Renooy 2009). Such measures would include tax education and awareness campaigns about the benefits of formal work, and the pursuit of perceived tax fairness, procedural justice and redistributive justice. Fairness here refers to the extent to which entrepreneurs believe they are paying their fair share compared to others (Wenzel 2004), redistributive justice to whether entrepreneurs receive the goods and services they believe they deserve given the taxes they pay (Richardson and Sawyer 2001), and procedural justice to the extent to which entrepreneurs believe that the tax authority has treated them in a respectful, impartial and responsible manner (Braithwaite and Reinhart 2000; Murphy 2005). CONCLUSION This chapter has critically evaluated the competing explanations for informal entrepreneurship that variously represent this activity as a traditional ancestral behavior and a residue from a previous mode of accumulation (modernization theory), a survival strategy for those excluded from the circuits of the modern economy (structuralism), an endeavor voluntarily pursued as a rational economic decision (neoliberalism), or an endeavor chosen by social actors for lifestyle reasons (poststructuralism). To evaluate these competing theories, a 2003 survey of informal entrepreneurs in urban Brazil has been analyzed. The finding is that no single explanation is universally applicable to all the informal entrepreneurs surveyed. Instead, each explanation is valid for some informal entrepreneurs. As such, it is only by combining these different explanations that a more accurate and finer-grained understanding of informal entrepreneurial activities in Brazil country can be achieved. Future research on informal entrepreneurs’ motives should involve explicit investigation of whether their entrepreneurial endeavor is an historical legacy, necessity-driven or voluntarily conducted either as a rational economic decision or as a lifestyle choice. In discussing policy implications, this chapter reviewed four policy options: doing nothing, eradication, deregulation, and facilitating formalization. Similar to the competing explanations of informal entrepreneurship, these four approaches are not always mutually exclusive. On the one hand, all four approaches can be applied simultaneously. For example, governments could simplify regulatory compliance while introducing incentives, such as amnesty, to encourage people to enter legitimate business activities.

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At the same time, for those who fail to comply, they could implement tougher sanctions while conducting awareness campaigns to elicit greater public commitment to tax morality and doing nothing about certain types of informal entrepreneurship and/or informal entrepreneurship in particular populations. On the other hand, different informal entrepreneurs could in theory have different policy approaches applied to them. For example, in principle, a do-nothing approach could be applied to those conducting informal entrepreneurship as a family tradition, an eradication approach to necessity-driven informal entrepreneurs, a deregulation approach to those doing so as a rational economic decision and a facilitating formalization approach to those social actors pursuing a lifestyle approach. In sum, this chapter has made a start on advancing the academic literature beyond universal explanations of informal entrepreneurs’ motives as well as advancing policy discussions by reviewing the different policy options. What is now required is further research to determine whether there are similar reasons for informal entrepreneurship in other economies along with deeper research to lay the groundwork for the policy approaches that need to be applied to different groups of informal entrepreneur. Hopefully, therefore, this discussion will encourage further research into the varying reasons for different kinds of informal entrepreneurship in different economic, political and cultural contexts as well as a more nuanced policy debate about what needs to be done about varying segments of this hidden enterprise culture. REFERENCES Allingham, M. and Sandmo, A. “Income tax evasion: A theoretical analysis.” Journal of Public Economics 1 (2), (1972): 323–38. Anderson, A. R. and Starnawska, M., “Research practices in entrepreneurship: Problems of definition, description and meaning.” International Journal of Entrepreneurship and Innovation 9 (4), (2008): 221–30. Bairoch, P. Urban unemployment in developing countries (Geneva: International Labor Office, 1973). Bhatt, E. We are poor but so many: The story of self-employed women in India (Oxford: Oxford University Press 2006). Bhowmik, S. K., “Street vending in urban India: The struggle for recognition,” in: J. Cross and A. Morales (Eds.), Street entrepreneurs: People, place and politics in local and global perspective (London: Routledge, 2007), 89–123. Bouchard, M., and Dion, C. B., “Growers and facilitators: Probing the role of entrepreneurs in the development of the cannabis cultivation industry.” Journal of Small Business and Entrepreneurship, 22 (1), (2009): 25–38. Bourdieu, P. “The forms of capital.” in: N. Woolsey-Biggart (Ed.), Readings in Economic Sociology (Oxford: Blackwell, 2001), 49–72. Braithwaite, V., and Reinhart, M. “The taxpayers’ charter: Does the Australian Tax Office comply and who benefits” (Canberra: Centre for Tax System Integrity, Working Paper no.1, 2000). Australian National University. Castells, M., and Portes, A. “World underneath: The origins, dynamics and effects of the informal economy” in: A. Portes, M. Castells, and L.A. Benton (Eds.), The informal economy: Studies in advanced and less developing countries (Baltimore: Johns Hopkins University Press, 1989),19–42.

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Evaluating the Competing Explanations 47 Chakrabarty, D., Provincializing Europe: Postcolonial thought and historical difference (New York: Princeton University Press, 2000). Charmes, J. “Concepts, measurement and trends.” in: J. P. Jütting and J. R. Laiglesia (Eds.), Is informal normal? Towards more and better jobs in developing countries (Paris: OECD, 2009), 19–35. Charmes, J. Street vendors in Africa: Data and methods (New York: United Nations Statistical Division 1998). Cross, J., and Morales, A. “Introduction: Locating street markets in the modern/ postmodern world.” in: J. Cross and A. Morales (Eds.), Street entrepreneurs: People, place and politics in local and global perspective (London: Routledge, 2000),1–13. Cross, J. C. “Street vendors, modernity and postmodernity: Conflict and compromise in the global economy.” International Journal of Sociology and Social Policy 20 (1), (2000): 29–51. Das, K., “Income and employment in informal manufacturing: A case study.” in: R. Jhabvala et al. (Eds.), Informal economy centrestage: New structures of employment (London: Sage, 2003), 62–103. Davis, J. Exchange (Milton Keynes: Open University Press, 1992). de Soto, H. The other path: The economic answer to terrorism (London: Harper and Row, 1992). de Soto, H. The mystery of capital: Why capitalism triumphs in the West and fails everywhere else” (London: Black Swan, 2001). Dekker, H. et al, Joining up the fight against undeclared work (Brussels: DG Employment, Social Affairs and Equal Opportunities, 2010). European Commission. Stepping up the fight against undeclared work COM 628 final (Brussels: European Commission, 2007). Evans, M., Syrett, S., and Williams, C. C. Informal economic activities and deprived neighbourhoods (London: Department of Communities and Local Government, 2006). Gallin, D. (2001). “Propositions on trade unions and informal employment in time of globalization.” Antipode 19 (4), (2001): 531–49. Geertz, C Peddlers and princes: Social change and economic modernization in two Indonesian towns (Chicago: University of Chicago Press, 1963). Grabiner Lord. The informal economy (London: HM Treasury, 2000). Gurtoo, A., and Williams, C. C. (2009). “Entrepreneurship and the informal sector: Some lessons from India.” International Journal of Entrepreneurship and Innovation 10 (1), (2009): 55–62. Hart, K. “Informal income opportunities and urban employment in Ghana,” Journal of Modern African Studies 11 (1), (1973): 61–89. Instituro Brasileiro de Geografia e Estatística (IBGE). Economia informal urbana (2003: http://www.ibge.gov.br/home/estatistica/pesquisas/pesquisa_resultados). ILO. Decent work and the informal economy (Geneva: International Labor Office, 2002a). ILO. Women and men in the informal economy: A statistical picture (Geneva: International Labor Office, 2002b). ILO. 298th session of Governing Body Committee on Employment and Social Policy: The informal economy (Geneva: International Labor Office, GB.298/ESP/4, 2007). Jütting, J. P., and Laiglesia, J. R. “Employment, poverty reduction and development: What’s new?” in: J. P. Jütting and J. R. Laiglesia (Eds.), Is informal normal? Towards more and better jobs in developing countries (Paris: OECD, 2009). Kapoor, A.“The SEWA way: Shaping another future for informal labour.” Futures 39 (2007): 554–68. Kudva, N. “The everyday and the episodic: The spatial and political impacts of urban informality.” Environment and Planning A 41 (2009): 1614–28.

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Kus, B. “Regulatory governance and the informal economy: Cross-national comparisons.” Socio-Economic Review 8 (2010): 487–510. Lewis, A. 1959. The theory of economic growth (London: Allen and Unwin, 1959). Llanes, M., and Barbour, A. Self-employed and micro-entrepreneurs: Informal trading and the journey towards formalization (London: Community Links, 2007). Maloney, W. F. “Informality revisited.” World Development 32 (7), (2004): 1159–78. Minard, S. C. L. “Valuing entrepreneurship in the informal economy in Senegal.” Social Enterprise Journal 5 (3), (2009): 186–209. Murphy, K. “Regulating more effectively: The relationship between procedural justice, legitimacy and tax non-compliance.” Journal of Law and Society 32 (4), (2005): 562–89. Murphy, K. “Enforcing tax compliance: To punish or persuade?” Economic Analysis and Policy 38 (1), (2008): 113–35. Nelson, E., and Bruijn, E. “The voluntary formation of enterprises in a developing economy: The case of Tanzania.” Journal of International Development 17 (2005): 575–93. Peck, J. Work-place: The social regulation of labour markets (London: Guildford Press, 1996). Perry, G. E., and Maloney, W. F. “Overview: Informality—Exit and exclusion.” in: G. E. Perry et al. (Eds.), Informality: Exit and exclusion (Washington, DC: World Bank, 2007): 1–20. Persson, A., and Malmer, H. Purchasing and performing informal employment in Sweden: Part 1: Results from various studies (Skatteverket: Malmo, 2006). Portes, A. “The informal economy and its paradoxes.” in: N. J. Smelser and R. Swedberg (Eds.), The handbook of economic sociology (New York: Princeton University Press, 1994): 141–69. Portes, A., and Haller, W. “La economía informal.” Seria Políticas Sociales 100. División de Desarrollo Social—CEPAL (Santiago, Chile: United Nations, 2004). Portes, A., and Roberts, B. “The free-market city: Latin American urbanization in the years of the neoliberal experiment.” Studies in Comparative International Development 40 (1), (2005): 43–82. Renooy, P., et al. Undeclared work in an enlarged union: Analysis of shadow work— An in-depth study of specific items (Brussels: European Commission, 2004). Richardson, M., and Sawyer, A. “A taxonomy of the tax compliance literature: Further findings, problems and prospects. Australian Tax Forum 16 (2), (2001): 137–320. Round, J., and Williams, C. C. “Everyday tactics and spaces of power: The role of informal economies in post-Soviet Ukraine.” Social and Cultural Geography 9 (2), (2008):171–85. Sassen, S. “Informalisation in advanced market economies.” Issues in Development Discussionpaper 20. (Geneva: ILO, 1997). Schneider, F., and Enste, D. H. The shadow economy: An international survey (Cambridge: Cambridge University Press, 2002). Schneider, F. The hidden economy (Cheltenham: Edward Elgar, 2008). Small Business Council. Small business in the informal economy: Making the transition to the formal economy (London: Small Business Council, 2004). Snyder, K. A. “Routes to the informal economy in New York’s East Village: Crisis, economics and identity. Sociological Perspectives 47 (2), (2004): 215–40. Stillerman, J., and Sundt, C. “Embeddedness and business strategies amongst Santiago Chel’s street and flea market vendors.” in: J. Crossand A. Morales (Eds.), Street entrepreneurs: People, place and politics in local and global perspective (London: Routledge, 2007): 180–98. Tokman, V. “Integrating the informal sector n the modernization process.” SAIS Review 21 (1), (2001): 45–60.

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Evaluating the Competing Explanations 49 Torgler, B. Tax compliance and tax morale: A theoretical and empirical analysis (Cheltenham: Edward Elgar, 2007). Unni, J., and Rani, U. “Employment and income in the informal economy: A microperspective.” in: R. Jhabvala et al. (Eds.), Informal economy centrestage: New structures of employment (London: Sage, 2003): 39–61. Venkatesh, S. A. “Off the books: The underground economy of the urban poor (Cambridge, MA: Harvard University Press, 2006). Volkov, V. “Violent entrepreneurs: The use of force in the making of Russian capitalism (New York: Cornell University Press, 2002). Webb, J. W., et al. “You say illegal, I say legitimate: Entrepreneurship in the informal economy.” Academy of Management Review 34 (3), (2009): 492–510. Wenzel, M. “The social side of sanctions: Personal and social norms as moderators of deterrence.” Law and Human Behaviour 28 (5), (2004): 547–67. Whitson, R. “Hidden struggles: Spaces of power and resistance in informal work in urban Argentina.” Environment and Planning A 39 (2007): 2916–34. Williams, C. C. Cash-in-hand work: The underground sector and hidden economy of favours (Basingstoke: Palgrave Macmillan, 2004). Williams, C. C. The hidden enterprise culture: Entrepreneurship in the underground economy (Cheltenham: Edward Elgar, 2006). Williams, C. C. “The hidden enterprise culture: Entrepreneurs in the underground economy in England, Ukraine and Russia.” Journal of Applied Management and Entrepreneurship 14 (2), (2009): 44–60. Williams, C. C., Nadin, S., and Rodgers, P. “Evaluating competing theories of informal entrepreneurship: Some lessons from Ukraine.” International Journal of Entrepreneurial Behaviour and Research, (2011), forthcoming. Williams. C. C., and Round, J. “Evaluating informal entrepreneurs’ motives: Some lessons from Moscow.” International Journal of Entrepreneurial Behaviour and Research 15 (1), (2009): 94–107. Williams, C. C., and Renooy, P. Measures to combat undeclared work in 27 European Union member states and Norway (Dublin: European Foundation for the Improvement of Living and Working Conditions, 2009). Williams, C. C., and Windebank, J. Informal employment in the advanced economies: Implications for work and welfare (London: Routledge, 1998). Zelizer, V. A. The purchase of intimacy (New York: Princeton University Press, 2005).

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Motivations of Entrepreneurs in the Informal Economy Examples from Cambodia Scott A. Hipsher

ENTREPRENEURSHIP Theories and frameworks used to examine and explain business strategies, entrepreneurship and other business practices have mostly been developed by examining business practices in the most developed economies around the world (Lau 2006; Mathews 2000). However, it has been generally acknowledged the different external environments found in different locations have a major impact on how individual businesses are operated, resulting in many geographical variations in normal business practices (e.g., Bach and Allen 2010; Hagan and Amin 1995; Kim 2008). Therefore, it can be assumed small businesses and entrepreneurship may have very different characteristics in the formal sector of a developed economy than they do in the informal sector in a less developed economy (Hipsher 2010b). Spain (2010, 20) states that “entrepreneur-founders are risk-takers, traveling uncharted roads with creative and innovative ideas, work long hours, and follow their dreams to a single destination—the ownership of a successful microenterprise.” However, this version of an entrepreneur as a risk taker makes the assumption quality paid employment in the formal sector of the economy is available as an alternative method of making a living. This option does not always appear to be available to many individuals living in less developed economies and the question arises as to whether we should always think of entrepreneurs as risk takers. INFORMAL ECONOMY Most of the attention of the media, economists and academics who examine business practices is on the formal sector of the world’s economies, which is natural since the nature of the informal sectors makes it very difficult to measure and study. Jutting and de Laiglesia (2009, 18) defined informal employment as “jobs or activities in the production and sales of legal goods and services which are not regulated or protected by the state.” Charmes (2009) found informal employment includes self-employment, running microenterprises and

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Motivations of Entrepreneurs in the Informal Economy 51 both paid workers and contributing unpaid family members working in an informal business. Informal employment and informal entrepreneurship are not uncommon. In fact, the majority of the workers in the world work in the informal economy, with this being especially the case in South Asia and sub-Saharan Africa (Jutting and de Laiglesia 2009). On a global scale, both the total number and percentage of workers engaged in nonagricultural self-employment grew through the 1970s up until the turn of the century, but this growth has since leveled off. Nevertheless, there is no indication that on a global scale the importance of the informal sector of economies is lessening (Charmes 2009). Employment in the informal sector of a developing economy is not a new phenomenon; Elson (1992) speculated the majority of workers in colonialera Singapore worked in the informal sector of the economy, and there was a split where the formal sector employed primarily males and individuals with relatively higher levels of education whereas the informal sector primary employed individuals with lower levels of education and women. This split does not seem to have changed much in nearly 100 years. Hasan and Jandoc (2010) reported in the Philippines, most of the better-paying jobs in the formal sector were filled by individuals with higher levels of education. Kucera and Xenogiani (2009) discovered women continue to make up a large percentage of workers in the informal economies around the world, although there are many regional differences with women employed in the nonagricultural informal sectors being especially high in sub-Saharan Africa and Latin America, while there is a lower percentage of women working in the informal nonagricultural sectors in the Middle East (Charmes 2009). There are differing opinions on the role of the informal economy in creating economic growth and poverty reduction (Jutting and de Laiglesia 2009). Kucera and Xenogiani (2009) found a strong negative correlation between percentage of workers in the informal economy and per-capita incomes. However, the high percentage of workers in an informal economy could be the result of slow economic growth rather than the cause of it. Workers, including self-employed entrepreneurs, in the informal economy generally earn less than workers in the formal economy (Charmes 2009; Gagnon 2009, Hasan and Jandoc 2010), which also gives an indication of the lack of productivity in the informal economy as opposed to the formal sector of the economy. However, the concept of one person, one job that prevails in developed economies may not apply as well to individuals working in developing economies. Many individuals work in the nonagricultural sector of the informal economy to supplement income from working in the formal economy, working in the agricultural sector or as a way for many women to combine child-rearing duties with income-generating activities, which would not be possible in the formal sector of an economy (Hipsher 2010b; Rigg 2005; Madamba 2010).

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It has been argued that moving workers from the inefficient and ill-paid informal sector of the economy into the better-paid formal economy would assist in poverty reduction and economic growth. However, an equally compelling argument is that in many less developed economies, the formal economy cannot provide enough employment for all and a vibrant informal economy can provide opportunities for those without the education and skills needed to compete for well-paid jobs in the formal economy. It would also allow individuals, for example women with small children or subsistence farmers, who do not have the time to hold down a position in the formal economy to engage in supplemental economic activities. Gagnon (2009) found there was considerable mobility available to workers within the informal sector and therefore it might be ill-advised to think of all workers as being trapped in the informal economy; instead, some are there by choice. While informal sectors of the economy are found in all areas of the world, informal sectors of economies are usually much larger in less developed economies than in developed economies (Charmes 2009; Jutting and de Laiglesia 2009; Kucera and Xenogiani 2009). Moreover, the business environments in less developed economies are characterized by few large businesses, few firms in which there is a separation of ownership and management, and more arbitrary enforcement of rules and regulations (Kim 2008; Prahalad 2005; Southiseng and Walsh 2010), suggesting informal entrepreneurship in less developed economies will take on different characteristics than those found in entrepreneurship in more developed economies. MOTIVATIONS OF ENTREPRENEURS IN THE INFORMAL ECONOMY Most entrepreneurs in both developed and less developed economies have financial as well as nonfinancial motives for starting a business. Nonfinancial motives can include seeking challenge, independence and addressing various family concerns (Befus et al. 1988; Choo and Wong 2006; Hatcher and Terjesen 2007; Southiseng and Walsh 2010; Paulson and Townsend 2005; Pinfold 2001). A lot of attention is paid to the handful of extremely successful entrepreneurs who begin firms which grow into internationally recognized multinationals; however, the vast majority of entrepreneurial firms stay small, often never growing to the point where employees outside the family are involved. For elite entrepreneurs, the goal of starting a firm is to create a large business and achieve wealth. For many small-scale entrepreneurs, the goal appears to be to create a job and feed one’s family. For example, Thai and Ngoc (2010, 42) found that most small, home-based and family owned businesses in Vietnam did not have any plans to grow and employ nonfamily members in the future. The goal of running a business for the majority of entrepreneurs in the informal sectors of less developed economies appears to be to earn enough income from being self-employed to support one’s family as opposed to creating a large business with many

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Motivations of Entrepreneurs in the Informal Economy 53 employees. The term entrepreneur encompasses a wide range of activities, but in comparing an entrepreneur in a high-tech start-up company from Silicon Valley and one in a family-owned grocery store in Pakse, Laos, one would probably see more differences than similarities. Entrepreneurs are often thought of as being pulled into starting a new business and taking on this risk by the lure of financial and intangible benefits. However, this view assumes there are viable and attractive alternative sources of income or paid employment available. This view of entrepreneurship may describe the conditions facing well-educated individuals living in urban areas of developed economies. However, these attractive alternatives are not as often available to individuals without substantial education living in less developed economies. It has been reported that many small-scale entrepreneurs are not pulled into starting a business, but pushed into going into business due to lack of other options to earn income (Kalantaridis and Labrianidis 2004; Kristiansen, 2002). The conditions found in less developed economies, such as lack of unemployment insurance or other social programs, fewer regulations and the presence of an existing and legally tolerated informal economy pushes more individuals to become entrepreneurs in the informal economy than is found in more developed economies. For example, Pitamber (2000) found that many females were pushed to become self-employed entrepreneurs in the informal economy in Sudan, and survival was the primary motivation for engaging in entrepreneurial activities rather than the dream of wealth and independence. In a study examining cases throughout Southeast Asia, Hipsher (2010b) reported that many selfemployed entrepreneurs in the informal sector were in reality creating jobs for themselves as opposed to creating a business. Running a small entrepreneurial operation in the informal economy may be significantly different from running a business in a more developed economy. There are fewer formal rules and clear procedures in running a business in a developing economy and much more reliance on the social capital, personal connections and relationships of the individual entrepreneur (Kundu and Katz 2003; Troilo 2010). Moreover, the vast majority of customers in less developed economies have relatively lower incomes and less discretionary spending power, which limits the options for types of businesses and strategies for individuals starting a business in these areas (Hipsher 2007). ILLUSTRATIVE EXAMPLE This chapter looks at a few examples of informal entrepreneurs in Cambodia in order to illustrate the motivations and practices of randomly selected informal entrepreneurs. A brief overview of the country is given to provide context for these examples. Cambodia is a country with a population estimated to be slightly over 13 million which is spread out over considerable land area, giving the country a very low population density. In 2010, the World Bank estimated per

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capita GDP was only $760. Cambodia is located between the two far more densely populated nations of Vietnam and Thailand. Although historically linked to Vietnam, from being a colony in French Indochina, it is culturally linked more to Thailand due to sharing of similar religious traditions (Hipsher 2010a). Cambodia came to the world’s attention in the 1970s due to the genocidal regime of the Khmer Rouge, whose legacy the country continues to work to overcome. Like much of the world, the country experienced a significant economic downturn in 2009. Since then, however, it has been helped by a growing demand for Cambodian-made garments and an increase in the number of foreign tourists, which have resulted in growth forecasts for the future of over 6%. The majority of the population lives in rural areas and the country has a poverty rate of 30%, with the majority of the poor living in rural areas and engaged in working in the agricultural sector. Higher food prices and reliance on only a few sectors for growth, specifically foreign tourism and exports of garments, which were hurt by the recent global economic slowdown, have prevented any significant recent reduction in the percentage of individuals living in poverty (Asian Development Bank 2011). Cambodia shares many characteristics with other less developed nations. The country is primarily rural with little heavy industry, high levels of illiteracy, the majority of the population working in the agricultural sector, corruption, a lack of managerial and technical skills, and an underdeveloped educational system (Ear 2009; Kao et al. 2008; Mahmood 2005; Tan 2007). These conditions, alongside its relative small size as a market, have limited the amount of job-creating foreign investment coming into the country. Cambodia may have some unique features stemming from its history and the influence of the religion the vast majority of the people, Theravada Buddhism. Hipsher (2010a) proposed that the business environment in Cambodia shares the following five characteristics with its neighbors Laos, Thailand and Myanmar/Burma which are a reflection of the religious and traditional values of the region: (1) organizations are hierarchical, but paternalistic in nature; (2) emphasis on flexibility with little in the way of longterm planning; (3) both managers and workers with a relatively low locus of control; (4) moderation of ambition (taking the middle path); and (5) a greater focus on the individual than found in most “collectivist” societies.

EXAMPLES OF ENTREPRENEURS IN THE INFORMAL ECONOMY IN CAMBODIA

Example One The first example is the case of an informal entrepreneur Ms. Solyna (a pseudonym) who sells rice and other types of food along the side of the road during the mornings in Battambang. Solyna has been selling rice at the

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Motivations of Entrepreneurs in the Informal Economy 55 same location for nearly 10 years. She took over from her mother, who used to run the same business. Her customers are people often on their way to work traveling on the road in the morning and wanting some breakfast. She has a number of return customers who praise the taste of her offerings and appreciate the low price. Solyna does not really think of what she does as a business; she thinks of her business as a job she goes to nearly every day. She believes selling food on the side of the road is a good option for her because she feels she lacks the experience and education needed for more formal types of employment. Solyna does not have any real plans to change what she does for a living and has no intentions to expand or move her business into the formal sector of the economy. While Solyna might not think and plan strategically, she has learned from her experiences and made adjustments in her pricing and product offers in response to customer needs and the competition. She feels her business/job provides her with a sufficient income but, of course, there are downsides to running an informal business, including being outside in the tropical sun, and there is a smelly canal running close to where she works. Her sister helps out from time to time, but for the most part this business in a one-woman show.

Example Two The second example of an informal entrepreneurial business is of a restaurant run by Ms. Sreykeo (a pseudonym). Sreykeo has been running the restaurant out of her home for a little over a year. Sometimes business is good, other times business is a little slow. Running a restaurant in the informal economy was not her first choice of occupation; she would prefer to have a job with an adequate salary, but good jobs are difficult to come by in Western Cambodia. In fact, if she was not an entrepreneur in the informal sector of the economy, she says she would probably try her luck working in Thailand, where jobs are easier to come by. She started her business because the work was not as strenuous as other activities she could have done, and there was a lack of competition in the village she lives in. She gets many of her supplies of vegetables and meat from her sister’s family, who owns a farm. One of the plus sides of this type of business is that if she is unable to sell all of the food she makes she can save the leftovers and serve them to her children and family. Sreykeo has no plans to expand the business in the future or to move it into the formal economy. However, she does keep trying to improve her business on an operational level. She often reads books on cooking and listens to recommendations and suggestions from her customers. The downside of running the business include no separation between her professional and personal life as her business is run out of her home and the long hours when business is good.

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Example Three Ms. Raksa (a pseudonym) runs an informal business selling food, mostly rice and foods to be eaten with rice, out of her home. She has been running this business for about eight years, but she is disappointed with the overall profits she makes. If given the opportunity, she would prefer to have a fulltime job with a steady salary. However, good jobs in her village outside of Battambang in Cambodia are rare, especially for someone like Ms. Raksa, who doesn’t have specialized skills or advanced education. She started the business because she was already cooking for her children and at one point began making more to sell to her neighbors. Her primary customers are those in her neighborhood who know her and choose to buy her products due to the convenience, good taste and low prices. She relies on her husband for advice and has learned which foods sell and how to manage supplies to ensure profitability while running her business. She started out selling noodle dishes for the most part, but has changed her product offerings to better match the demands of the customers. She combines selling food at home with taking care of her domestic and child-rearing duties. By being an informal entrepreneur, she can earn some extra money for her family while still taking care of her children and family. She dreams of opening a larger restaurant someday, but for the time being this is mostly a dream, and she has no solid plans to actually make this dream happen.

Example Four Mr. Sopheak (a pseudonym) owns and operates an informal motorcycle repair business in Battambang. He has been running this business for over 15 years. He started this business as he needed to earn money to support his family and there were few options for paid employment. Sopheak feels that his lack of education made it difficult to find quality, paid employment and therefore his best option was to create his own job. He is good with his hands, although at times he gets tired of the dirt, grease and mess that accompany being a motorcycle mechanic in the informal sector of the economy. He has become accustomed to the flexibility that comes from being selfemployed and enjoys being able to set his own hours. He has no real plans for the future and thinks of his work as a job, not really a business to grow and expand. He takes things day by day, but for now his work supports his family and he feels it is currently his best option. LESSONS LEARNED None of the individuals examined fits the description of a risk-taking innovative entrepreneur who is seeking to start a business to seek wealth. Instead, we see individuals who have been pushed into creating their own

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Motivations of Entrepreneurs in the Informal Economy 57 jobs because of the lack of other opportunities. Each of the individuals has shown flexibility and the ability to respond and adapt to customer demands; however, these individuals have not created employment for others outside their own families and cannot be viewed as creating new ideas leading to increases in productivity or innovation leading to the creation of new industries in the region. We also do not see evidence of individuals developing the skills needed to go from being an entrepreneur in the informal economy to becoming large-scale entrepreneurs or paid employees in the formal sector of the economy. POLICY IMPLICATIONS One of the most important issues of our times is poverty reduction. The importance of the private sector in producing economic growth, a necessary condition for poverty reduction, has been well established (e.g., Fukasaku 2007; Hasan et al. 2007; OECD 2010; Vandenberg 2006). Son (2010) has found a strong correlation between economic growth and improved measurable aspects of standard of living, such as increasing life expectancy, lowering rates of infant mortality, increasing the percentage of women giving birth with qualified medical care and increasing levels of education and literacy. However, Son also reported government policies have an impact on how much impact economic growth has on poverty reduction and how evenly the prosperity is shared throughout the society. Therefore, policies should be aimed primarily at creating economic growth without ignoring those at the “bottom of the pyramid” who do not benefit equally from increased economic growth. Economic growth comes primarily from increased productivity, and the formal sector of the economy is generally more efficient in the use of resources than is the informal sector. Therefore, it is recommended that policies be aimed at increasing opportunities for employment in the formal sector of the economy as a means of increasing the efficiency of the economy and creating the type of economic growth needed to significantly reduce poverty. On the other hand, many individuals in less developed economies, due to lack of education and specialized skills and, because of the generally high birth rates in less developed economies they have extensive childrearing responsibilities, do not have the ability to participate in the formal economy. Therefore, a vibrant informal economy provides an economic safety net which may be more efficient and sustainable than government social programs for individuals as an economy transitions to a more developed and formalized economy. While promoting economic growth in the formal sector of the economy, the safety net provided by the informal economy should be recognized and allowed to flourish as a country, such as Cambodia, makes the transition to a larger and more formal economy that comes from developing economically.

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Policy Recommendation 1: Economic Reforms Aimed at Creating Openness and Increasing Productivity There is a strong correlation between economic reforms aimed at increasing competition, which stimulates increases in productivity, and the creation of the economic growth needed for substantial poverty reduction (Ospina and Schiffbaer 2010). Most of the world’s worst performing economies are also the least open economies. There is overwhelming empirical evidence that economies that are open to both domestic and foreign competition outperform closed economies which have less competition (e.g., Anderson 2005; Arora and Varnvakidi 2005; Berggren and Jordahl 2005; Farrell 2004; Sen 2002; Stark 2005; Walde and Wood 2004; Winters 2005; Yao 2006). Although globalization is often given a bad name and international firms are often accused of causing increased poverty, the empirical evidence seems to indicate more areas of the world have high levels of poverty due to being ignored by international businesses rather than are poor due to being exploited.

Policy Recommendation 2: Invest in Infrastructure and Education To be competitive, businesses need roads, reliable electricity, ports and telecommunication systems; in addition to developing physical infrastructure, the intangible aspects of the infrastructure, such as a well functioning legal system, which play important roles in increasing the efficiency of the economy, should not be ignored (Beattie 2009). In addition, having a good education is vital in finding work in the formal sector of the economy, as evidenced by the above examples of entrepreneurs in the informal economy. Therefore, the creation of the human resource infrastructure comprised of a better-educated population will both help attract investment into the economy and increase its productivity.

Policy Recommendation 3: Allow a Vibrant Informal Economy to Coexist with the Growing Formal Sector of the Economy The informal economy provides additional opportunities for individuals, especially those who do not fit well into the formal economy due to age, level of education and domestic duties. It is known that ‘ “the poor’ are not a homogeneous group” (Caspary 2008, 92), and therefore it cannot be expected that any single policy approach will reach everyone striving to pull themselves out of poverty. Therefore, policies for poverty reduction within a developing economy should address opportunities in both the formal and informal sectors. The promotion and creation of microfinancing programs have been found to have some impact on assisting those at the bottom of the economic hierarchy to become successful entrepreneurs in the informal sector

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Motivations of Entrepreneurs in the Informal Economy 59 (Newa 2010; Tedeschi 2010; Yunus and Weber 2007), but there are also critics of the use of microfinancing who question its use outside South Asia, its effectiveness in reaching the poor and its focus on women which can lead to gender stereotyping (Lerpold and Romani 2010; Romani and Lerpold 2010). Instead of microfinancing loans, Hanlon, Barrientos and Hulme (2010) have proposed that targeted cash transfers with no or few conditions attached to the poorest segments of the population can be an effective, if indirect, method to encourage growth in the informal economy. However, it would be a mistake to think of microfinancing, cash transfers or any other programs aimed at promoting businesses to spring up in the informal economy as magic bullets which will significantly reduce poverty. A vibrant informal sector provides options for individuals to make a living, but very few businesses in the informal sector of the economy create many quality new jobs or innovative ideas which will substantially help to grow the overall economy. Many entrepreneurs in the informal economy are not entrepreneurs in the sense of being innovative risk takers. Rather, they are trying to create jobs for themselves, often due to the lack of opportunities in the formal sector. Entrepreneurs in the informal economy generally do not create innovation, significant increases in productivity or improving of the work skills of the individuals working in the informal economy. The informal economy has a role to play in poverty reduction as a safety net for individuals, but the informal economy is not likely to drive the economic growth needed for significant poverty reduction and improvements in quality of life. As seen in the examples provided, entrepreneurship in the informal economy in a developing economy provides a subsistence level of income but does not normally provide opportunities for career advancement or significant improvements in marketable skills for the individual entrepreneurs. For significant poverty reduction, it is suggested that the main policies should focus on macroeconomic policies, which create a well-functioning formal economy that will provide additional options for workers while also allowing the informal economy to continue to provide opportunities for those with the skills to work in either sector, as well as an option for those without the skills to work in the formal economy to be productive and earn their own living. Improvements in standards of living for individuals normally come from having more options, not fewer. REFERENCES Anderson, Kym. 2005. “On the Virtues of Multilateral Trade Negotiations.” Economic Record 81 (255): 414–38. Arora, Vivek, and Athanasios Varnvakidis. 2005. “How Much Do Trading Partners Matter for Economic Growth?” IMF Staff Papers 52 (1): 24–40. Asian Development Bank. 2011. Asian Development Outlook 2011. Mandaluyong City, Philippines: Asian Development Bank.

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Bach, David, and David B. Allen. 2010. “What Every CEO Needs to Know about Nonmarket Strategy.” MIT Sloan Management Review 51 (3): 41–8. Beattie, Alan. 2009. False Economy: A Surprising Economic History of the World. New York: Riverhead Books. Befus, David R., Timothy S. Mescon, Debbie L. Mescon and George S. Vozikis. 1988. “International Investment of Expatriate Entrepreneurs: The Case of Honduras.” Journal of Small Business Management 26 (3): 40–7. Berggren, Niclas, and Henrik Jordahl. 2005. “Does Free Trade Really Reduce Growth? Further Testing using the Economic Freedom Index.” Public Choice 122 (1–2): 99–114. Caspary, Georg. 2008. “Tackling Opposition to Implementing Fiscal Reform in Developing Countries.” International Journal of Emerging Markets 3 (1): 87–103. Charmes, Jacques. 2009. “Concepts, Measures and Trends.” In Is Informal Normal?: Towards More and Better Jobs in Developing Countries, edited by Johannes Jutting and Juan. R. de Laiglesia, 27–62. Paris: Organisation for Economic Cooperation and Development (OECD). Choo, Stephen, and Melvin Wong. 2006. “Entrepreneurial Intention: Triggers and Barriers to New Venture Creation in Singapore.” Singapore Management Review 28 (2): 47–64. Ear, Sophal. 2009. “Sowing and Sewing Growth: The Political Economy of Rice and Garments in Cambodia.” Working Paper 384, Stanford Center for International Development. Elson, Robert E. 1992. “International Commerce, the State and Society: Economic and Social Change.” In The Cambridge History of Southeast Asia, vol. 2, edited by Nicholas Tarling, 131–196. Cambridge: Cambridge University Press. Farrell, Diana. 2004. “The Case for Globalization.” The International Economy 18 (1): 52–5. Fukasaku, Kiichiro. 2007. “Introduction and Overview.” In Business and Development: Fostering the Private Sector, 11–20. Paris: Development Centre of the Organisation for Economic Co-operation and Development. Gagnon, Jason. 2009. “Moving out of Bad Jobs—More Mobility, More Opportunity.” In Is Informal Normal?: Towards More and Better Jobs in Developing Countries, edited by Johannes Jutting and Juan. R. de Laiglesia, 115–42. Paris: Organisation for Economic Cooperation and Development (OECD). Hagan, Abdalla F., and Sammy G. Amin. 1995. “Corporate Executives and Environmental Scanning Activities: An Empirical Investigation.” S.A.M. Advanced Management Journal 60 (2): 41–8. Hanlon, Joseph, Armando Barrientos and David Hulme. 2010. Just Give Money to the Poor: The Development Revolution from the Global South. Sterling, VA.: Kumarian Press. Hasan, Rana, and Karl R. Jandoc. 2010. “Workers’ Earnings in the Philippines: Comparing Self-employment with Wage Employment.” Asian Development Review 27 (1): 43–79. Hasan, Rana, Devashish Mitra and Mehmet Ulubasoglu. 2007. “Institutions and Policies for Growth and Poverty Reduction: The Role of Private Sector Development.” Asian Development Bank Review 24 (1): 69–116. Hatcher, Caroline A., and Siri A. Terjesen. 2007. Towards a New Theory of Entrepreneurship in Culture and Gender: A Grounded Study of Thailand’s Most Successful Female Entrepreneurs. Paper presented at the Fourth AGSE International Entrepreneurship Research Exchange, Brisbane, Australia, February 6–9. Hipsher, Scott. 2007. “Creating Market Size: Regional Strategies for the World’s Least Developed Areas.” In Innovative Approaches to Reducing Global Poverty, edited by James Stoner and Charles Wankel, 153–74. Charlotte, NC: Information Age.

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Motivations of Entrepreneurs in the Informal Economy 61 Hipsher, Scott. 2010a. Business Practices in Southeast Asia: An Interdisciplinary Analysis of Theravada Buddhist Countries. Oxford: Routledge. Hipsher, Scott. 2010b. “Theoretical View on Microenterprise Entrepreneurial Motivators.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 49–60. Northampton, MA: Edward Elgar. Jutting, Johannes, and Juan R. de Laiglesia. 2009. “Employment, Poverty Reduction and Development.” In Is Informal Normal?: Towards More and Better Jobs in Developing Countries, edited by Johannes Jutting and Juan. R. de Laiglesia, 17– 26. Paris: Organisation for Economic Cooperation and Development (OECD). Kalantaridis, Christos, and Lois Labrianidis. 2004. “Rural Entrepreneurs in Russia and the Ukraine: Origins, Motivations, and Institutional Change.” Journal of Economic Issues 38 (3): 659–81. Kao, Chiang, Wann-Yih Wu, Wen-jen Hsieh, Tai-Yue Wang, Chinho Lin and Loang Hsuan Chen. 2008. “Measuring the National Competitiveness of Southeast Asian Countries.” European Journal of Operational Research 187: 613–28. Kim, Annette M. 2008. Learning to Be Capitalists: Entrepreneurs in Vietnam’s Transition Economy. New York: Oxford University Press. Kristiansen, Stein. 2002.” Individual Perception of Business Contexts: The Case of Small Scale Entrepreneurs in Tanzania.” Journal of Development Entrepreneurship 7 (3): 283–304. Kucera, David, and Theodora Xenogiani. 2009. “Women in Informal Employment: What Do We Know and What Can We Do?” In Is Informal Normal?: Towards More and Better Jobs in Developing Countries, edited by Johannes Jutting and Juan. R. de Laiglesia, 89–114. Paris: Organisation for Economic Cooperation and Development (OECD). Kundu, Sumit K., and Jerome A. Katz. 2003. “Born-international SMEs: Bi-level Impacts of Resources and Intentions.” Small Business Economics 20 (1): 25–47. Lau, Chung M. 2006. “Achievements, Challenges and Research Agendas for Asian Management Research Studies.” Asian Business & Management 5 (1): 53–66. Lerpold, Lin, and Laurence Romani. 2010. “Social Capital and Cross-cultural Model Replication: The Case of Hand in Hand in India and South Africa.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 221–33. Northampton, MA: Edward Elgar. Madamba, Jeanette. 2010. “Microenterprise Sustainability: A Philippine Perspective.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 288–99. Northampton, MA: Edward. Mahmood, Moazam. 2005. “Getting Decent Work for Poverty Reduction for Cambodia.” International Labour Organization (Geneva) working paper 48. Mathews, Vinitia E. 2000. Management in a Developing Nation: And We Thought American Managers Had It Tough.” Multinational Business Review 8 (2): 10. Newa, Fred O. 2010. “Microfinance and the Growth of Micro and Small Enterprises (MSEs) in Sub-Saharan Africa: The Case of Faulu Kenya.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 87–101. Northampton, MA: Edward Elgar. OECD. 2010. Perspectives on Global Development 2010: Shifting Wealth. Paris: OECD. Ospina, Sandra, and Marc Schiffbauer. 2010. “Competition and Firm Productivity: Evidence from Firm Level Data.” IMF Working Paper WP/10/67. Paulson, Anna L., and Robert M. Townsend. 2005. “Financial Constraints and Entrepreneurship: Evidence from the Thai Financial Crisis.” Economic Perspectives 29 (3): 34–48. Pinfold, John F. 2001. “The Expectations of New Business Founders: The New Zealand Case.” Journal of Small Business Management 39 (3): 279–85.

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Pitamber, Sunita. 2000. “Accessing Financial Resources and Entrepreneurial Motivations Amongst the Female Informal Sector Micro-entrepreneurs in Sudan.” Ahfad Journal 17 (1): 4–21. Prahalad, C. K. 2005. Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. Philadelphia: Wharton School. Rigg, Jonathan. 2005. Living with Transition in Laos: Market Integration in Southeast Asia. London: Routledge. Romani, Laurence, and Lin Lerpold. 2010. “Microfinance and Poverty Alleviation: Underlying Values and Assumptions.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 276–87. Northampton, MA: Edward Elgar. Sen, Amartya. 2002. “Globalization, Inequality and Global Protest.” Development 45 (2): 11–6. Son, Hyun H. 2010. “A Multi-country Analysis of Achievements and Inequalities in Economic Growth and Standards of Living.” Asian Development Review 27 (1): 1–42. Southiseng, Nittana, and John Walsh. 2010. “Competition and Management Issues of SME Entrepreneurs in Laos: Evidence from Empirical Studies in Vientiane Municipality, Savannakhet and Luang Prabang.” Asian Journal of Business Management 2 (3): 57–72. Spain, Michelle I. 2010. “Microenterprises: The Interface between Entrepreneur and Manager.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 20–31. Northampton, MA: Edward Elgar. Stark, Jurgen. 2005. “The State of Globalization.” The International Economy 19 (2): 52–6. Tan, Charlene. 2007. “Education Reforms in Cambodia: Issues and Concerns.” Educational Research for Policy and Practice 6 (1): 5–24. Tedeschi, Gwendolyn. 2010. “Microfinance: Assessing Its Impact on Microenterprises.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 116–38. Northampton, MA: Edward Elgar. Thai, Mai, and Ho Thuy Ngoc. 2010. “Microentrepreneurship in a Transitional Economy: Evidence from Vietnam.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 32–48. Northampton, MA: Edward Elgar. Troilo, Michael. 2010. “Microenterprise start-up: A Cross-national Comparison.” In Contemporary Micro-enterprise: Concepts and Cases, edited by Joseph M. Munoz, 9–19. Northampton, MA: Edward Elgar. Vandenberg, Paul. 2006. “Poverty Reduction through Small Enterprises: Emerging Consensus, Unresolved Issues and ILO activities.” SEED Working Paper No. 75, International Labour Organization. Walde, Klaus, and Christina Wood. 2004. “The Empirics of Trade and Growth: Where Are the Policy Recommendations?” International Economics and Economic Policy 1 (2/3): 275–92. Winters, L. Alan. 2006. “International Trade and Poverty: Cause or Cure?” Australian Economic Review 39 (4): 347–58. World Bank. 2010. Gross National Income per Capita [Data file]. http://siteresources. worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf Yao, Shujie. 2006. “On economic growth, FDI and exports in China.” Applied Economics 38 (3): 339–51. Yunus, Muhammad, and Karl Weber. 2007. Creating a World without Poverty: Social Business and the Future of Capitalism. New York: Public Affairs.

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Part II

Financial Aspects of Informal Entrepreneurship

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5

Informal Venture Capital Investing in Emerging Asian Economies William Scheela, Edmundo Isidro and Thawatachai Jittrapanun

We are studying the impact of informal venture capital investors (also called business angel investors) on the creation of entrepreneurial firms in emerging economies of Southeast Asia. There has been a lack of research focusing on the impact that business angels have on the development of early-stage, high-growth potential firms in emerging economies. We have determined that business angels (BAs) in Thailand and the Philippines support the funding and development of early-stage, high-growth potential entrepreneurial ventures in spite of the lack of fully developed legal and financial institutions needed to support both formal and informal venture capital investing in emerging economies (Scheela and Jittrapanun 2012; Scheela and Isidro 2009). Our research question is: How do business angels effectively invest in and help develop entrepreneurial firms in emerging economies lacking the fully developed institutions necessary to support private equity investors? The format of this chapter is a follows: first, we will provide an overview of BA investing; second, we will introduce institutional theory as our theoretical framework, which will enable us to better understand the challenges of private equity investing in emerging economies; third, we will explain our research methodology; fourth, we will examine BA investing in two Asian emerging economies; finally, we will develop policy recommendations to enhance BA financing in emerging economies. BUSINESS ANGEL INVESTING BAs are high-net-worth individuals, typically with considerable business experience, who invest both their personal funds and managerial experiences into early-stage ventures (Morrissette 2007; Sohl 2003b; Freear, Sohl and Wetzel 1994, 2002; Roberts, Stevenson and Morse 2000). Venture capital firms invest institutional equity and provide management assistance to highgrowth potential, unlisted SMEs (Van Osnabrugge and Robinson 2000). While venture capital has played a significant role in funding high-tech SMEs in the US over the last three decades (Lerner, Leamon and Hardymon

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William Scheela, Edmundo Isidro and Thawatachai Jittrapanun

2012; Gompers and Lerner 2001), BAs are playing an increasingly significant role in the US by providing equity investments for early-stage ventures, increasingly perceived by venture capitalists as being too risky and too small for investing (Sohl 2003a, 2003b; Morrissette 2007). Similar to venture capitalists, BAs invest for financial gain via equity investments, but many BAs also invest in early-stage companies as a way to give back by providing entrepreneurs both equity and advice in developing their ventures (Van Osnabrugge and Robinson, 2000). BAs can also invest as an institution by forming formal networks (BA clubs), a recent trend in the US and Western Europe, but not in emerging economies (Sohl 2007). To date, BA research has focused mostly on developed economies, primarily BA investing in North America (Kelly 2007; Gompers and Lerner 2001), UK (Avdeitchikova, Landstrom and Mansson 2008; Paul, Whitman and Wyper 2007; Mason and Harrison 2002) and Scandinavia (Avdeitchikova 2008), where developed financial and legal institutions play a strong supporting role for early-stage investments. Initial research on Asian BAs has focused almost exclusively on the developed economies of Japan and Singapore (Wong and Ho 2007; Kutsuna and Harada 2004; Hindle and Lee 2002; Tashiro 1999), with only recently published research analyzing the emerging economies of Thailand (Scheela and Jittrapanun 2012) and the Philippines (Scheela and Isidro 2009). So why is it important to study emerging economies? Emerging economies have developed significantly large and growing markets which have generated increasing attention and investment from MNCs in developed economies (The Economist 2011). According to Khanna and Palepu (2010, 1), “The world is focused on emerging markets.” Within emerging markets, East Asia and Southeast Asia represent two of the fastest growing segments (Asian Development Outlook 2011, The World Bank East Asia and Pacific Economic Update 2010). However, it is unclear what, if any, impact BA investing has on the funding of early-stage ventures in these two emerging markets. Researchers have called for increasing research on entrepreneurship success and venture capital investing in emerging Asian economies (Bruton, Alhstrom and Li 2010; Bruton, Ahlstrom and Obloj 2008; Ahlstrom and Bruton 2006; Bruton, Fried and Manigart 2005). INSTITUTIONAL THEORY Institutional theory attempts to explain the impact contextual systems have on organizational behavior and economic performance (Hoskisson, Eden, Chung and Wright 2000; North 1990). North (1990, 3) defines institutions as providing the “rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.” Institutions, especially legal and financial institutions, tend be more fully developed and effective in developed countries, especially in comparison to developing

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Informal Venture Capital Investing in Emerging Asian Economies 67 countries (Peng 2003; Ramamurti 2000). A major impact of the lack of institutional support in developing countries is a higher cost of doing business (North 1990; World Development Report 2002). For a more in-depth analysis of the application of institutional theory to emerging economies, see Scheela and Jittrapanun (2012). Bruton et al. (2005, 743) characterize Asia’s institutions as “generally poorly developed . . . [and] not enforcing laws and regulations.” However, Asia is not a homogeneous economic region but a continuum of economic development, ranging from developed economies and institutions such as Japan and Australia to emerging economies with relatively undeveloped institutions to include China, India, Malaysia and Vietnam (Lockett and Wright 2002). Regulatory institutions have been shown to play a significantly positive role in the development of venture capital in Singapore, a country with fully developed regulatory institutions and a vibrant venture capital industry (Bruton, Ahlstrom and Singh 2002). Very little research has analyzed the development of formal and informal venture capital in the emerging Asian economies, whose regulatory institutions would better fit the above description as “generally poorly developed” (Scheela and Jittrapanun 2012, 2008; Scheela 2006; Scheela and Nguyen 2004). Further supporting Asia as a heterogeneous region are significant institutional differences between developed Asian economies, such as Japan and Singapore, and developing economies, such as the Philippines and Thailand (Lopez-Claros, Porter, Sala-i-Martin and Schwab 2006; Lockett and Wright 2002). More specifically, in Table 5.1 we computed an Institutional Score for both developed and emerging Asian economies and also, for comparison purposes, the US. We selected key institutional rankings (business corruption, property rights protection, trust of politicians, stock market and bank soundness) computed by Lopez-Claros et al. (2006) for their Global Competitiveness Report 2006–2007. We then calculated the mean rank (1 = highest rank, 125 = lowest rank) for each country from the five institutional rankings to get an institutional score for each country. Thailand and the Philippines exhibit low rankings/low institutional scores (48.2, 75.4, respectively) whereas Singapore, Japan and the US rank significantly higher (11.0, 28.4 and 25.2, respectively). Clear institutional differences exist between the five countries with Japan, US and Singapore comprising a developed-institutional cluster and the Philippines and Thailand comprising a developing-institutional cluster. The latter two countries face similar institutional problems of corruption, weak property rights, lack of trust of politicians, ineffective stock markets and weak banks. Khanna and Palepu (2005) refer to the lack of developed institutions as an institutional void, which exists when “institutions are either absent or under developed in an economy” (Khanna and Palepu 2005, 1). Khanna and Palepu (2010) refer to these institutional voids as a lacuna or ditches created by the absence of market intermediaries needed to effectively support market efficiency to minimize transactions costs. They further

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Table 5.1

Institutional analysis

Country (rankings)

Philippines 81

Business corruption

1

Institutional ranking

46

Japan

Singapore

22

7

US 32

70

40

15

11

21

106

48

25

1

24

40

32

4

15

22

80 75.4

75 48.2

76 28.4

21 11

27 25.2

Venture capital6

79

42

23

13

1

7

Informal sector

76

42

16

1

28

Protect minority shareholders8

50

35

31

22

16

Time to start a business9

81

48

42

6

3

Access to loans10

78

47

38

16

11

Business angel score (Mean rank)

72.8

42.8

30

11.6

11.8

Protect property rights

2

Trust of politicians3 Stock market4 Bank soundness

5

Institutional score (Mean rank)

Business angel ranking

Thailand

Source: Lopez-Claros, 2006 1 Higher rank (1–125; 1 = highest rank) indicates business corruption has no impact. 2 Higher rank indicates property rights are clearly delineated and protected by law. 3 Higher rank indicates higher trust of politicians. 4 Higher rank indicates companies can easily raise money by issuing shares. 5 Higher rank indicates that banks are healthy with sound balance sheets. 6 Higher rank indicates greater availability of venture capital for risky & innovative ventures. 7 Higher rank indicates more business transactions are registered. 8 Higher rank indicates minority shareholders are protected by law. 9 Higher rank indicates fewer days to start a business. 10 Higher rank indicates it is easier to obtain a loan with no collateral.

posit that “informal institutions have developed in many emerging markets to serve intermediary roles” in supporting transactions (Khanna and Palepu 2010, 15). Do emerging-economy BAs, who operate in institutional voids when attempting to do deals, face relatively more challenges compared to BAs investing within developing economies? To answer this question, we attempted to calculate a BA score for each of the countries in Table 5.1. We again selected key institutional variables that could affect new venture investing (venture capital, informal sector, protect minority shareholders, time to start a business and access to loans) from the Global Competitiveness Report 2006–2007 (Lopez-Claros et al. 2006) for each country and then computed the mean rank for each country across the five variables. The results are similar to the institutional score in that the developed economies ranked

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Informal Venture Capital Investing in Emerging Asian Economies 69 significantly higher (11.6–30.0) compared to the Philippines and Thailand (72.8 and 42.8, respectively). The lower rank indicates a lack of market intermediaries needed to support doing deals. It appears that BAs operating in emerging economies of Southeast Asia face more obstacles to doing deals than developed-country BAs. According to Lopez-Claros et al. (2006), the informal sector (see Table 5.1) in Thailand and the Philippines, where relatively more business transactions are not registered compared to developed countries, plays a significant role in their respective economies. We see the informal sector as being a significant component of informal institutions in emerging economies, where culture and networking (North 1990; Scott 1995) can play a major role in angel investing. Williams and Nadin (2010) define the informal economy as where the paid production of legitimate goods and services are legal in all aspects except that they are unregistered, which is very similar to the definition of the informal sector in Table 5.1 (footnote 7). Peng and Heath (1996) propose that informal institutions may replace ineffective or undeveloped formal institutions in emerging economies. Informal institutions (networking) could play a significant role in deal making for BAs operating in the Philippines and Thailand. Following this dichotomy of formal and informal institutions, it is useful to analyze the investment strategies and performances of BAs operating in these two emerging economies. RESEARCH METHODOLOGY We used a mixed-methods research methodology “which combine qualitative and quantitative approaches in the methodology of a study” (Tashakkori and Teddlie 1998, ix). Hurmerinta-Peltomaki and Nummela (2006, 10) posit that “in emerging markets, because of the required contextualization of the data collection method, researchers may be pushed towards a mixed method approach.” More specifically, we used the “exploratory design” type of mixed methods, where we constructed items and scales from our field research to develop tables and weighted frequency distributions that represented both the qualitative and quantitative results (Creswell and Clark 2007). A major challenge in studying BAs is to find them (Morrissette 2007; Amatucci qnd Sohl 2006) because BAs tend to prefer a low profile almost to the point of being invisible (Harrison and Mason 2008; Wetzel 1983). Because of the lack of BA public databases, collecting primary data from individuals who wish to remain anonymous is an arduous task (Mason and Harrison 2008; Amatucci and Sohl 2006). Therefore, developing a representative random sample of BAs from an “invisible” population is extremely problematic (Avdeitchikova et al. 2008; Farrell, Howorth and Wright 2008), especially in a developing country. Coviello and Jones (2004) recommend using a judgment sample when it is difficult to identify firms or individuals in the population of interest. Mason and Harrison (2008, 322)

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identify business angel networks as “the only visible part of the informal venture capital market” which could be a potential source to collect data. Of course, using such networks increases bias because the sample would not be representative of the population. We identified potential BAs from two angel networks: an investment forum in Manila comprised of entrepreneurs and formal and informal investors, and a Thai-Chinese association in Bangkok whose membership includes primarily business men and women. From each sample we selected individuals who were active investors in new ventures. For more information on BA selection and interview techniques please see Scheela and Jittrapanun (2012). RESULTS

Thailand and the Philippines’ BA Profiles We interviewed 20 Thai-Chinese and 29 Filipino business angel investors and analyzed their investment strategies (see Table 5.2). Collectively, these two sets of very experienced, highly educated business angels invested in 297 investee companies, had access to investment funds of approximately US$2 million, originated deals ranging from a median of US$100 thousand to $1.25 million/investee company and invested with three to four partners in each deal. These 49 BAs invested primarily in early- and growth-stage companies (93%—Philippines and 69%—Thailand) and managed between three and eight companies per portfolio. The BAs in our sample were very active, long-term investors (six to eight years time frame), as shown by significant time spent monitoring their investee companies, taking a board seat in most deals and aggressively removing top managers when warranted. Clearly, BAs in both samples invested significant personal funds and time into early- and growth-stage investee companies.

CHALLENGES AND PERFORMANCE FOR BA INVESTING We asked each BA to state his/her investment strategy. In Figure 5.1, we show a selection of the strategies quoted from the Thai BAs. The quotes portray a diversity of strategies among the 20 BAs ranging from profit maximization, minimizing and stabilizing risk and finding the right partners, portfolio diversification to providing social and community benefits. Interestingly, only one BA focused on technology via investing with “MNCs to achieve a technology edge,” which is more of a Western BA strategy of high-technology and profit maximization (Morrissette 2007; Sohl 2003b). Western BAs also tend to invest in industries where they have significant expertise (Van Osnabrugge and Robinson 2000). Yet only one BA explained that his/her strategy was “.maintaining investments in an area of expertise.” BAs in our sample are very different from Western BAs in their investment

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Informal Venture Capital Investing in Emerging Asian Economies 71 Table 5.2

Business angel profiles Thailand (n = 20)

Categories

Philippines (n = 29)

Fund size • Median fund size • Range of fund size

US$2.25M .09M–15M

US$1.8M 40K–300M

Investment size • Mean • Median

US$2.7M–4.6M 1.0M–1.25M

US$133K–1.7M 100K–250K

Average number of years of investing

16.1 years

18.0

Investors/Angel

3.6 partners

3.0

Total number of investments

59 companies

238 companies

Average investments/BA

2.95 companies

8.2 companies

Investment Stage Seed stage/Early Growth stage Mature stage/buy out/other

% of Investments 47 22 31

% of Investments 85 8 7

Average investment duration Range of duration

6.1 years 2–no exit

8.3 years 1–no exit

Time spent monitoring investee company (% of total time/week)

69.3%

74.7%

Number of CEOs removed by BA Number of Mgrs. removed by BA

11 58

5 41

Level of education/BA • HS • BA/BS • MS/MBA • PhD Previous work experience

Percentage 13 38 50 0 100%

Percentage 0 28 66 7 100%

Number of board seats/BA • Range • Mean • Median

1–6 seats 2.6 2

0–16 seats 5.2 4

Source: Interviews 2003–2007 in the Philippines and Thailand

strategies, which may be a function of an investment environment that does not produce a large number of good deals. Our research indicates that BAs report many challenges when investing in emerging economies such as Thailand and the Philippines (see Table 5.3). Finding good deals with the right people (partners and entrepreneurs) in a highly uncertain and competitive environment where there is a lack of understanding about private equity is especially challenging for the BAs in our

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William Scheela, Edmundo Isidro and Thawatachai Jittrapanun 1. Invest to stay ahead of the competition. 2. Buy and sell, minimize human contact, avoid large investment and make many investments to diversify risk. 3. Invest in companies with quality operations and manageable level of competition. 4. Focus on high quality service companies that can offer a competitive price. 5. Teaming up with the right partners. 6. Invest in companies with few competitors that meet a market need and have growth potential. 7. International joint ventures with MNCs to achieve a technology edge. 8. Conduct market research, move fast, check financials. 9. Focus on strong potential for long-term growth and stable returns. 10. Low capital, low risk, fast returns. 11. Invest successful and profitable businesses. 12. Maximize the value of existing assets. 13. Conservative investments. 14. Focus on market expansion and community development. 15. Minimize costs and long-term focus. 16. Invest in companies with few competitors and stable demand. 17. Invest in companies with stable returns meeting social and environmental concerns. 18. Invest in low-risk businesses in real estate development. 19. Look for the highest financial returns. 20. Beginning to diversify while maintaining investments in an area of expertise.

Figure 5.1

Thai business angel investment—selected quotes

Source: Interviews with business angels (2006–2007)

samples. In general, the investment climate exhibits a lack of institutional support for doing deals: high political uncertainty, weak legal and financial support for investors and entrepreneurs, corruption/red tape and inefficient government support for SMEs. BAs in both samples find it difficult to obtain reliable data in order to accurately estimate market potential. These institutional voids make it difficult to convince foreigners to invest because of their lack of understanding of investing in an emerging economy. Government is seen as unsupportive for developing entrepreneurs and providing transparency for doing business. In spite of these institutional challenges, between 75 and 79% of the BAs report overall investment fund returns either meeting or exceeding their initial investment expectations. However, investing in primarily early-stage investee companies in institutional voids is not without significant risk as BAs report between 30% and 36% of their investee companies are not meeting expectations. INFORMAL NETWORKING As indicated in Table 5.1, the informal sector plays a relatively major role in conducting business transactions in Thailand and the Philippines compared to the developed economies of the US, Japan and Singapore (Lopez-Claros et al. 2006). Our results corroborate the challenges facing BAs in profitably

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Table 5.3

Challenges

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Unstable political environment • Corruption

High financial risks increase costs • High funding costs • Foreign investors don’t understand Thailand • Shortage of key personnel Weak legal framework • Political connections of big business • Lack of government transparency Inefficient government • Complicated tax system • Economic development only focuses on big cities

Finding the right people • Investment partners • Entrepreneurs • Managers Finding opportunities • Need to educate about private equity • Be patient in doing deals • Accurately estimate market size Poor economic performance • Weak currency • Political and social risk • Focus on survival Dealing with red tape/bureaucracy & corruption • Lack govt. programs for entrepreneurs • Improve tax collections

Rank 2

Rank 3

Rank 4

Rank 5

(Continued)

Very competitive business environment result in low profitability • Difficult to obtain reliable data • High personal turnover • Volatile market environment

Convince foreigner to invest • Fundraising is difficult • Declining disposable income • Small market size

Thailand

Rank 1

Philippines

Challenges for BA investing and investment performance in Thailand and the Philippines

Table 5.3

34% 29% 1.7% 25%–below; 40%–average; 35%–above

34% 18% 14%–below; 38%–average; 41%–above; 7%–too early

Investee companies Above expectations

Investee companies Too early/exit

Fund performance vs. expectations

36%

Thailand

18%

30%

Philippines

Investee companies Average expectations

Investee companies Below expectations

(Continued)

Source: 2003–2007 interviews

Investment performance

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Informal Venture Capital Investing in Emerging Asian Economies 75 doing deals in institutional voids. To overcome weak institutional support, BAs develop informal institutions by coinvesting with family members, other investors and networking with government officials. More specifically, the BAs in our samples coinvest with 3.0 to 3.6 investors in each deal; they seldom invest alone. Thai-Chinese BAs invest primarily with family investors whereas Filipino BAs invest with other BAs. Both sets of BAs also conduct in-depth due diligence before investing and closely monitor their investee companies after investing. Based on our initial BA results and related research analyzing formal venture capital investing in Southeast Asia (Scheela and Isidro 2008; Scheela and Jittrapanun 2008; Scheela 2006; Scheela and Nguyen 2004), we expect an investment strategy that may be crucial among both BAs and venture capitalists in most Asian emerging economies is based on significant networking because of the importance of the informal sector to provide the necessary market intermediaries to do deals. Ahlstrom and Bruton (2006, 312) found that venture capitalists in East Asia “generally used networks to substitute for formal institutions such as the rule of law.” BAs in the Philippines and Thailand also networked with other investors to find deals, conduct due diligence and reduce investment risk because of the lack of legal protection for minority shareholders. The BAs in both samples complained about the challenges of dealing with red tape, bureaucracy and corruption, which may be a reason for both entrepreneurs and BAs to voluntarily exit the formal economy either totally or partially. This finding supports the neoliberal perspective (Williams and Nadin 2010, 369) whereby the informal economy “is a direct response to the over-regulation of the market.” The lack of fully developed, efficient institutions along with weak government support for SMEs in both countries have resulted in BAs working in both formal and informal economies using a combination of formal and informal institutions to do deals. Consequently, investment networking is extremely important for BAs to be able to effectively exploit investment opportunities in these two emerging Asian economies. This observation reinforces previous research supporting networking as a mandatory survival strategy in doing business in emerging economies lacking developed institutions (Ahlstrom and Bruton 2006; McMillan and Woodruff 2002; Peng and Heath 1996). Operating in an institutional void has forced BAs in these emerging countries to develop informal institutions in order to do deals that have mainly generated quality (above-average or average) investments. Interestingly, it may be that the combination of the lack of formal institutions and a BA’s ability to develop informal institutions via networking could be a competitive advantage for investing in an emerging economy (Bruton et al. 2010; Bruton et al. 2008), especially compared to foreign investors. In summary, while many BAs in developed countries coinvest with other investors (primarily to reduce financial risk), a coinvesting strategy appears to be especially important for BAs in the Philippines and Thailand because of the high levels of financial, legal, currency, political, economic and market risks. BA networking relates directly to our research question (How do

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business angels effectively invest in and help develop entrepreneurial firms in emerging economies lacking the fully developed institutions necessary to support private equity investors). BAs network in order to find deals, coinvest and monitor their investments. BUSINESS ANGEL RECOMMENDATIONS We specifically asked BA investors, “What would you like to see in the future for the informal investing industry in [Thailand or the Philippines]?” (see Table 5.4). Generally, BAs in these two emerging economies believe both investors and governments can significantly improve the investment process and climate. BAs are interested in forming business angel clubs or networks in order to develop a comprehensive database and website to improve deal making by being able to find better deals and then collaborate on due diligence and postinvestment monitoring. They believe governments can also greatly enhance the investment process in four areas. First, governments can provide more support to finance, educate and promote entrepreneurship, especially with regard to educating entrepreneurs about the start-up process, how to do deals and the role of BA financing. Second, governments need to support the development of better legal and financial institutions necessary to increasing deal making and generally improving the investment climate. Third, governments must be more effective in providing reliable public information so investors can conduct in-depth due diligence more efficiently. Finally, governments need to improve public governance and transparency by reducing corruption/red tape for investors and entrepreneurs and also maintaining political stability. POLICY RECOMMENDATIONS Clearly, higher education can play a major role in improving the investment process for both BAs and entrepreneurs. Higher educational institutions in emerging economies can research the unique characteristics and challenges facing BAs and entrepreneurs operating in institutional voids and develop appropriate curricula, which could be markedly different than Western entrepreneurship curricula. It is important for these new curricula to be based specifically on emerging-country, private-equity research and the development of indigenous case studies of entrepreneurs/start-ups, BAs and venture capitalists. The role of government in improving the investment process has been problematic in both developed and emerging economies. Professor Josh Lerner (2009) of the Harvard Business School has written extensively about the opportunities, challenges and pitfalls facing governments in attempting to support the development and financing of entrepreneurs. According

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Informal Venture Capital Investing in Emerging Asian Economies 77 Recommendations to improve BA investing

Table 5.4 Rank

Philippines

Thailand

1

Form a BA Club/Forum • Develop a deal database  Identify success & failures Website listing deals

Public investment for SME/VC promotion • SMEs to globalize • Emphasize successful start-ups • More professional entrepreneurs • Educate entrepreneurs How to do start-ups Understand strategy •  Public support banks to finance SMEs

2

Education • Entrepreneur’s understanding of BAs • “How to do a deal” • International deals via US$ • Large company mentoring • Fund student business plans

Improve the investment climate • Support from financial institutions • Public investment in basic industries & tourism • Invest in education & technology • More bio-tech specialists

3

Further institutional development • Protect foreign investors • Improve peace & order • Decrease corruption • More aggressive banks

Better political stability & governance • Eliminate corruption/ red tape • Gov’t. support for exporting

4

Develop over-the-counter SME trading • Improve SME transparency • Minimal restrictions to buy & sell • Provide access to funding

More equitable legal system • Control large MNCs

5

Improve the investment climate • Public & private funds for start-ups • More VCs doing smaller deals • Form a VC association • Change the mentality of family business

More reliable public information for deals • Reduce bureaucracy for small deals

Source: 2003–2007 interviews

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to Lerner (2009, 192), based on his research, five consistent themes have emerged: • Governments around the world today seek to promote entrepreneurial and venture capital activity, employing a variety of “stage setting” [improving the entrepreneurial environment] and direct strategies. • These steps are sensible, given the historical record and theoretical arguments regarding the importance of such interventions in the development of entrepreneurial regions and industries. • But programs to promote entrepreneurship are challenging. Governments cannot dictate how a venture market will evolve, and top-down efforts are likely to be unsuccessful. • The same common flaws doom far too many programs. These flaws reflect both poor design—indicating a lack of understanding of the entrepreneurial process—and poor implementation. • Governments must do a careful balancing act, combining an understanding of the necessity of their catalytic role with an awareness of the limits of their ability to stimulate the entrepreneurial sector. Entrepreneurship and private equity are documented vehicles for both innovation and economic growth (Lerner 2009), worthy of public financial support but extremely challenging for governments to develop and implement effective entrepreneurship programs. One of Lerner’s many recommendations pertains directly to emerging economies facing the challenges of institutional voids—“make education an important part of the mixture” (2009, 187). Similar to the challenges facing our BAs, Lerner posits that venture investors are hesitant to invest in countries where there is a lack of information about both the “local market’s potential” and the “level of entrepreneurial activity in local markets” (2009, 187–88). Educators and governments can play a major role in researching and developing public databases about market potential and entrepreneurial activity. In a related way, Lerner notes that (2009, 188) “educating entrepreneurs is a critical process.” In light of our research, we believe that educating entrepreneurs and public officials is crucial to significantly improving both the investment process and the entrepreneurial climate. A major component of this educational mandate is to introduce both stakeholders to formal and informal venture capital investing in the local context. Entrepreneurs and public officials alike need to be educated about the typically inefficient investment process and challenges facing private equity investors operating in emerging economies. For this education process to be effective, it must be transnational education—think global, teach local. That is, it needs to include global knowledge about private equity investing in general (primarily from Western universities) while developing significant local “emerging” content based on academic research. In this way, indigenous databases and case studies can be developed to make

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Informal Venture Capital Investing in Emerging Asian Economies 79 education germane to entrepreneurship students in emerging economies that will be doing deals despite facing significant institutional voids. SUPPORTING HIGH-GROWTH ENTREPRENEURS We have two policy recommendations to specifically support high-growth entrepreneurs operating in emerging economies. First, based on our teaching and research experiences in Southeast Asian emerging economies, there is a lack of higher education support for both teaching and research that focuses on business angel financing for early-stage, high-growth entrepreneurial firms (Gunawan, Scheela, Wessiani and Luthfiyah 2011; Scheela, Isidro, Jittrapanun, Nguyen, and Gunawan 2012). Building a regional case-study library of successful high-growth entrepreneurs who received informal and/or formal venture capital financing must be a top priority in conjunction with developing private equity training and higher education courses based on these local case studies. Second, governments should subsidize the creation and initial development of business angel clubs (see the Malaysian Cradle Fund Sdn. Bhd., www.cradle.com.my), which will significantly increase the visibility, via website development, of equity sources for high-growth entrepreneurs in emerging economies. Formal BA networks can greatly improve quality deal flows by providing a visible location to submit business plans. Doing so will satisfy BA concerns about the lack of quality deal flows and entrepreneurs’ concerns about finding angel investors. BA clubs/networks can also provide education and training for both entrepreneurs and BAs (see the Malaysian BA Club Virtuous Investment Circle, www.vic.org.my). FUTURE RESEARCH This chapter has focused on an attempt to aggregate the results from two previous studies on BA investing in two emerging Southeast Asian economies. As can be seen in the tables, besides many similarities between these two countries, there are also many differences. Future research should focus on further analysis of both similarities and differences between BAs in different countries and also expand the number of countries represented in the samples. REFERENCES Ahlstrom, D., & Bruton, G. “Venture Capital in Emerging Economies: Networks and Institutional Change.” Entrepreneurship Theory and Practice summer (2006): 299–320. Amatucci, F. M., & Sohl, J. E. “Business Angels: Investment, Processes, Outcomes, and Current Trends.” In Entrepreneurship: The Engine of Growth, edited by A. Zacharakis & S. Spinelli, vol. 2, 87–107. Wesport, CT: Greenwood, 2006.

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Informal Venture Capital Investing in Emerging Asian Economies 81 Kutsuna, K., & Harada, N. “Small Business Owner-Managers as Latent Informal Investors in Japan: Evidence from a Country with a Bank-Based Financial System. Venture Capital 6 (2004): 283–311. Lerner, J. Boulevard of Broken Dreams. Princeton, NJ: Princeton University Press, 2009. Lerner, J., Leamon, A., & Hardymon, F. Venture Capital, Private Equity, and the Financing of Entrepreneurship. Hoboken, NJ: John Wiley & Sons, 2012. Lockett, A., & Wright, M. “Editorial: Venture Capital in Asia and the Pacific Rim. Venture Capital 4 (2002): 83–195. Lopez-Claros, A., Porter, M. E., Sala-i-Martin, X., & Schwab, K. The Global Competitiveness Report 2006–2007. Geneva: World Economic Forum, 2006. McMillan, J., and Woodruff, C. “The Central Role of Entrepreneurs in Transition Economies. Journal of Economic Perspectives 16 (2002): 153–70. Mason, C. M., & Harrison, R. T. “Measuring Business Angel Investment Activity in the United Kingdom: A Review of Potential Data Sources.” Venture Capital 10 (2008): 309–30. Mason, C. M., & Harrison, R. T. Is It Worth It? The Rates of Return from Informal Venture Capital Investments. Journal of Business Venturing 17 (2002): 211–36. Morrissette, S. G. “A Profile of Angel Investors.” Journal of Private Equity summer (2007): 52–6. North, D. C. Institutions, Institutional Change and Economic Performance. Cambridge, UK: Cambridge University Press, 1990. Paul, S., Whittam, G., & Wyper, J. “Towards a Model of the Business Angel Investment Process.” Venture Capital 9 (2007): 1–7, 125. Peng, M. . “Institutional Transitions and Strategic Choices.” Academy of Management Review 28 (2003): 275–96. Peng, M., & Heath, P. “The Growth of the Firm in Planned Economies in Transition: Institutions, Organizations, and Strategic Choice.” Academy of Management Review 21 (1996): 492–528. Ramamurti, R. “A Multilevel Model of Privatization in Emerging Economies.” Academy of Management Review 25 (2000): 525–50. Roberts, M. J., Stevenson, H. H., & Morse, K. P. Angel Investing. Boston: Harvard Business School, 2000. Scheela, W. “Knowledge Transfer: The Development of Venture Capital in South East Asia.” In Venture Capital and the Changing World of Entrepreneurship, edited by J. Butler, A. Lockett, & D. Ucbasaran, 75–90. Greenwich, CT: Information Age, 2006. Scheela, W., & Isidro, E. S. “Business Angel Investing in an Emerging Asian Economy.” Journal of Private Equity 12 (2009): 44–56. Scheela, W., & Isidro, E.S. “Private Equity Investing in the Philippines: Business Angels vs. Venture Capitalists.” Journal of Private Equity 11 (2008): 90–9. Scheela, W., Isidro, E. S., Jittrapanun, T., Nguyen, T. T. T., & Gunawan, J. “Business Angel Investing in Emerging Economies: Policy Implications for Southeast Asia.” Paper presented at the International Research and Policy Roundtable, Liverpool, UK, March 11–12, 2012. Scheela, W., & Jittrapanun, T. “Do Institutions Matter for Business Angel Investors in Emerging Asian markets?” Venture Capital 14 (2012): forthcoming. Scheela, W., & Jittrapanun, T. “The Impact of the Lack of Institutional Development on the Venture Capital Industry in Thailand.” Journal of Enterprising Culture 16 (2008): 189–204. Scheela, W. J., & Nguyen, V. D. “Venture Capital in a Transition Economy: The Case of Vietnam.” Venture Capital 6 (2004): 333–50. Scott, W. R. Institutions and Organizations. Thousand Oaks, CA: Sage, 1995.

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Sohl, J. “The Organization of the Informal Venture Capital Market.” In Handbook of Research on Venture Capital, edited by Hans Landstrom. Northampton, MA: Edward Elgar, 2007. Sohl, J. “The Private Equity Market in the USA: Lessons from Volatility.” Venture Capital 5 (2003a): 29–46. Sohl, J. “The US Angel and Venture Capital Market: Recent Trends and Developments.” Journal of Private Equity 6 (2003b): 7–17. Tashakkori, A., & Teddlie, C. Mixed Methodology: Combining Qualitative and Quantitative Approaches. Thousand Oaks, CA: Sage, 1998. Tashiro, Y. “Business Angels in Japan.” Venture Capital 1 (1999): 259–73. The Economist. “Why the Tail Wags the Dog: Emerging Economies Now Vave Greater Heft on Many Measures than Developed Ones. August 6 (2011): 66. The World Bank. “Emerging Stronger from the Crisis.” World Bank East Asia and Pacific Economic Update, vol. 1. Washington, DC: The International Bank for Reconstruction and Development / The World Bank, 2010. Van Osnabrugge, M., & Robinson, R. J. Angel Investing. San Francisco: JosseyBass, 2000. Wetzel, W. E. “Angels and Informal Risk Capital.” Sloan Management Review summer (1983): 23–34. Williams, C. C. & Nadin, S. “Entrepreneurship and the Informal Economy: An Overview.” Journal of Developmental Entrepreneurship 4 (2010): 361–78. Wong, P. K., & Ho Y. P. “Characteristics and Determinants of Informal Investment in Singapore.” Venture Capital 9 (2007): 43–70. World Development Report 2002: Building Institutions for Markets. Washington, DC: Oxford University Press, 2002.

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6

Alternative Financial Services An Essential Tool for Informal Entrepreneurs Les Dlabay

Vast numbers of informal entrepreneurs operating around the world must seek financial services outside the formal banking system. Cultural traditions along with a limited financial infrastructure in many developing economic environments result in an assortment of alternative banking services (Adams and Fitchett 1992). These financial products attempt to serve business development needs among the poor in both rural and urban settings. “Off the books” financial activities serve millions of entrepreneurs and households in base-of-the-pyramid situations. To clarify the diversity of the alternative financial service environment of informal entrepreneurs, this chapter considers these research questions: 1. What factors influence the creation and operation of alternative financial services used by informal entrepreneurs? 2. What types of alternative financial services are available in informal entrepreneurial settings? 3. What actions could improve access to financial services for informal entrepreneurs? THE INFORMAL FINANCIAL SERVICES ENVIRONMENT At one end of the continuum of financial service providers are formal institutions, subject to laws, regulations and supervision. This group includes various microfinance institutions (MFIs), savings banks, commercial banks and other nonbank financial intermediaries, such as the postal service in Kenya, India, Pakistan and other countries. In contrast, informal providers are nonregistered groups, such as community or village-based groups along with friends and family members. Between these extremes are semiformal financial service providers, subject to general and commercial laws, but not usually under formal bank regulation and supervision. These include financial nongovernmental organizations (NGOs), credit unions and credit cooperatives (Pagura and Kirsten 2009; Ritchie n.d.). In contrast to community-based financial programs, most NGOs obtain external funding from donors or grants. NGOs may act as intermediaries

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between informal entrepreneurs and donors, and operate locally as well as globally (through a physical or an online presence). Sometimes referred to as “financial intermediary nongovernmental organizations” (FINGOs), these MFIs are usually licensed to offer limited financial services, such as savings plans and loans (Mercy Corps 2008). Indigenous enterprise operators often need quick access to funds for business activities and household expenses. Restrictions by banks and other formal financial institutions often result in low-income entrepreneurs making use of informal financial services to address irregular cash-flow situations and emergencies. As noted by Collins, Morduch, Rutherford and Ruthven (2009), informal services are used since the need to save often exceeds demand for borrowing, which has resulted in many MFIs expanding their portfolio of microfinance services to include additional products. A PORTFOLIO OF ALTERNATIVE FINANCIAL SERVICES While borrowing and lending are usually the foundation, informal entrepreneurs often need other financial services. Both informal and formal providers are expanding their offerings to better serve the needs of business owners. These financial services may be viewed as a L-I-S-T portfolio: • Loans, often in the form of microlending, have provided economic opportunity for millions of entrepreneurs and households in dire financial situations. • Insurance is used as a financial-coping device for frequently overlooked business risks through an expanding number of microinsurance programs. • Savings vehicles allow both small business proprietors and households an opportunity to accumulate capital, smooth erratic cash flows, and fund large expenditures. • Transfers of funds often occur as remittances and through currency exchange transactions. While informal financial services often charge higher rates and may not be as reliable as more established sources, Collins et al. (2009) point out that the appeal for these alternative banking products includes: • Loans from friends, families or community members are more flexible with regard to length and repayment terms. • Reduced transportation costs by not traveling to MFIs and other formal financial institutions. • Interest-free borrowing from family and friends may be available. • A greater sense of security when borrowing from a local moneylender, since the person is someone they know and see regularly.

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Alternative Financial Services 85 • More opportunities to obtain funds for personal reasons; MFIs may restrict loans for business purposes only. • The need to quickly obtain short-term loans when encountering cashflow problems. These insights result in new approaches for lending and other financial services for entrepreneurial clients. LOAN SOURCES While loans may be provided by family members and friends, several types of community-based funding sources exist. These locally formed and managed groups adapt to cultural norms and regional business practices and may be referred to as “informal credit markets” (Ghate 1992).

Self-help Groups Self-help groups (SHGs) are village-based assemblies involving 15 to 20 women, usually in rural areas, who come together to form an informal savings and credit organization. Also called “savings and credit groups” (SCGs) or “self-reliant groups” (SRGs), their participants make a commitment to serve each other through their own savings (US AID 2008). SHGs provide women with social and economic empowerment while facilitating entrepreneurial activities. The financial resources of the group are used to make small interest-bearing loans to their members. The process creates a collective ethic that focuses on savings first. In this setting, interest rates and borrowing terms are established by the group, and all participants are committed to funding loans with their own savings. Providing capital through SHGs helps to overcome the lack of financial services while creating confidence and economic self-dependence, particularly among women who are often invisible in the social structure. Self-help groups have had a significant impact on the lives of women, especially in India. Women have financial security and improved self-confidence along with improved literacy. The role of the women in the household changes since they are treated with more respect and attain improved social status (Sinha 2010). Variations of self-help groups include rotating savings and credit associations (RoSCAs) and accumulating savings and credit associations (ASCAs) (Nokia Research Center n.d.).

Rotating Savings and Credit Associations Rotating savings and credit associations (RoSCAs) are one of the most commonly used informal financial services, with people in over 70 countries

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involved in this community-based tradition. These lending circles allow people otherwise unable to save or obtain credit to pay for medical bills or to buy a water buffalo or oxen for a family business. Ardener and Burman (1996) describe the RoSCA as “an association formed upon a core of participants who make regular contributions to a fund which is given in whole or in part to each contributor in turn.” RoSCAs have various names and methods of operation. In Cameroon and other French-speaking countries, they are tontines. In India, they are chitty. In Mexico, they are tandas, ekub in Ethiopia and osusu in Nigeria (Bouman 1995). At each meeting, one member gets all the money in the fund. The distribution of funds can be determined in many ways, two of the most common are: 1. A random RoSCA allocates the collected funds based on a random drawing, with the winning member receiving the money. This process is repeated with each previous recipient excluded from the drawing until each participant has received the money once. 2. A bidding or auction RoSCA involves participants bidding competitively for the collection of money. At the next meeting, members who have yet to receive the fund bid to receive it. The fund goes to the member who wins the bid, and the bid amount is divided among group members (Food and Agriculture Organization of the United Nations 2002). The RoSCA dissolves after every member gets the money once. Another one can then be started, with different terms and rules as desired by group members. The people involved in a RoSCA also serve as a support system for each other. Most involve women, a feature which provides them with economic and social empowerment.

Accumulating Savings and Credit Associations Similar to RoSCAs, accumulating savings and credit associations (ASCAs) emphasize savings among the group members, who are allowed to “deposit” varying amounts at each meeting. These funds may or may not be loaned to the members, depending on needs. When loans are made, interest earned is eventually distributed to those who provided the funds. Unlike the RoSCAs, ASCA members save regularly but do not empty the fund at each meeting by giving it all to one person. Instead, the ASCA lends varied amounts of the fund to individual members, charging interests on the loan and agreeing on a repayment plan with the borrower (Rutherford 2009). Credit does not need to be accessed by each member. However, those that do take out a loan can so do with flexibility of lengths and amounts. In many cases, a loan fund serves as an insurance feature and is available in the event of a disaster (natural or otherwise).

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Village Savings and Loan Associations Village savings and loan associations (VSLAs) most often make use of a time-bound model for providing financial services. Members save and borrow from the accumulated savings for a limited period of time. The savings and interest received are then shared out among the members in proportion to the amount that had been saved during the cycle. After the payout, groups commonly re-form immediately and start a new cycle of savings and lending. VSLAs are independent and self-managing. All transactions are carried out at meetings in front of the members, a feature which ensures transparency and accountability since those present are, witness to the amounts that are saved or borrowed. To guarantee that transactions do not take place outside group meetings, a lockable cash box fitted with three padlocks is often used. Anyango, Esipisu, Opoku, Johnson, Malkamaki, and Musoke (2007) report that VSLA members in Zanzibar–Tanzania are relatively well off and well educated, with more than half completing secondary school. In addition, their evidence suggests that VSLA participants experience sustainable savings and lending programs in communities poorly served by other organizations. Expanded use of this financial service model has been also reported in Angola, Burundi, Côte d’Ivoire, Eritrea, Haiti, India, Kenya, Lesotho, Malawi, Mozambique, Rwanda, Uganda, Zambia and Zimbabwe. The VSLA model continues to expand with assistance from organizations such as the Aga Khan Foundation, CARE, Catholic Relief Services, Freedom from Hunger, Oxfam, Plan, and World Relief. A range of implementation partnerships exist with involvement of local NGOs, international NGOs, faith-based organizations and franchises. Although they are generally exempt from regulatory barriers, some countries require VSLAs to register with a local authority.

Credit Unions and Credit Cooperatives While not compliant with the financial regulations of a given country, various financial institutions operate to serve communities with an ongoing business structure. Credit unions and credit cooperatives recruit in a target community, accept savings and make loans at low interest rates to members. These nonprofit MFIs typically have a smaller geographic reach than banks and are organized for maintaining institutional sustainability. Community and village banking models are more formalized versions of informal associations formed by members of a community. The social collateral among the group serves to improve repayments and reduce operating costs. Widespread use of the cooperative financial services model exists in Asia, including:

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Les Dlabay • In Nepal, savings and credit cooperatives (SACCOs) are small, indigenous groups that lend funds from group savings and may or may not be registered. • Also in Nepal, Small Farmers’ Cooperatives Limited (SFCLs) are ruralbased, member-owned and controlled and provide financial and nonfinancial services (Mercy Corps 2008). • Rural credit cooperatives have a long history in India and include the State Cooperative Banks (SCB), District Central Cooperative Banks (DCCB) and Primary Agricultural Credit Societies (PACS) for shortterm credit, with long-term credit supplied by the Primary Cooperative Agriculture and Rural Development Banks (PCARDB). • In China, rural cooperative foundations have a “quasilegal” status since there is uncertainty as to which government branch regulates these financial institutions (Tsai 2004).

5–6 Moneylenders, Loan Sharks and Pawn Shops While many informal lending programs are based on community trust and social connections, others may take advantage of clients. 5–6 Moneylenders are informal financiers in the Philippines. An individual borrows 5 pesos and pays back 6, which is a 20% interest rate for the agreed time period (usually a week), resulting in an annualized rate of over 1,000%. Two types of 5–6 moneylenders operate: (1) Filipino moneylenders are “community insiders” who lend money to finance small, informal business activities; and (2) Indian moneylenders, the “unwelcome outsiders,” who obtain funds through informal channels originating in India (Kondo 2003). Other exploitive lenders in various geographic settings include loan sharks in China. These underground lenders, sometimes charging interest as high as 70%, are often used due to a lack of access to state-controlled banks (Barboza 2011). Pawn shops with exorbitant interest rates on loans also have a market presence in most countries of the world. MICROINSURANCE PROGRAMS Low-income and informal entrepreneurs continually face business and personal risks. Financial threats such as death of the household head, disease, crop failure and loss of family livestock affect the long-term viability of these enterprises. Financial losses for low-income people can be especially damaging because they most often do not have other assets. Microinsurance programs have been developed to cover specific risks in exchange for small premium payments, with life and medical coverage being most common. Various financial service providers, both NGOs and insurance companies, have become involved in microinsurance activities, such as ACCION, Opportunity International and AIG Uganda. Many other organizations are

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Alternative Financial Services 89 assessing the feasibility and cost effectiveness of using existing financial service delivery channels and are establishing microinsurance partnerships with existing MFIs as well as other alliance models, such as through mobile phone networks. Less formal microinsurance programs make use of savings groups, in which participant contributions create a small fund to cover emergencies encountered by group members. Some village and savings and loan associations have added insurance products to cover the costs of funerals, medical expenses and education fees if the main household provider dies (Allen and Panetta 2010). During a time of increased microinsurance programs, potential clients must be aware of illegal insurance schemes, such as the underground insurance market in China. Foreign insurance companies attract customers by offering high rates of return on life insurance policies. However, since the companies violate Chinese regulations and evade taxes, consumers have no recourse when trying to collect (Li and Hsu 2009).

Savings Services Community-managed financial service groups (SHGs, RoSCAs, ASCAs, and VSLAs) are examples of savings-led microfinance services. Beyond these, a growing movement exists to provide savings programs for low-income populations, including a focus on rural areas through NGOs, MFIs and other financial intermediaries (Hirschland 2005). These efforts are designed to meet the demand for saving among informal entrepreneurs and low-income, unbanked households. Traditionally, many indigenous savers made use of money guards, some of whom were friends or family members while others charged a fee. Also used are saving-up clubs, in which deposits cannot be accessed until an agreed upon point in time, such as Christmas, Eid, or Dewali (Collins et al. 2009). Susu collectors in Ghana hold funds for market traders in exchange for a fee. These money keepers provide a valuable service in helping clients accumulate capital since many banks do not accept small deposits. However, savers may be charged a fee, holding back as much as 10% of the balance. In recent years, the Ghana Co-operative Susu Collectors Association (GCSCA) was created as an umbrella organization for susu operators throughout the country. This association regulates the activities of susu collectors and serves as an intermediary between susu customers and formal financial institutions. The Bank of Ghana, the country’s central bank, supervises the operations of GCSCA, which calls itself a “non-banking microfinance financial institution in Ghana, Africa and the world” (Ghana Co-operative Susu Collectors’ Association). Another initiative among susu collectors in Ghana was developed by Barclays Bank in an attempt to maintain this century-old, trust-based tradition

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while extending microloans to small traders and microentrepreneurs to help foster business expansion (Osei 2008). In an effort to avoid excessive savings fees and to serve the demand for savings among the poor, savings groups are being developed by various microfinance and development organizations. The savings groups of the Aga Khan Foundation are called community-based savings groups (CBSG), and the savings and internal lending community (SILC) is the Catholic Relief Services’ program. Saving for Change (SfC) is a cooperative effort between Freedom from Hunger and Oxfam, whereas CARE makes use of a VSLA model (Allen and Panetta 2010). Several of these programs combine the savings groups with development activities to distribute social products, such as solar lanterns, and to expand the availability of agricultural inputs, such as seeds and fertilizer (Rippey and Fowler 2011). Several initiatives exist to bring savings group members into the formal financial system despite cost and profitability concerns when serving small savers. Westley and Palomas (2010) confirmed these high costs for two MFIs, ADOPEM in the Dominican Republic and Centenary Bank in Uganda, with annual marginal operating costs (excluding fixed costs) of 59% to 241% of the deposit balances for small savers. However, the authors conclude that these operating costs can be more than overcome by the profits generated from loans, life-insurance products, automated teller machine usage and savings account fees. FUND TRANSFERS Informal entrepreneurs have an ongoing need for payments and fund-transfer systems within a country and across borders. These activities are commonly in the form of remittances, currency exchanges and, more recently, mobile payments.

Remittance Networks Hawalas are informal remittance networks, often used by migrant workers primarily from the Middle East, Africa and Asia. Transactions take place on an honor basis through brokers around the world. The brokers not only earn a commission but may also profit from differences in exchange rates. In recent years, hawalas have been scrutinized as a possible funding source for terrorist activities (Faith 2011). The process starts with a person, who wants to send money to another country, contacting a hawala dealer or broker. After negotiating the fee and exchange rate, the dealer (A) contacts (by phone, fax, or e-mail) another dealer (B) in the country to which the money is to be sent. Dealer B arranges for the payment to be made in the local currency and will eventually settle this transaction with Dealer A when money needs to be sent back to the originating country.

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Informal Currency Traders In many regions of the world, a legitimate business enterprise, such as food retailing, may serve as a front for unregistered currency exchange activities. While foreign exchange services are available at hotels, airports, rail stations and small shops, in many countries informal currency traders also operate. In an assessment of unregistered currency exchange activities, Dlabay and Reger (2007) concluded that: • Nations with lower levels of economic development tended to experience greater levels of informal foreign exchange activities. • Unregistered currency exchange services may operate in small, locally owned shops with the retailer serving as a “front” for exchange activities not sanctioned by government. • Border areas involve a greater level of informal exchange activities, including acceptance of a bordering country’s currency; this is especially prevalent in southern Africa. • The use and acceptance of the US dollar in Central and South America, both formally and informally, is present on a regular basis.

Mobile Payments While traditional financial activities with manual record-keeping systems thrive in many developing economies, mobile-phone banking is also taking hold. Low-income and rural consumers are able to receive funds, make payments and transfer money to others. Remote regions where banks, cash machines and credit cards do not exist are being served by low-cost cellphone banking services which are easily used by those with limited technology skills. While usually connected to a bank account, cell-phone financial transactions in the future are expected to bypass banks with a summary of receipts and payments appearing on phone bills. Increased cell-phone use provides the foundation for banking and other services to serve the needs of informal entrepreneurs. Partnerships between financial institutions and telecommunication companies, most notably M-PESA in Africa, have resulted in expanded access to microfinance services for many not previously served. The market success of M-PESA in Kenya is the result of country conditions conducive to a mobile money system for domestic remittances along with an execution strategy to quickly reach large numbers of customers (Mas and Radcliffe 2010).

OPERATIONAL ISSUES As informal and formal financial services blend to assist traditionally underserved clients, both entrepreneurs and households, several strategic issues should be assessed for effective implementation strategies.

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Lending Models Individual loans are the standard in industrialized economies. However, trust groups (group lending), which evolved from the cultures of SHGs and RoSCAs, are most common in developing economies. These groups, usually 10 to 30 people, join together to obtain loans that are commonly used for small-business operations. The group members guarantee each other’s loans and support one another’s businesses. This trust element serves as collateral, often resulting in repayment rates of over 90% (Opportunity International n.d.). Weekly meetings are a common feature of the trust-group model, at which time payments are made and training sessions occur. The group members, typically women, also provide social and emotional support for the each other. Common benefits of group lending include increased accessibility to financing services for poor households that might not be available on an individual basis due to a lack of collateral. MFIs benefit from lower administration and transaction costs with larger loans made to the group rather than monitoring individual accounts (Opportunity International n.d.).

Funding Sources An ongoing evolution is occurring for funding sources in relation to savingsled and credit (donor)-led microloans. First, SHGs, RoSCAs and ASCAs created the foundation for the microfinance industry. Next, international NGOs used donor funds to provide loans. More recently, as the grassroots demand for savings services increases, savings-led microfinance programs provide loans funded by the participants. The savings-led microfinance movement may have limitations, since community-managed providers may have difficulty serving large numbers of clients. To address this situation, NGOs and other MFIs are connecting with self-help groups to better reach the rural and urban poor.

Financial Institution Linkages Despite improvements in providing financial services to underserved entrepreneurs, limited availability still exists in many rural and low-income areas. To address this situation, some informal MFIs have established linkages in the form of a “mutually beneficial partnership between a formal and a less formal institution that results in the expansion of rural financial services” (Pagura and Kirsten 2009). Horizontal linkages involve collaboration among similar financial enterprises. The potential benefits of these formal–informal partnerships are reduced transaction costs, improved economies of scale and shared technical assistance. Fundacion para Alternativas de Desarrollo (FADES), an unregulated microfinance institution in Bolivia, experienced substantial growth in the number of clients and loans. FADES developed horizontal linkages with

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Alternative Financial Services 93 other informal financial service providers to gain additional funding and to expand the financial services offered (Quiros and Gonzalez-Vega 2007). Vertical linkages involve cooperation among financial intermediaries at different levels of the value chain. A formal institution may provide subsidized credit to an informal moneylender instead of providing funds directly to rural borrowers. Since banks are able to provide an array of services more efficiently than nonprofits, MFIs may establish partnerships with banks to better serve a previously unbanked population. Vertical linkages provide the MFI with benefits that might not be possible when working autonomously. These formal or informal collaborations can result in expanded markets, improved services, lower costs and increased access to financial literacy and technical training for clients. ALTERNATIVE FINANCIAL SERVICES: POLICY-MAKING IMPLICATIONS To expand and improve financial services for informal entrepreneurs, various actions might be considered by business, government, development agencies and others: • Employ diverse research methods to identify and validate metrics to assess the economic and social impact of alternative financial services. Marketplace observations, key informant interviews, financial diaries and other ethnographic data can provide insight into the effectiveness of existing and proposed financial services. • Develop strategies for the creation of inclusive markets for financial services among underserved populations and the extreme poor. Financial inclusion attempts to address these concerns in an effort to provide economic growth and stability for emerging markets. At the forefront of this movement are the Centers for Financial Inclusion (www. centerforfinancialinclusion.org), launched by ACCION International, and CGAP—the Consultative Group to Assist the Poor (www.cgap. org), a policy and research center. • Monitor microfinance industry practices to prevent overindebtedness while promoting transparency, responsible pricing and client privacy. The Smart Campaign (www.smartcampaign.org) is a global cooperative effort among microfinance organizations to develop and implement client protection standards, tools and resources. • Implement financial literacy programs to prepare business clients and others for successful use of varied financial services. A recent initiative among Genesis Analytics, Microfinance Opportunities, and the MasterCard Foundation attempts to enhance the impact, increase the scale and sustain the accessibility of financial education programs (MasterCard Foundation 2011).

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Les Dlabay • Consider formal–informal financial service linkages to enhance valuechain facilitation for informal entrepreneurs. While some business owners may benefit connecting with an MFI, for others formal linkages might be beyond the scope of their needs. • Assess the use of microfranchising for financial service delivery and as a scalable business model for other types of enterprises. While Kistruck et al. (2011) report various operational and sustainability challenges, the social benefits of this approach were suggested for the underserved communities studied. The authors also note that unique adaptations to the microfranchising model may be possible to meet local market needs. • Expand cell-phone banking services for both small-business activities and household needs. The ongoing growth and improving infrastructure in this industry has increased access to financial and other information services in traditionally underserved areas. • Identify education and training services for improved business operations and technical knowledge. Despite higher operating costs, many financial service providers develop human capital among informal microentrepreneurs through educational programs. These training activities include coverage of accounting, marketing, inventory management and agricultural skills. Personal development topics such as health care, literacy skills, money management and spiritual teaching may also be included in an attempt to create holistic change for a community.

CONCLUDING COMMENTS Local entrepreneurs and households involved in informal business activities, especially in rural and impoverished urban areas, will continue to be dependent on informal, unregistered banking activities. Alternative financial services are not only a transition to participation in the formal banking sector, but they also create a foundation for innovative financial products that adapt to local economic conditions and cultural settings. Capital limitations for informal entrepreneurs will continue to restrict economic growth opportunities in villages, regions and countries. Financial, economic and political stability are needed for nations to facilitate global trade and attract foreign investment. The lack of a consistent financial infrastructure serving all people will cause many financial activities to continue “off the books.”

REFERENCES Adams, Dale W., and Delbert A. Fitchett, eds. 1992. Informal Finance in LowIncome Countries. Boulder: Westview Press.

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Alternative Financial Services 95 Allen, Hugh, and David Panetta. 2010. Savings Groups: What Are They? Washington, DC: The SEEP Network Savings-Led Financial Services Working Group. Anyango, Ezra, Ezekiel Esipisu, Lydia Opoku, Susan Johnson, Markku Malkamaki, and Chris Musoke. 2007. “Village Savings and Loan Associations—Experience from Zanzibar.” Small Enterprise Development 18:11–24. Ardener, Shirley, and Sandra Burman, eds. 1996. Money-Go-Rounds: The Importance of ROSCAs for Women. Oxford: Berg. Barboza, David. 2011. “In Cooling China, Loan Sharks Come Knocking.” New York Times, October 13. Accessed May 7, 2012. http://www.nytimes.com/2011/ 10/14/business/global/as-chinas-economy-cools-loan-sharks-come-knocking. html?pagewanted=all. Bouman, F. 1995. “ROSCA: On the Origin of the Species.” Savings and Development 29 (2):129. Accessed May 7, 2012. www.gdrc.org/icm/rosca/rosca-names. html. Collins, Daryl, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. 2009. Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton, NJ: Princeton University Press. Dlabay, Les R., and Greg Reger. 2007. “A Regional Comparison of Informal Foreign Exchange Activities: A Qualitative Analysis.” Paper presented at the annual meeting of the Midwest Chapter, Academy of International Business, Chicago, Illinois, March 28–30. Faith, David C. 2011. “The Hawala System.” Global Security Studies 2 (1): Accessed May 7, 2012. globalsecuritystudies.com/Faith%20Hawala%20FINAL. pdf. Food and Agriculture Organization of the United Nations. 2002. The Group Savings Resource Book—A Practical Guide to Help Groups Mobilize and Manage Their Savings. Accessed May 7, 2012. http://www.fao.org/docrep/005/y4094E/ y4094e00.htm. Ghana Co-operative Susu Collectors’ Association. Accessed April 17, 2012. http:// ghanasusu.com. Ghate, Prabhu. 1992. Informal Finance: Some Findings from Asia. Oxford: Asian Development Bank Press, Oxford University Press. Hirschland, Madeline, ed. 2005. Savings Services for the Poor. Sterling, VA: Kumarian Press. Kistruck, Geoffrey M., Justin W. Webb, Christopher J. Sutter, and R. Duane Ireland. 2011. “Microfranchising in Base-of-the-Pyramid Markets: Institutional Challenges and Adaptations to the Franchise Model.” Entrepreneurship Theory and Practice xx:503–31. Kondo, Mari. 2003. “The Bombay 5–6: Last Resource Informal Financiers for Philippine Micro-Enterprises.” Kyoto Review of Southeast Asia, October. Accessed May 7, 2012. http://kyotoreview.cseas.kyoto-u.ac.jp/issue/issue3/article_298. html. Li, Jianjun, and Sara Hsu. 2009. Informal Finance in China: American and Chinese Perspectives. Oxford: Oxford University Press. Mas, Ignacio, and Dan Radcliffe. 2010. Mobile Payments Go Viral: M-PESA in Kenya. Accessed May 7, 2012. http://siteresources.worldbank.org/AFRICAEXT/ Resources/258643–1271798012256/M-PESA_Kenya.pdf. MasterCard Foundation. 2011. Taking Stock: Financial Education Initiatives for the Poor. Accessed May 7, 2012. http://www.mastercardfdn.org/pdfs/TakingStock Financial.pdf. Mercy Corps Nepal. 2008. Mercy Corps Nepal Microfinance Assessment: Scope of Meso-level Technical Service Provision to MFIs in Nepal. Accessed May 7, 2012. http://nepal.mercycorps.org/pdf/MercyCorpsNepalMicroFinanceAssessment ScopeofMesoLevelTechnicalServiceProvisiontoMFIsinNepal.pdf.

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Nokia Research Center. Merry Go Round: A Study of Informal Self-Help Groups in Kenya. Accessed May 7, 2012. http://liberationtechnologydcourse.pbworks. com/f/Self-help+Groups+Report.pdf. Opportunity International. n.d. Trust Group Backgrounder. Accessed May 7, 2012 http://videos.opportunity.org/website/media-center/Opportunity_International_ Trust_Group_Backgrounder.pdf. Osei, Robert Darko. 2008. Linking Traditional Banking with Modern Finance: Barclays Microbanking—Susu Collectors Initiative. Accessed May 7, 2012. http:// www.growinginclusivemarkets.org/media/cases/Ghana_Susu%20Collectors_ 2008.pdf. Pagura, Maria, and Marie Kirsten. 2009. “Formal-Informal Financial Linkages: Lessons from Developing Countries.” Accessed May 7, 2012. http://www.bwtp.org/ pdfs/arcm/Pagura.pdf. Quiros, Rodolfo, and Claudio Gonzalez-Vega. 2007. “Strategic Alliances for Scale and Scope Economies: Lessons from FADES in Bolivia.” Accessed May 7, 2012. www.ruralfinance.org/fileadmin/templates/rflc/documents/1188985642636_ FADES_Bolivia.pdf. Rippey, Paul, and Ben Fowler. 2011. Beyond Financial Services: A Synthesis of Studies on the Integration of Savings Groups and Other Developmental Activities. Aga Khan Foundation. Accessed May 7, 2012. www.akdn.org/publications/ 2011_akf_beyond_financial_services.pdf. Ritchie, Anne. n.d. Typology of Microfinance Service Providers Version 1.31. World Bank. Accessed May 7, 2012 http://siteresources.worldbank.org/INTCDD/Resources/ mftype.pdf. Rutherford, Stuart, and Sukhwinder Singh Arora. 2009. The Poor and Their Money: Microfinance from a Twenty-First Century Consumer’s Perspective. Warwickshire: Practical. Sinha, Frances. 2010. Microfinance Self-Help Groups in India: Living Up to Their Promise? Warwickshire: Practical Action. Tsai, Kellee S. 2004. Back-Alley Banking: Private Entrepreneurs in China. Ithaca: Cornell University Press. US AID. 2008. Nepal Inclusive Economic Growth Assessment: Microenterprise Development. Accessed May 7, 2012. http://pdf.usaid.gov/pdf_docs/PNADN015. pdf. Westley, Glenn D., and Xavier Martín Palomas. 2010. “Is There a Business Case for Small Savers?” Occasional Paper 18. Washington, DC: CGAP.

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Part III

Organizational Forms of Informal Entrepreneurship

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Informal Online Entrepreneurship in South Korea Amanda Min Chung Han

In late 2011, the Korean National Tax Service tried to investigate the income of a few thousand bloggers to determine whether there was any tax evasion. The tax agency asked Web portals to hand over bloggers’ personal information. The attempt met with a backlash from millions of bloggers. Bloggers claimed that the tax agency viewed all bloggers as potential tax evaders without any solid evidence. Since turning over personal information might constitute a breach of confidentiality and privacy policies, the Web portals asked the Ministry of Justice for a ruling on whether the tax agency’s request conflicted with the privacy protection law (Cho 2011). The national tax agency downsized the investigation from a few thousand to a few hundred bloggers and completed it quickly due to strong opposition by bloggers and Internet users. How did these informal online entrepreneurs come to the attention of the tax agency and why did they remain in the informal economy? To provide answers to these questions, this research traces the history of blog businesses. A blog is a website containing frequent postings of material and is often centered on a specific topic (Hanson and Kalyanam 2007). Since blogs first emerged in 1999, marketers have begun paying attention to them. Blogs evolved out of personal online diaries or journals to become a marketing platform to attract customers, promote books and search for paid speaking and consulting jobs (Strauss and Frost 2009). When a blogger with a lot of followers mentions certain company or products, it becomes free advertising communicated to all of the blog’s readers (Miller 2009). Some well-known bloggers have taken proactive measures with a view to earning money.1 In exchange for payment, they offer to mention the names of or review large companies on a blog. Many bloggers often organize group purchasing to buy products at a lower price, though some of them hide the fact that they get commissions from companies for acting as intermediaries for group purchasing. It would appear that blogs have been transformed into online business platforms as marketing tools. However, until recently in Korea, there have been no particular regulations that bloggers comply with when conducting profit-making commercial activities. Moreover, income from blogs is hard to trace for a tax agency because most of the financial

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transactions occur outside the website and are often in the form of cash payments. Unless bloggers openly disclose their income, it is not clear how much money they make through their blogs. Furthermore, since blogs are considered personal media, some experts disagreed with the idea of turning over bloggers’ personal information to the government, claiming that doing so could be viewed as censorship. Still, it is hard to deny that blogs are becoming a platform for commercial activities as well as a way of starting up a business. Web communities have followed a similar path. Internet users gather with like-minded people for conversation and networking in a Web community (Strauss and Frost 2009). Web communities are a potential source of participant loyalty and commitment (Hanson and Kalyanam 2007). When a Web-community operator abuses the loyalty and commitment of its members for personal profit, consumers could be seriously misled. Blog and Web-community entrepreneurship are relatively new concepts. As such, their implications and motives have yet to be thoroughly studied. Although there have been some studies looking at blogs as an alternative media and as marketing tools, there have been very few discussions about blog and Web-community entrepreneurship. Informal online-entrepreneurship phenomena will become more significant in the near future in Korea as well as in many developing countries given the rapid pace of Internet penetration in these countries. Therefore, it is essential to understand the underlying motives and drivers and the measures need to move them out of the informal economy and into the formal economy. This chapter begins with a literature review of informal entrepreneurship and its motives to understand why people stay in the informal economy. It will then examine how bloggers and Web-community operators make money through their blogs and communities by drawing on an interview of a power blogger and a survey of 30 bloggers. This chapter also aims to find the key drivers to creating blogs through a survey of power bloggers and influential Web communities. It also discusses the best way to tax online entrepreneurs without discouraging entrepreneurship and how to encourage them to shift to the formal economy. The goal here is to contribute to encouraging online entrepreneurship in the formal economy and to set guidelines for online entrepreneurs to support them. MOTIVES OF INFORMAL ENTREPRENEURS Why do some entrepreneurs remain in the informal economy instead of moving to the formal economy? Previous studies offer various explanations. One of the answers to this question is that entrepreneurs acquire practice before heading into the real business world. Many informal entrepreneurs start their business to increase their standard of living or to support a family or to actualize their dreams. One of the reasons that people start their

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Informal Online Entrepreneurship in South Korea 101 business as informal entrepreneurs could be that the most business ventures fail in the first year and almost half fail in the first five years (Seawright et al. 2005). To decrease the risk of failure, one option is to have a main job and work at a second job as an informal entrepreneur. For example, having a second job outside of working hours or holding multiple jobs is used as a riskreduction mechanism for job changers in Russia (Kim 2010). Kim explains that holding a first job while waiting for the second job to work out is less costly and less risky than immediately changing jobs without a buffer. It also allows for enough time to prepare the skills needed to be an entrepreneur in a future. He argues that acquiring experience as an informal entrepreneur has a positive impact on future experiences as a formal entrepreneur in a future, indicating that there is a positive correlation between informal entrepreneurship and the reduction of the risk of failure. Tax is cited as one of the reasons why entrepreneurs remain in the informal economy. Most formal companies see taxation as the main obstacle to doing business (Porta and Shleifer 2008). Porta and Shleifer argue that informal firms are so inefficient that forcing them to pay taxes or comply with government regulations would likely put them out of business. Entrepreneurs decide not to register their firms to evade punitive taxation (McMillan 2006). Higher tax rates encourage taxpayers to hide their activities, and as such there is a negative correlation between the tax ratio and the size of the informal economy in developing countries (Lee 2005). Weak law enforcement is also viewed as a major contributor to informal entrepreneurs. Stolen products are sold online because doing so guarantees low risk and high profit. The Web allows thieves to unload merchandise quicker and in greater volume than in the past. These operations are barely visible to law enforcement agents (Zimmerman 2006). Informal-economy entrepreneurs may be effective at taking advantage of weak enforcement by formal institutions. However, when the possibility of detection by enforcement agents increases because their businesses have grown bigger, the risk

Entrepreneurship preparation time

Avoiding taxation Informal economy entrepreneurs Weak law inforcement

Costly entry barrier

Figure 7.1 Conceptual model of the determinants of informal economy entrepreneurs

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of detection motivates a transition to the formal economy. Sometimes a partial transition takes place, in which entrepreneurs maintain the size of their venture at less visible levels while pursuing formal economic opportunities (Webb et al. 2009). Often, it is costly for firms to register in poor countries where the benefits from registering are small. The cost could be large because of corrupt people. Entrepreneurs can shortcut licensing procedures and get on with doing business by paying a bribe (McMillan 2006). DRIVERS OF INFORMAL ONLINE ENTREPRENEURS Entrepreneurship plays a key role in an economy. It stimulates economic growth, makes the poor richer and creates jobs for future generations. As South Korea comes closer to becoming a developed country, it has been getting harder to create more jobs the way it previously did in manufacturing industry. The unemployment rate among young people and women has increased in Korea. To solve the problem, the Korean government strongly encourages young people to start up their businesses, but has found itself with numerous informal online entrepreneurs. Informal online entrepreneurship was not clearly acknowledged until the recent tax evasion incident. The size and scope of online entrepreneurship are not clear because of its unmonitored nature. Even the definition of the informal economy varies slightly from one scholar to the next. Some informal economy businesses are illegal whereas others with undetectable tax evasion are considered legal. Schneider evaluated the size of the Korean shadow economy as 27.6% of total GDP from 2004 to 2005 (Schneider 2007).2 He also estimated that the Korean shadow economy accounted for 29.0% of total GDP in 2007 (Schneider, Buehn and Montenegro 2010). For his part, Park suggests that the Korean underground economy accounted for up to 17.1% of total GDP in 2008. He notes that the size of the underground economy decreased since the Korean government began to encourage the use of credit cards and cash receipts for tax reduction (Park 2011). However, the size and the characteristics of online entrepreneurship are not well known. Since blog and online community businesses are relatively new, the size and scope of the market are vague. The unidentified nature of the informal economy also makes it hard to estimate the size of informal online businesses. However, it is clear that more and more people have started using blogs and online communities to support their already-existing formal businesses. There are many estimates about the number and growth of blogs. However, not only are there few credible blog statistics, but the data are also sometimes contradictory or different, depending on the definition and scope. Nevertheless, it is not difficult to see that blogs are growing quickly.

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Informal Online Entrepreneurship in South Korea 103 According to the BlogPulse website, the number of Internet blogs went from 126 million in 2009 to 152 million in 2010. The number of Internet blogs as tracked by BlogPulse as of November 9, 2011, was 176 million, and at the time, a whopping 95,228 blogs were being created and 1.2 million new posts updated every 24 hours. As of April 23, 2012, the SOS eMarketing website estimated that the percentage of American companies using blogs for marketing purposes increased from 34% in 2010 to 43% in 2012. Blog usage was only 16% in 2007 and gradually increased to 29% in 2009, according to eMarketer’s source. Similar patterns have been observed in Korea. According to an Internet user survey, 19 million Koreans used the Internet in 2000. This number increased to 37 million in 2010, indicating that 77.8% of Koreans used the Internet. Among Internet users, 45.7% have had and used their own blogs in the last year,3 and 65.7% used a social network service (SNS) in same time period. Among these users, 83.2% used blog style SNS, 77.4% used community style, and 68.1% used mini-homepage (Korea Communications Commission, Korea Internet & Security Agency 2010). As of November 2011, there were 7.8 million Naver café and 28.5 million Naver blogs.4 Daum has 8.5 million Daum café and 8 million Daum blogs (Korea Fair Trade Commission 2011). There are no reliable data about the number of companies that use blogs for marketing purposes in Korea. However, many large Korean companies have recently adopted blogging marketing strategies. While blogs are in high demand as the main marketing channel for companies, several problems have appeared. One of the problems is the credibility of the blog posts. When a large company launches a new product, the company pays bloggers for a comment or a review. If bloggers deliberately write a positive testimonial in exchange for payment, the impact on other consumers could be serious (Kim, Lee and Lee 2010). It is for this reason that the Federal Trade Commission in the U.S. requires disclosure of the material connections between product endorsers and sellers. The revised Guides Concerning the Use of Endorsements and Testimonials in Advertising came into effect on Deccember1, 2009. The guideline clearly states when there is a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement, such connection must be openly disclosed. For example, when a college student with a reputation as a video game expert receives a free copy of a video game to write about it on his blog, he or she should fully disclose that he or she received the game for free (Federal Trade Commission 2009). In addition, the Word of Mouth Marketing Association (WOMMA) required its members to disclose all forms of consideration or compensation they receive from the member, marketer or sponsor of the product or service (WOMMA 2010).

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Another problem is that few blogs and online communities abide by laws governing electronic commerce. A regular Internet shopping mall costs US$20 per year to keep the independent domain name. A server or a professional Web hosting service is needed to operate an online shopping mall. However, blog and online community websites are easily set up by joining a portal website. Moreover, since Web portals provide a restricted form of blogs or online communities, there is not much room for following the requirements of the consumer protection laws in electronic commerce (Park 2011). According to the Korea Consumer Agency’s report, blog and online community sites are estimated to account for about 10% of all online shopping malls. Only 108 blogs and online community sites were registered as an online marketing business.5 Furthermore, only 30 (28%) of them had disclosed the information required by the government. Online businesses are required to indicate the name, address and telephone number of the owner, entrepreneur registration number, terms of use and privacy policy. The agency learned that only 17.6% of them met all of these requirements, and 38% did not publish their terms of use and privacy policy. In addition, 94 out of 108 online community websites allow only cash transfers when customers buy products. Even though they are required to offer an escrow service for purchases exceeding US$100, only one online community website does so (Park 2011).6 Cash-only payments make it hard for the government to track and tax the income of online entrepreneurs. The absence of personal information on blogs and online communities also makes it impossible for the tax agency to trace online entrepreneurs.7 Since more blogs and online community websites have emerged as key e-commerce sites, the Korea Fair Trade Commission (FTC) has decided to inspect popular bloggers. The FTC levied a US$17,600 fine on four power bloggers in November 2011 because they failed to disclose that they had been paid commissions for organizing group purchasing. According to the FTC, seven power bloggers received commissions for organizing group purchasing from companies without informing consumers on their sites. These purchases amounted to as much as US$14 million for commissions of US$776,000 from July 2010 to June 2011. One blogger organized 263 group purchases in a single year. These bloggers received a commission ranging from 2% to 10% of total group purchasing volume. The seven charged power bloggers had blogs on the Naver and/or Daum portal websites. Since blogs and online community websites are one of the major distribution and marketing channels for small- and medium-size companies, which for budget reasons cannot afford conventional TV commercials and media promotion, the FTC tries to apply preventive steps in the form of self-enforced guidelines to protect consumers and to ensure compliance with e-commerce regulations. The FTC hopes that Web portals, bloggers and consumers will follow these steps to cultivate a healthy social commerce environment (Korea Fair Trade Commission 2011).

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Informal Online Entrepreneurship in South Korea 105 Since the Korea Fair Trade Commission has become active in implementing e-commerce, consumer protection law on blogs and online communities, portal websites have begun to encourage their users to comply with the law by explaining how to include information on their social networking sites. WHY POWER BLOGGERS STAY IN THE INFORMAL ECONOMY

Case Study I conducted an e-mail interview with one of the power bloggers to find out why online entrepreneurs remain in the informal economy. He has a blog on the Naver Web portal site. His blog was selected as the power blog by Naver since 2008. On an average day, his blog receives between 15,000 to 19,000 visitors, and on good day between 30,000 and 50,000. 1. What motivated you to start your blog? I started a blog to share my interest in movies, books, animation and digital gadgets with other people. My blog became famous through word of mouth by Internet users. The blog was one of the top 10 most visited blogs in 2007. 2. When did you start making money from the blog? It happened by chance. Because my blog gets more visitors, companies suggested that I get into viral marketing, blog marketing and Web advertising. Because I have a full time job, all the income from the blog postings and Web advertisements is put aside for my retirement. 3. How much do you earn from your blog? I receive 200,000 KRW (US$177) per review of new electronic goods. Sometimes I get the review products for free. The top 5% of IT gadget bloggers earn from KRW 500,000 to 1,000,000 (US$442 to $884) per product review. I also get KRW 100,000 (US$88.4) per post of a new movie. I tend to earn from KRW 600,000 to 1,000,000 (US$530 to $884 USD) from Web advertisements on my blog per month. I earn about KRW 500,000 to 2,000,000 (US$442 to $1,768) and average KRW 1,500,000 (US$1,325) a month. I was offered an overseas trip as part of blog marketing a couple of times, but I had to turn it down for personal reason. 4. Many people start blogs to make money. Do you have any advice for them? There are people who earn KRW 2,000,000 (US$442) a month regularly, but they are the top few. If someone starts a blog thinking about making a fortune, he or she should be very patient. It takes time, just like most businesses. In my case, the income from the blog was $10 dollars and then $20 dollars, and afterwards it grew steadily.

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5. The fact that many bloggers remain in the informal economy provoked the Tax Agency to investigate whether there was possible tax evasion. Why do they remain in the informal economy? After the tax evasion investigation began, many power bloggers shut down their blogs to avoid unnecessary attention. The majority of bloggers do not make enough money to worry about taxes and/or registering the business. Just like most businesses, only the top few people make most of the money in the market. The rest of them hardly make any money.

Survey I conducted an e-mail survey of 30 power bloggers and influential community operators to understand how they earn money from their sites, why they remain in the informal economy and why they started a blog-based business.8 The respondents are power bloggers and influential online community operators who were selected by Web portals such as Daum and Naver. The majority of them did not start as online entrepreneurs, and many of them still do not make any money from their blogs or online communities. This research seeks to learn from them about the characteristics of power bloggers and influential online community operators so as to help “wannabe” online entrepreneurs by understanding them better. The demographics of the respondents were reviewed in five categories: gender, age, job, education level and income level. There were 30 respondents in all, 17 males and 13 females. The majority of them (18 out of 30) were between 25 and 39 years old. In all, 13 bloggers had a job and 17 were unemployed (student or housewife). Unlike many informal economy entrepreneurs in underdeveloped countries, more than 80% of power bloggers either have or will soon have a bachelor’s degree. The average household income was similar to the average Korean household income.9 Many informal entrepreneurs start their business to support their family or to increase their standard of living. Given that power bloggers’ income is comparable to the average Korean household income, earning potential may not be the motivation for online entrepreneurship. Two of the respondents refused to disclose their income level. The majority of the respondents have operated a blog or café for more than four years. Only eight bloggers (26.7%) have operated a blog or café for one to two years. This statistic indicates that it takes some time to establish the credibility and reputation needed to become a power blog or an influential café. Twenty-six power bloggers used a fixed-template blog offered by leading blog hosting sites such as Naver or Daum. Of these, four bloggers have their own domain for their blogs. Only four bloggers had blogs on their own website. The number of unique visitors to their blogs is

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Motivation

6(20)

10(33.3)

11(36.7)

30(100)

Agree

Strongly agree

Total

2(6.7)

Slightly no

Neutral

1(3.3)

As a journal of ideas and thoughts

Never

No (%)

Motivation

Table 7.1

30(100)

12(40)

13(43.3)

4(13.3)

1(3.3)

0

To share information and to network

30(100)

1(3.3)

1(3.3)

9(30)

7(23.3)

12(40)

To make money

30(100)

1(3.3)

10(33.3)

4(13.3)

6(20)

9(30)

To collect the current job related information

30(100)

10(33.3)

15(50)

3(10)

1(3.3)

1(3.3)

To have fun as a hobby

108


moderate. Only four bloggers had more than 100,000 visitors a month. The majority of them had between 3,000 and 50,000 visitors a month. The topics of blogs were various, with the largest portion being shopping/product reviews (five bloggers, 16.7%) and computer/IT (five bloggers, 16.7%). Five different questions were asked to find out the main reason for starting a blog. Table 7.1 shows the different reasons. Respondents were asked whether they started their blog as way to express their opinion, to share a network, to earn money, to acquire work-related information which might lead to future business opportunities in future or to have fun as part of a hobby. It is interesting to note that almost none of them started because they wanted to make money. Rather, their goal was to share their opinions, to establish networks and to keep diaries of their own thoughts. To the question about whether the reason for starting the blog was to share information with other people and to establish networks, 11 people answered “strongly agree,” and 10 answered “agree.” Only two bloggers agreed or strongly agreed that their main reason was as entrepreneurs wanting to make money. However, it is interesting to note that 37% of the respondents started a blog to acquire work-related information for future employment or business expansion opportunities. Although 63% of the respondents answered that they did not have much interest in financial benefit, we can see that people views blogs as a way of expanding their businesses. However, the most common reason for starting a blog or café was to have a fun as part of a hobby; 25 out of 30 bloggers agreed or strongly agreed with this reason. Half the respondents (47%) described themselves as operating a blogger as a hobby. Table 7.2 shows how much money they made from their blogs. One-third (33%) of them answered that they made additional money from blogging on top of their main income. None of them made a significant amount of money from their blogs. Surprisingly, power bloggers do not make as much money as people think: 18 out of 30 (60%) bloggers answered that they did not regularly make money from their blogs. Six bloggers (20%) made less than KRW 200,000 (US$176) a month and six others made between KRW 300,000 and 499,999 (US$265 to $441) per month. None of them made more than KRW 500,000 (US$ 442) a month. Most bloggers did not own a business; only two bloggers had a business related to a blog. Although they do not make much money and did not start a blog to make money, they are willing to try to make money through blogs. Twenty bloggers (67%) would like to take banner ads or group purchasing to make money, on the condition that the ads or blog commerce is not detrimental to the blog’s theme. Two bloggers were more proactive and said they would launch a different website as a business undertaking. Seven bloggers did not express much interest in making money from their blog. The next set of questions was addressed to bloggers who make money from their blogs. Although only 12 bloggers (40%) answered that they had

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10 (33.3)

4 (13.3)

0

2 (6.7)

For additional income

For your company

As your main income

For starting a business

30 (100)

14 (46.7)

For fun only

Total

No (%)

Blog income

Your blog is operated

Table 7.2

Total

30 (100)

3 (10) 0

400,000−499,999

3 (10)

300,000−399,999

500,000 and above

0

3 (10)

2 (6.7)

1 (3.3)

18 (60)

No (%)

200,000−299,999

100,000−199,999

50,000−99,999

−49,999

None

The income from your blog is (KRW)

Total

No

Yes

You have a business related to a blog

30 (100)

28 (93.3)

2 (6.7)

No (%)

Total

I already have business on my blog

Rather set up a separate site for business

No interest in money

Yes, if the offer fits with the blog theme

Definitely Yes

If you get a business offer about your blog

30 (100)

1 (3.3)

2 (6.7)

7 (23.3)

20 (67)

0

No (%)

110


made money from blogs in the previous question, 14 (46.7%) provided details about their blog income. This difference is due to the fact that bloggers who make money provided income details in an irregular manner. Among the 14 bloggers who answered that they had made money from blogs, blog banner ads were a minor income source. Only three bloggers said that more than 80% of their blog income had come from banner ads. E-commerce on blogs was also not a major income source for the respondents.10 Only two people earned more than 90% of their blog income from blog commerce. The others answered that they earned money through other sources, including products review. Hardly any of the bloggers who make money from blogs registered the blog as their business. Only one out of 14 (7.14%) bloggers were registered as self-employed workers. When the 13 others were asked why they did not register their activities, 9 bloggers answered that the income was too minimal to register. One of the reasons cited for remaining in the informal economy was lack of familiarity with registration procedures, indicating that the barrier had less to do with the costs of registration than with the complicated nature of the process. DISCUSSION This chapter looks at the motivation for starting blogs and the reasons why bloggers remain as informal entrepreneurs. The findings can be summarized as follows. First, the majority of power bloggers started a blog as a hobby. Although they eventually made money from their blogs, financial gain was not the initial reason for starting their blog. Second, they remain in the informal economy because of the low motivational force of financial gain and the low income derived from their blogs. Many of them did not think it was necessary to register as a legitimate business because of low earnings from blogs. Third, the somewhat complicated business registration process scared bloggers off. Fourth, power bloggers were very interested in turning their blogs into a money-making business only if the business was consistent with the theme of their blogs. These findings suggest that approaching blog entrepreneurs in a conventional way would not work well. They start a blog business out of curiosity and passion and not for financial reasons. We can see similar patterns from young entrepreneurs, especially in the Internet business. When Mark Zuckerberg started Facebook for classmates and friends at Harvard University, he was not focused on making money or starting a business. Rather, it was more for fun. Given that the best start-up motivations are interest in and passion for business, these power bloggers are prepared to start their own business through this unconventional medium. To nurture young blog entrepreneurs, it is important to encourage them to take on challenges and be creative with their blogs. Imposing laws and regulations on relatively new

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Informal Online Entrepreneurship in South Korea 111 business fields such as blog commerce may dampen entrepreneurship since young bloggers are not familiar with the business registration process. It would be more appropriate to encourage them through volunteer rather than forced compliance with guidelines.

CONCLUSION The findings of this research indicate that the majority of power bloggers do not make a lot of money from their blogs, which discourages them from registering as a business. Blog commerce often leads to tax evasion. Some bloggers remain in the informal economy since it is hard to submit proof of purchase. When a blogger organizes a group purchase, wholesale dealers supply products in exchange for cash without a receipt or proof of purchase, as is typically the case in business transactions. It is important to encourage bloggers to register their business once they start generating revenue from their blog or online community. However, the best approach might not be to force them to register at the outset. It would be better to create up a website to explain the process of becoming a blog entrepreneur and how to register and pay taxes voluntarily. Internet space is a unique space that is often self-regulated by net users. Therefore, the best approach is to leave them to self-regulate their activities. Although money was not the initial motivation for starting a blog, bloggers were willing to start a business based on their blog’s contents and network. Given that most bloggers set up their blogs on portal websites, building a strong cooperative system with Web portals could be a solution. If Web portals provide standardized blog business sites for bloggers who want to add blog commerce or to make profits from their blogs, bloggers could simply choose the business-oriented blog format without having to go to the trouble of finding the relevant information. Slightly differentiated blog formats would help blog entrepreneurs to include the necessary identification information on their site (e.g., registration number, contacts, etc.). Moreover, if a review is paid by a company, the business-oriented blog format could automatically indicate that it was sponsored by the company. These findings suggest that policymakers should develop policies to encourage blog entrepreneurs. These policies could include the reformation of the business registration process for blog entrepreneurs, appropriate training for new entrepreneurs and the development of good relationships with Web portals. NOTES 1. These influential bloggers are called “big bloggers,” “star bloggers” or “power bloggers.” This research uses the term power blogger since it is commonly used

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112

2.

3. 4. 5. 6. 7. 8.

9. 10.

Amanda Min Chung Han in South Korea. For those influential Internet communities, representative café and excellent café are both used. This research uses influential café to describe them. Schneider uses shadow economy instead of informal economy. He states that the shadow economy includes all market-based legal production of goods and services deliberately concealed from public authorities to avoid payment of income, value added or other taxes and so on. The blogs include microblogs such as Twitter, mini-home page. Naver is the biggest Web portal in South Korea. Naver café is a virtual community offering Internet message boards, Internet chat rooms and more. The Korea Consumer Agency monitored 15,127 registered online marketing business sites (108 blogs and online community websites and 15,019 online shopping malls) from August 2010 to December 2010. Since July 29, 2011, all transactions over US$50 in online shopping malls must use an escrow service to protect customers. Among 108 online community websites, 80.5% do not provide contact information such as telephone number and e-mail address. An online community is slightly different from a blog because readers can write posts, which is not the case for blogs. However, they have common functions such as a site membership requirement to read full posts, to write a comment under a post, and sharing similar interest. For ease of reading, this research uses bloggers to encompass online community operators. According to Statistics Korea, the average Korean household income is 3.4 million Korean won per month, including one-person households. The amount goes up to 3.9 million Korean won, excluding one-person households. In this chapter, all forms of e-commerce, including group purchasing and selling products on blogs, are referred to as “blog commerce.”

REFERENCES Cho, Hyun Ho. 2011. “The Tax Agency Starts to Investigate the Income of the Bloggers.” Mediatoday, July 21. http://www.mediatoday.co.kr/news/articleView. html?idxno=96480. Federal Trade Commission. 2009. “Guide Concerning the Use of Endorsements and Testimonials in Advertising.” Federal Register 74 (198):53124–43. http://www. ftc.gov/os/2009/10/091005endorsementguidesfnnotice.pdf. Hanson, Ward, and Kirthi Kalyanam. 2007. Internet Marketing & e-Commerce. Ohio: Thomson South-Western. Kim, Byung Yeon. 2010. “Informal Economy Activities and Entrepreneurship in Russia.” The German Development Economics Conference Hannover 2010 55:1–35. http://econstor.eu/bitstream/10419/39972/1/352_kim.pdf. Kim, Wikun, Kanghyung Lee, and Donghun Lee. 2010. Power Bloggers in Korea. Seoul: Korea Press Foundation. Korea Communications Commission; Korea Internet & Security Agency. 2010. “2010 Korea Internet Use Survey.” Korea Communications Commission press release, September 29. http://kcc.go.kr/download.do?fileSeq=29013. Korea Fair Trade Commission. 2011. “Inspection Result of Blog/Cafe Shopping Malls.” Korea Fair Trade Commission press release, November 14. http:// www.ftc.go.kr/news/ftc/reportView.jsp?report_data_no=4542&tribu_type_ cd=&report_data_div_cd=&currpage=22&searchKey=&searchVal=&stdate=& enddate=.

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Informal Online Entrepreneurship in South Korea 113 Lee, Young. 2005. “Taxes and Unofficial Economy in Developing and Developed Countries.” Journal of Economic Research 10: 189–211. McMillan, John. 2006. “Below the radar: underground markets for the poor.” Harvard International Review 27 (4):1–8. http://hir.harvard.edu/underground-markets/ below-the-radar. Miller, Michael. 2009. Selling Online2.0. Indianapolis: Pearson Education. Mortensen, Jim, Kristie Seawright, Mikenze Bott, Mai Quan, and Jennifer Badger. 2005. “Entrepreneurial Development in the Informal Economy in Search of Sustainable Entrepreneurial Development.” International Journal of Environmental, Cultural, Economic and Social Sustainability 1 (5):111–18. Park, Jae Koo. 2011. “Korean Social Shopping Malls and Its Implications.” Consumer Policy Trends 22:1–9. Park, Myung Ho. 2011. “The Proper Understanding of the Estimated Size of the Underground Economy.” Finance Forum 184:33–48. Porta, Rafael La, and Andrei Shleifer. 2008. “The unofficial Economy and Economic Development.” Brookings Papers on Economic Activity, 275–352. http://www. jstor.org/stable/27720402. Schneider, Friedrich. 2007. “Shadow Economies and Corruption All over the World: New Estimates for 145 Countries.” Economics: The Open-Access, Open-Assessment E-Journal 9:1–66. doi: 10.5018/economics-ejournal.ja.2007–9. Schneider, Friedrich, Andreas Buehn, and Claudio E. Montenegro. 2010. “Shadow Economies All over the World: New Estimates for 162 Countries from 1999 to 2007.” World Bank Policy Research Working Paper Series 5356: 1–53. http:// ssrn.com/abstract=1645726. Strauss, Judy, and Raymond Frost. 2009. E-Marketing. Mahwah, NJ: Pearson/Prentice Hall. Webb, Justin W., Laszlo Tihanyi, Duane Ireland, and David Sirmon. 2009. “You Say Illegal, I Say Legitimate: Entrepreneurship in the Informal Economy.” Academy of Management Review 34 (3):492–510. WOMMA. 2010. “WOMMA Ethics Code.” Accessed November 14. http://womma. org/ethics/code. Zimmerman, Ann. 2006. “As Shoplifters Use High-Tech Scams, Retail Losses Rise.” Wall Street Journal, October 25.

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8

Institutional Entrepreneurship in the Informal Economy The Case of the Zambia National Marketeers Association Marcus Møller Larsen

Informal economy market vendors in Zambia face a number of detrimental institutional voids in their business environments. Besides operating in markets characterized by a poor level of maintenance and security and insufficient trading space, informal economy market vendors are generally unable to access basic business support and business development financing (WoW 2006). The informal economy in itself is an ambiguous term and is thus difficult to empirically measure (Portes and Haller 2005). However, a survey conducted in 2004 by the Zambian Central Statistical Office found that as much as 83% of the total Zambian labor force was engaged in the informal economy (91% of the female labor force and 76% of male) (WoW 2006). Another study found that the informal economy in Zambia accounted for 48.9% of total GDP in 1999/2000 (Schneider 2002). Employment in the informal economy takes many forms, with market vending being among the most significant. Most markets in Zambia are under the administration of the Zambian Ministry of Local Government and Housing and are managed by Town/Municipal Councils through a Market Master and Market Advisory Committee. Through a case study of the Zambia National Marketeers Association (ZANAMA), a nongovernmental, nonprofit association established to assist and secure the rights of market vendors in Zambia, this chapter investigates the institutional role of informal economy associations in creating privatesector development. Supported by institutional entrepreneurship theory, the results of this chapter suggest that ZANAMA promotes market vendors’ business conditions by filling important formal institutional voids in the markets, and in doing so, has a positive effect on private-sector development in the Zambian informal economy. In sum, a major function of informal economy associations is to address the significant formal institutional voids that hamper the market functioning and participation in the informal economy. THEORETICAL BACKGROUND Over the last few decades, the analysis of economic development has taken an institutional turn (North 1990; Evans 2005). Rather than ascribing

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Institutional Entrepreneurship in the Informal Economy 115 causes of economic underdevelopment to single factors such as lack of physical capital, insufficient entrepreneurship or incorrect prices (Adelmann 2001), it is argued that institutions are the fundamental determinants of economic development. As such, a central question has been to understand the conditions in which private-sector development is promoted and secured (Martinussen 1999; Stiglitz 2003; Schulpen and Gibbon 2002). In this light, much attention has been devoted to market failures in developing countries. In particular, aspects such as failure to stimulate market creation, functioning and participation have been emphasized (World Bank 2003). According to North (1990, 3), “institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.” Institutions can either be formal (rules and laws) or informal (norms, ethics and acceptability). Accordingly, the main function of institutions in a society is to “reduce uncertainty by establishing a stable structure to human interaction” (North 1990, 6). Scott (1995) argues that organizations and organizational behavior are constrained by three conceptions of institutions: the regulative, in which behavior is guided through force and risk of formal sanction; the normative, in which ethics and norms guide behavior; and the cognitive, in which institutions form the way organizations interpret and perceive their world and act accordingly. The informal economy can be characterized by the absence of formal institutions regulating economic activity (McKeever 2003). The concept of informal economy was originally coined by Keith Hart (1973) in a study of urban labor markets in Africa. In this study, he found that unrecognized, unrecorded, unprotected or unregulated economic activities kept on expanding and cut across wider economies. Although the validity of this concept has been much debated due to its analytical vagueness and normative attachments (Portes and Haller 2005), it seems to be widely accepted that the informal economy encompasses “those actions of economic agents that fail to adhere to the established institutional rules or are denied their protection” (Feige 1990, 990). The concept of institutional voids emerges as an important framework for understanding the (impeding) role of the lack or underdeveloped nature of formal institutions in the informal economy. For example, Khanna and Palepu (1997) argue that voids in the institutional frameworks of emerging and developing economies predominantly impede economic exchange in the capital, labor and product markets. As such, economic activity is disincentivized, and, as a result, firms are reluctant to conduct business. Moreover, the lack of local formal institutions can impede entrepreneurship which is dependent on both tangible and intangible institutions (Venkataraman 2004). Whereas tangible institutions include a sound legal system, transparent capital markets and transportation systems, intangible institutions include focal points for producing novel ideas, the need for proper role models, the need for informal entrepreneurship forums, the need for region-specific ideas to be created, the need for safety

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Marcus Møller Larsen

nets and the need for executive leadership. An institutional context unaccompanied by these institutions will thus hamper entrepreneurs’ business environments. A relevant question relates to how the institutional voids characterizing the informal economy can best be filled to facilitate private-sector development. The analysis of institutional change has largely been occupied by exogenous explanations, such as informal constraints embedded in societies or shocks that challenge existing institutions into alterations (Oliver 1992; Hoffman 1999). The behavior of endogenous and institutional embedded actors, such as organizations and individuals, has therefore been presumed to act according to the institutional constraints embedded in society, and, as such, unable to change or fill the institutional voids characterizing the informal economy. However, there are reasons to question this assumption. In particular, how is institutional change in the absence of exogenous shocks explained? Why do some endogenous agents act in ways other than the institutions predict? Questions like these have motivated a number of scholars to investigate the entrepreneurial role of embedded actors in contributing to institutional change (Holm 1995; Seo and Creed 2002). Battilana et al. (2009, 66) argue that since the existing institutional literature has ignored actor agency in favor of institutional analysis, “the notion of institutional entrepreneurship thus emerged as a new avenue of research into endogenous explanations of institutional change.” Institutional entrepreneurs can be defined as actors (individuals, groups of individuals, organizations, or groups of organizations) who leverage resources to create new institutions or transform existing ones (Garud et al. 2007). The concept was originally introduced by DiMaggio (1988), who recognized that “institutional theory tells us relatively little about ‘institutionalization’ as an unfinished process (as opposed to an achieved state)” (DiMaggio 1988, 12). He identified actors with sufficient resources that contributed to the change of institutional setups in a way they favored, and argued that they were institutional entrepreneurs. The field has since then grown substantially. For example, research has investigated “the paradox of embedded agency” by emphasizing different enabling conditions of institutional entrepreneurship, such as regulatory changes, social turmoil, competitive discontinuities and actors’ social position. Research has also found that the specific characteristics of actors can enable institutional entrepreneurship. These characteristics include socially skilled agents with the ability to find and maintain collective identities and who are able to shape and meet the respective interests of different groups (Maguire et al. 2004). It has also been pointed out that institutional entrepreneurs call attention to the weaknesses of certain institutions and institutionalized practices and norms in order to justify the promotion of alternative and superior institutional projects (Snow and Benford 1992). In this light, the success

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Institutional Entrepreneurship in the Informal Economy 117 of institutional entrepreneurship depends on agents’ ability to access and leverage critical resources to increase their political influence and action. These resources include both tangible ones, such as financial assets, and intangible ones, such as social capital, legitimacy and formal authority (Levy and Scully 2007). However, the literature on institutional entrepreneurship has almost exclusively concerned developed country contexts, in which institutions and institutional frameworks are mature and well developed and have ignored contexts such as the informal economy, where formal institutional frameworks are incomplete or even inexistent. The goal of this chapter is to address this research gap. More specifically, through a case study on the Zambia National Marketeers Association (ZANAMA), this chapter explores (1) ZANAMA’s role in addressing the institutional voids faced by market vendors, and (2) the factors that enable ZANAMA to address these voids.

CASE STUDY

Research Methodology This chapter is exploratory in nature, inasmuch as it seeks to investigate a phenomenon that has received little research attention, namely, institutional entrepreneurship in the informal economy. A case study methodology is particularly suitable for this exploratory purpose (Yin 1993). This research was conducted as part of a field research on labor associations in the informal economy from September 2008 to December 2008 (as such, the case study does not account for post-2008 events). Semistructured interviews and participant observations constitute the primary data sources of the study. A total of 48 semistructured interviews were conducted with ZANAMA representatives at all levels in the organization, local and national authorities, other associations representing market vendors, and market vendors. Based on a judgmental sampling strategy, the interviewees were selected with a view to obtaining a diversified and representative picture of ZANAMA and its operations. The length of the interviews varied from approximately 30 minutes to 90 minutes. The interviews with the market vendors were conducted at their stands. The length of these interviews was in general not more than 10 minutes, and the number of interviewees per interview varied from one to four. Given that the English-language skills of the market vendors varied considerably, local Zambian interpreters were used. In addition to the semistructured interviews, participant observation enriched the empirical base for the research. Specifically, throughout the field research period, I was able to work closely with ZANAMA on issues not directly related to this research (e.g., administrative assistance for the

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National Executive Committee). This facilitated, among other things, participant observation of the behavior of the organization and its members in a less formal setting than the semistructured interviews as well as interactions with many people who could validate the presumptions gained from the interviews. The ensuing sections are organized as follows. First, the establishment of ZANAMA and the work it does are presented more generally. Second, there is a discussion of different examples of how ZANAMA is addressing the institutional voids faced by its market-vendor members, and the impact of its work on private-sector development. Finally, there is a discussion of ZANAMA’s different strategies to enable and legitimize its activities. All in all, this provides a case of how an informal economy association provides institutions for private sector development. ZAMBIA NATIONAL MARKETEERS ASSOCIATION ZANAMA was officially established as a nongovernmental, nonprofit association on August 13, 1999, in Kitwe, Zambia, by a group of market vendors who had experienced the need of having an organizational body that could represent their interests and address the injustices and vulnerabilities they encountered. There were predominantly two reasons that led to the establishment of ZANAMA. Firstly, a weak Zambian economy, particularly with the collapsing international copper prices in the mid-1970s and the failure of IMF’s Structural Adjustment Programs, had forced a large number of retrenched workers, mostly from the mining sector, to pursue incomegenerating activities in the informal economy markets (McCullock et al. 2001). Secondly, the markets were under the sole management of the local authorities who, due to resource constraints, often neglected and ignored the needs of the market vendors. ZANAMA’s primary mandate was therefore originally formulated to nurture and promote the interests and welfare of informal market vendors in Zambian markets. ZANAMA provides a broad range of services for its members. For example, it provides education to its members by training them in business management, good account management and how to establish good relations with public institutions. It builds and maintains infrastructure in the markets and also provides collateral bargaining in negotiations with local and national authorities. Moreover, it works to source and facilitate the provision of credit facilities for members from various lending institutions within and outside the country. It formulates market rules and regulations in conformity with the existing laws and by-laws of the local authority and invests funds in short- and long-term projects for the betterment of the market vendors. In sum, ZANAMA works towards “promoting and bringing together in unity all marketeers in Zambia.”

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Institutional Entrepreneurship in the Informal Economy 119 ZANAMA is the largest association representing market vendors in Zambia (WoW 2006). It is estimated that in 2006 ZANAMA had 3,050 market-vendor members (WoW 2006), although the true number is difficult to quantify. It is organized in different markets in eight of Zambia’s nine regional provinces. ZANAMA’s membership is made up of all types of informal economy market vendors: employers, the self-employed and wage-workers. Members are active in a number of different industries, such as clothing (e.g., new clothes, second-hand clothes, shoes, tailoring, etc.), food (e.g., restaurants, groceries, fish, fruit, vegetables, butcheries, beverages, etc.), consumer products (e.g., hardware, electronics, DVDs/ CDs, toys, wholesale, cosmetics, furniture, books, etc.), and services (e.g., traditional doctors, barbershops, electronic repair, saloons, etc.). A common feature of all members is that they operate in within the defined market boundaries and are all considered to be part of the Zambian informal economy. Although ZANAMA’s main source of funding is membership fees, it also receives some financial resources from donations and the association vehicle.

ZANAMA and Institutional Voids Market vendors in the informal economy in Zambia are constrained by the absence of formal institutions that regulate and guide economic activity. One such institutional void relates to the lack of sufficient executive leadership in the markets to maintain market infrastructure, secure drainage systems, garbage removal, etc. Under normal circumstances, it is the responsibility of respective Town/Municipal Councils to provide executive leadership in the markets. As a representative from the Zambian Ministry of Local Government and Housing put it: “They [the Councils] should be able to generate enough revenue for them to be able to manage the working environment, to pay for the working men and to ensure a safe place for the market vendors, and those who buy food from them. And that is supposed to be managed by the local authority.” However, due to financial restraints, in many cases the capacity of the local authorities to assume these tasks is very limited. For example, the Kitwe Town Council admits that it is indeed a challenge to meet the market vendors’ expectations on issues such as provision of water, security and garbage removal. As a result, the markets are often left in a deteriorating condition. In response to this institutional void, a key function of ZANAMA is to provide executive market leadership through its Branch Executives Committees located in different markets. Even though ZANAMA’s leadership does not interfere with the operations of the market vendors’ businesses, the association provides a mechanism whereby many institutional aspects related to the functioning of the market are developed and coordinated. For example, it is under this administration that the construction and maintenance

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of the physical infrastructure in the markets is begun. ZANAMA uses many of its resources to build roads in the markets, drainage systems, shelters, sanitation systems, market sweeping, etc. Given that these efforts facilitate and ease the dynamics and conditions for trading and market vending, ZANAMA contributes positively to the functioning of the markets. The Branch Executives Committee also provides its members with a dispute resolution mechanism. When members of ZANAMA disagree and dispute with each other on issues such as trading and delivery of goods, enforcement of agreements and contracts or violations of good trading practices, they can approach the respective ZANAMA Executive Committee in the market for advice and dispute resolution. Since the market vendors operate in the informal economy, they are not in a position to use existing public institutions such as the judicial systems and competition laws. Market vendors are thus confronted with a substantial institutional void that hampers effective market functioning. The process by which ZANAMA bridges this institutional void is for members to meet with an Executive Committee member and present their side of the dispute. The ZANAMA representative then tries to arbitrate and resolve the dispute by making suggestions and proposing solutions. Even though the dispute resolution mechanism does not have any formal or binding authority, the agreed-upon solutions are usually respected and implemented. It can therefore be argued that ZANAMA provides a means for defining and enforcing property rights and contracts between market vendors, and thereby promotes market dynamics. More externally, one of ZANAMA’s main activities is collateral bargaining and lobbying of local and national authorities. One example in this regard concerns the level of the daily levies collected from the market vendors by Town/Municipal Councils. ZANAMA is against increasing these levies as long as the local authorities cannot fulfill their obligations with regard to market management and maintenance. Consequently, ZANAMA pressures local authorities to provide a fair return for the levies they collect. Market vendors can thus trade and sell without fearing that the daily levies will rise to levels they cannot pay. However, it should be noted that ZANAMA requires members to pay membership fees. Some stakeholders even draw parallels between ZANAMA’s membership fees and the Council’s daily levies. Another institutional void addressed by ZANAMA is member access to external financing. Market vendors need financial sustainability in order to survive. Accessing external financing is an essential tool to this end. However, market vendors are unable to provide the necessary securities or to meet the requirements of conventional banks. The presence of microfinance institutions in the markets is often too limited for a vast number of market vendors to benefit from them. These institutions also tend not to reach the core poor that work in urban markets. To address this problem, ZANAMA has implemented a soft-loans scheme by which smaller loans at favorable

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Institutional Entrepreneurship in the Informal Economy 121 interest rates are offered to members. As such, ZANAMA acts as an intermediate financial institution, enabling people excluded from conventional banks to participate in market trading and exchange. Besides business growth, this financing is also a necessary initial factor for participating in the markets. By being granted these small loans, market vendors can buy start-up inventories to sell for profit in the markets. However, this scheme is only valid for established market vendors and not for new people wishing to enter the market. Members wishing to receive loans must own a permanent trading ground in the market and must have been trading there for at least one year. A sound legal system is needed to create effective market functioning and private-sector development. In this respect, ZANAMA enforces, in some markets at least, the rule of law by forming neighborhood Crime Prevention Units. More specifically, security guards have been hired to maintain peace and security in the markets. This security service ensures that market vendors can operate their businesses efficiently without fear of having crimes committed against them. However, it should also be mentioned that concerns have been voiced by stakeholders about the sometimes rough methods and practices used by the security officers. Similarly, ZANAMA also addresses important institutional voids through the provision of safety nets. Integral to ZANAMA’s organization is the different subcommittees on areas such as funeral assistance and HIV/ AIDS awareness. For example, the HIV/AIDS subcommittees host awareness campaigns about this disease which claims many market vendors’ lives every year. Although this service is not directly linked to private-sector development, it is clear that through its subcommittees, ZANAMA provides members with a set of social services that make it easier for them to go about their businesses. The high prevalence of HIV/AIDS among Zambians and market vendors acts to repel poor people from participating in the markets (the rate of Zambian adults aged 15 to 49 living with HIV was 15.2% in 2007 [UNAIDS 2008] whereas the rate in the markets is estimated to be higher [WoW 2006]). Through ZANAMA’s awareness campaigns have increased knowledge about the disease, its prevention and how to live with it.

Enabling and Legitimizing Strategies In order to enable and legitimize its activities, ZANAMA uses a number of different strategies. Through different discursive measures, ZANAMA has built a platform from which it can specify the lack of institutions as well as the flaws and limitations of existing institutional setups relevant to market vendors. At the same time, it uses the same platform to propose new projects and justify existing ones that address these weaknesses. For example, the organization arranges frequent public meetings in markets to inform market vendors about its activities and work. At these meetings, market

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vendors are educated about their rights and freedoms as well as informed about how ZANAMA can benefit them. ZANAMA is also proactive in ensuring that its activities are covered by local and national media (television, radio and newspapers). ZANAMA’s Chairman General has become a public figure in Zambia through his many appearances in the media where he comments on matters relevant to the association and the market vendors. As ZANAMA’s Secretary General puts it: “Our being on air, our advocacy on air, has helped us a lot to the level where we are. We have a lot of calls, emails, and people suggesting that we go to this place because they are affected.” This exposure creates awareness about and legitimacy for ZANAMA and its work. However, one of the risks inherent in these discursive strategies is that they can discourage and even exasperate potential allies and stakeholders because their projects and views might have been presented as too radical and far-reaching. For ZANAMA, this is particularly true and it has experienced much opposition from different stakeholders since its inception. For instance, ZATMA, another association representing traders and market vendors in Kitwe, Zambia, was “formed out of frustration with one association: ZANAMA.” Its main argument is that ZANAMA does not collect membership fees from its members; it levies them illegally. In many instances, ZANAMA’s relationship with local authorities has also been characterized as confrontational because of the nature of its discursive strategies. For example, a representative from Kitwe Town Council expressed frustration with the fact that ZANAMA makes market vendors feel like the council is not doing anything in the market: “We are all trying to help market vendors, but the other one [ZANAMA] is asking ‘What is the Council doing?’ so that people will lose confidence in their Council. That is one thing which I see which is bad. If they don’t say that, they are free to be an association, but the only thing is that when the Council is trying to do something good, they might block it.” Another strategy that enables and legitimizes ZANAMA’s activities is its ability to mobilize resources. In particular, ZANAMA has been successful in accessing intangible resources. As noted above, ZANAMA has a rich network of influential actors (e.g., journalists and strong umbrella organizations). Through this network, it has been able to establish legitimacy and thus to launch its institutional projects. Given that ZANAMA has framed itself as an association for and by market vendors, it uses this legitimacy to be taken seriously by the stakeholders its activities concern. In particular, since ZANAMA operates in an emerging organizational field of market vending representation, it is important for it to be able serve as a bridge between different stakeholders and to meet their expectations. This legitimacy is therefore important, which can be seen, for example, in the extent to which ZANAMA is allowed to operate within the markets, collect monthly membership fees and freely build infrastructures in

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Institutional Entrepreneurship in the Informal Economy 123 the market. However, ZANAMA has been less successful in mobilizing financial assets. Good access to financial assets can be used to overcome obstacles when developing institutional projects, building coalitions with other actors and pressing important stakeholders. Not being able to access financial assets has limited ZANAMA’s ability to expand as rapidly and as widely as initially intended. DISCUSSION AND CONCLUDING REMARKS The purpose of this chapter is to explore the institutional role of informal economy associations in informal economy markets. Through a case study of ZANAMA, an association representing informal economy market vendors in Zambia, the chapter found that a major function for informal economy associations is to address the significant voids in formal institutional frameworks that hamper market functioning and participation in the informal economy. By providing formal and physical institutional infrastructures in markets, ZANAMA promotes private-sector development in the Zambian informal economy, thereby making it easier for informal market vendors to conduct their business. ZANAMA thus plays a pivotal role in changing the “rules of the game” for informal economy activities by filling vast institutional voids hampering private-sector development. Through its institutional activities, such as market executive leadership, collateral bargaining and provision of external financing, ZANAMA is able to promote market functioning and participation in contexts where formal institutional support typically provided by local and national authorities is poorly developed if not inexistent. Based on the foregoing, it can be concluded that ZANAMA acts as an institutional entrepreneur in the sense that it fills institutional voids in the informal economy with a view to creating private-sector development. As such, this chapter finds support for applying the theoretical lens of institutional entrepreneurship in contexts such as informal economies characterized by vast institutional flaws. An implication of this conclusion is that one of the main tasks for institutional entrepreneurs in the informal economy is to fill institutional voids rather than changing existing institutions. However, this is not to suggest that informal economy institutional entrepreneurs also change existing institutional frameworks. For example, ZANAMA puts much effort into lobbying local and national authorities to create more favorable institutions to govern economic activity in informal economy markets. In contrast to existing research on institutional entrepreneurship in more developed economies that focuses exclusively on how individuals and organizations create new or transform institutions in existing institutional frameworks, this chapter found that an equally important role relates to filling institutional voids.

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POLICY RECOMMENDATIONS The findings of this chapter have important implications for official development policies. It provides an illustration of how a nonprofit organization provides institutions for market transactions and private-sector development and, as such, has important implications for how we understand the role and purpose of informal economy associations. Private sector development is high on official development agendas (e.g., World Bank 2003). For example, the Danish International Development Agency proclaimed in 2006 that “Vigorous private sector development is a decisive precondition for growth,” and that it aims to improve “the preconditions for operating private business in the developing countries and thus [opening] up the possibility for these measures being able to function as the motor of economic growth that benefits the most impoverished population groups” (DANIDA 2006, 6). A central question thus revolves around how this can most efficiently be achieved. The findings of this chapter suggest that there is well worth recognizing and appreciating local organizations, in contrast to more official development rhetoric that emphasizes grand statesponsored initiatives. Specifically, this chapter shows the necessity of treating local actors as endogenous variables in institutional change. More conventional institutional views maintain that organizations act solely in conjunction with the institutional context in which they are embedded. However, in light of associations like ZANAMA, which are in a continuous pursuit of improving the operating environment for their stakeholders, it is clear that these associations challenge present institutional setups and propose solutions for their improvement. Similarly, it has been argued that effective informal economy associations may act as institutional providers when faced with the institutional voids. This indicates that effective associations step in and fill institutional voids hampering private sector functioning and participation. An important implication relates to the general recognition of informal economy associations in private-sector development. This chapter has demonstrated how an association for market vendors can contribute positively to private-sector development in Zambian markets by acting as an institutional entrepreneur. However, there are many grassroots informal economy associations in sub-Saharan Africa, similar to the one analyzed here, that too often end up being ignored or only partly recognized in government or municipal policies. In light of findings of this chapter, the work and activities of associations should receive higher recognition among stakeholders working for private-sector development in informal economies. REFERENCES Adelmann, Irma. 2001. “Fallacies in Development Theory and Their Implications for Policy.” In Frontiers of Development Economics—The Future in Perspective,

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Institutional Entrepreneurship in the Informal Economy 125 edited by Gerald M. Meier and Joseph E. Stiglitz, 103–34. Washington, DC: Oxford University Press. Battilana, Julie, Bernard Leca, and Eva Boxenbaum. 2009. “How Actors Change Institutions: Towards a Theory of Institutional Entrepreneurship.” The Academy of Management Annals 3 (1): 65–107. DANIDA. 2006. Business Growth and Development—Action Programme for Danish Support to Private Sector Development in Developing Countries. Copenhagen: DANIDA. DiMaggio, Paul J. 1988. “Interest and Agency in Institutional Theory.” In Institutional Patterns and Organizations: Culture and Environment, edited by Lynne G. Zucker, 3–22. Cambridge, MA: Ballinger. Evans, Peter. 2005. “The Challenge of the ‘Institutional Turn’: New Interdisciplinary Opportunities in Development Theory.” In The Economic Sociology of Capitalism, edited by Victor Nee and Richard Swedberg, 90–116. Princeton, NJ: Princeton University Press. Feige, Edgar L. 1990. “Defining and Estimating Underground and Informal Economies: The New Institutional Economics Approach.” World Development 18 (7): 989–1002. Garud, Raghu, Sanjay Jain, and Arun Kumaraswamy. 2002. “Institutional Entrepreneurship in the Sponsorship of Common Technological Standards: The Case of Sun Microsystems and Java.” Academy of Management Journal 45: 196–214. Gaynor, Ciara. 2005. “Structural Injustice and the MDGs: A Critical Analysis of the Zambian Experience.” Trócaire Development Review 2005: 57–84. Hart, Keith. 1973. “Informal Income Opportunities and Urban Employment in Ghana.” The Journal of Modern African Studies 11 (1): 61–89. Hoffman, Andrew J. 1999. “Institutional evolution and change: Environmentalism and the US Chemical Industry.” Academy of Management Journal 42: 351–71. Holm, Petter. 1995. “The Dynamics of Institutionalization: Transformation Processes in Norwegian Fisheries.” Administrative Science Quarterly 40 (3): 398–422. Khanna, Tarun, and Khrisna Palepu. 1997. “Why Focused Strategies May Be Wrong for Emerging Markets.” Harvard Business Review July–August: 41–51. Levy, David, and Maureen Scully. 2007. “The Institutional Entrepreneur as Modern Prince: The Strategic Face of Power in Contested Fields.” Organization Studies 28 (7): 971–91. Maguire, Steve, Cynthia Hardy, and Thomas B. Lawrence. 2004. “Institutional Entrepreneurship in Emerging Fields: HIV/AIDS Treatment Advocacy in Canada.” Academy of Management Journal 47 (5): 657–79. Mair, Johanna, and Ignasi Marti. 2007. “Entrepreneurship for Social Impact: Encouraging Market Access in Rural Bangladesh.” Corporate Governance 7 (4): 493–501. Martinussen, John. 1999. Society, State and Market. London: Zed Books. McCullock, Neil, Bob Baulch, and Milasoa Cherel-Robsen. 2001. “Poverty, Inequality and Growth in Zambia during the 1990s.” United Nations University, World Institute for Development Economic Research, Discussion Paper No. 2001/123: 1–44. McKeever, Matthews. 2003. “The Informal Economy and Institutional Theory in the New Economic Sociology.” Paper presented at the annual meeting of American Sociological Association, Atlanta, Georgia, August16. North, Douglas C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. Oliver, Amalya L., and Kathleen Montgomery. 2008. “Using Field-Configuring Events for Sense-Making: A Cognitive Network Approach.” Journal of Management Studies 45 (6): 1147–67.

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Portes, Alejandro, and William Haller. 2005. “The Informal Economy.” In The Handbook of Economic Sociology, 2nd ed, edited by Neil J. Smelser and Richard Swedberg, 403–25. New York: Princeton University Press. Schneider, Freidrich. 2002. “Size and Measurement of the Informal Economy in 110 Countries around the World.” Paper presented at a workshop of Australian National Tax Center, Canberra, Australia, July 17.

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9

Informal Entrepreneurs in Central America A Labor of Love or Survival? Michael J. Pisani

Discussion of the informal sector is virtually absent in mainstream management and international business curricula and texts. Since contemporary management and international business thought is monopolized by outlets written in English and primarily by authors in the triad (i.e., developed Europe, North America and developed Asia), where the informal economy is relatively small, the informal economy is mostly overlooked and perhaps seen as a curiosity rather than an important employer and engine of economic growth (Pisani and Patrick 2002). Nevertheless, outside the triad, the informal sector is a mainstay of economies large and small and comprises upwards of 50% of the economically active population in the developing world (Mead and Liedholm 1998). International business and management scholars who conduct their research in the developing world are aware of this reality, though not always amenable to the study of small unregulated enterprises. Development economists and sociologists, on the other hand, have ventured into this research arena, but have done so without much focus on the larger business and managerial dynamics of the firm. The overall knowledge deficit extends to entrepreneurship in Central America generally, and informal female entrepreneurship in particular. This chapter seeks to partially address this omission through a business study of a large and informal retail sector in Central America: home-based convenience stores, referred to locally as the tiendita (or “little store”). Of further importance, tienditas are primarily owned and staffed by women; this chapter focuses on informal female entrepreneurs. This is accomplished through a unique data set of 850 mostly informal tienditas from Central America, specifically from El Salvador and Nicaragua, allowing insights into two fundamental research questions: (1) what are the determinants of informality for female-owned and operated tienditas? and (2) what is the business rationale (or model) for enterprise creation and maintenance of female-owned informal tienditas?

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Michael J. Pisani

LITERATURE REVIEW The pertinent literature includes a discussion of informality generally and women and informality and entrepreneurship specifically, with contributions from the area of microenterprise development. The great majority of the self-employed in developing countries, particularly in Central America, work under conditions of anonymity with relation to governmental and regulatory authorities and thus are considered informal sector participants (Funkhouser 1996; Jain and Pisani 2008; Pisani and Pagán 2004). The retail function of tienditas may be performed under the auspices of government regulators and tax collectors, but more often than not, the government is absent from tiendita oversight. This hiddenfrom-government-purview employment has been referred to as “informal employment” (Hart 1973, 1970). In essence, work “activities that avoid state regulation” best describes informality (Itzigsohn 2000, 11). Yet informal work activity is not said to be criminal in as much as that the work itself could be undertaken within the bounds of government legislation (Portes and Schauffler 1993). The study of informality has taken several approaches: structuralist (Hart 1973, 1970), neo-Marxist (Bienefeld 1975), legalist (de Soto 1989), and microenterprise development (Rakowski 1994) chief among them. I believe each of these approaches adds significant insights within developing economic and entrepreneurial contexts—including excess or surplus labor resulting in own-account employment (structuralist), capitalist systems which betray microentrepreneurship (neo-Marxist), government legislation and graft inhibiting microenterprise development (legalist), and the practice of self-employment not only as a means of survival, but also as a path toward poverty alleviation (microenterprise development). Typically, informality is seen as a negative economic state of being, but it need not be so (Pisani and Patrick 2002). Nonetheless, the sheer number of informal sector participants, upwards of half of all employment in Central America (Funkhouser 1996; Pérez Saínz 1999), requires serious investigation into the phenomenon. A handful of studies share insights into informal female entrepreneurship. In a recent study of female informality in India, Williams and Gurtoo (2011) suggest that while many women enter into self-employment for lack of better earning alternatives, once there, they outperform their wage and salaried informal female peers. Also important are family traditions of previous engagement in the informal sector as a prelude to continued informal self-employment through the generations. Within a British context, Williams (2009) found informal female entrepreneurs were more necessity driven at start-up; yet many of these same informal female entrepreneurs over time moved beyond business operations of necessity in order to exploit business opportunities in dynamic economic space. This shift from necessity driven to opportunity driven informal microenterprises over time suggests

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Informal Entrepreneurs in Central America 129 targeted public policy may promote nascent entrepreneurship into meaningful drivers of national economic growth (Pisani and Patrick 2002). In Ukraine, Williams and Round (2009) argue that most female entrepreneurs may be labeled as reluctant (or necessity) entrepreneurs operating chiefly in the informal sector. Welter and Smallbone (2008) add from their study of Uzbek female (and mostly informal) entrepreneurs the importance of economic and employment independence as well as necessity in seeking out self-employment opportunities. In a study of cross-border informality along the US-Mexico border, Pisani and Richardson (2012) noted a higher propensity for informal female entrepreneurs to participate in petty retail and domestic service than their male counterparts. Lastly, Pisani (2006) found that previous work experience played a strong determining role for self-employed (and mostly informal) females in Nicaragua. The microenterprise development literature adds to our understanding of informal entrepreneurship in developing contexts. Mead and Liedholm (1998) found that working proprietors or one-person businesses accounted for over half of all microenterprise employment in the developing world. These microentrepreneurs are self-employed where entrepreneurship refers to own-account employment (Blanchflower and Oswald 1998). Academic researchers have classified microenterprises as business entities with typically five or fewer employees, engaged in nonprimary activities and selling at least 50% of their output (Johnson 1998; Mead and Liedholm 1998). Extending the workplace to unpaid family members within working proprietorships accounts for over 75% of all workers engaged in microenterprise establishments (Mead and Liedholm 1998; Portes and Hoffman 2003). More recent scholarship has revealed the importance of the macroeconomic climate in combination with microenterprise health (Daniels 2003; Pisani and Patrick 2002), microfinance and microenterprise development (Baptista, Ramalho and da Silva 2006; Pisani 2010; Pisani and Yoskowitz 2005), the returns to small start-up investment (McKenzie and Woodruff 2006), and as dynamic or disadvantaged enterprises (Fajnzylber, Maloney and Montes Rojas 2006; Nichter and Goldmark 2009; Richardson and Pisani 2011). The literature is mixed with regard to microentrepreneurship and the sectoral maximization of earnings (Daniels 2003; Pisani and Pagán 2004; Fajnzylber, Maloney and Montes Rojas 2006). TIENDITAS AND THE CENTRAL AMERICAN CONTEXT In this section, I provide a description of tienditas and a brief overview of the economic landscape in which these businesses operate. Tienditas are tiny home-based convenience or grocery stores, typically found in the relatively poorer or underdeveloped sections of the country—such as shantytowns, rural hamlets and urban barrios. The tiendita caters to a nearby clientele that is bound to the neighborhood by location primarily the result

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of mobility constraints arising from a lack of financial resources, inadequate transportation alternatives and poor job prospects. The home-based convenience store typically devotes and converts the front section of a home into a selling space or retail outlet. The size and construction of the tiendita depend on the local market and the microentrepreneur’s resource base. A retail space of 200 square feet may be typical, but each retail environment reflects the home construction in the first order, with the concomitant retail space usually an added feature after the home was built. The basic stock of a tiendita includes staple food supplies, hygienic products, junk food, school supplies and other specialty items, depending upon the tiendita. Tiendita start-up costs in Central America may be as low as US$100. The typical tiendita is open from six in the morning until eight in the evening, seven days a week. Credit is often available for the best and most regular customers (Pisani and Yoskowitz 2012). The workforce comes from the family unit, typically under the ownership and direction of the wife (Haase 2007) supported by other family members in the household. Generally, the entrepreneurs have middle-school education or less but do have considerable work (or potential work) experience to draw on, based on their middling age. For families of means, tienditas often are avoided in favor of purchases at modern grocery stores with a larger selection and better prices (Minten and Reardon 2008). In essence, supermarkets become a first-order preference over other grocery outlets such as tienditas (D’Haese, Van de Berg, and Speelman 2008). Central America ranks in the lower-middle income arena with regard to development. Adequate employment, education, health care, sanitation, safety and food security are all extreme challenges in the region. Additionally, civil unrest and civil war have also been a major part of life over the past three generations. Economically, El Salvador’s per capita income is three times that of its coastal neighbor Nicaragua.1 Poverty is more extreme in Nicaragua, where about half the population live below the poverty line compared to about one-third in El Salvador. Economic emigration to the United States is common. METHODOLOGY Tienditas from both El Salvador and Nicaragua were surveyed in the summer and fall of 2004. Our surveys of tienditas were done in the urban periphery of San Salvador in the communities of Apopa, Santa Tecla, Sosonate, and Soyopango. Only Sosonate is not physically located within urban metroplex of greater San Salvador; Sosonate (population 75,000) lies within an hour’s drive to the west of the capital. In Nicaragua, our surveys were done in the department of Matagalpa, the second-most populous and important district in the country, after Managua. With the assistance of Catholic Relief Services (CRS), which serves both environments extensively through

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Informal Entrepreneurs in Central America 131 microfinance institutions,2 a representative sample of neighborhood tienditas was sought. No specialized government census of tienditas exists for either El Salvador or Nicaragua. Based on recommendations from our partner institutions in El Salvador and Nicaragua, 365 urban tienditas in El Salvador and 485 rural and urban tienditas in Nicaragua were selected for survey.3 Overall the sample is fairly representative of the tiendita population despite the general lack of public data for the tiendita sector; nonetheless, the method of sample acquisition has not fully eliminated the risk of some systematic sample bias. The survey instrument consisted of 90 questions grouped around the themes of business operations, business finance and respondent and household demographics. On average, the survey took 40 to 45 minutes to complete and was administered at the tiendita.4 The original survey, written in English, was translated into Spanish then back-translated into English as suggested by Brislin (1980). With the active support of CRS staff in both locations, four trained and paid university business students, two each from Matagalpa and San Salvador, assisted the author in the survey administration. RESULTS First, I provide an overview of tienditas in my sample with a focus on the firm and the microentrepreneur. I benchmark female informal tienditas against their male and formal counterparts. From there I explore two research questions: (1) what are the determinants of informality for femaleowned and operated tienditas? and (2) what is the business rationale (or model) for enterprise creation and maintenance of female-owned informal tienditas?

Overview (Descriptive Statistics) I find that tienditas are indeed very small microenterprises, typically run by an experienced owner-operator with primary assistance from unpaid family members and occasionally using a single paid employee (see Table 9.1-A). Informal or formal, tienditas are open nearly every day, all day long, with many nearby competitors. Microentrepreneurs with tienditas are middle-aged with a middle-school education (see Table 9.1-B). Most are married and head of household, living in their own (often self-constructed) home, surrounded by a family of five and come from a familial tradition of self-employment. Few have access to the social safety net or a relative abroad who might be able to send remittances. A majority of formal tienditas and a plurality of informal tienditas were started out of economic necessity (see Table 9.1-C). More than onethird of informal tienditas began with the prospect of exploiting a business

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Table 9.1 gender

Characteristics of Central American Tienditas by (in)formality and Informal (N = 578)

Formal (N = 272)

Female (N = 455)

Male (N = 115)

Female (N = 196)

88.3

86.1

92.7

Male (N = 71)

A. Firm-Level Variables Full-time participation in the tiendita by microentrepreneur (%) Mean years worked in a tiendita (std. dev.) Average total hours open for business per week (std. dev.) Average days open per week (std. dev.) Tiendita location attached to home (%)

7.6 (7.4)

6.6 (5.6)

8.2 (8.2)

89.7

7.4 (6.4)

98.1 (15.5) 97.7 (14.0) 97.1 (16.1) 96.0 (14.4) 6.8 (0.6)

6.9 (0.2)

6.9 (0.5)

6.9 (0.5)

92.8

91.2

93.0

98.5

Receive external funding source 38.5 for business start-up (Yes) (%)

21.7

16.8

5.6

Current business loan outstanding (Yes) (%)

60.9

44.9

43.7

Average number of paid employees (std. dev.) Share with paid employees (%) Average number of unpaid (family) employees (std. dev.)

64.6 0.2 (0.4) 18.3 0.9 (0.3)

Written or mental business plan 35.1 (Yes) at start of business (%) Average number of neighborhood / competitor tienditas (std. dev.) Compared to last year, business is the same or better (%)

8.5 (8.6)

71.8

0.1 (0.3) 7.4 0.8 (0.4)

50.0 9.0 (7.6)

73.9

0.2 (0.4) 21.0 1.0 (0.2)

0.2 (0.4) 16.4 1.0 (0.2)

55.6

46.3

11.9 (8.1)

10.5 (6.7)

76.7

65.7

B. Microentrepreneur-Level Variables Mean Age (std. dev.)

42.4 (12.2) 38.0 (10.5) 40.1 (11.7) 39.3 (11.5)

Mean education level–Years (std. dev.)

7.5 (5.5)

6.7 (5.3)

7.7 (5.7)

7.3 (5.4)

Mean reported paid work experience–Years (std. dev.)

6.1 (8.4)

7.7 (9.4)

5.1 (9.8)

6.2 (7.4)

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Informal Entrepreneurs in Central America 133 Informal (N = 578) Female (N = 455)

Male (N = 115)

Formal (N = 272) Female (N = 196)

Male (N = 71)

Civil status–Percent married (%) 57.9

71.9

61.3

66.7

Percent home ownership (Yes) (%)

84.0

91.2

86.6

95.8

Percent with cement home flooring (%)

88.6

74.1

86.5

75.7

Mean bedrooms (std. dev.) Percent household head (std. dev.) Mean household size (std. dev.)

2.8 (1.3) 64.0 4.7 (1.9)

2.8 (1.8) 94.6 4.8 (2.3)

2.8 (1.5) 60.5 4.8 (2.1)

3.1 (1.7) 88.4 5.0 (2.1)

Percent enrolled in health insurance (%)

16.8

18.0

10.1

20.9

Percent enrolled in social security (%)

12.4

11.9

9.7

14.7

Receive overseas remittances (Yes) (%)

18.5

14.0

11.4

14.9

47.1

54.9

54.5

55.9

Mother’s occupation (%) Self-employed Wage and salaried

27.0

23.4

9.5

31.4

Did not work

25.9

21.7

36.0

12.7

Self-employed

68.2

80.2

76.0

80.3

Wage and salaried

27.6

19.8

16.3

18.3

4.2

0.9

7.7

1.4

Economic necessity (%)

44.7

46.5

62.7

52.9

No other work available (%)

15.9

18.4

13.0

24.3

Business opportunity (%)

39.4

35.1

24.4

22.9

73.8

71.3

86.8

78.6

Maintain in its current form (%) 19.9

22.6

8.4

18.6

6.1

4.7

2.9

Father’s occupation (%)

Did not work C. Tiendita Business Rationale

D. Future Business Plans for Tiendita Growth/Expansion (%) Close/Exit (%)

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6.3

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opportunity, whereas less than a quarter of formal tienditas were begun in this fashion. Overall, more than 70% of existing tienditas seek to grow and expand their business operations (see Table 9.1-D). This growth option is robust across the three business rationale groups indicating that necessity driven firm origins frequently transform into purposeful and growth oriented microenterprises. Since El Salvador’s economy is more robust than Nicaragua’s, sales, estimated profits and inventory size figures are separated by country (see Table 9.2). Business incomes approximate the opportunity cost of day-wage employment. However, the initial start-up costs require a substantial savings equivalent to one to two years of day employment in El Salvador and six months of day employment in Nicaragua. In most cases, once the business is established, growth follows.5

Determinants of Informality Looking specifically at female-owned and operated tienditas (N = 651) in the Central American sample, I use logistic regression (informal = 1) to better understand the determinants of informal female tienditas.6 I assembled a selection of microentrepreneur-based variables in order to uncover the odds of being a female-owned and operated informal tiendita. Only one variable proved significant, where having at least one self-employed parent increased the likelihood of being an informal female tiendita owner by 68% over formal female-operated tienditas (see Model 1 in Table 9.3). Adding to the analysis of microenterprise-related variables, I find that the odds of being an informal female tiendita owner lessens as the business undertakes financing and has more local competitors (59.0% and 6.1% respectively). Coming from a family with at least one self-employed parent continues to be significant, raising the odds of being an informal female tiendita owner by 73.2% (see Model 2 in Table 9.3).7

Tiendita Business Rationale and Future The survey asked why each female tiendita microentrepreneur began her microenterprise. The responses sorted into three categories: economic necessity, no other work available, and business opportunity. Using the largest group, economic necessity, as the reference category, I employed logistic regression to establish the significance of business rationale in the determination of informal female tiendita ownership in combination with my previously established variables. I find that female tiendita owners are much more likely to be informal when citing “no other work available” (128.5%) and “business opportunity” (253.1%) as the primary rationale for starting their tiendita microenterprise compared to start-ups citing economic necessity as their rationale for start-up (see Model 3, Table 9.3). In further exploring the maintenance research question, the survey inquired as to what the future plans were for the tiendita. Three responses

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28

252

60

3,095.42 (6,525.39)

1,905.11 (3,434.05)

33.14

165.68 (179.41)

Female

Male

19

1,312.65 (1,482.74)

1,840.62 (2,976.92)

56.23

281.15 (138.93)

Formal

203

791.83 (1,194.64)

182.59 (249.71)

31.62

158.08 (204.71)

Female

Male

87

615.84 (557.48)

184.50 (313.38)

26.99

134.95 (99.20)

Informal

136

1,689.03 (2,346.24)

260.91 (365.35)

49.70

248.50 (307.08)

169.71 (142.77)

40.10

200.51 (192.76)

Male

52

1,578.25 (1,703.63)

Formal Female

Nicaragua

*The exchange rate at the time of the surveys was 15.9 Nicaraguan Córdobas per US$1. El Salvador uses the US dollar as its base currency. All tabular monetary values are reported in US dollars

N

2,547.64 (3,606.58)

1,166.22 (1,818.38)

Current inventory value (std. dev.)

1,673.14 (2,651.51)

44.55

41.26

Mean weekly business income (estimated @ 20% of sales)

747.66 (1,642.47)

222.75 (190.14)

206.28 (301.97)

Average weekly business sales (std. dev.)

Initial start-up capital (std. dev.)

Male

Female

Informal

El Salvador

Characteristics of (in)formal Tienditas (in US$) by country & gender*

Variables

Table 9.2

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Table 9.3 Determinants of Central American informal female tienditas micro-entrepreneurs and business rationale (logistic regression) Variables

Model 1

Model 2

Model 3

Model 4

Odds Ratio Odds Ratio Odds Ratio Odds Ratio Microentrepreneur Constant

1.543

2.794

1.222

.870

Age (years)

1.018

1.010

1.011

1.010

Education (years)

1.005

.990

.992

.990

Have at least one selfemployed parent (Yes = 1)

1.680**

1.732*

2.026**

Receive overseas remittances (Yes = 1)

.954

1.033

.993

1.019

Civil status–Married (Yes = 1)

1.168

1.316

1.418

1.284

Number of bedrooms

.890

.982

.992

1.062

Cement floor (Yes = 1)

1.077

.685

.670

.559

Previous paid work experience (years)

.998

.984

.979

.979

Country (Nicaragua = 1)

.672

.828

.867

.842

Work full-time in tiendita (Yes = 1)

–

1.447

1.335

1.387

Have paid employees (Yes = 1)

–

1.626

1.355

2.061

Receive external funding at start-up (Yes = 1)

–

.862

.991

.918

Have a current business loan (Yes = 1)

–

.410***

.319***

.264***

Number of nearby competitors

–

.936***

.943***

.948***

Had a business plan at startup (Yes = 1)

–

Tiendita Business Rationale^

–

No other work available Business opportunity

2.323***

Microenterprise

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1.166

1.390

1.207

–

–***

–***

–

–

2.285*

2.818**

–

–

3.531***

3.668***

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Informal Entrepreneurs in Central America 137 Variables

Model 1

Model 2

Model 4

–

–

–***

–***

–

–

–

3.147**

–

–

–

4.420*

Future Business Plans for Tiendita Maintain tiendita in its current form

Model 3

Close/Exit tiendita 384

284

283

280

456.301

316.495

302.167

285.229

Cox & Snell R

.045

.131

.172

.211

Nagelkerke R

.063

.183

.240

.295

N Model statistics 2 Log likelihood 2

2

***, **, * implies statistical significance at the .01, .05, and .10 levels, respectively. ^Reference Categories: Tiendita Business Rationale = Economic Necessity; Future Business Plans = Growth/Expansion of Tiendita.

predominated: growth and expansion of the existing microenterprise, maintenance of the status quo and exit from the tiendita business. In this last model (see Model 4, Table 9.3), female-operated tienditas were 2.1 and 3.4 times more likely to be informal than formal female-operated tienditas if they planned to stay the course or exit the tiendita business altogether vis-à-vis female-operated tienditas focused on growth and expansion (the reference category), respectively. Additionally, firms indicating a desire to exit the marketplace experienced recent declines in business activity. DISCUSSION AND POLICY RECOMMENDATIONS I believe several findings shed additional light on informal female entrepreneurship and address the research questions. Those female-owned tienditas in Central America that began because of a general lack of employment alternatives or because of a recognized business opportunity did so beyond the reach of government oversight; they were essentially “born” as informal microenterprises. The “birthing” or business incubating process can be traced to parental occupation whereby parental self-employment was a significant marker of tiendita informality for female owners. The bonds of informality loosen as female-owned tienditas access capital to grow their microenterprise. Additionally, as more competitors compete in the same locale, the density of tienditas promotes formality. Both access to financing and enhanced competition for female-owned tienditas most likely draw increased government

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attention, hence a concomitant increase in firm-level formality. Conversely, female-owned tienditas currently positioned against growth find friendly terrain in the informal sector and in essence remain hidden from government view. These informal female-owned tienditas are uncertain about the future. It makes business sense if one’s microenterprise goal is the status quo (no growth) or exit that one would not invest in the regulatory infrastructure to move from informality to formality and seek to remain hidden from government oversight. As a whole, more female-owned informal tienditas are refuges for survival within vulnerable economic environments. Nevertheless, some femaleowned informal tienditas are labors of love and occupational choice. Small profits based on low sales volumes suggest a Kirznerian (1973) view of entrepreneurship in this sector, where marginal business opportunities or economic space is exploited. Hence, tienditas are not a radical rupture or innovation with current business practices in the Schumpterian sense (Schumpeter 1911). Yet, a familial tradition of entrepreneurship provides a positive structural environment for business creation and maintenance, and if emphasized may provide a small engine of growth and dynamism in distressed economic areas. This is especially true of tienditas willing and planning to grow in the future. Policymakers should provide economic space, especially for femaleowned microenterprises such as tienditas, to operate informally. Informal tienditas allow women, particularly women logistically tied to households in vulnerable economic regions, the opportunity to engage in gainful selfemployment. This build-up of business acumen is transferred generationally, adds entrepreneurial capacity, and for some opens a path toward business expansion and formality. Tienditas also serve an important distribution function for consumers away from city centers where transportation impediments are significant. As female-owned informal tienditas mature, policymakers should consider providing a path for formality whereby the benefits of becoming formal outweigh the costs of remaining informal. For example, paths to business growth via access to financial markets (i.e., microfinance institutions) would be welcomed. Also, neighborhoods with densely competitive tiendita milieus should allow for more expedient government oversight and formality. In addition, government authorities should exempt from permitting and taxes the very smallest of the tienditas—in essence making the informal, formal—to allow for a more gradual and purposeful formal sector environment without impeding small-scale female entrepreneurship. CONCLUSION AND FUTURE RESEARCH In this chapter, I have looked more closely at a unique and large segment of the Central American retail economy—the ubiquitous home-based convenience store, or tiendita. This retail segment is populated primarily by

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Informal Entrepreneurs in Central America 139 women-owned microenterprises. And most of these microbusinesses are run outside the purview of government authority as informal enterprises. Embedded in homes and in impoverished peripheral neighborhoods or rural hamlets, tienditas serve a primary distribution and retail function for common, everyday household purchases. Importantly, base-of-the-pyramid consumers who are geographically isolated because of poor transportation infrastructure and who are constrained by insufficient employment opportunities rely on tienditas not only as a marketplace, but also as a support mechanism where buying on credit is common. As with customers, most female tiendita proprietors, especially those operating informally, operate their tiendita as a means to facilitate their own household survival more so than as a labor of love. However, for a small subset of informal female tiendita owners, business growth is not only possible, but achievable. If business growth and expansion are planned for the tiendita, then the economic space in which it is positioned likely switches from informal to formal. A history of familial self-employment is an important determinant of tiendita ownership, whereby the tacit knowledge of operating within an entrepreneurial venture is transmitted intergenerationally. Policymakers would do well to understand and facilitate the employment prospects offered to women via microentrepreneurship. Future research into informal female self-employment should explore the incorporation of sustainable microentrepreneurship. Within the larger and formal sector economic environment in developed contexts, sustainable entrepreneurship has recently entered into the literature (Shepard and Patzelt 2011), but not directly so with informality. Moving beyond social venturing (Prahalad 2005), ecological entrepreneurship, and profitcentered entrepreneurship, sustainable entrepreneurship extends the triple bottom line to the world of entrepreneurship and self-employment. A better understanding of failed female microenterprises is also warranted. Though relatively small, as detected in the sample analyzed in this chapter, informal female tienditas had the highest rate of business owners wishing to exit the business environment. Perhaps there are structural impediments yet unknown that may describe this exit variance. Advances in these areas are ripe for study, particularly for female-owned informal microbusinesses in developing contexts.

NOTES 1. The 2010 per capita income in El Salvador was $3,360 and $1,090 in Nicaragua, both figures adjusted for purchasing power parity (www.worldbank.org). 2. These two CRS affiliated microfinance institutions were CARITAS, in Matagalpa, Nicaragua, and Enlace, in San Salvador, El Salvador. 3. A test of means showed no significant differences between the two Nicaraguan subsamples along the following critical variables: start-up costs (p = .796), weekly sales revenue (p = .577), weekly business income (p = .577), and current inventory value (p = .265). Hence, we collapsed together all of the urban

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140

4. 5.

6. 7.

Michael J. Pisani and rural observations. For most of our analyses, we merge all tienditas into a single dataset. De Mel, McKenzie and Woodruff (2009) found that basic microenterprise surveys revealed about as much usable information as detailed firm diaries, mitigating the generally poor record-keeping performance of microenterprises. Sales, business income and inventory figures are provided within the descriptive analysis but are omitted from the collapsed sample multivariate analyses due to scale differences in the economies of El Salvador and Nicaragua (as well as some missing data concerns). Logistic regression is the appropriate statistical procedure for estimating a single dichotomous dependent variable (informal/formal) and multiple independent variables (see Pampel 2000). The odds are calculated by subtracting 1 from exp(), or 1 – 1.732 = 0.732, or 73.2%, for at least one self-employed parent, as exemplified in model 2 of Table 9.3.

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Informal Entrepreneurs in Central America 141 Jain, Adishwar, and Michael J. Pisani. 2008. “Small and Microenterprise Business Development in Costa Rica: An Examination of Domestic and Foreign Born Entrepreneurs.” Latin American Business Review 9:149–167. Johnson, Margaret A. 1998. “Developing a Typology of Nonprofit Microenterprise Programs in the United States.” Journal of Developmental Entrepreneurship 3:165–184. Kirzner, Israel M. 1973. Competition and Entrepreneurship. Chicago: University of Chicago Press. McKenzie, David J., and Christopher Woodruff. 2006. “Do Entry Costs Provide an Empirical Basis for Poverty Traps? Evidence from Mexican Microenterprises.” Economic Development and Cultural Change 55:3–42. Mead, Donald C., and Carl Liedholm. 1998. “The Dynamics of Micro and Small Enterprises in Developing Countries.” World Development 26:61–74. Minten, Bart, and Thomas Reardon. 2008. “Food Prices, Quality, and Quality’s Pricing in Supermarkets versus Traditional Markets in Developing Countries.” Review of Agricultural Economics 30:480–90. Nichter, Simeon, and Lara Goldmark. 2009. “Small Firm Growth in Developing Countries.” World Development 37:1453–64. Pampel, Fred C. 2000. Logistic Regression: A Primer. Thousand Oaks, CA: Sage. Pérez Saínz, Juan P. 1999. From the Finca to the Maquila: Labor and Capitalist Development in Central America. Boulder, CO: Westview Press. Pisani, Michael J. 2006. “Nicaraguan Self-Employed Women under Neoliberalism: Characteristics and Determinants.” Latin American Business Review 7:89–106. Pisani, Michael J. 2010. “Is Microcredit Compatible with Micro-Entrepreneurship? Evidence from Latin American Tienditas.” In Contemporary Microenterprise: Concepts and Cases, edited by J. Mark Munoz, 102–115. Northampton, MA: Edward Elgar. Pisani, Michael J., and José A. Pagán. 2004. “Sectoral Selection and Informality: A Nicaraguan Case Study.” Review of Development Economics 8:541–56. Pisani, Michael J., and J. Michael Patrick. 2002. “A Conceptual Model and Propositions for Bolstering Entrepreneurship in the Informal Sector: The Case of Central America.” Journal of Developmental Entrepreneurship 7:95–111. Pisani, Michael J., and Chad Richardson. 2012. “Cross-border Informal Entrepreneurs across the South Texas–Northern Mexico Boundary.” Entrepreneurship and Regional Development 24:1–17. Pisani, Michael J., and Daivd W. Yoskowitz. 2012. “A Study of Small Neighborhood Tienditas in Central America.” Latin American Research Review, forthcoming. Pisani, Michael J., and David W. Yoskowitz. 2005. “ ‘In God We Trust:’ A Qualitative Study of Church-Sponsored Microfinance at the Margins in Nicaragua.” Journal of Microfinance 7:1–41. Portes, Alejandro, and Kelly Hoffman. 2003. “Latin American Class Structures: Their Composition and Change during the Neoliberal Era.” Latin American Research Review 38:41–82. Portes, Alejandro, and Richard Schauffler. 1993. “Competing Perspectives on the Latin American Informal Sector.” Population and Development Review 19:33–60. Prahalad, C. K. 2005. The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. Upper Saddle River, NJ: Wharton School. Rakowski, Cathy A. ed. 1994. Contrapunto: The Informal Sector Debate in Latin America. Albany: State University of New York Press. Richardson, Chad, and Michael J. Pisani. 2011. “Labor, Informality, and the Underground Economy in South Texas.” In Procesos Económicos, Urbanos y Laborales en la Frontera Norteste en el Contexto de la Apertura Económica, edited by

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Belem Iliana Vásquez Galán, Mario Alberto Jurado Montelongo, and José Luis Castro Ruiz, 239–72. Tijuana: El Colegio de la Frontera Norte. Schumpeter, Joseph A. 1911. The Theory of Economic Development. Berlin: Duncker und Humboldt. Shepherd, Dean A., and Holger Patzelt. 2011. “The New Field of Sustainable Entrepreneurship: Studying Entrepreneurial Action Linking ‘What Is to Be Sustained’ with ‘What Is to Be Developed.’ ” Entrepreneurship Theory and Practice 35:137–63. Welter, Friederike, and David Smallbone. 2008. “Women’s Entrepreneurship from an Institutional Perspective: The Case of Uzbekistan.” International Entrepreneurship and Management Journal 4:505–20. Williams, Colin C. 2009. “Informal Entrepreneurs and Their Motives: A Gender Perspective.” International Journal of Gender and Entrepreneurship 1:219–25. Williams, Colin C., and Anjula Gurtoo. 2011. “Women Entrepreneurs in the Indian Informal Sector: Marginalisation Dynamics or Institutional Rational Choice?” International Journal of Gender and Entrepreneurship 3:6–22. Williams, Colin C., and John Round. 2009. “Explaining participation in Off-theBooks Entrepreneurship in Ukraine: A Gendered Evaluation.” International Entrepreneurship and Management Journal 5:497–513.

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Part IV

Institutional Environment for Informal Entrepreneurship

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10

Unbundling Institutional Reform The Case of a Garment Cluster in Lima, Peru, 1988–2008 Matthew Bird

Since the publication of Hernando de Soto’s The Other Path (1986), an analysis of Peru’s informal economy, there has been a general assumption among many scholars, policy makers and practitioners that informality is inefficient by definition, is a reality that must be addressed urgently and is potentially a lower-cost intervention compared to other forms of aid. Contained within this concept of informality—or extralegality, as de Soto prefers to call it—are several assertions. First, the decision to operate outside the formal legal system results from burdensome laws. Second, better laws would lead to greater economic efficiency. Third, these formal laws, be they market regulations, property rights or contract enforcement, are additive, that is, incremental improvements in any one will contribute to overall efficiency in the economic environment. A case study of the effects of “formalization” efforts in a garment cluster in Lima, Peru, the empirical birthplace of the institutional analysis of informality and the country with arguably the longest sustained effort to address the issue, suggests otherwise: the creation of efficient legal systems does not always justify the costs of implementation, greater efficiency does not necessarily result from less regulation and, perhaps most importantly, formal laws exist—together—as elements of an institutional system of economic governance. Such findings have important theoretical and policy implications for understanding and addressing informality in Peru and beyond. THE OTHER PATH: AN INSTITUTIONAL ANALYSIS OF INFORMALITY AND ENTREPRENEURSHIP Appreciation of the “informal” sector began when Keith Hart (1970) coined the term in an article on small-scale entrepreneurs in Ghana. He and later the International Labor Organization (ILO) argued that the survival strategies used by rural migrants who flooded into many “third-world” cities were not a marginal but an integral economic activity. But informality had its limits. The ILO then believed that it was caused by excess labor supply, undercapitalization and a lack of skills and technology. By providing

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financial, technological and educational resources, growth would ensue, causing unemployment to drop. The policy prescription almost seemed too clear to question. Yet that is what the next major appraisal of informality did. In 1979, Hernando de Soto returned after a long absence to his native Peru to head a mining consortium. There, he saw a connection between the red tape he encountered and the difficulties Andean migrants faced living and working in Lima. To examine the issue, he commissioned private research, such as that on business registration in Gamarra, a garment cluster in Lima, and in 1981 founded the Institute of Liberty and Democracy (ILD), a nonprofit organization dedicated to the study of the informal economy. By 1984, the ILD had unearthed new data on how the majority of Peru’s population made a living and began publicizing policy recommendations via a media campaign. De Soto and the ILD argued that the informality of Andean migrants was a rational response to bad laws created by a mercantilist state. These decisions were reflective not of excess labor, undercapitalization or the lack of skills and technology but of people who were acting like capitalist entrepreneurs in the face of high transaction barriers created by the legal system. Migrants weighed the costs and benefits of obtaining a legal title, getting a business license or using courts to enforce contracts and decided that it was more efficient to squat on land, operate illicitly or resolve their own disputes. But informality, while more efficient in the short run, exacted a greater price. When you are not legal, the costs of detection lead you to disperse activities, shun publicity and spend on sanction-dodging bribes. When you are not legal, you are forced to deal exclusively in cash within an inflationary environment, as was the case in Peru, and choose to save in tangible goods rather than in cash with financial institutions. When you are not legal, you may benefit from avoiding taxes and labor laws, but doing so forces you to hire less qualified workers and become more labor, rather than capital, intensive. When you are not legal, you do not have guarantee of your ability to use an asset, appropriate returns from it or change its form or substance. You thus lack the incentive to invest in your own property and cannot use it as collateral for credit. When you are not legal, you have trouble enforcing your contracts, many of your exchanges rest on oral agreements and when a dispute arises you cannot easily resolve it through a judicial court mechanism. The proposed solution to poverty in Peru—and by extension any developing market—was not to further criminalize the poor nor focus on providing directly technical, educational and financial resources, but to reform the legal system and make it more inclusive. Actors would take care of the rest through the formal market. This institutional analysis of informality eventually seeped into major development programs. It inspired the World Bank’s Doing Business Report, launched in 2004, and led to the creation in 2005 of the United Nations Development Program’s Commission for the Legal Empowerment of the Poor, co-chaired by Hernando de Soto and Madeleine Albright, former

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Unbundling Institutional Reform 147 United States Secretary of State. The Commission sought to raise awareness and do the political spadework necessary to bring the estimated four billion people living outside the law into the formal legal systems of their respective countries. In 2008, the Commission’s final report called for action on four fronts: property rights, labor rights, rights to livelihood and entrepreneurship, and rule of law and access to justice. In other words, protect private property, ensure dignified working conditions, improve the legal operating environment for small businesses and offer mechanisms for enforcement and dispute resolution. This diagnosis of and prescription for informality contains within it at least three assertions. First, as de Soto argued in The Other Path and, later, in The Mystery of Capital (2000), the decision to operate outside the formal legal system is a rational choice made by the “working poor” in the face of inefficient laws which created excessive transaction barriers. Reduce the administrative costs to legal access and entrepreneurs will choose formality. Second, a reduction in informality will translate into greater economic efficiency and, by extension, firm, household and country growth. If the working poor did not have to worry about the costs associated with the lack of business licenses, tenuous claims to land and assets or weak monitoring and enforcement of contracts, then the lowered costs of exchange would free up resources for conducting business, incent more investment in one’s assets, and enable greater specialization and productivity. Third, these formal laws are additive; that is, improvement in any one area will reduce overall transaction costs and thus translates into overall economic improvements. Given the policy bet placed on formalization or “legal empowerment,” one would expect that ample evidence supports the assertions above, especially in Peru, the empirical birthplace of the institutional analysis of informality and the country with arguably the longest history of reform. But is this the case? PERU: A CASE STUDY Peru, and more specifically, Gamarra, Latin America’s largest garment cluster, with roughly 17,000 firms and over $1 billion in annual sales, offer an ideal setting for assessing, via a case study, not only the individual outcomes of formalization efforts but also the holistic impact of the reforms originally proposed in The Other Path. While previous studies focused on the specific effects of business registration or property rights reforms, none considered how these reforms interacted with one another in the transformation of the total institutional operating environment. A focus on Gamarra enables one to answer this question via a species of natural experiment since one major reform proposed by de Soto and the ILD was never implemented—contract enforcement. This case study thus sought to assemble the quantitative and qualitative evidence needed to construct a holistic picture of informality in

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Peru in the mid-1980s (when de Soto and the ILD diagnosed Peru’s informality and prescribed reforms) versus the mid-2000s (after reforms had been implemented, with the exception of contract enforcement.) Unexpected but informative results emerged.

Prereform: Lima, Peru, in the 1980s When de Soto and his colleagues took to the streets of Lima, they identified three major institutional factors hindering economic activity: • Unregistered firms: To avoid detection and the associated fines or bribes for operating unlicensed businesses, extralegal firms dispersed production activities and refrained from publicity, which resulted in an inability to achieve economies of scale and increase sales via marketing. • Lack of property rights: The high cost of obtaining formal property rights theoretically cut Lima’s small entrepreneurs off from access to formal credit because of the inability to use land as collateral. It also created disincentives for investing in their own assets because of lack of guarantees. • Weak contract enforcement: The inability to force parties to commit to an exchange agreement created obstacles to increased specialization because many businesses chose to do more activities in-house rather than through the market. To compensate, they sunk costs into limited informal contract enforcement mechanisms. The ILD subsequently recommended business registration, property rights and arbitration reforms to address each issue. Meanwhile, the state enacted market liberalization reforms and created a legal framework for microfinance institutions. Individual outcomes were notable.

Reform Sequencing Between the late 1980s and the early 2000s, the sequencing of reforms by Peru’s national and local government overlapped considerably. Yet contract enforcement was left unaddressed. Macroeconomic Reforms By the late 1980s, inflation had crippled Peru’s economy. Shortly after his election in 1990, then-President Alberto Fujimori implemented a macroeconomic stabilization program, or “Fujishock.” Overnight, the government eliminated subsidies, lifted price controls and allowed the currency to float freely, leading to economic contraction and hyperinflation. Thereafter, prices stabilized, enabling actors to make savings and investment decisions with greater certainty. Subsequent macroeconomic reforms focused

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Unbundling Institutional Reform 149 on financial liberalization, trade reform, tax reform, privatization and labor reform. Meanwhile, a military crackdown quelled guerrilla violence, albeit with accusations of human rights abuses. The general result was one of GDP growth and falling inflation—from -13.4% growth in 1989 and 7,479% inflation in 1990 to 15 years of expansion and minimal inflation between 1993 and 2008. Microcredit Expansion During the 1990s, microcredit, first introduced two decades earlier, expanded considerably with the help of new legal frameworks. Credit volume grew from $162 million in 1995 to $3.5 billion in 2008. Meanwhile, annual interest rates dropped from 84% in 1995 to 36% in 2008. The number of clients rose from 393,000 in 2000 to 1.8 million in 2008 while default rates fell from 6% to 3% (Conger et al. 2009). For four consecutive years— from 2008 to 2011—the Economist Intelligence Unit, in association with the International Finance Corporation and other multilateral organizations, ranked Peru as the best microfinance business environment in the world (EIU 2012). During the liberalization wave in the 1980s and 1990s, de Soto and the ILD also worked with different governments to improve Peru’s institutional operating environment. Business Registration Reforms The adoption of ILD-inspired reforms between 1990 and the early 2000s lowered business registration costs, which helped increase the number of legal businesses. In the early 1980s, the ILD found that it took 289 days and $1,231 in registration fees or bribes to formalize a business, using as a test case the registration of a garment firm in Gamarra to obtain national and municipal licenses. Improvements at the federal level began in 1990. One month after Fujimori had announced the shock program, he adopted an ILD-drafted law and decreed the creation of a “Unified Business Registry,” which oversaw the simplification of registration processes for incorporating a firm and issuing a tax identification number. ILD claimed that costs of registering firms nationally fell from 289 days, nine approvals, six offices, 34 applications and $1,231 to one day, one approval, one office, one application, and $174, with 382,100 new businesses registered between 1991 and 1994 (Bettcher et al. 2009). In 1990, the ILD also began to work with several municipalities to reduce barriers for issuing operating licenses. A follow-up study in Gamarra in 2003 found that total registration costs had fallen to 61 days and $163 (Jaramillo 2004). Though improvements were irregular, especially at the municipal level, and were partially reversed at the national level, subsequent reforms continued to tackle the issue, such as a joint-project between the Municipality of Lima and the International Finance Corporation in the mid-2000s. By

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2012, the World Bank’s Doing Business report, using its own methodology, estimated that the firm registration process fell from 98 days, 10 procedures and an income per capita cost of 39% of GDP to 26 days, five procedures and an income per capita cost of 12%, ranking Peru 55th globally (World Bank 2012). While methodologies and contexts differ, the trend line is clear. It was easier to register a new firm in the 2000s than it was in the 1980s. Property Rights Reforms Given the ILD’s focus in Peru on property rights reforms from the 1980s to the mid-1990s and de Soto’s international advocacy via the publication of The Mystery of Capital (2000), Peru became known for its titling efforts. In 1988, the ILD embarked on a media campaign and presented a draft Property Rights Registry law to the Peruvian congress. The legislation passed, creating a national property registry, which the ILD ran on behalf of the Fujimori government between 1990 and 1996. The Fujimori government, the ILD and the World Bank then partnered on a pilot titling project, but de Soto soon parted ways with them. Beginning in 1996, Fujimori and the World Bank scaled the ILD’s property rights reforms. By 2003, an estimated 7 million people had been affected and 1.2 million urban households had received titles, bringing over $4 billion in “hidden” assets into the formal economic system. According to the World Bank’s Doing Business report, titling costs further fell between 2005 and 2012, from five procedures, 33 days, and a 3% cost of property value to 4 procedures and 7 days, while the 3% cost remained. Peru was ranked 21st globally in titling ease. Yet the individual impact of this titling effort has been less clear. Although individual investments in properties did rise by two-thirds (Field 2005) and titling may have freed up labor for more productive activities since less effort was given to protection (Field 2007), there was no evidence that titles increased credit access (Field and Torero 2006). Contract Enforcement The only significant institutional domain not addressed in Peru was contract enforcement. In 1992, the ILD presented draft legislation, which created a legal channel for parties to bypass the judicial system and resolve disputes via arbitration. The proposal led to the inclusion of certain provisions in an arbitration law passed that year and later in a 1996 property rights law to help resolve ownership conflicts. However, arbitration did not emerge as a viable option for the resolution of commercial disputes between small-scale entrepreneurs. Meanwhile, contract enforcement remained as costly in the 2000s as in the 1980s. In 2012, the World Bank’s Doing Business report estimated that it took over three years and cost 7% of one’s estate to recover

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Unbundling Institutional Reform 151 28 cents on the dollar. And even if courts did rule in one’s favor, entrepreneurs still had difficulty enforcing the court’s judgment (Elena et al. 2004). Peru’s ability to enforce contracts ranked 100th globally. In sum, between the mid-1980s and the mid-2000s, Peru stabilized its economy and embarked on sustained growth, created arguably the globe’s most sophisticated microfinance industry, reduced new business registration costs and strengthened access to formal property rights (see Figure 10.1). Given the success of individual reforms, one would expect that they fostered considerable firm growth, especially in marketplaces such as Gamarra. One would presume informality to have decreased, for better laws to have created greater economic efficiency and for incremental improvements in specific laws to have increased overall efficiency in the operating environment. But when viewed holistically, what operational impact did these reforms really have? An answer lies in Gamarra, where a new challenge to firm growth emerged. Many small-business owners who benefited from the reforms (i.e., modification of the ex ante rules of the game) continued to confront obstacles in the economic governance system’s operation (i.e., in the ex post play of the game). While there was an uptick in income following reforms and the number of firms expanded from 6,800 in 1994 to roughly 17,000 in 2008, entrepreneurs saw earnings stagnate and decline in the first decade of the 2000s. Why? When interviewed, owners did not identify property rights protection, business formalization or the lack of credit as a major obstacle. They have less of a fear of detection, though many worry about the state tax agency, and they have greater access to financing, though some complained of high interest rates. Instead, entrepreneurs spoke most about fierce market competition, low sales, shrinking profit margins, underutilized capacity and the lack of trust between firms (see also Ministerio del Trabajo 2008). What happened? Fieldwork was done in Gamarra to answer this empirical question. During data collection, which included 23 semistructured interviews and participant observation, a classic economic dilemma and an ideal natural experiment emerged. To ask why Gamarra’s firms cannot either grow or create alliances, especially to meet export demands, is akin to asking what explains firm size, the problem upon which transaction cost economics was built (Coase 1937).

Postreform: A Vicious Cycle in Gamarra Reforms in the 1990s lowered entry barriers to such a point that they incented firm creation, which increased anonymity, weakened existing informal contract enforcement mechanisms, and hindered firms from specializing in order to capture gains from trade. Gamarra’s entrepreneurs are forced to “rationally” stay small because they are squeezed.

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Figure 10.1

1994: 382,100 new firm registered since 1991

Overlapping business environment reforms in Peru

1990

1992: ILD presents draft arbitration law. Does not emerge as viable option

1990: ILD manages property registry

1990: Government creates of Unified Business Registry

2008: 3% default rates, $3.5 billion microcredit, 36% annual interest rate

2008: GDP growth 14 of last 15 years

2000

2003: 7 million people, 1.2 million households affected

2003: 61 days, $163 to register a business in Gamarra

2000: 6% Microcredit default rates

1996: arbitration included in property rights law

1996: Property rights law passes, World Bank scales reforms

1996: 1995: $162 million in microcredit, Microfinance Law passed with 84% annual interest rate

1989: GDP 1990: Fujishock 1993: Inflation shrinks by- inflation reaches drops to 49% 7,479% 13.4%

1988: ILD presents property registry law to Congress

1981: 289 days, $1,231 to register a business in Gamarra

1980

Contract Enforcement

Property Rights

Business Registration

Microcredit

Macroeconomy

2010

2012: Peru 100th globally in contract enforcement

2012: Peru 21st globally in titling ease

2012: Peru 55th globally in business registration ease

2012: Peru globe’s most advanced microfinance industry

Unbundling Institutional Reform 153 The cycle emerged innocently. The majority of Gamarra’s business owners, located in a 21-block area, began either as poor Andean migrants or as their sons and daughters. Most, beginning with the first arrivals in the 1950s, started as street vendors with nothing more than the small amount of capital they had scraped together and a ferocious drive to improve their situation. Whether they were founders or latecomers, Gamarra’s entrepreneurs adhered to the holy trinity of capital’s logic: work, save, reinvest. They labored 60 to 70 hours per week and were frugal with their earnings, conceptualizing spending decisions as a choice between “business” and “home.” Home expenses were limited to food, clothes, and, most importantly for them, education for their children. Many avoided investing in additional goods or home repairs because, as one entrepreneurial daughter of a Gamarra businessman said, “to invest in the home is dead capital.” It did not offer any return. Gamarra’s founders benefited from first-mover advantage and spoke nostalgically about the 1960s and 1970s. “Anything you made was sold,” one pioneer said. “You couldn’t manufacture fast enough.” Although firms had formalization problems and thus little access to formal credit, they offset this by extending credit to one another. But by the mid-2000s, this practice was becoming the exception rather than the rule. Most businesses paid suppliers up front and offered credit only to those with whom they had traded for years. With improved business registration, titling reforms, more microfinance and the willingness of larger banks to extend loans, credit became readily available without the need of using titles as collateral. Despite improved credit access, many owners expressed an ambivalent attitude toward external financing, shunning it because of either what they saw as high interest rates or a general aversion to debt. In 2003, of the 44% of the firms who accessed some form of credit, 57% came from banks and 34% from family and friends, while dedicated microfinance entities accounted for less than 4% (Prompyme 2003). But the most striking characteristic of Gamarra’s entrepreneurs was neither their work ethic nor their capacity to save and reinvest. It was their drive for independence. The goal of hired workers, street vendors and the sons and daughters of entrepreneurs was to “be independent,” to establish their own income stream by starting their own business. A combination of economic and sociocultural factors helps explain this drive. First, Gamarra has relatively low entry barriers. Second, worker salaries often do not meet income needs. And third, the ideal of becoming a business owner offered many pride and self-respect. Regardless of the explanation, the drive to be independent initiated a firm multiplier effect that led to fierce industry rivalry and greater anonymity. Both created a series of problems. First, low entry barriers and set-up costs, resulting from improved formalization procedures and the laborintensive nature of the industry, crowded the industry and eroded profit margins. Competitor rivalry turned Gamarra into a buyer’s market. Second,

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lower purchasing and production costs could offset this, but economies of scale cannot be achieved. Smaller firms do not have bargaining leverage with suppliers, and low levels of technology and limited market size result in excess capacity. Third, greater anonymity increased opportunistic or shirking behavior that, because of Gamarra’s size, cannot be checked by informal contract enforcement mechanisms. This industry environment creates enforcement problems both between and within firms, which squeezes businesses and forces them to “rationally” stay small. Experience taught Gamarra’s business owners that each transaction presented a risk of loss. A couple walks up to your stand and places an order for 500 T-shirts. They leave a small down payment, but when they return they renege on the deal and refuse to pay. Since agreements are oral you cannot demand payment, and because of Peru’s high court enforcement costs, you never bothered to sign a contract. Owners fought these problems with the same informal solutions de Soto identified in the 1980s—reputation, investment in information, social networks, collective organizations and even violence. But these solutions had limited efficiency because of Gamarra’s growth and anonymity. Combine this problem with a fiercely competitive market, and owners jealously guarded their goods and services. Every day owners extended less credit as businesses came to depend more on formal financing, and demand more up-front cash payments in order to reduce risk of loss. Most owners can tell a story of how a prosperous business went under because of one bad deal. The risks were so high that entrepreneurs opted to reduce them by eliminating more market activities and integrating them into their firm. Attempts at joint production highlight these between-firm obstacles. When several firms come together to fill an export order, they must set the conditions of their association by specifying liability, property rights divisions, and quality-control procedures. The challenge is twofold: to specify rights and operational protocol ex ante and to enforce the agreement ex post should a firm not fulfill its obligation. But again, anonymity in the absence of effective enforcement (either because courts are inefficient or because informal strategies are limited) creates problems. Since businesses use joint production to fill short-term orders, the risk of partners’ stealing designs and taking advantage of supplier contacts after the contract ends impedes full development of trust. In light of such costs, owners again rationally choose to integrate activities into their firm. Given this, one would think that Gamarra’s firms would have extra incentive to grow. But they are squeezed. The push to integrate runs up against internal agency costs. Owners find it difficult to enforce employer– employee and owner–manager contracts. How can a firm provide incentives for employees to work in the firm’s or the owner’s best interest when many employees also rationally seek to become independent and start their own business once the opportunity arrives?

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Unbundling Institutional Reform 155 Gamarra’s owners resort to four strategies. First, many rely heavily on piece-rate labor, since workers respond to production incentives. Second, most prefer to hire only those who are recommended by friends or family. Third, owners delegate major responsibilities in the firm only to “trustworthy people,” such as family members or close friends who constitute its inner circle. And fourth, some firms have begun to subcontract activities, an option that has grown given the excess capacity of some businesses. But piece-rate and service contracting just brings us back full circle to betweenfirm enforcement issues. In sum, the leading cause of firm size became contract enforcement. Property rights and business legalization reform lowered entry barriers to the point where they resulted in a perverse firm-multiplier effect that exacerbated contract enforcement problems and, ultimately, stunted firm growth. Gamarra’s firms stay small because they are squeezed. On the one hand, they are pushed to integrate activities within the firm, yet there they run up against internal agency costs. On the other hand, internal agency costs force them to return to the market to subcontract, yet there they face contract enforcement issues. In the end, owners opt to do the work themselves— sewing, accounting, purchasing and marketing—and productivity suffers because they cannot achieve gains from specialization. Government surveys capturing firm creation and turnover data between 2003 and 2008 support the multiplier effect hypothesis. In 2003, only 29% of Gamarra’s firms had operated for three years or less, and by 2008 this figure had risen to 52% (see Figure 10.2). Meanwhile, firm size stayed the same in that over 90% of the firms employed seven or fewer workers (Prompyme 2003; Ministerio de Trabajo 2008). 60 52.1 44.4

45

30.6

30

26.4 23.7

Less than 1 year 1 to 3 years 4 to 5 years 6 or more years

17.1 15 5.5 0

0.3 2003

2008

Figure 10.2 Years of operation (% of firms in Gamarra)

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Theory would expect that Gamarra’s entrepreneurs would have an easier time solving the contract enforcement problems on their own compared to high business registration costs or insecure property rights (Acemoglu and Johnson 2005). Yet this has not been the case.

Seeking Alternative Contract Enforcement Solutions Gamarra relies on two types of contract enforcement—organic private and designed public-order mechanisms. But both have proved inadequate. Organic private-order enforcement refers to both bilateral and multilateral reputation strategies. Bilateral enforcement occurs when parties enter into an exchange in which the credible threat of the “cheated” punishing the “cheater” discourages breach. This usually happens in small communities where markets are thin and information about buyers and sellers is more available. Such conditions exist in Andean villages where local kinshipbased reciprocity practices prevail and were used upon arrival in Lima (Bird 2010a). However, Gamarra’s growth and increasing anonymity make the formation of these relationships more difficult. They require high initial investments of time in order to build trust. Given this, many firms also rely on a multilateral reputation mechanism, which occurs when several parties share information and are responsible for sanctioning cheaters, even if they were not directly hurt. In Gamarra, this emerged organically through gallery cooperatives. For example, firms may share a retail space and pay a joint fee for shared services, such as fixing a stairwell. When people do not pay, the cooperative posts a list of names and amounts owed, which damages reputations. But once again, Gamarra’s growth limits this mechanism’s efficiency since its effectiveness depends on how quickly information can be processed and shared. Firms move from gallery to gallery and easily get lost in Gamarra’s sea of anonymity. For these reasons, some theorists trumpet the importance of designed public order mechanisms. This refers to the creation of third-party state legal mechanisms that collect and process information in order to enforce contracts. The upside is that once the system is set up it has lower marginal costs; that is, the cost of enforcing additional contracts is less than with organic reputation mechanisms. But if the state monitors contracts, who monitors the state? Peru’s high level of government corruption, especially in its judicial system, makes court enforcement mechanisms inaccessible. Firms in Gamarra are left to fend for themselves as best they can through elaborate social network and reputation mechanisms. A third logical solution lies nascent but has yet to be explored by members of the cluster—designed, private-order solutions.1 They resemble public-order enforcement because they operate with formalized rules and procedures, but are similar to organic mechanisms because private agents impose sanctions. History is rife with examples of these solutions, from medieval guilds to credit rating agencies to private third-party stock exchanges,

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Unbundling Institutional Reform 157 and in many cases they have substituted for ineffective state institutions (Greif 2005). This mechanism may be more efficient than organic private and public order enforcement because it: • Restructures exchange: Instead of many buyers and sellers searching for one another, they exchange with an intermediary, which minimizes the number of transactions needed to do business. • Reduces information costs: As an intermediary, the mechanism reduces the cost of collecting and processing information on an economic actor, such as past behavior and prior sanctions. • Minimizes agency costs: Self-enforcing exchange gets created because the private intermediary has an economic incentive to be transparent and perform the service well, unlike in government, where corruption is more difficult to monitor and sanction. • Lowers marginal costs: Formalized rules and procedures for information collection and punishment, while requiring high initial fixed costs, are capable of incorporating additional parties and exchanges at a low relative cost because of economies of scale. Each of these characteristics would meet Gamarra’s contract enforcement needs. For example, micro-, small-, and medium-sized businesses need to form alliances in order to export. They cannot compete with Asian, especially Chinese, volume, and thus know that they must adopt two types of strategies: produce for high-quality niche markets using Peruvian pima cotton or serve low-volume niche markets. But to do this, they must join forces to cut costs and standardize production. Or, in more colloquial terms, they must realize that they will make more money together than separately. Yet the solution has yet to arise. UNBUNDLING INSTITUTIONAL REFORM A holistic analysis of Peru’s formalization efforts calls into question three assumptions contained in the institutional analysis of informality, suggesting that policy makers should consider at least three points when designing and implementing these types of interventions.

See Formalization as a Means and Not an End in Itself If the decision to operate outside the formal legal system is a rational decision made in the face of burdensome laws, then it follows that informality or extralegality should decrease after legal reform. Although this appears to have occurred in Peru following business registration and property rights reforms, the Peruvian experience highlights not only the weakness of formalization metrics but also that formalization should not be seen as an end

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in itself. First, extralegality is not categorical since firms may operate informally in several areas at once. Measuring formalization in one dimension, such as titling, leaves another, such as business licenses, untouched. Second, the outcomes of the reform (e.g., number of registered firms or land titles) should not be confused with impact (e.g., whether formalization fosters firm, household and country growth). The latter is the metric for determining whether the returns to reform justified the costs of implementation. In Peru, the extent of reform impact remains unclear.

Assess Alternative Institutional Arrangements and Opt for Greater Efficiency Formalization outcomes are often confused with impact because the assumption is that “better” law leads to greater economic efficiency. But this is not always so. Consider land titling. Formalization improves efficiency only under certain conditions—such as when there is true competition over alternative uses (Alston et al. 2009). Yet when land is abundant, the efficiency gains from formal property rights are negligible compared to informal open-access arrangements. Likewise, a similar calculus of the efficiency of alternative economic governance mechanisms, such as that of contract enforcement, may also be made (Greif 2005; Dixit 2007). The efficiency gains from formal contract law may be negligible in the face of organic, private-order bilateral and multilateral mechanisms. Furthermore, the formalization of property rights does not appear to have increased credit access. Informality matters because it is assumed to be inefficient, yet sometimes extralegality is just as efficient next to well-designed and functioning formal law. When considering reforms, policy makers should treat formality and informality on equal terms and then assess them according to an efficiency criterion.

Be Aware of the Systemic Nature of Reforms It is assumed that improvements in any aspect of informality will contribute to general improvements in the operational environment. Yet as evidenced in Gamarra, formal laws and extralegal solutions exist—together—as elements of an institutional system of economic governance. Following reforms in Peru, a firm multiplier effect set in, creating new contract enforcement problems. This new context forced entrepreneurs to “rationally” stay small. Despite the “success” of individual reforms (as measured by outcomes), the total operating environment did not necessarily improve. When considering reforms, policy makers should examine them as parts of an institutional system and anticipate interaction effects. This requires scholars to ask less about the relative performance of economic governance institutions (Acemoglu and Johnson 2005) and focus more on developing systemic frameworks that predict interactions. With these frameworks in hand, attention could

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Unbundling Institutional Reform 159 be paid to bundling interventions when enacting reforms such as those proposed by the Commission for the Legal Empowerment of the Poor (2008). While institutional reforms have much promise, better designs and more effective interventions require policy makers to question implicit assumptions—see formalization as a means and not an end in itself, assess alternative institutional arrangements and opt for greater efficiency, and be aware of the systemic nature of reforms. Otherwise, unexpected and pernicious effects may result, as was the case in Gamarra. NOTE 1. The creation of a private, for-profit, third-party contract enforcement mechanism, proposed in an earlier policy essay (Bird 2007), is now being designed with support from the Innovations in Poverty Action’s Small- and MediumSized Enterprise (SME) Initiative.

REFERENCES Acemoglu, Daron, and Simon Johnson. “Unbundling Institutions.” Journal of Political Economy 113 (2005): 949–95. Alston, Lee, Edwyna Harris, and Bernardo Mueller. “De Facto and De Jure Property Rights: Land Settlement and Land Conflict on the Australian, Brazilian, and US Frontiers.” NBER Working Paper No. 15264, 2009. Bettcher, Kim, Martin Friedl, and Gustavo Marini. “From the Streets to Markets: Formalization of Street Vendors in Metropolitan Lima. Center for International Private Enterprise.” REFORM Case Study. No 0901, 2009. Bird, Matthew. “Traveling Down the Other Path: Learning to See Extra-legality as an Investment Opportunity.” In Business and Development: The Private Path to Prosperity, edited by Michael Klein, 16–25. Washington, DC: International Finance Corporation/Financial Times, 2007. Bird, Matthew. “Critique of Reciprocity: Shifting uses of Ayni among Andean groups.” In Cooperation in Social and Economic Life, edited by Robert Marshall, 55–79. Lanham: AltaMira, 2010. Coase, Ronald. “The Nature of the Firm,” Economica 4 (1937): 386–405. Commission for the Legal Empowerment of the Poor. Making the Law Work for Everyone. New York: United Nations Development Program, 2008. de Soto, Hernando. El Otro Sendero. Lima: Instituto Libertad y Democracia, 1986. de Soto, Hernando. The Mystery of Capital. New York: Basic Books, 2000. Dixit, Avinash. Lawlessness and Economics: Alternative Modes of Economic Governance. Princeton, NJ: Princeton University Press, 2007. Conger, Lucy, Patricia Inga, and Richard Webb. El Arbol de la Mostaza. Historia de las Microfinanzas en el Perú. Lima: Universidad de San Martin de Porres, 2009. Economist Intelligence Unit. Global Microscope on the Microfinance Business Environment. London: Economist Intelligence Unit, 2011. Elena, Sandra, Alvaro Herrero, and Keith Henderson. “Barriers to the Enforcement of Court Judgments in Peru. Winning in Court is only Half the Battle: Perspectives from SMEs and Other Users,” IFES Rule of Law Occasional Working Paper Series, 2004.

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Field, Erica. “Property Rights and Investment in Urban Slums.” Journal of the European Economic Association 3 (2005): 279–290. Field, Erica. “Entitled to Work: Urban Property Rights and Labor Supply in Lima, Peru,” Quarterly Journal of Economics, 122 (2007): 1561–1602. Field, Erica, and Máximo Torero. “Do Property Titles Increase Credit Access Among the Urban Poor?” Mimeo, Princeton University, 2006. Greif, Avner. “Commitment, Coercion, and Markets: The Nature and Dynamics of Institutions Supporting Exchange.” In The Handbook for New Institutional Economics, edited by Claude Menard and Mary Shirley, 727–86. Norwell, MA: Kluwer Academic, 2005. Hart, Keith. “Small-Scale Entrepreneurs in Ghana and Development Planning,” Journal of Development Studies 6 (1970): 104–20. Jaramillo, Miguel. “Starting a Garment Manufacturing Firm in Peru: Background and Case Study.” Research Report 1. St. Louis, MO: Ronald Coase Institute, 2004. Ministerio del Trabajo del Perú. Necesidades de Gamarra frente al TLC. Lima: Ministerio del Trabajo, 2008. Prompyme. Documento de trabajo sobre los principales resultados hallados en la Encuesta a los Empresarios de Gamarra. Lima: Prompyme, 2003. World Bank. Doing Business in a More Transparent World Report—Peru. Washington, DC: World Bank, 2012.

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11 Tackling Informal Entrepreneurs Tailoring Policy Measures to the Varieties of Informal Entrepreneurship Colin C. Williams

It is now widely recognized that the informal economy is a widespread phenomenon and growing relative to the formal sector, not only in developing and emerging markets but also in Western economies (Jütting and Laiglesia 2009; Marcelli et al. 2010; Schneider 2008). Given that in advanced Western societies, the majority of entrepreneurs start up their business ventures trading wholly or partially in the informal economy (Williams 2006a), the aim of this chapter is to identify entrepreneurs’ motives for operating informally so as to determine whether a “one-size-fits-all” policy approach is appropriate or whether different policy interventions are required to tackle different types of informal entrepreneurship. To this end, the first section will briefly review the existing literature on informal entrepreneurship and show that few if any studies have evaluated entrepreneurs’ rationales for operating informally. The second section will then report the methodology used to identify these rationales in a UK locality (kept anonymous to preserve the anonymity of the participants), and the third section will report the findings. The fourth section will discuss the lessons for tackling informal entrepreneurship. The final section will then draw out conclusions and make a call for further research and evaluation of the wider validity of the policy interventions required. Before beginning, however, a clear definition of informal entrepreneurship is required. If we define an entrepreneur as someone actively involved in starting a business or the owner/manager of a business less than 36 months old (Harding et al. 2005; Reynolds et al. 2002), and the informal economy as involving monetary transactions not declared to the state for tax and/ or benefit purposes when they should be declared but which are legal in all other respects (e.g., European Commission 2007; Williams 2006a), informal entrepreneurship can be defined here as encompassing those who have owned or managed a business for less than 36 months and who participate in monetary transactions not declared to the state for tax and/or benefit purposes when they should be declared but which are legal in all other respects.

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INFORMAL ENTREPRENEURS AND THEIR MOTIVES: A LITERATURE REVIEW A review of the vast literature on entrepreneurship reveals that few commentators have analyzed the relationship between entrepreneurship and the informal economy. As Williams (2006) and Jones and Spicer (2005, 2006) explain, this absence stems largely from the fact that the entrepreneurship discipline remains dominated by a wholesome, positive and virtuous representation of the entrepreneur as a superhero (Burns 2001; Cannon 1991). The result is that the forms of entrepreneurship that tarnish this ideal are positioned either outside the boundaries of entrepreneurship, ignored, portrayed as temporary or asserted to have little to do with “proper” entrepreneurship. Nevertheless, since the turn of the millennium, a small but growing tributary of the entrepreneurship literature has begun to evaluate this relationship between entrepreneurship and the informal economy (Gurtoo and Williams 2009; Llanes and Barbour 2007; Ram et al. 2007; Small Business Council 2004; Venkatesh 2006; Webb et al. 2009; Williams 2006a, 2006b). One of the few studies to evaluate whether entrepreneurs commonly trade in the informal economy finds that 100%, 90% and 77% of entrepreneurs surveyed in Russia, Ukraine and England, respectively, trade partially or wholly informally (Williams 2009). Although based on a survey of just 81 entrepreneurs in Russia, 331 in Ukraine and 91 in England, the strong intimation is that this is not a minority practice. Informal entrepreneurs, however, differ both in terms of the degree to which they trade in the informal economy and whether they have any intention of formalizing. In Russia, 96% trade wholly in the informal economy, 51% in Ukraine but just 20% in England (Williams 2009), although 31% do so in low-income English localities compared with 6% in affluent areas (Williams 2010). In analyzing whether informal entrepreneurs intend to formalize, meanwhile, we find that around a half to two-thirds in these countries report that they are moving towards legitimacy (Williams 2009). Four waves of thought can be identified with regard to whether the reasons for informal entrepreneurs’ starting up businesses are similar to those for formal entrepreneurs. Replicating the formal entrepreneurship literature by differentiating between “necessity” entrepreneurs pushed into entrepreneurship because other choices are absent or unsatisfactory and “opportunity” entrepreneurs doing so out of choice, a first wave of studies simply assumed that informal entrepreneurs were all necessity driven (Boyle 1994; Sassen 1997). A second wave argued the opposite, namely, that they voluntarily chose to be entrepreneurs (Gerxhani 2004; Maloney 2004). A third wave explored the ratio of necessity-to-opportunity entrepreneurs (Edgcomb and Thetford 2004). A recent fourth wave, mirroring studies of legitimate entrepreneurs’ motives (Aidis et al. 2006), reveals how opportunity- and necessity-drivers can be copresent in informal entrepreneurs’ motives, and the balance can shift over time (Snyder 2004; Williams 2009, 2010).

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Tackling Informal Entrepreneurs 163 However, these studies only evaluate informal entrepreneurs’ motives for engaging in entrepreneurship, not their reasons for operating in the informal economy. To date, these motives have seldom been evaluated. The aim of this chapter is to begin to fill that gap so as to understand the policy interventions required to tackle informal entrepreneurship. EXAMINING INFORMAL ENTREPRENEURS’ MOTIVES IN A UK LOCALITY To evaluate this sensitive issue, and given that a large proportion of UK businesses are home based (Mason et al. 2009) and that informal entrepreneurship is relatively more prevalent in deprived localities (Williams 2006a), face-to-face interviews using a household rather than business premise survey were conducted with entrepreneurs in a relatively deprived locality in a rural region of the UK during 2006. To select households, a spatially stratified sampling technique was employed (Kitchin and Tate 2001). Given that there were some 20,400 households in the locality surveyed and 700 household interviews were sought, the researcher called at every 29th household. If there was no response and/ or an interview was refused, then the 30th household was visited, then the 28th, 31st, 27th and so on. This spatially stratified sample meant that the interviews were representative of the locality. For each household, furthermore, the “closest birthday” rule was used to select respondents for interview among those available in the household at the time. To collect data, the interview schedule gradually moved towards the more sensitive questions. Firstly, sociodemographic background data on the household were collected in terms of the age, gender, employment status and work history of household members as well as gross household income, including whether any household member had started up a business venture in the past 36 months. If no new business venture was identified, the interview was ended. If identified, then, secondly, the nature of their business start-up was investigated, including the number employed, the length of time it had existed, economic sector and the level and nature of the income. Thirdly, attitudinal questions were asked about the extent of the informal economy in their sector. The fourth section then moved onto whether their business start-up traded in the informal economy. This firstly asked, “Many businesses start-up doing some of their transactions partially or wholly offthe-books. Did you do any off-the-books transactions at the start of your business?” Following this, further probes enquired about whether they continued to do so, whether the proportion was changing and whether they were seeking to formalize or not. The fifth and final section asked openended questions about their reasons for trading in the informal economy, both at start-up and at present, if relevant. Further probes included the interviewer inflecting their first response, such as “only to avoid paying tax?” and asking “are there any other reasons?”

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The results are evaluated below. Before doing so, however, it is important to state that this was a challenging survey to conduct, as has been previously identified by others conducting surveys of the informal economy (e.g., Vershinina and Rodionova 2011). Participants often became fearful when responding to questions about their own informal economy practices and needed to be constantly assured that we were university academics and that the responses would be anonymous. Nevertheless, participants were generally reluctant to provide detailed responses, often simply providing oneword or one-sentence answers. As a result, the interview transcripts were largely rather “thin.” All interview transcripts were nevertheless subjected to a thematic analysis, with the themes determined predominantly by the interview questions. More elaborate coding systems commonly associated with the thematic analysis of qualitative data were unnecessary due to the limited depth and complexity of the data generated. EVALUATING INFORMAL ENTREPRENEURS’ MOTIVES IN A UK LOCALITY Some 97 households had one or more members who had started a business in the past 36 months and these households had been involved in 120 business start-ups over this time period, signaling how some households had started multiple businesses. Of these 120 business start-ups, 72 (60%) were registered and had not reportedly traded in the informal economy whereas 48 (40%) reported that they had engaged in the informal economy. Of these, 10 (8% of all business start-ups and 21% of all business startups trading in the informal economy) were unregistered, wholly informal enterprises, 15 (13% of all business start-ups and 31% of all those trading informally) were registered enterprises trading partially in the informal economy with no intention of more fully formalizing, and 23 (19% of all business start-ups and 48% of those trading in the informal economy) were registered enterprises trading in the informal economy but in transition to legitimacy. Why, therefore, did these entrepreneurs participate in the informal economy? A thematic analysis of the transcripts suggests that the reasons differ according to the extent to which they operated in the informal economy and whether or not they viewed themselves as moving towards greater formality. Consequently, we analyze entrepreneurs’ reasons for operating in the informal economy by differentiating three types of informal entrepreneur: wholly informal entrepreneurs, with no intention of formalizing; entrepreneurs with registered enterprises operating partially in the informal economy, with no intention of more fully formalizing; and entrepreneurs with registered enterprises trading partially in the informal economy but formalizing. None of the wholly informal respondents who had an intention of formalizing were identified.

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Motives of Wholly Informal Entrepreneurs with No Intention of Formalizing An examination of the 10 wholly informal entrepreneurs surveyed revealed three subgroups according to the entrepreneur’s employment status. Firstly, four were registered unemployed people who, due to their uncertainty regarding the viability of the business as a means of livelihood, did not want to declare their earnings for fear of losing their welfare benefits. As an unemployed male participant running an odd-jobs business stated, “I don’t earn enough to make a living out of it. Some weeks I get work, others I don’t. . . . It’s too complicated with my benefits to tell them about it.” All four viewed operating legitimately as too costly due to the taxes and national insurance payments they would owe, concluding that it was simply “not worth it.” Indeed, most only did jobs for people they knew so as to keep the enterprise “hidden,” which led them to view it as not a “real business.” As an unemployed man who worked as a painter and decorator stated, “Often they pay you much more than they should do. And other times I charge much less than the going market rate. It’s not really a real business then is it.” However, they agreed that if their clientele and turnover expanded, they would consider registering the business: I just do it for people I know. I don’t advertise. If I were to, I would have to tell the social. Not at the moment though. It’s not a proper business. I don’t advertise, have premises and all that. If I did, I’d tell them. The reasons these registered unemployed operate wholly informal enterprises, therefore, are: the perceived difficulties involved in declaring their enterprises while claiming benefits; the limited and intermittent income received; and their view that their enterprise is not a real business because the clients are closer social relations, they often do not receive or charge market rates and do not have business premises. Secondly, three economically inactive participants (two house persons married to an employed person and a retired person) operated wholly informal enterprises. One was an upholsterer for whom it was additional household income she saw no reason to declare since she considered that her husband contributed sufficient taxes. A retired woman making and selling dog accessories saw her activities more as a hobby than a business venture and a supplement to her state pension. She believed that she had contributed enough tax over her lifetime. None had any intention of registering their business. Their rationale for operating as wholly informal entrepreneurs, therefore, primarily revolves around a lack of tax morality and a view that it is not a proper business. Thirdly, three formal employees operated wholly informal enterprises, namely a satellite dish installer, a solicitor and a plumber. All were “parasitic”

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ventures, making contact with customers via their formal employment and then doing the jobs informally during the weekends or evenings for cheaper rates. None viewed it as possible to register the business because firstly, it would signal to their existing employer that they were operating this business venture, secondly, they viewed it as an illegitimate venture and thirdly, they believed that if they paid taxes and so on, they would not be able to undercut their current employer on price. None, therefore, saw establishing their own legitimate enterprise as viable and were happy to continue operating wholly in the informal economy.

Motives of Partially Informal Entrepreneurs with No Intention of Further Formalizing Some 15 informal entrepreneurs were interviewed who had registered their enterprise but worked partially in the informal economy and who had no intention of more fully formalizing. Some of these informal entrepreneurs declared earnings up to the tax-free limit, and anything over were not declared. Some declared only the earnings when an invoice was requested but not when cash was paid, and some explicitly and continuously requested cash payments and only declared earnings not paid in cash. Why, therefore, did these entrepreneurs operate in the informal economy? Firstly, four viewed themselves as engaged in small-scale fiddling and therefore not as accountable as “bigger players.” As a second-hand bookseller stated, “I just don’t put through the till all my sales. It’s hardly grand theft is it like the big multinationals not paying tax?” Secondly, eight asserted that working in the informal economy had positive rather than adverse consequences. As a plumber commented, “I do jobs for retired people for cash so that they can afford it. That’s charity, not tax fiddling.” Thirdly, seven blamed the law, government or tax authorities for their actions. As a landlord of a public house stated, “The government do nothing for us, so why pay tax when I don’t have to.” Fourthly, nine deemed it acceptable to trade in the informal economy because everybody else did. As a painter and decorator stated, “Ideally, you’d put everything through the books, but in my trade, it’d make you on an uneven playing field”. Fifthly, 13 viewed it as a financial necessity in order for the enterprise to remain solvent. As they variously put it, “You wouldn’t make a profit if you didn’t do cash-in-hand,” “a few offthe-books jobs make all the difference,” and “it stops you going under.” None of these entrepreneurs with registered business ventures but operating partially in the informal economy had experienced problems formally registering their business. Generally, they perceived this as very easy. As one put it, “It was easy enough. One phone call and you’re registered.” However, registering as a company or partnership was viewed as more troublesome. They complained about the amount and length of time involved. Completing annual tax returns was also seen as problematic and worrisome. Participants stated that it was “nervewracking,” “scary” and “hard work.”

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Motives of Partially Informal Entrepreneurs in Transition to Legitimacy In addition to the 72 entrepreneurs interviewed who reportedly operated wholly in the formal economy, a further 23 entrepreneurs operated partially in the informal economy but were in transition to formality. For these entrepreneurs, who were either formalizing or formalized, the key reason for formalizing was to access new markets and to enable the business to grow. Indeed, the widespread belief was that most entrepreneurs start off trading in the informal economy but formalize over time. As a builder asserted, “a lot of cash-in-hand work goes on around here, especially in the early stages of a business.” Or, as a motor vehicle repair business put it, “there are a lot of people making money off-the-books working from inside their own garage when they first start out. It’s the only way that they have got of getting started.” As they become established, however, a formalization process is observed. As one entrepreneur commented, It’s all large projects now. We make staircases so there is little opportunity even if we had the inclination. For others starting up though, it’s a common strategy. It helps them get a foothold and get established. As a motor vehicle repair garage owner put it, “Once you get a loyal customer base, you don’t need to undercut your competitors.” For many, therefore, there is a natural succession from informality to formality. Four principal barriers to formalization, however, were identified by these entrepreneurs who had either gone through a process of formalization or were currently doing so: the complexity of the compliance procedures (“it is so difficult knowing what you need to do to be legit”); customers who demand “how much for cash?”; a lack of advice on how to move from informality to formality; and a perception in the early stages of a business that the benefits might not outweigh the costs. However, all of these participants were advocates of formalization due to the new markets it opened up, the positive sense of identity brought about by being a “proper” business and the fact that they were able “to sleep well at night without fear of being caught for working off-the-books.”

POLICY IMPLICATIONS: TOWARDS A TAILORED APPROACH Given the contrasting rationales for operating in the informal economy among these three kinds of informal entrepreneur, policy measures will need to be tailored to tackle each kind of informal entrepreneurship. Below, the policy measures required for each type of informal entrepreneur is considered in turn.

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Tackling Wholly Informal Entrepreneurs with No Intention of Formalizing For informal entrepreneurs who were registered unemployed and operating wholly informal enterprises, a first step to facilitate formalization would be to change the earnings disregard (i.e., the amount the unemployed can earn without losing entitlement to their benefits) to an annual rather than weekly disregard. This would instantly formalize much of this endeavor. However, it would provide no incentive to expand the business since turnover would need to remain below the annual earnings disregard. To encourage the further growth of their business venture and help them smooth the transition to self-employment, a gradual replacement of welfare benefits by self-employed income could be used. An example is the Ich AG scheme in Germany. Unemployed people starting up as self-employed receive 50% of the average unemployment benefit level in the first year, 30% in the second year and 20% in the third and final year. The German government expected around 20,000 start-ups to be launched (Renooy 2007). Between 2003 and 2006, however, 400,000 entrepreneurs were supported and 75% were still in operation 28 months later. Given that 60% had already acquired their first customers before entering the Ich AG scheme (Baumgartner et al. 2006), this measure secured the formalization of some 240,000 business start-ups. To tackle entrepreneurs who are officially defined as economically inactive but in practice operate wholly informal enterprises, tax authorities could recognize that many perform small jobs in the informal economy on an own-account basis and allow them to do so up to a tax-free limit and/or with greatly reduced tax and social contribution rates if declared on their self-assessed tax return. Doing so would instantly formalize such enterprising endeavor. A “mini-jobs” category in Germany did precisely this by allowing earnings up to €800 per annum at greatly reduced tax and social contribution rates. By 2004, 7 million people had registered and 580,000 were estimated to have formalized their small-scale off-the-books endeavor using this scheme (Baumann and Wienges 2003). Finally, to tackle informal entrepreneurs who are working formal employees but operating “parasitic” business ventures that steal clients from their formal employer, one approach is to encourage greater commitment to tax morality via education campaigns (see below). Another is to encourage employers to pay fairer wages and to work towards strengthening the psychological contract between employers and employees.

Tackling Partially Informal Entrepreneurs with No Intention of Further Formalizing For entrepreneurs with registered businesses but trading partially in the informal economy and no intention of further formalizing, registering as

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Tackling Informal Entrepreneurs 169 self-employed was not problematic. However, registering as a company was not so easy. To overcome this obstacle, public policy could make it easier to register a formal business, provide help-lines and cut out some of the steps involved. For example, the “On the Spot” firm (Empresa na Hora) initiative introduced in 2005 in Portugal enables the creation of a company in a onestop shop in a single day. Between 2005 and 2008, 59,068 new enterprises were created in an average time of 1 hour and 14 minutes at an average cost of €360 (Williams and Renooy 2009). The stress involved in completing tax returns could be reduced by introducing a standard deduction for expenses in different sectors (Elffers and Hessing 1998). A preventative measure would be to introduce certified cash registers to prevent retail businesses from deleting some sales at the end of the day or making sales in “training position,” resulting in cash not being registered but customers getting a receipt. This initiative was introduced in Sweden in 2010, requiring anybody selling goods and services in return for cash payments to have a certified cash register (Williams and Renooy 2009). Given that many of these businesses see no point in paying their full taxes and that tax morality is highly correlated with the level of tax knowledge (Erikson and Fallan 1996), improving tax knowledge is another route to formalization. Measures might include providing information on where taxes are spent or more broadly, publicity campaigns to win “hearts and minds” to engender a culture of commitment to tax morality so that entrepreneurs would regulate themselves rather than be regulated by external rules. In the UK, an evaluation of the advertising campaigns run by Her Majesty’s Revenue & Customs (HMRC) reveals that 8,300 additional taxpayers registered who would otherwise not have done so, contributing some £38 million over three years, providing a return of 19:1 on the expenditure of £2 million (National Audit Office 2008). Such information campaigns are most effective when they highlight the benefits of formal work rather than the risks and costs of informal work (Torgler 2007). In this regard, the use of “role models,” both at the local and national level, extolling the benefits of full declaration would be useful. However, advertising the benefits of formalizing needs to be coupled with punitive measures for those not making the transition. Telephone hotlines, increased penalties for those caught operating in the informal economy and greater publicity of those caught working in the informal economy would be useful in this regard (Williams and Renooy 2009).

Tackling Partially Informal Entrepreneurs in Transition to Formality For registered enterprises operating partially in the informal economy but moving towards formalization, it is not advertising the benefits of formalization but rather help in tackling the barriers to formalization they face that is required. This requires bespoke advice and support (Copisarow and

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Barbour 2004; Small Business Council 2004; Williams 2006a). One approach is to introduce anonymous telephone lines/Internet chat-lines offering advice to those wishing to leave the informal economy. The development of a “formalization service” is another option. The CUORE (Centri Operativi per la Riqualificazione Economica) initiative in Naples, Italy. is one example. Neighborhood centers provide help and advice to off-the-books entrepreneurs wishing to formalize, devise customized formalization paths and then monitor each step to ensure the path still suits the enterprise. In total, 1,280 informal entrepreneurs have received counseling and 326 problems have been solved. Help is also provided with advertising, training, trade fairs arranged, copyright help provided and aid with internationalizing their markets, thus creating incentives for businesses to formalize (Bàculo 2005). To tackle purchasers who request “how much for cash?”, straightforward income-tax relief can be offered, claimed on (self-assessed) tax returns, to those employing businesses formally to do specific home improvement and maintenance tasks, for example. Another option would be to use service voucher schemes. In Belgium, vouchers can be used to pay for everyday personal services. Each voucher costs €6.70 and pays for an hour of work from certified companies that hire unemployed people. The household pays with the vouchers, which cost €21.00 in 2005 prices. The difference is paid to the company by the federal government. The household can recover 30% of the price of the voucher on their tax return, which means that the price for one hour of work is €4.69. By the end of 2005, 28,933 people had been employed through this service voucher scheme by 792 companies (Gevers et al. 2005). Customer surveys reveal that 44% of the transactions using service vouchers were previously conducted in the informal economy (Renooy 2007). CONCLUSIONS Despite the burgeoning literature on informal entrepreneurship, few if any studies have evaluated why some entrepreneurs operate in the informal economy with a view to understanding how public policy might facilitate their transition towards formalization. To bridge this gap, this chapter reported evidence from 120 business start-ups in a UK locality, of which 48 operated in the informal economy. This survey revealed that entrepreneurs’ rationales for trading in the informal economy vary according to the extent to which they operate in the informal economy and whether or not they view themselves as in transition to formalization. The analysis of wholly informal entrepreneurs with no intention of formalizing reveals that they all tend to conduct intermittent small, odd jobs and not to view their venture as a real business. To tackle these ventures amongst the registered unemployed, changing the weekly earnings disregard for those on welfare benefits to an annual disregard would instantly

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Tackling Informal Entrepreneurs 171 formalize much of this enterprising endeavor. If coupled with allowing a gradual transition from welfare benefits to self-employment, as exemplified by the Ich AG scheme in Germany, these informal entrepreneurs would be able then to expand their business ventures. For the economically inactive, their endeavor could be largely formalized by introducing a “mini-jobs” category of work declared on tax returns but exempted from tax or taxed at low rates. For formal employees operating “parasitic” ventures, engendering greater commitment to tax morality through education campaigns coupled with employers paying fairer wages and a strengthening of the psychological contract between employers and employees is required. To tackle entrepreneurs with registered businesses trading partially in the informal economy and no intention of further formalizing, meanwhile, registering a formal business needs to be made easier by providing help-lines and/or cutting out some of the steps involved. There is also a need to reduce the complexity and stress of completing tax returns, by introducing a standard deduction for expenses in different sectors, for example. Certified cash registers could also reduce informal economy transactions in some sectors, such as retailing. Primarily, however, encouraging tax morality through tax education required. This includes providing information on how taxes are spent to engender a culture of commitment to tax morality so that entrepreneurs regulate themselves rather than be regulated by external rules. Such education campaigns need to focus on the benefits of formalization. Advertising the benefits of formalization, however, needs to be coupled with punitive measures for those not making the transition, including telephone hotlines, increased penalties for those caught and greater publicity of those caught working in the informal economy. For entrepreneurs with registered enterprises trading partially in the informal economy but formalizing, meanwhile, it is less advertising the benefits of formalization than help with tackling current barriers: the complexity of compliance procedures, purchasers who demand “how much for cash?”, lack of advice on how to formalize and the perception that the benefits might not outweigh the costs. To tackle these barriers, a bespoke formalization service, along with anonymous telephone/Internet chat-lines to offer advice and support is required. To combat purchasers requesting off-thebooks transactions, income-tax relief on self-assessed tax returns could be offered when invoices are received for specific household tasks. Alternatively, incentives, such as service vouchers, could be offered to purchasers to use formal services. It is important to state, however, that the above findings are very tentative. They result from analyzing the rationales of only 48 informal entrepreneurs in one UK locality. Further research is required to determine whether the rationales identified here are more widely valid and, therefore, the policy measures more broadly relevant. Hopefully, this chapter will encourage more research on entrepreneurs’ motives for working in the informal economy so that an informed debate can occur on what needs to be done about

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this hidden enterprise culture. If this chapter engenders more discussion on this issue, then it will have achieved its objectives.

REFERENCES Aidis, Ruta, Friederike Welter, David Smallbone and Nina Isakova. “Female Entrepreneurship in Transition Economies: The Case of Lithuania and Ukraine.” Feminist Economics 13 (2006): 157–83. Bàculo, Liliana. “Tackling Informal Employment: The Case of Southern Italy.” International Journal of Manpower 27 (2006): 552–71. Baumann, Arne, and Sebastien Wienges. Policies on Undeclared Labour in Germany. Paper presented at Conference on Undeclared Labour, Malmo, November, 2003. Baumgartner, Hans J., Marco Caliendo and Victor Steiner. “Existenzgründungsförderung für arbeitslose: erste evaluationsergebnisse für Deutschland.” Vierteljahreshefte zur Wirtschaftsforschung 75 (2006): 32–48. Boyle, Evan. “The rise of reluctant entrepreneurs.” International Small Business Journal 12 (1994): 63–9. Burns, Paul. Entrepreneurship and Small Business. Basingstoke: Palgrave, 2001. Cannon, Tom. Enterprise: Creation, Development and Growth. Oxford: Butterworth-Heinemann, 1991. Copisarow, Ruth, and Aaron Barbour. Self-Employed People in the Informal Economy: Cheats or Contributors? London: Community Links, 2004. Edgcomb, Elaine L., and Tamra Thetford. The Informal Economy: Making It in Rural America. Washington DC: Aspen Institute, 2004. Elffers, Hans, and Dooren J. Hessing. “Influencing the Prospects of Tax Evasion.” Journal of Economic Psychology 18 (1997): 289–304. Eriksen, Knut, and Lars Fallan. (1996), “Tax Knowledge and Attitudes towards Taxation: A Report on a Quasi-experiment.” Journal of Economic Psychology 17 (1996): 387–402. European Commission. Stepping up the Fight against Undeclared Work COM(2007) 628 final. Brussels: European Commission, 2007. Gerxhani, Klarita. “The Informal Sector in Developed and Less Developed Countries: A Literature Survey.” Public Choice 120 (2004): 267–300. Gevers, Anallen, An van Pelt, and Analeen Peeters. Evaluatie van het stelsel van dienstencheques voor buurtdiensten en—banen. Brussels: IDEA, 2005. Gurtoo, Anjula, and Colin C. Williams. “Entrepreneurship and the Informal Sector: Some Lessons from India.” International Journal of Entrepreneurship and Innovation 10 (2009): 55–62. Harding, Rebecca, David Brooksbank, Mark Hart, Dylan Jones-Evans, Jonathan Levie, Maureen O’Reilly and Johanna Walker. Global Entrepreneurship Monitor United Kingdom 2005. London: London Business School, 2005. Jones, Campbell, and Andre Spicer. “The Sublime Object of Entrepreneurship.” Organization 12 (2005): 223–46. Jütting, Johannes P., and Juan R. Laiglesia. “Employment, Poverty Reduction and Development: What’s New?” In Is Informal Normal? Towards More and Better Jobs in Developing Countries, edited by Johannes P. Jütting and Juan R. Laiglesia, 1–19. Paris: OECD. Katungi, Dennis, Emma Neale and Aaron Barbour. People in Low-Paid Informal Work: Need Not Greed. York, UK: Joseph Rowntree Foundation, 2006. Kitchen, Rob, and Nick Tate. Conducting Research in Human Geography: Theory, Practice and Methodology. London: Prentice Hall, 2001.

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Tackling Informal Entrepreneurs 173 Llanes, Marlen, and Aaron Barbour. Self-employed and Micro-entrepreneurs: Informal Trading and the Journey towards Formalization. London: Community Links, 2007. Maloney, William F. “Informality Revisited.” World Development 32 (2004): 1159–78. Marcelli, Enrico A., Colin C. Williams and Pascale Joassart, editors, Informal Work in Developed Nations. London: Routledge, 2010. Mason, Colin, Sara Carter and Stephen Tagg. Invisible Businesses: The Characteristics of Home-based Businesses in the United Kingdom. Working paper 08–01. Glasgow: University of Strathclyde Business School, 2008. National Audit Office. Tackling the Hidden Economy. London: National Audit Office, 2008. Ram, Monder, Paul Edwards and Trevor Jones. “Staying Underground: Informal Work, Small Firms and Employment Regulation in the United Kingdom.” Work and Occupations 34 (2007): 318–44. Renooy, Piet. “Undeclared Work: A New Source of Employment?” International Journal of Sociology and Social Policy 27 (2007): 250–57. Reynolds, Paul D., William D. Bygrave, Erkko Autio and Michael Hay. Global Entrepreneurship Monitor: 2002 Executive Monitor. London: London Business School, 2002. Sassen, Saskia. Informalisation in Advanced Market Economies. Issues in Development, Discussion Paper 20. Geneva: ILO, 1997. Schneider, Friedrich. The Hidden Economy. Cheltenham: Edward Elgar, 2008. Small Business Council. Small Business in the Informal Economy: Making the Transition to the Formal Economy. London: Small Business Council, 2004. Snyder, Karrie A. “Routes to the Informal Economy in New York’s East Village: Crisis, Economics and Identity.” Sociological Perspectives 47(2004): 215–40. Torgler, Benno. Tax Compliance and Tax Morale: A Theoretical and Empirical Analysis. Cheltenham: Edward Elgar, 2007. Venkatesh, Sudhir A. Off the Books: The Underground Economy of the Urban Poor. Cambridge, MA: Harvard University Press, 2006. Vershinina, Natalia, and Yulia Rodionova. “Methodological Issues in Studying Hidden Populations Operating in the Informal Economy.” International Journal of Sociology and Social Policy 31 (2011): 697–716. Webb, Justin W., Laszlo Tihanyi, Duane R. Ireland and David G. Sirmon. “You Say Illegal, I Say Legitimate: Entrepreneurship in the Informal Economy.” Academy of Management Review 34 (2009): 492–510. Williams, Colin C. The Hidden Enterprise Culture: Entrepreneurship in the Underground Economy. Cheltenham: Edward Elgar, 2006a. Williams, Colin C. “Beyond the Sweatshop: Off-the-Books Work in Contemporary England.” Journal of Small Business and Enterprise Development 13 (2006b): 89–99. Williams, Colin C. “The Hidden Enterprise Culture: Entrepreneurs in the Underground Economy in England, Ukraine and Russia.” Journal of Applied Management and Entrepreneurship 14 (2009): 44–60. Williams, Colin C. “Spatial Variations in the Hidden Enterprise Culture: Some Lessons from England.” Entrepreneurship and Regional Development 22 (2010): 403–23. Williams, Colin C., and Piet Renooy. Measures to Combat Undeclared Work in 27 European Union Member States and Norway. Dublin: European Foundation for the Improvement of Living and Working Conditions, 2009.

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Part V

Sociocultural Contexts of Informal Entrepreneurship

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12 The Feminine Paradigm of Entrepreneurship in the Informal Economy Marsha A. Tongel

Known as the people’s economy, second economy, and parallel economy (Ocici 2006), a discrepancy exists in how the informal economy is perceived and defined. As an economic force for developing countries, it includes an array of economic activities including food preparers, garment workers, healers, hairdressers and beach/street vendors, as well as people engaged in illicit activities such as prostitution and gambling. Loosely organized, comprised of mostly unregistered enterprises owned at a household level, with few employees, paying little if any relevant taxes or other social contributions (Ocici 2006), it provides a “protective environment,” sparing businesses from burdensome and costly regulations that could prematurely sink or compromise their growth (Portes and Haller 2006). This economy includes nonwage and wage employment that is not recognized, regulated or protected by existing legal or regulatory frameworks as well as nonremunerative work undertaken as part of an income producing enterprise (Hiralal 2010; UNSHP 2006). Nonwage employment includes the self-employed in microenterprises, family businesses and for their own account, whereas regular and casual workers comprise those in wage employment. In either case, this diverse sector has been described as the “survival” sector (Blunch 2001) for many who are in living in poverty. This chapter considers women’s engagement in microenterprise within the informal economy through a feminine critique of existing studies of female entrepreneurship in general and female informal entrepreneurship in particular. It points out the reasons why women engage in informal entrepreneurial activities as well as why their business needs vary from male entrepreneurs and, as such, demand a different approach. The overriding reason why women develop businesses in this sector is personal survival as opposed to profit making and returns on investment (Huda 2009). With low, often intermittent returns, these businesses offer a subsistence existence in which working hours are long, conditions are poor and security and stability are minimal (Huda 2009). These businesses generally start up with very small amounts of capital, less than $100, and employ anywhere from 5 to 10 people, including the business owners and family members (Ocici 2006).

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UNDERSTANDING THE BUSINESS PARADIGM The current business model is rooted in modern capitalism and economics under the tutelage of such thinkers as Joseph Schumpeter and Adam Smith. It emanates from a machine model of organization (Tomer 1998), which is basically a linear, cost-efficiency model with inputs of resources leading to outputs of revenues, profits and job creation. Known as a profitability model, this traditional, mainstream paradigm of business has an end goal of creating profits and growth. Variations of this paradigm have emerged out of economic sociology (Smelser and Swedberg 2006) and alternative economic and business theories (Hawken 1993; Folbre 2001; Calas et al. 2009). These theories consider business as having a more encompassing purpose, one that integrates social, ethical and environmental concerns and responsibilities as part of business practice. As a mainstream business model, it has become the dominant paradigm in the marketplace and the basis for economic development and measurement, especially in developed countries. Its capitalistic economic system roots have provided a set of assumptions and theories that have directed what is considered normal and acceptable actions and values in business. Many of the traditional business practices within the formal economy have been based on the values of white, European males (Proudman 2001), and business ownership and entrepreneurship have been viewed through the lenses of traditional, masculine characteristics and traits (Ahl 2006; Bird and Brush 2002; Brush 1992; Lewis 2006), such as being aggressive, competitive, domineering, tactical and ruthless. Although this paradigm has guided business through the years, it may not be the only paradigm or one that is acceptable to women who tend to be more relationship focused, situational and collaborative in their business approach. Although women entrepreneurs are often seen as a new phenomenon, it was during the late 19th and early 20th centuries that women began to have a presence in the marketplace. The 19th century was an era that embraced a doctrine of “separate spheres,” a concept that divided the world into male/female, public/private, and work/home, and which assumed that there was a fundamental difference between men and women (Gamber 1998). This difference carved out certain characteristics—ambition, assertiveness, competitiveness—which were seen as being inherently masculine and necessary to succeed in business. It was assumed that women did not possess these necessary traits and that the proper place for them was in the home. Women, however, were engaged in a variety of small enterprises, called petty entrepreneurialism, which included pursuits such as art, selling feminine finery, food and lodging purveyors, domestics, keepers of houses of ill-repute, owners of grocery and variety stores, book and newspaper dealers, healers, midwives, apothecaries, tobacconists, jewelers, and embalmers (Acker 2004; Gamber 1998). However, the efforts and practices of these women have been excluded for the most part from business.

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The Feminine Paradigm of Entrepreneurship 179 Female entrepreneurs fall between a number of historiographical cracks; perhaps one reason they have received so little scholarly attention is that they fail to fit easily within interpretative paradigms . . . more often than not, analyzing the business of women means shifting the focus, not from big to small, but from small to microscopic. (Gamber 1998, 192) The experiences of women have been lost in business history because they did not meet the standard definitions of business—the concept of the “firm,” a tangible, physical site of production that sought greater efficiency and more substantial profits (Gamber 1998). “Thus not only did men and women run different kinds of businesses (a fact that historians attributed to women’s “choices” rather than to discrimination), they embraced different—“nonmarket”—business values, practices, and customs; in short women brought women’s culture to the business world ” (Gamber 1998, 201). In many ways, these early female entrepreneurs were operating in a secondary, more “informal economy.” Yet in the early 20th century, women found their way to the marketplace, regardless of the dominance of a masculine business world (Peiss 1998). Peiss observes that women played a key role in the growth of Avon, one of the largest cosmetic firms in the United States. Through selling beauty products, women pioneered many commercial techniques in use today, such as franchising and multilevel marketing. Women used their social networks—friends, family and community— to build their commercial network. Many created clubs which provided protection and offered aid, insurance, death benefits and opportunities for leisure and philanthropic work, obscuring distinctions between business, philanthropy, community-building and politics (Peiss 1998). The prevalent worldview creates assumptions that result in the creation of paradigms and theories that guide action and establish expectations in business. The current paradigms in business are frequently not based on the perceptions, experiences, characteristics and behavior of women. Going outside this established system demands creative thinking and a willingness to consider that business enterprise can possibly fulfill a role in people’s lives and the community that goes beyond growth and profit motives. Minnich (1990, 115) asks, “What would it look like if we were, today, to put women in the center, as feminists have long said we should?” Research on women entrepreneurs suffers from various shortcomings (Ahl 2006), such as: a one-sided empirical focus (Gatewood, Carter, Brush, Greene and Hart 2003), a lack of theoretical grounding (Brush 1992), the neglect of structural, historical, and cultural factors (Chell and Baines 1998; Nutek 1996), the use of male-gendered measuring instruments (Moore 1990; Stevenson 1990), the absence of a power perspective, and the lack of explicit feminist analysis (Mirchandani 1999). Data on women entrepreneurs within the informal economy are even more limited. Lack of policy

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and law regarding operations, unregulated income and participation in illicit activities makes it difficult to collect clear data on the extent and benefit of this sector. WOMEN AND ENTREPRENEURIALISM IN THE “INFORMAL ECONOMY” Within the informal sector of the economy, women make up a significant and growing component. It is estimated that 60% of female workers in developing countries are employed in the informal sector (Beneria and Floro 2006). “Over the past decade or so it has been revealed that a large proportion of informal work is conducted on a self-employed basis: 70% in SubSaharan Africa, 62% in North Africa, 60% in Latin America and 59% in Asia” (Williams and Gurtoo 2009, 19). “Push/pull” factors contribute to a woman’s desire to start a business (Wilson et al. 2007). Seeking independence, self-actualization and financial benefits and desiring to achieve a better balance between family and work responsibilities “pull” women into entrepreneurship whereas unemployment, underemployment and dissatisfaction with current employment “push” women into starting their own businesses (Brockhaus 1980; Heilman and Chen 2003). Poverty plays a vital role in driving women to work in the informal sector while simultaneously preventing them from actually breaking out of the cycle of poverty due to the nature of employment in that sector (UN-OHRLLS 2006). Higher levels of unemployment, limited education and skills, poverty and religious/cultural restraints are reasons why women engage in informal economic activity (Hiralal 2010). Scholars (Brush 1992; Mitra, 2002) indicate that for women, the self-employment provided by business ownership is a means of providing flexibility in work scheduling that generally is not available in traditional employment. Women play a vital role in the development of local economies. The creation of women-owned enterprises (WOEs) has enabled women to overcome many traditional boundaries they face (Huda et al. 2009). WOEs are more likely to be found in retail and service sectors, require less start-up capital and offer smaller returns on investment (Huda et al. 2009; Hisrich 1989; Hisrich and Brush 1984; Hisrich and O’Brien 1981). Lower earnings for women from businesses have been attributed to the fact that men in the local economy tend to be able to produce and sell at a higher volume, obtain better tools of the trade and work sites/spaces and have greater access to financial capital and other assets (Chen 2007). The link between working in the informal sector and being poor that is stronger for women (Chen et al. 2001). Many women are the sole breadwinners for their family, working in activities such as street trading and as home-based workers designing and producing their own goods for sale (Hiralal 2010; Budlender and Theron 1995; SEWU 1995). They are more

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The Feminine Paradigm of Entrepreneurship 181 likely to own and manage business enterprises together with other family members rather than on their own (Bardasi et al. 2007). This type of engagement is not only an economic response but an evolved business paradigm that may better address the needs and responsibilities of women and is a means of economic development that begins to confront the deeper issue of the long-term cycles of poverty faced by women. Many women identify themselves as being unemployed housewives, despite the fact they spend 14 to 16 hours a day in an income-generating capacity to support their families (Hiralal 2010). Home-based workers are identified as being self-employed, piece-rate workers, contractors and small family firms who generally work for a “middle man” or a chain store (Hiralal 2010). In Africa, even though women are self-employed and run “microenterprises,” their activity is looked upon as “survivalist” work, generating a low but necessary income (Hiralal 2010). Moreover, there is frequently a gender gap in income and wages (Chen 2004). Women business owners seldom have employees and tend to have smaller-scale operations that predominantly deal with food items (Carr and Chen 2002). It is not uncommon for women to engage in a home-based business as a supplemental income source to another occupation. Home-based businesses are diverse, depending on the country, local culture and economics, product demand and availability of local resources. These businesses can include retail activities such as small convenience stores or bars, informal fast-food places, street vending, and services such as hair salons, shoe repair, car and truck parts, public phones, and production activities like tailoring, dressmaking and carpentry (Hiralal 2010). Homebased businesses allow women to tend to their domestic and child-rearing duties as well as earn income for the family. Family firms that subcontract for a larger company are another form of business frequently found in the informal sector. These firms provide for some autonomy, depending on the parent company and the control they retain over materials, production and processes, and so on (Hiralal 2010). Family firms can subcontract with more than one company, especially in times of economic hardship (Hiralal 2010). WHY WOMEN ENTER THE INFORMAL ECONOMY Various reasons are given for why women enter the informal economy. Foremost among these reasons is the need for basic, supplemental or multiple incomes. Lacking skills and opportunities to engage in the formal economy, participation in the informal sector provides avenues for women to use the skills they have gained through domestic or agricultural responsibilities. Women undertake a far greater share of domestic work and child care than men (Kabeer and Van Anh 2006). Home-based businesses offer freedom and flexibility; women can work their businesses only part-time due to

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choice or conflicting family and household roles or start a business in order to also attend to family responsibilities (Lustgarten 1995). Even though men tend to work more hours than women outside the home, when domestic chores are taken into account, women tend to work longer hours overall and to have less leisure time (Kabeer and Van Anh 2006). SOCIAL, CULTURAL AND RELIGIOUS INFLUENCES Cultural and religious influences can inhibit women’s ability to fully engage in community and economic life (Hiralal 2010). Engaging in business is not always perceived as an appropriate career option for women whose primary function is seen as attending to family duties (Phororo and Verick 2009). Social and cultural considerations that impede full economic engagement for women include the differences in the legal status of men and women, gender differences in property rights and land ownership, and rights relating to marriage and inheritance (Bardasi et al. 2007). These considerations can place constraints on the type of enterprise and activities that women can engage in as well as its structure and performance (Bardasi et al. 2007) and can create challenges for women when negotiating, obtaining credit and working with suppliers (Ocici 2006; Kaheeru 2005). Limitations and bans on dress and how and when women can interact and communicate with men or members inside or outside the community can restrict the way in which women engage in economic activities. For example, the observance of purdah (practice of seclusion, wearing of the veil) is considered a sign of self-respect and respect for the family, but in many cases requires confinement to the home, thereby limiting women’s economic activity to the home (Hiralal 2010). Participating in the informal economy can offer women an opportunity to be income producing, even minimally, while allowing them to respect their religion or culture. SUPPORTING WOMEN WORKING IN THE INFORMAL ECONOMY Providing support for women working in the informal economy entails addressing various and multiple forms of personal and business challenges and limitations confronted by women involved in microbusiness ventures (Chant and Pedwell 2008; Mayoux 2006; Chen et al. 2004). These challenges and limitations include: education/training, market access, financing and credit, support through organizations and networks, access to information and technology, and protection for unemployment, child or elder care, health care, housing, income and pension. Recognizing that women have different needs and priorities in business demands that we look at how best to help them overcome the particular challenges they face in creating and sustaining businesses. Doing so could provide the motivation and support needed to help

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The Feminine Paradigm of Entrepreneurship 183 women sustain a business, move their business activity into the formal economy and help address their long-term poverty and social protection needs.

Education and Skills Most workers in the informal sector are either low-skilled or unskilled, gaining skills primarily through apprenticeships and on-the-job training (Blunch 2001). Women in this sector lack the life, literacy and vocational skills needed to “access gainful jobs, improve productivity and income” (Chant 2008; ILO 2007a, 11) and acquire entrepreneurial skills to develop and manage a business and role models (Bardasi et al. 2007). For many women, access to education and training is limited, studying technical and business skills is discouraged (Phororo and Verick 2009), and isolation and social and cultural barriers create constraints (Chant 2008). Most women microenterprises are characterized by a managerial skill deficit. This deficit translates into a lack of formal business principles and poor decision making and record keeping (Ocici 2006) and is reflected in businesses lacking organizational infrastructure and support, human and social resources, and access to markets vital for continued operation (Baruah 2004; Cheston and Kuhn 2002). Women “have to struggle to learn administrative and management skills every time a new problem comes up” (Baruah 2004), and planning and business decisions tend to be crisis driven (Ocici 2006). Formalized entrepreneurial training can help women learn business practices, and mentoring programs can provide technical expertise as well as social support and role models.

Finances and Credit Most entrepreneurs in this sector rely on personal savings or equity or obtain credit and loans from family and friends for start-up capital (Baruah 2004). When outside borrowing is required, businesses in the informal sector generally resort to more informal financial institutions, such as money lenders (Baruah 2004). The lack of adequate financing affects a business owner’s ability to differentiate their product and remain competitive (Ocici 2006). Moreover, being underfinanced or lacking access to sources of credit creates a significant challenge to establishing, sustaining or growing a business. Women have difficulty accessing financial networks due to their lack of experience and skill (Aldrich 1989; Hurley 1991). This state of affairs has a negative impact on women entrepreneurs because it limits income capacity and growth and constrains the ability to negotiate contracts, work with suppliers or obtain needed resources, equipment or property. It also keeps women enterprises small and can actually force them out of business. Ironically, however, it has been found that women’s loan repayment rates are typically superior to those of men and they are less likely to be in arrears or to renege on their loans (Cheston and Kuhn 2002).

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Cheston and Kuhn (2002) indicate that even though microfinance institutions have tried to address the traditional financial barriers facing women, such as collateral and guarantor requirements, cultural barriers, literacy and limited mobility, there are still a number of countries where few or no financial institutions offer services with conditions and terms amenable for women. Empowerment for women in the informal economy is vital. Financial institutions can support the empowerment of women. Empowerment is about change, choice, and power. It is a process of change by which individuals or groups with little or no power gain the power and ability to make choices that affect their lives. The structures of power—who has it, what its sources are, and how it is exercised— directly affect the choices that women are able to make in their lives. Microfinance programs can have tremendous impact on the empowerment process if their products and services take these structures into account. In order for a woman to be empowered, she needs access to the material, human, and social resources necessary to make strategic choices in her life. (Cheston and Kuhn 2002, 12) Providing women with access to working capital and other types of financing maximizes their productivity and economic capacity. The World Bank found that societies that discriminated on the basis of gender paid greater costs in poverty, slower economic growth, weaker governance, and lower living standards for their people (Cheston and Kuhn 2002). Awareness of the differing needs of women and improving gender equality as part of development strategies and policy addresses the business needs of women as well as long-term poverty. Gender Entrepreneurship Markets (GEM), the Foreign Investment Advisory Service (FIAS) and the World Bank are collaborating to develop a program to address gender-based legal and regulatory obstacles, to build entrepreneurship capacity and to create financing mechanisms for women entrepreneurs in partnership with commercial banks (Bardasi et al. 2007).

Information and Technology Having greater access to technological resources can assist women business owners in locating information as well as providing them with a platform to locate low-cost materials and sell their goods in a variety of markets. New outlets and markets can be created through the use of Internet websites and social networks. Lack of access to technology hampers entrepreneurship. In addition to providing supplier and market information and access, technology can help with overall business management. Entrepreneurs who are not able to afford or access appropriate technology equipment or training rely on laborious and often backwards means to help them organize or grow their business.

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The Feminine Paradigm of Entrepreneurship 185 Helping women in the informal economy gain access to and be trained in the use of computers, Internet research and marketing is vital. Providing technical support for the development of websites and social networking sites could help women strengthen and grow their businesses.

Organizational Support and Networks The conservative practices of labor organizations and trade unions do not meet the needs of women workers in the informal economy (Baruah 2004). Baruah goes on to say poor women have very few financial resources or assets, but pooling together what they have can have a significant impact . . . Organizing women into collectives not only increases their economic clout and bargaining power but also opens up other opportunities for change. Frequently, women’s organizations have enabled women to gain increased access to new markets or to negotiate better terms in old arrangements. (Baruah 2004, 612) Struggling daily to earn just enough to keep their families going and “terrified of losing the small sporadic income that they do have, or of having violence committed against them, women are initially reluctant to organize” (Baruah 2004, 607). Feelings of fear, helplessness and distrust make women wary of the motives of organizations attempting to organize them into unions, cooperatives, banks and other bargaining collectives. Financial exploitation, physical abuse and social harassment from middlemen, subcontractors, local gangs and the police and resistance from middlemen and moneylenders, who tend to benefit from the poverty and the vulnerability and despair of poor self-employed women, impede organizing efforts (Baruah 2004; Carr et al. 1996). Women lack access to business networks (Aldrich 1989; Loscocco and Robinson 1991). Yet formal and informal networks (Aldrich 1999) influence entrepreneurial decision making in women-owned businesses and should be developed and encouraged. Women can use networks and role models when engaged in varying stages of the entrepreneurial process (Langowicz et al. 2006), especially to fill gaps where they lack skills and expertise.

Market Access The inability to access markets in the informal economy poses significant obstacles to sustainability and/or growth of the enterprise. A lack of marketing skills and sociocultural impediments to marketing, such as not being able to travel, inhibit market access (Phororo and Verick 2009). A shortterm outlook, lack of business planning and inability to separate business activities from personal ones prevent many women entrepreneurs in the

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informal sector from being able to take full advantage of all market opportunities (Ocici 2006). A key problem is the lack of knowledge about available markets and access to these markets (Baruah 2004). Female home-based workers, a highly marginalized group, need to be able to bargain stronger for market access to secure more contracts. Collaboration among grassroots organizations working on behalf of those working in the informal economy can help women obtain more market opportunities (Chant 2008; ILO 2007). Chen (2007) suggests that government procurement policies be reexamined and directed towards the purchase of more goods and services from the informal economy, similar to the contracts that the Self-Employed Women’s Association (SEWA) in India negotiated for the procurement of fruits, vegetables and eggs from street vendors for hospitals and prisons and cleaning services from rag pickers for government. Developing strategic alliances or partnerships with larger firms can provide women with entryways to markets as well as other types of support.

Social Protection When discussing the social protection deficit for women, a number of key things stand out: (1) women earn lower wages through their business efforts in the informal economy, which adds to the overall poverty of women and places a heavier financial burden on divorced and single parents in caring for their families (ILO 2000); (2) women are more likely to be exposed to occupational and health hazards (ILO 2000); and (3) they have inadequate protection from unemployment, illness, disability and old age (Chen 2007). Providing social protection is a complex issue demanding the acceptance that women need and are entitled to such protections and determining the best way to provide it. Short- and long-term strategies need to be developed and considered as part of overall economic development practices. POLICY CONSIDERATIONS Baugn, Chua and Neupert (2006) indicate that institutions set the rules of the game, constraining or empowering certain types of behavior (North 1990). Current policy approaches may have been obscured by a traditional masculine approach to business. Variations in how women perceive and experience business need to be further understood, and allowances made by policymakers. Below are some recommendations that policymakers should consider: 1. Since starting a business is daunting to many women, policies, procedures and information should be simplified and easily accessible.

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The Feminine Paradigm of Entrepreneurship 187 2. Emphasize mentoring/coaching for business development and planning and development of collaborative ventures for resource sharing, production and marketing to help women launch and sustain businesses and provide women with role models, motivation, confidence and support to grow businesses and embrace the formal economy. 3. Revise requirements and expectations of lenders for women since generating revenues and profits may take longer and be smaller. 4. Encourage purchasing policies with local governments and institutions with minimal purchasing thresholds of products and services from women. 5. Develop courses at local universities to teach women business owners marketing and technology skills and supply student interns in business to assist women in developing marketing plans and creating websites. 6. Offer support tailored to women’s responsibilities (e.g., child and elder care) so that women can focus more fully on the development of their business while fulfilling other family and domestic responsibilities. 7. Encourage the development of social protection initiatives to provide security as well as begin to alleviate long-term poverty. Revising policies may actually reveal greater returns for women and for local economies than initially realized. CONCLUSION Women-owned businesses do not have the same characteristics or values seen in traditional business. They are smaller, less profitable (Hisrich and Brush 1984; Kallenberg and Leicht 1991) and tend to grow slower and perform below traditional industry standards (Lustgarten 1995; Pellegrino and Reece 1982), a phenomenon referred to as the “female underperformance hypothesis” (DuRietz and Henrekson 2000). Attempting to change a paradigm that may be more relevant to women and their needs in frequently unfavorable and unsupportive economic, social and cultural conditions may be less effective than learning how better to support the everyday opportunities that they are attempting to create for themselves and their families. Sustainability as opposed to profitability may be a key distinction that needs to be considered when looking at women’s businesses in the informal economy. REFERENCES Acker, Joan. “Gender, Capitalism, and Globalization,” Critical Sociology 30, no. 1 (2004):17–42. Ahl, Helene. “Why Research on Women Entrepreneurs Needs New Direction,” Entrepreneurship Theory and Practice 30 (2006):595–621.

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Aldrich, Howard. “Networking among Women Entrepreneurs,” in Women-Owned Businesses, edited by Donald Sexton, New York: Praeher, 1989. Aldrich, Howard. Organizations Evolving. London: Sage, 1999. Bardasi, Elena, C. Mark Blackden and Juan Guzman. “Gender, Entrepreneurship, and Competitiveness in Africa,” in World Economic Forum, the Africa Competitiveness Report, World Bank and Africa Development Bank, Washington, DC: The World Bank, 2007. Baruah, Bipasha. “Earning Their Keep and Keeping What They Earn: A Critique of Organizing Strategies for South Asian Women in the Informal Sector,” Gender, Work and Organization 11, no. 6 (2004): 605–626. Baugn, Christopher, Bee-Leng Chua and Kent Neupert. “The Normative Context for Women’s Participation in Entrepreneurship: A Multicountry Study,” Entrepreneurship Theory and Practice 30, no. 5 (2006): 687–708. Beneria, Lourdes, and Maria Floro. “Labor Market Informalization, Gender and Social Protection: Reflections on Poor Urban Households in Bolivia, Ecuador and Thailand,” in Gender and Social Policy in a Global Context: Uncovering the Gendered Structure of the Social, edited by Shahra Razavi and Shireen Hassim, New York: Palgrave Macmillan, 2006. Bird, Barbara, and Candida Brush. “A Gendered Perspective on Organizational Creation,” Entrepreneurship Theory and Practice 26, no. 3 (2002): 41–65. Blunch, Neils-Hugo, Sudharshan Canagarajah and Dhushyanth Raju, The Informal Sector Revisited: A Synthesis across Space and Time. Washington, DC: The World Bank, 2001. Brush, Candida. “Research on Women Business Owners: Past Trends, a New Perspective and Future Directions,” Entrepreneurship Theory and Practice 16 (1992): 5–26. Budlender, Debbie, and J. Theron. “Home-Based Workers: Eking out an Existence,” South African Labour Bulletin 19, no. 3 (1995): 14–19. Calas, Marta., Linda Smircich and Kristina Bourne. “Extending the Boundaries: Reframing Entrepreneurship as Social Change through Feminist Perspectives,” Academy of Management Review 34, no. 3 (2009): 552–569. Carr, Marilyn, and Martha Chen. Globalization and the Informal Economy: How Global Trade and Investment Impact on the Working Poor. Geneva: International Labour Office, 2002. Carr, Marilyn, Martha Chen and Renana Jhabvala. Speaking out: Women’s Economic Empowerment in South Asia. London: Intermediate Technology Publications, 1996. Chant, Sylvia, and Carolyn Pedwell. Women, Gender and the Informal Economy: An Assessment of ILO Research and Suggested Ways Forward. Working Paper. Geneva: International Labour Organization, 2008. Chell, Elizabeth, and Susan Baines. “Does Gender Affect Business Performance— Micro Businesses in Business Services in the UK,” Entrepreneurship and Regional Development (1998): 117–135. Chen, Martha. Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment. New York: United Nations, Department of Economics and Social Affairs, 2007. Chen, Martha. Rethinking the Informal Economy Linkages with Formal Economy and the Formal Regulatory Environment. Presented at EGDI and UNU/WIDER Conference, Unlocking Human Potential Linking the Informal and the Formal Sectors, Helsinki, 2004. Chen, Martha, Marilyn Carr and Joann Vanek. Mainstreaming Informal Employment and Gender in Poverty Reduction: A Handbook for Policymakers and Other Stakeholders. London: Commonwealth Secretariat, 2004.

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The Feminine Paradigm of Entrepreneurship 189 Chen, Martha., Renana Jhabvala and Francie Lund. Supporting Workers in the Informal Economy: A Policy Framework. Paper Prepared for ILO Task Force on the Informal Economy, 2001. Cheston, Susy, and Lisa Kuhn. Empowering Women through Microfinance. UNIFEM, 2002. DuRietz, Anita, and Magnus Henrekson. “Testing the Female Underperformance Hypothesis,” Small Business Economics 14, no. 1 (2000): 1–10. Folbre, Nancy. The Invisible Heart: Economics and Family Values. New York: The New Press, 2001. Gamber, Wendy. “A Gendered Enterprise: Placing Nineteenth-Century Businesswomen in History. Business History Review 72, no. 2 (1998): 8–219. Gatewood, Elizabeth et al. Women Entrepreneurs, Their Ventures, and the Venture Capital Industry. Stockholm: Esbri, 2003. Hawken, Paul. The Ecology of Commerce: A Declaration of Sustainability. New York: HarperBusiness, 1993. Heilman, Madeline, and Julie Chen. “Entrepreneurship as a Solution: The Allure of Self-Employment for Women and Minorities,” Human Resource Management Review 13, no. 2 (2003): 347–365. Hiralal, Kalpana. “The “Invisible” Workers of the Informal Economy—A Case Study of Home-Based Workers in Kwazulu/Natal, South Africa,” Journal of Social Science 23, no.1 (2010): 29–37. Hisrich, Robert. “Women Entrepreneurs: Problems and Prescriptions for Success in the Future, in Women-Owned Businesses, edited by Oliver Hagan, Carol, Rivchun and David Sexton, New York: Praeger, 1989. Hisrich, Robert, and Candida Brush. “The Woman Entrepreneur: Management Skills and Business Problems,” Journal of Small Business Management 22, no.1 (1984): 30–7. Hisrich, Robert, and Marie O’Brien. “The Women Entrepreneur from a Business and Sociological Perspective, in Frontiers of Entrepreneurship Research, edited by K. Vesper, Wellesley: Babson College, 1981. Huda, Sadrul, Sayeed Alam and Yunus Khan. “A Comparative Study of Women Entrepreneurs in Formal and Informal Economy: A Study of Dhaka City,” Asian Journal of Business Management 1, no.1 (2009):19–23. Hurley, Amy. “Incorporating Feminist Theories into Sociological Theories of Entrepreneurship.” Presented at the Annual Academy of Management Meetings, Entrepreneurship Division. Miami, Florida, August, 1991. International Labour Office. The Informal Economy. Geneva: ILO, Committee on Employment and Social Policy, for Debate and Guidance, 2007. International Labour Office. Women and Men in the Informal Economy: A Statistical Picture. Geneva: ILO, 2002. Kabeer, Naila, and Tran Thi Van Anh. “Globalization, Gender and Work in the Context of Economic Transition: The Case of Vietnam.” The International Working Group on Gender, Macroeconomics, and International Economics, Working paper, 2006. Kaheeru, Barungi. “Opportunities and Challenges of Women Entrepreneurs in Retail Business: A Study of Nakawa Market, Kampala District, and Uganda Martyrs University,” Unpublished MBA Dissertation, 2005. Kallenberg, Arne, and Kevin Leicht. “Gender and Organizational Performance: Determinants of Small Business Survival and Success,” The Academy of Management Journal 34, no.1 (1991):136–161. Langowicz, Nan, Norean Sharpe and Mary Godwyn. “Women’s Business Centers in the United States: Effective Entrepreneurship Training and Policy Implementation,” Journal of Small Business and Entrepreneurship 19, no. 2 (2006):167–182.

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Lewis, Patricia. “The Quest for Invisibility: Female Entrepreneurs and the Masculine Norm of Entrepreneurship,” Gender, Work & Organization 13 (2006): 453–469. Loscocco, Karyn, and Joyce Robinson. “Barriers to women’s small business success in the United States,” Gender and Society 5, no.4 (1991): 511–532. Lustgarten, Steven . “Business Ownership as an Employment Opportunity for Women.” Washington, DC: US Small Business Administration, Office of Advocacy, 1995. Mayoux, Linda . “Jobs, Gender and Small Enterprises: Getting the Policy Environment Right.” SEED Working Paper No. 15, Geneva: International Labour Office, 2001. Minnich, Elizabeth. Transforming Knowledge. Philadelphia: Temple University Press (1990). Mirchandani, Kiran. “Feminist Insight on Gendered Work: New Directions in Research on Women and Entrepreneurship,” Gender, Work and Organization 6, no. 4 (1999): 224–235. Mitra, Reshmi. “The Growth Pattern of Women-Run Enterprises: An Empirical Study in India.” Journal of Developmental Entrepreneurship 7, no. 2 (2002): 217–237. Moore, Dorothy. “An Examination of Present Research on the Female Entrepreneur—Suggested Research Strategies for the 1990’s,” Journal of Business Ethics 9, no. 4–5 (1990): 275–281. North, Douglass. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press (1990). NUTEK. Aspects of Women’s Entrepreneurship (Vol. B 1996:10). Stockholm: NUTEK, 1996. Ocici, Charles. “A Working Paper on Entrepreneurship.” Presented at National Consultation Conference: Legal Empowerment of the Poor, Speke Resort Munyonyo, November, 2006. Peiss, Kathy. “Vital Industry and Women’s Ventures: Conceptualizing Gender in Twentieth Century Business History,” Business History Review 72, no. 2 (1998): 219–242. Pellegrino, Eric, and Barry Reece. “Perceived Formative and Operational Problems Encountered by Female Entrepreneurs in Retail and Service Firms,” Journal of Small Business Management April (1982): 15–24. Phororo, Hopolang, and Sher Verick. Vulnerability and Young Women Entrepreneurs: A Case Study of the Ethiopian Informal Economy. Presented at ILO, Regulating for Decent Work, Geneva, July 8–10, 2009. Portes, Alejandro, and William Haller. “The Informal Economy,” in The Handbook of Economic Sociology, edited by Neil Smelser and Richard Swedberg, 403–428, Princeton: Princeton University Press, 2006. Proudman, Bill. Understanding American White Male Culture. Unpublished manuscript (2001). Self Employed Women’s Union. Homework Research Project. Cape Town: L. L. Unit, Ford Foundation, 1995. Smelser, Neil, and Richard Swedberg. “Introducing Economic Sociology,” in The Handbook of Economic Sociology, edited by Neil Smelser andRichard Swedberg, 3–25, Princeton: Princeton University Press, 2006. Stevenson, Lois. “Some Methodological Problems Associated with Researching Women Entrepreneurs,” Journal of Business Ethics 9, no. 4–5 (1990): 439–446. Tomer, John. “Beyond the Machine Model of the Firm, Toward a Holistic Human Model,” The Journal of Socio-Economics 27, no. 3 (1998): 323–341. UN-OHRLLS (United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing

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The Feminine Paradigm of Entrepreneurship 191 States). Breaking Barriers: Gender Perspectives and Empowerment of Women in Least Developed Countries. New York: United Nations, 2006. Williams, Colin, and Anjula Gurtoo. Evaluating Women Entrepreneurs in the Informal Sector: Some Evidence from India. Netherlands: Paycheck India and Wage Indicator Foundation, 2009. Wilson, Fiona, Jill Kickul and Deborah Marlino. “Gender, Entrepreneurial SelfEfficacy, and Entrepreneurial Career Intentions: Implications for Entrepreneurship Education,” Entrepreneurship Theory and Practice 31, no. 3, (2007): 387–406.

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13 Enterprise Education for Small Artisanal Businesses A Case Study of Sokoban Wood Village, Ghana Bernard A. Obeng, Richard K. Blundel and Ahmed Agyapong The role of micro- and small businesses in promoting economic development has been well documented (Robson et al. 2009). In sub-Saharan Africa, most of these businesses are found in the informal sector (Adams 2008; Schneider 2008). In Ghana, informal sector employment represents about 80% of the total private sector labor force, a similar proportion to that found in other African countries (Debrah 2007; Palmer 2007).1 However, although the informal sector makes a major contribution to the Ghanaian economy, government support for enterprise development has largely focused on the formal sector (Robson and Obeng 2008). A report on job creation and skill development in Ghana noted that rising educational levels are producing higher levels of earnings in the informal sector (World Bank 2008). While such developments are encouraging, it is also evident that many of Africa’s microenterprises still lack the necessary human and financial resources to “make the leap” out of traditional market niches (Dia 1996, 155). This long-standing issue is prompting calls for new forms of educational provision to help business owners to develop their enterprises (Adams 2008). Several studies have examined the growth potential of informal sector enterprises in Ghana (e.g., van Dijk 1997; Buame 1996; Chamlee-Wright 1997). Researchers have also examined issues related to education and training in the traditional apprenticeship systems (Palmer 2007, 2009; Debrah 2007). However, although this work provides many valuable insights, there is still an important gap in our understanding of the ways in which educational services might be enhanced in order to promote enterprise development in Ghana’s informal sector. This chapter reports on a recent attempt to address this issue, namely, a pilot project in enterprise education developed over a two-year period by a team of Ghanaian academics working in conjunction with artisans at the Sokoban Wood Village (SWV) near Kumasi, the capital of Ghana’s Ashanti Region. The chapter is structured as follows. The case study opens with two context-setting sections, the first providing a brief overview of the current state of education, training and skills acquisition in Ghana’s informal sector

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Enterprise Education for Small Artisanal Businesses 193 and the second an introduction to SWV and its position within Ghana’s forestry industry. This is followed by a report on the enterprise education project at SWV, which combined traditional learning practices with more innovative learning approaches. The concluding section highlights some of the main learning points from the project and discusses the broader policy implications.

THE CONTEXT—GHANA’S INFORMAL SECTOR

Informal Sector Education, Training and Skills Acquisition The informal sector is active in many different sectors of the Ghanaian economy, including personal services, retailing, trading, crafts, small-scale manufacturing, agricultural production, animal husbandry and fishing (Debrah 2007). In contrast to their counterparts in formal sector enterprises, who often develop narrow specializations, informal sector workers require a wide variety of skills to operate successfully because their business operations often involve multiple functions (Adams 2008). A recent report on job creation and skill development in Ghana suggested that rising educational levels were producing higher levels of earnings in the informal sector (World Bank 2008). However, there is evidence to show that educational levels in the sector are still much lower than those of formal-sector workers (Haan 2006; World Bank 2008). Furthermore, the traditional apprenticeship system is not providing young people entering informal sector enterprises with an adequate portfolio of skills to cope with a turbulent and competitive market environment (Palmer 2009). The majority of informalsector workers acquire their skills through traditional apprenticeships that involve a contractual arrangement between the apprentice or the parent/ guardian and the master craftsman (Adams 2008; Barber 2004; Palmer 2007, 2009).2 Although this system has proved effective in some respects, it is now criticized on a number of grounds, including: lack of emphasis on theoretical knowledge, reliance on outdated technologies, standardized and inflexible pedagogic practices and no standardized instruments to measure or evaluate the quality of the training provided. These limitations are seen as contributing to low productivity and income levels and other problems, such as low-quality outputs, health and safety issues and environmental pollution (Liimatainen 2002). For many artisanal producers and manufacturers, including those working in the wood products industry, there are also intensifying competitive pressures from imported products. Relevant and cost-effective education, training and skills-development programs are needed to enhance the resilience of informal sector enterprises in the face of such external pressures (Palmer 2009; Sparks and Barnett 2010).3 This opens up the question of what type of provision is likely to be appropriate,

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given the distinctive characteristics of artisanal communities, including their educational backgrounds and business operations. While the evidence from previous attempts to enhance the managerial, accounting and entrepreneurial skills of master craftsmen is mixed (Liimatainen 2002; Johnson and Adams 2004), shorter, practical courses have proved more effective than longer, classroom-based approaches (Palmer 2009). The challenge is to create innovative learning experiences that are grounded in the culture and daily practices of the artisans while also gaining their trust (Halme 2001; Lorenzen 1998). FORESTRY AND WOODWORKING IN GHANA Ghana’s forestry sector is vitally important in economic, social and environmental terms. Revenue from the timber trade accounts for about $212 million (stabilized five-year average), representing 4% of Ghana’s Gross Domestic Product (GDP) and 11% of the country’s export revenues (Forestry Commission 2010; Osei-Tutu 2010). However, forestry is under threat from a combination of factors, including illegal chainsaw operations, insufficient maintenance of afforestation projects and shortages of supply of wood products for the domestic industry. Ghana’s forests are located in the southern third of the country, comprising a total land area of about 8.2 million hectares. The forest zone includes 214 forest reserves (about 1.6 million hectares), but the larger portion is “off-reserve.” There is increasing concern about the economic, social and environmental consequences of forest degradation. Between 1996 and 2005, total tree-standing volume in Ghana’s off-reserves is estimated to have fallen from 95 million m3 to 37 million m3 (Affum-Baffoe 2009). The percentage of recorded timber production in the off-reserves also fell from about 80% in the early 1990s to about 30% by 2009 (Boateng et al. 2009). Nongovernmental organizations are working closely with Ghana’s Forestry Commission, university researchers and other stakeholders to address these problems (Nketiah and Owusu 2011). The Sokoban Wood Village (SWV) is Ghana’s largest wood-products manufacturing district. It is located on the outskirts of Kumasi, a city in the Ashanti Region. SWV was created as a replacement for long-established informal-sector wood markets in the nearby settlements of Anloga and Kyirapatere. Woodworking operations were relocated as part of a $48 million Kumasi Roads and Urban Development Project, which was jointly financed by the Government of Ghana and Agence Française de Dévelopment (AFD). Kumasi Metropolitan Authority (KMA) acquired 12.35 hectares of land at Sokoban. Chinese contractors were commissioned to create an industrial park, which includes a 1 kilometer access road, electricity and water supplies, 62 large manufacturing and storage sheds, an administrative block and support services such as canteens, toilets, retail outlets and parking (Figure 13.1). SWV created a new base for approximately 5,000 wood

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Enterprise Education for Small Artisanal Businesses 195

Figure 13.1 Sokoban Wood Village: First field visit to Sokoban and view of a woodworking shed

workers who had operated for over 50 years from temporary structures in a largely unregulated environment. Relocation to a new, purpose-built settlement was presented as an opportunity to increase productivity, enhance working conditions and reduce environmental impacts (AFD 2011; KMA 2009).

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The new facilities are addressing several long-running problems, including waste management and fire safety. However, the artisans continue to face a number of serious challenges including wood-supply shortages and increasing competition from imported furniture. For example, while the Ghanaian government is seeking to develop new markets for wood products, including the use of sustainable alternatives to traditional hardwoods, the durbar (traditional ceremony) to mark the first anniversary of SWV included calls for additional training to attract younger people into the sector (Oppong 2010).

THE SOKOBAN EDUCATIONAL PROJECT

Origins, Methods and Aims ( January to June 2010) The project originated out of discussions at the first residential meeting of ABLE Ghana (Advancing Business Learning for Employability and Entrepreneurship in Ghana) on the role of higher education institutions (HEIs) in enterprise education and an associated exercise that mapped existing pedagogic practice (Paton 2011). We also consulted relevant stakeholders such as the Association of Ghana Industries (AGI), the Ghana Chamber of Commerce and the National Board for Small Scale Industries (NBSSI) to establish the requirements of their members operating in the informal sector and to find out how they might be better supported. Our research confirmed that the majority of informal sector workers acquired their skills through traditional apprenticeship (Palmer 2009) and that informal social networks were the most popular vehicle for reproducing working practices. Given that Ghanaian business schools had largely sidelined micro-, smalland medium-sized enterprises (MSMEs), particularly those in the informal sector, we concluded that it should be a priority of the project to address this issue (Cloete et al. 2010). The aim of our pilot project was to develop an educational intervention that combined the traditional learning practices of the informal sector with more innovative learning approaches, with a particular focus on promoting growth, formalization and sustainability. Given the exploratory and participative nature of the study, we adopted a qualitative research design. Semistructured interviews, secondary sources and observational methods were used to gather data in sufficient depth and detail (Patton 2002). Research team members were actively involved in the initial scoping study and the design and delivery of the pilot and its evaluation. This allowed us to engage with the SWV artisans over an extended period. In doing so, we gained a more sophisticated understanding of how their educational requirements related to day-to-day operational practices (Holden et al. 2010).

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Stage One—Site Selection and Needs Assessment (July to October 2010) The project fieldwork began during the second residential meeting in Kumasi. In preparing for the project, the team visited Kumasi’s Suame Magazine, an informal sector cluster of metal workers and associated trades that has been the subject of previous studies (e.g., Nyaki Adeyu 2008). We randomly selected and visited about eight garages and engaged in informal interactions with the artisans on issues related to skills needs, business networks and contacts and challenges facing their businesses. Based on this experience, we developed a semistructured interview checklist for informal sector owner–managers. We then arranged a one-day visit to SWV where we collected evidence from three senior administrators and 16 artisans. SWV was selected on the grounds that it was a purpose-built facility with a suitable infrastructure, including meeting rooms in an administrative building that could be used for educational purposes. Access was also straightforward due to the layout of the site, with its large, open-sided sheds, and because both the SWV artisans and administrators expressed an immediate interest in the project. A further field visit was undertaken to assess the detailed needs of the artisans and to consider the conditions under which training programs could be designed and delivered (Table 13.1).

Stage Two—Developing the Pilot Module (November 2010 to February 2011) The stakeholder consultation, including the responses of the artisans and the experiences of the academics involved in designing the curriculum, suggested that the pilot project should focus on the following learning aims: • Developing the managerial and entrepreneurial capabilities of the artisans, many of whom are self-employed. • Introducing them to appropriate technologies that will add value to their business. • Enlightening them on more effective ways of marketing their products and services. • Encouraging them to consider other viable businesses that are economically and environmentally sustainable. • Providing guidelines on the bidding and tendering process for contracts. In the event, we decided to pilot a course design on product marketing, a topic of particular interest to the artisans at Sokoban, and one that has been identified as requiring further development (Osei-Tutu et al. 2010). During the design phase, based on the personal characteristics of the artisans (e.g., age, education, skill and knowledge requirements), we decided to adopt a model of teaching and learning organized around

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Table 13.1 Initial needs assessment—summary of responses 1

Age

Master craftsmen: 25 to 45 years old Apprentices: under 25 years old

2

Years in business

5 to 20 years old

3

Ownership

Sole proprietorships, partnerships and familyowned businesses

4

Motivation

Mixture of family influences (traditions), prefer ence for self-employment and intrinsic love for job (n.b. factors not explored in detail)

5

Associations

Various, reflecting specializations (i.e., carpentry, lumber, plywood, firewood, hardware and saw millers).

6

Benefits from associations

Social support and members’ welfare (e.g., in the case of injury or illness).

7

Previous education and training

Traditional apprenticeships; little or no formal management or enterprise training.

8

Education and training needs

Product/service marketing; financial manage ment; general business management; use of appropriate modern technologies; improving product finishing to add value (n.b. artisans recognized that many topics were interrelated).

9

Main challenges

Product/service marketing; adding value; use protections; basic utilities (e.g., electricity, drainage, transportation); access to finance (e.g., working capital); macro environmental factors (e.g., government policy on timber felling, shortages of timber, waste disposal; cost of living).

the artisans’ existing practices. This approach was selected following a review of enterprise education methods (Cope 2005). It was adapted from practice-based learning approaches used at The Open University and similar institutions, and was informed by the experiences of team members as academics specializing in enterprise education and MSMEs (Obeng and Blundel 2011; Tackie 2011). We concluded that an experientially based program, which was both problem- and learner-centered, was likely to prove the most attractive to the artisans because it would enable us to integrate academic concepts and practical application (Higgins 2009; Thorpe et al. 2009). The module content was based on a variety of sources including Open Educational Resources (OERs), textbooks and case materials that were

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Enterprise Education for Small Artisanal Businesses 199 contextualized using material gathered from our interviews with the artisans and other local stakeholders. We also emphasized visual media in the design in order to prompt discussion, enhance the participants’ understanding of core concepts and to overcome literacy issues. These media included local newspaper advertisements, our photographs of other carpenters displaying their own products and a short video recording in which we acted out a typical customer-service issue. PILOT STUDY AND INITIAL FEEDBACK (MARCH 2011) The aim of the initial pilot study was to introduce participants to the basic principles and concepts of marketing and their application to the marketing of goods and services to achieve customer satisfaction and profit. In all, 35 artisans from five different associations participated in the half-day workshop at SWV. The workshop was facilitated by three members of the ABLE-Ghana team and the language of instruction was a combination of Twi (a language used by the Akans in Ghana) and English (Figure 13.2).

Figure 13.2 Piloting the marketing course at Sokoban

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PRESENTATION USED DURING WORKSHOP SESSION At the start of the workshop, we collected some initial comments from the participants on their motivation for attending it and their expectations of the day. Their reactions are presented below as verbatim comments (translated from Twi): How to improve finishing; Increase sales; How to understand customers; Want to be able to help others; How to add value and understanding of marketing and management practices; How to attract customers; Why sales have been up and down; How to manage work; How to help and handle customers; How to improve relationship with customers through communication skills. We quickly realized that using Twi as the primary language of instruction would help to enhance the participants’ understanding of the core concepts and enable the majority of them to contribute to class discussions. The key challenge was to find suitable Twi words to explain particular marketing terms. However, although one of the facilitators was not fluent in this language, his colleagues were available to clarify some of the ideas and principles. One unanticipated problem related to the very limited writing skills of most participants, which undermined a few of the planned activities. Ultimately, these activities had to be abandoned. However, we found that the use of practical examples related to the participants’ business operations enabled us to introduce marketing principles and concepts while the visual materials we had assembled, such as photographs and videos, helped us to make connections between the participants’ personal experiences and the more general themes of the session. Encouraging participants to contribute examples and anecdotes also helped to reinforce their active participation. At the end of the training session, the participants were provided with lunch and asked to complete an evaluation exercise. The following are verbatim comments (translated from Twi) from this session: • Ways to improve the course: • Government intervention [to support artisan education and training]; Increase number of days of the seminar; Course must be in a dialogue way [i.e., interactive]; Use local [Twi] dialect; Visit workshops to study trends on the ground; Repeat training. • Overall assessment: • Course is timely; Good start; Good; It is good in that formerly we were ignorant of many things that [were] a hindrance to the progress of our business in general; We now know how to deal with our customers; Ensure continuity.

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Enterprise Education for Small Artisanal Businesses 201 SECOND-STAGE EVALUATION (DECEMBER 2011) Nine months after the initial workshop, two team members visited SWV to reinterview the participants. We also spoke to a number of nonparticipants to provide a comparison. The specific objectives of the evaluation were to: • Explore the views and perceptions of the participating owners and managers, noting any changes that had taken place during the initial workshop. • Investigate the key challenges facing participants in implementing the practical ideas and learning that they gained from the workshop. • Gain a better understanding of work, employment and managerial practices in the participating enterprises, with particular reference to their resilience and growth potential. In all, 20 artisans were interviewed (13 workshop participants and 7 nonparticipants). The respondents were randomly selected and interviewed using a semistructured questionnaire. The average age of the respondents who participated in the sessions was 40 years old while that of the nonparticipants was 28.5 years old. This marked age difference between the two groups reflected the fact that the workshop participants were mostly master craftsmen and more experienced artisans. The respondents reported an average of nine years of basic education, though a few reported that they had received no formal schooling. With regard to their skills acquisition, most of the artisans (both participants and nonparticipants) had obtained their skills from the traditional apprenticeship system, typically being trained by either their father or brother (Palmer 2009).4 Our initial evaluation generated a number of interesting findings that we are exploring in a more extensive follow-up study. These include verbatim comments (translated from Twi), on the key issues they are facing, perceived actual and potential benefits of the workshop, and obstacles that still need to be overcome. The benefits were demonstrated in their response to a question about what they thought of their businesses before and after the workshop. The general theme that emerged is that they have more confidence in handling marketing issues and particularly in dealing with customers: Before the training, I was finding it difficult to get jobs. After the training, I now understand my customers better and I have many jobs today than before. The training opens my mind about certain things like how to handle my customers. I remember that statement always. It was difficult but after the training it is better. I had no idea how to market my products. Now I know how to convince the customer. Responses to the same question by nonparticipants appear to suggest a number of frustrations in running their businesses. These comments also

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highlight more general problems faced by the SWV artisans, which include as lack of wood supplies and limited credit facilities: Initially it was good but these days lack of wood supplies is affecting production. The Forestry people are worrying us. It is difficult. I am not enjoying this work. There are many artisans competing on price. Currently, I do not have a full shed. I do not have regular customers. I wait for customers to come before production. Due to inadequate capital, we cannot bid for big contracts so we depend on the handouts from big carpenters when they get big orders from customers with a tight delivery schedule. One of the major practical challenges raised by SWV artisans was the introduction of power tools to boost productivity. Some artisans also identified lack of trust as an important, though less tangible obstacle that could hinder efforts to promote the sharing of new ideas. Lack of trust appeared to be the result of competitive threats and the tendency for more senior artisans to be resistant to their younger counterparts getting training. It will be necessary to address such tensions if Sokoban’s woodworkers are to move beyond their traditional market niches and grow their businesses (Dia 1996).

CONCLUDING DISCUSSION

Learning from the Sokoban Project The pilot project reported in this case study has demonstrated a possible approach to enterprise education for artisans in informal sector, with a particular focus on addressing the challenges that owners and managers face when they attempt to break out of traditional market niches and seek to compete more effectively with imported products. It is also important to acknowledge that the success of the pilot study was in part a product of its location at SWV, a purpose-built settlement that benefitted from the active support of the local administrators and a well-developed infrastructure. The findings of this single-site project cannot be readily generalized to other locations or sectors. However, the SWV pilot study has opened up a number of issues regarding future approaches to enterprise education in the informal sector by: • Indicating the willingness of artisans to adopt new ideas and learn new skills that can help them grow their businesses and make them more resilient. • Questioning previous research that questioned whether informal sector artisans were receptive to formalized learning environments. Our pilot suggests that classroom-based enterprise education can be effective, provided that it is combined with a highly contextualized, problemcentered and interactive pedagogy.

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Enterprise Education for Small Artisanal Businesses 203 • Demonstrating the potential of engaging academics from researchoriented universities in informal-sector educational initiatives. From the academics’ perspective, it represented a departure from normal practice. We were challenging prevailing views of our role by taking an active part in what is sometimes regarded as low-status vocational activity. From the artisan’s perspective, the experience of engagement boosted their confidence and let them believe in themselves and their profession. As the leader of the SWV Carpenters Association remarked in his welcome message, “Today GIMPA, which organizes training for the Cabinet, parliamentarians, chief executives, has come to Sokoban.” • Reinforcing the need for close and continuing interaction between the academic team and the artisans, with both parties recognizing that they are engaged in a learning process. For our part, we quickly realized that it was essential to gain a good understanding of the woodworkers’ motivations, practices and culture, and to allow this understanding to shape our pedagogic approach. • Signaling the importance of effective monitoring and how it might be enhanced in future projects. We gained a great deal of useful feedback during the initial workshop and in the posttraining evaluation. Given the exploratory nature of the pilot study, the use of informal and largely qualitative approaches proved appropriate and effective. However, more formal evaluation is needed to support larger-scale interventions at Sokoban or the replication of this initiative with other informal-sector artisans. In the context of tight budgetary constraints on publicly funded programs and increasingly stringent monitoring and accountability requirements, this will require appropriate evaluation methodologies (cf. Gertler et al. 2010; Pawson 2006; White 2009). The project has also highlighted a number of practical and social obstacles that affect the resilience and growth of artisanal woodworking businesses and which need to be addressed alongside any future enterprise education programs: • The traditional apprenticeship method of skill training does not provide trainees with adequate skills in management that can help them run their business successfully. This includes access to computing facilities at SWV. • The nature of skills training provided by the traditional apprenticeship system produce artisans that lack adequate knowledge and the use of modern technology, which affects their productivity and the quality of their finish products. • Other challenges identified include lack of access to credit facilities, intense competition among local producers and imported cheap furniture products from China. Inadequate supplies of timber also affected their operations. This supply issue raises wider questions about environmental

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Bernard A. Obeng, Richard K. Blundel and Ahmed Agyapong sustainability and resilience. Education in the management of these resources could help to address the depletion of Ghana’s forests.

POLICY IMPLICATIONS This project has indicated the potential of a new approach to enterprise education among Ghana’s woodworking artisans and may have a broader application. Although the model has the potential to be replicable and scalable, in any such efforts, it will be essential to remain sensitive to contextspecific needs and practices and to evaluate both the immediate impact and longer-term outcomes. In addition, policymakers need to address other key factors hindering the growth of informal businesses or undermining their resilience. Many of the challenges are largely practical or technical in nature, such as securing improved information and computing facilities. There was also evidence of persistent social and cultural structures, such as the lack of trust between competing artisans and between generations, which may also impede innovation. However, even this kind of obstacle can be overcome with the help of well-designed educational interventions. For example, one might encourage small groups of artisans to consider the factors underlying the traditional lack of trust and the potential benefits of adopting a more collaborative approach. Efforts can also be focused on areas where collaboration might be mutually beneficial, such as in developing location-based marketing schemes and training initiatives in order to compete with foreign imports (Afenyadu et al. 2001; McGrath 2009; Masakure et al. 2009). The authors of a recent review argued that, “Governments need to unequivocally recognize and admit the importance of the informal sector and find ways to encourage its growth” (Sparks et al. 2010, 5). The Sokoban project has explored one potentially fruitful contribution to fulfilling this ambition through providing innovative approaches to education and training for informal sector artisans. However, initiatives of this kind will need to be complemented by more strategic and inclusive approaches to create supportive enterprise environments for informal sector industries (Palmer 2007). Such a strategy is likely to include action in four related areas: establishing enabling environments and supportive regulatory frameworks; improving basic facilities and amenities and infrastructures; increasing the ability to obtain property titles and access to credit; and improving national databases and establishing uniform standards (Sparks et al. 2010). There is considerable scope for policy makers to support a more ambitious program of collaborative learning projects between tertiary institutions and the informal artisanal sector, specifically designed to enhance the competitiveness and growth potential of informal artisanal workers in today’s challenging business environment. These programs should aim at developing context-specific training and skills development in the areas such as entrepreneurship, small-business management, sustainable production and the use of information technologies. They should also explore the potential of experiential, problem- and learner-centered pedagogies as vehicles for introducing

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Enterprise Education for Small Artisanal Businesses 205 new concepts and perspectives while also complementing long-established, informal apprenticeship methods and respecting local practices. From a resilience perspective, new forms of collaborative learning and political action are also essential across multiple scales (Folke et al. 2010) if small-scale learning initiatives such as those taking place at Sokoban are to contribute to broader institutional changes in the forestry system (Smith and Stirling 2010) and help to preserve a fragile ecosystem upon which so much else depends.

NOTES 1. There are competing definitions of informal sector or informal economy (Adams 2008; Barber 2004; Chen 2008; Robson and Obeng 2008). In this chapter, the term is used with reference to a localised community of artisanal woodworkers and the discussion focuses primarily on the work-based activities of the master-craftsmen and apprentices who are located in the Sokoban Wood Village. 2. Liimatainen (2002) has estimated that about 70% of informal sector workers develop their skills through traditional apprenticeships, though both the proportion of workers pursuing this route and the ways in which their training is delivered is likely to vary significantly between countries and sectors. 3. The term resilience is used here in combination with concepts of economic competitiveness and growth, to reflect a broader perspective on the artisanal woodworking community as an integrated system of people and the natural environment (Resilience Alliance 2012). In this context, resilience is measured in relation to the degree to which a system can undergo change, its ability to self-organize and its capacity for learning and adaptation (Folke et al. 2010). In the case of Sokoban, resilience requires human responses to a complex assortment of challenges, including the economic threat posed by cheap imported products, local pollution problems and the continuing degradation of Ghana’s forests. 4. While all of the woodworking artisans we observed were male, there were also many female workers at SWV. These included a number of central administration staff and others who specialized in finance and credit arrangements for the timber and woodworking enterprises.

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Barber, J. 2004. “Skill Upgrading within Informal Training: Lessons from the Indian Auto Mechanic.” International Journal of Training and Development 8 (2): 128–39. Boateng, K., K. Okae and C.P. Hansen. eds. 2009. Strengthening Off-Reserve Timber Resource Management in Ghana. Kumasi, Ghana: Tropenbos International. Buame, S. K. 1996. Entrepreneurship: A Contextual Perspective, Discourses and Praxis of Entrepreneurial Activities within the Institutional Context of Ghana. Lund: Lund University Press. Chamlee-Wright, E. 1997. The Cultural Foundation of Economic Development: Urban Female Entrepreneurship in Ghana. Routledge: London. Chen, M. 2008. “Informality and Social Protection: Theories and Realities.” IDS Bulletin 39 (2): 18–27. Cloete, N., T. Bailey and P. Maassen. 2010. Universities and Economic Development in Africa: Pact, Academic Core and Coordination (Synthesis Report). Wynberg, South Africa: Centre for Higher Education Transformation (CHET). Cope, J. 2005. “Toward a Dynamic Learning Perspective of Entrepreneurship.” Entrepreneurship Theory & Practice 29 (4): 373–97. Debrah, Y. A. 2007. “Promoting the Informal Sector as a Source of Gainful Employment in Developing Countries: Insights from Ghana. The International Journal of Human Resource Management 18 (6): 1063–84. Dia, M. 1996. Africa’s Management in the 1990s and Beyond: Reconciling Indigenous and Transplanted Institutions. Washington, DC: World Bank. Folke, C., S. R. Carpenter, B. Walker, M. Scheffer, T. Chapin and J. Rockström. 2010. “Resilience Thinking: Integrating Resilience, Adaptability and Transformability.” Ecology and Society 15 (4): 20. Accessed April 29, 2012. http://www. ecologyandsociety.org/vol15/iss4/art20/ Forestry Commission. 2010. Timber Industry Statistics. Accra: Forestry Commission. Gertler, P. J., S. Martinez, P. Premand, L. B. Rawlings and C. M. J Vermeersch. 2010. Impact Evaluation in Practice. Washington, DC: World Bank. Government of Ghana. 2011. Highlight of 2012 Budget Statement of the Republic of Ghana. Accra: Ministry of Finance and Economic Planning. Haan, H. C. 2006. Training for Work in the Informal Micro-enterprise Sector: Fresh Evidence from Sub-Sahara Africa. Doordrecht: Springer. Halme, M. 2001. “Learning for Sustainable Development in Tourism Networks.” Business Strategy and the Environment 10 (2): 100–14. Higgins, D. 2009. “Engaging the Small Firm in Learning: Practice Based Theorising on Complex Social Knowledge. Journal of European Industrial Training 33 (1): 81–96. Holden, M. T., A. Foley, P. Lynch and J. Hussey. 2010. “Building Entrepreneurship and Innovation Through the Continuing Education of Micro and Small Tourism Enterprises: A Contemporary Framework for Program Delivery.” Paper presented at the Tourism Entrepreneurship Conference. Wilfrid Laurier University, Waterloo, April 26–9. KMA. 2009. Sokoban Wood Village: Handing Over Report. Kumasi: Resettlement Office, Kumasi Roads and Urban Development Office, Kumasi Metropolitan Authority. Liimatainen, M. R. 2002. Training and Skills Acquisition in the Informal Sector: A Literature Review (Informal Economy Series). Geneva: International Labour Organization. Lorenzen, M. ed. 1998. Specialisation and Localised Learning: Six Studies on the European Furniture Industry. Frederiksberg: Copenhagen Business School Press. McGrath, S. 2002. “Skills for Development: A New Approach to International Cooperation in Skills Development?” Journal of Vocational Education & Training 54 (3): 413–30. Masakure, O., S. Henson and J. Cranfield. 2009. “Performance of Microenterprises in Ghana: A Resource-Based View.” Journal of Small Business and Enterprise Development 16 (3): 466–84.

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Enterprise Education for Small Artisanal Businesses 207 Nketiah, K. S., and B. Owusu. eds. 2011 Making Knowledge Work for Forests and People of Ghana: Annual Report 2010. Kumasi, Ghana: Tropenbos International—. Nyaki Adeyu, C. 2008. “The Suame Manufacturing Cluster in Ghana.” In Knowledge, Technology, and Cluster-Based Growth in Africa (WBI Development Studies), ed. D. Zhihua Zeng, 15–24. Washington, DC: IBRD / World Bank. Obeng, B. A., and R. K. Blundel. 2011. “New SME Curricula.” In ABLE-Ghana: Reports, Resources, Reflections, ed. R. Paton, 14–15. Milton Keynes: The Open University. Oppong, E. K. 2010. “Sokoban Wood Village Is One.” Daily Graphic, November 1. Accessed January 23, 2012. http://www.graphic.com.gh/business/ Osei-Tutu, P., K. Nketiah, B. Kyereh, M. Owusu-Ansah and J. Faniyan. 2010. Hidden Forestry Revealed: Characteristics, Constraints and Opportunities for Small and Medium Forest Enterprises in Ghana (IIED Small and Medium Forest Enterprise Series No. 27). London: Tropenbos International and International Institute for Environment and Development. Palmer, R. 2007. “Skills for Work: From Skills Development to Decent Livelihoods in Ghana’s Rural Informal Economy.” International Journal of Educational Development 27 (4): 397–420. Palmer, R. 2009. “Formalising the Informal: Ghana’s National Apprenticeship Programme.” Journal of Vocational Education & Training 61 (1): 67–83. Paton, R. ed. 2011. ABLE-Ghana: Reports, Resources, Reflections. Milton Keynes: The Open University. Patton, Q. M. 2002. Qualitative Research and Evaluation Methods. Thousand Oaks, CA: Sage. Pawson, R. Evidence-Based Policy: A Realist Perspective. Thousand Oaks, CA: Sage. Resilience Alliance. 2012. “About RA.” Accessed April 5. http://www.resalliance. org/index.php/about_ra Robson, P., and B. Obeng. 2008. “The Barriers to Growth in Ghana.” Small Business Economics 30 (4): 385–403. Robson, P., H. Haugh and B. Obeng. 2009. Entrepreneurship and innovation in Ghana: Enterprising Africa. Small Business Economics, 32(3): 331–50. Schneider, F. 2002. Size and Measurement of the Informal Economy in 110 Countries around the World. Canberra: Australian National University. Smith, A., and A. Stirling. 2010. “The Politics of Social–Ecological Resilience and Sustainable Socio-Technical Transitions.” Ecology and Society 15 (1): 11. Accessed April 5, 2012. http://www.ecologyandsociety.org/vol15/iss1/art11/ Sparks, D. L., and S. T. Barnett. 2010. “The Informal Sector in Sub-Saharan Africa: Out of the Shadows to Foster Sustainable Employment and Equity.” International Business & Economic Research Journal 9 (5): 1–11. Tackie, G. 2011. “Strategies for Curriculum Review and Course Design.” In ABLEGhana: Reports, Resources, Reflections, ed. R. Paton, 21–3. Milton Keynes: The Open University. Thorpe, R., J. Cope, M. Ram and M. Pedler. 2009. “Leadership Development in Small- and Medium-Sized Enterprises: The Case for Action Learning.” Action Learning: Research and Practice 6 (3): 201–208. Van Dijk, M. P. 1997. “Small Enterprise Associations and Networks: Evidence from Accra.” In Enterprise Clusters and Networks in Developing Countries, ed. M. P. Van Dijk and R. Rabellotti, 131–154. London: Frank Cass. Village Communications. 2010. Resettlement Activities of Sokoban Documentary film. Accra: Village Communications. White, H. 2009. “Theory-based Impact Evaluation: Principles and Practice.” Journal of Development Effectiveness 1 (3): 271–84. World Bank. 2008. Ghana: Job Creation and Skills Development Draft Report, vol. 1: Main document. Washington, DC The World Bank.

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14 When Religion Meets Capitalism A Study of the Role of Islam among North African Entrepreneurs in Montreal Jamel Stambouli and Sébastien Arcand

Studying entrepreneurship among ethnic minorities entails using notions such as ethnic belonging, cultural origins, values, social networks as well as discrimination and exclusion as part of complex social practices. Researchers are therefore unlikely to conclude that ethnic minority members start their business solely because they suffer discrimination, because it is in their culture or because they have or lack access to social networks and resources. As such, the complexity of the problems and possibilities experienced by minority members has led researchers to focus on specific aspects of ethnic entrepreneurship. For the needs of the current chapter, we have synthesized the most relevant theories through four main approaches, as shown in Table 14.1. According to Zhou (2004), authors in the field of entrepreneurship attempt to explain the causes and consequences of ethnic entrepreneurship which differ from one group to another. Consequently, choosing a theoretical approach depends on the context as well as the group in question. While debates around the emergence of capitalism underpinning modern life tend to draw a separation between modernity and tradition, the role of religion in practices by some businesses appears to be more visible nowadays in most immigration countries. In this light, we suggest that the enclave theory provides a particularly useful foundation for examining the phenomenon of religion-based business (RBB), even when there is no spatial clustering. The ethnic enclave economy effectively creates a quasi-monopoly situation in the market, in which it operates. This monopoly is based on ethnic networks, trust and the use of language of origin within the group. It is these elements that build the social capital necessary to establish and maintain the ethnic enclave economy. From an academic perspective, the concept of RBB is somewhat new, and few researchers use it even when referring to this phenomenon. Although some authors openly promote the integration of religious faith into business practices, and others are specifically interested in business ethics, very few authors use an academic approach to understand the economic and social impact of religion on business. Michael Torry (2005), one of a few such authors, proposes the concept of faith-based businesses. Others, such as

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When Religion Meets Capitalism 209 Table 14.1 Basic explanatory theories of ethnic entrepreneurship Approaches-Theories

Main ideas

Authors

Middleman Theory (Structural Approach)

Ethnic groups act as an intermediary between social classes. Social rank determines the type of market niches.

Edna Bonacich (1973)

Cultural Theory

Ethnic groups have intrinsic qualities and traditional values predisposing them to entrepreneurship. Entrepreneurial behavior is influenced by individuals’/groups’ cultural traits (such as religion).

Max Weber (1958) Werner Sombart (1951)

Disadvantage Theory

Based on the difficulties of “access to economic mobility within groups of immigrants.” Economic and social disadvantages push immigrants to entrepreneurship.

Ivan Light (1979)

Ethnic Enclave Theory (Economic Approach)

Based on two principal elements: Spatial clustering The large number of companies belonging to immigrants and employing immigrants from the same group.

Wilson and Portes (1980) Alejandro Portes (1987)

Al-Alak and Elleter (2010) use the notions of social entrepreneurship and social enterprise to examine the link between Islam and the economy, concluding that Islamic society can be seen as a business organization producing distinct economic and social values. In their analysis of the Malaysian context, Mohd et al. (2011) conclude that conventional approaches contribute to promoting a static, communitybased notion of ethnic entrepreneurship. The authors instead favor theories that encourage ethnic entrepreneurs to “come out of their shells and be the part of business mainstream to expand and grow” (Mohd et al. 2011, 1). Although the focus of our study is RBB, which implies a certain concept of community, the work of Mohd and al. is important to our reflections.

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Indeed, it supports the notion that ethnic entrepreneurs do not simply serve a particular community. Rather, it is their ambition to grow their businesses and extend their market shares. Abdul et al.’s (2009) work on halal certification helps us understand how obtaining this accreditation may or may not modify a business’s strategy. Notably, the authors find that out of 136 Malaysian enterprises that sell halal products, only 44.3 % belong to Muslim owners. This demonstrates that halal products are not just attractive to religion-based entrepreneurs but to anyone who sees these products as a business opportunity. These selected works demonstrate that the notion of ethnic entrepreneurship is in flux and subject to many variations, depending on the empirical realities at play and the theoretical approaches employed. Moreover, these studies show that the encounter between religious and economic factors must not be studied from a solely material perspective. Beliefs and values have an enduring impact on RBBs, a fact that is particularly apparent with Islamic-based businesses and the question of financing. In reviewing the existing literature, we found no concrete definition for RBBs and therefore feel compelled to propose our own: A religion-based business is an enterprise in which owners integrate their religious beliefs and practices into their professional activities. The concept of RBB refers to the close relationship between rites and customs and management processes and production. In RBBs, economic practices are preceded by codes and values prescribed by the owner’s religion. These codes and values are, in turn, transformed over time according to the socioeconomic context in which they operate. Located at the crossroads of tradition and modernity, RBBs do not entirely belong to either the formal or informal economy. Due to their nature, they are seldom able to benefit from the advantages of formal institutions in terms of financial aid, coaching and networking possibilities. We will therefore examine the growing phenomena of businesses whose practices, products and services are structured by Islamic law through the lens of this fluctuation between formal and informal economy. In doing so, we hope to gain a better understanding of this dynamic within a multicultural context, where the Muslim population is in constant growth. To this end we propose a second concept, namely Islamic-based business (IBB): An Islamic-based business is an enterprise run by a Muslim owner, who, in keeping with his faith, integrates most of the religious values and norms prescribed by Islamic law into his business practices, and sells products and services that correspond to these norms and values. Building on the concepts of RBB and IBB, we framed this chapter around two research questions. Our first question seeks to identify the extent to

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When Religion Meets Capitalism 211 which RBBs belong to the informal economy. Our second line of questioning is an attempt to measure the impact of religious values and norms in formalizing Islamic-based business practices. To this end, we have divided the chapter into two main sections. Section I focuses on the literature on religion and ethnic entrepreneurship, placing emphasis on the financing process with respect to Islamic law. Section II presents the current state of IBBs in Montreal, along with four case studies to provide a clearer picture of this phenomenon. Our conclusion provides some promising avenues for further research and future public policies. ENTREPRENEURSHIP, RELIGIOUS VALUES AND THE FINANCING OF ISLAMIC-BASED BUSINESSES As a rule, entrepreneurs must seek external financing in order to meet their goals and succeed in their business ventures (Shane and Cable 2002). This issue is of particular importance when considering immigrant entrepreneurship. Among the many problems immigrant entrepreneurs face when launching a business, access to finance is considered one of the main barriers to self-employment (Ibrahim and Galt 2003; Smallbone et al. 2003). In the early stages of their operations, entrepreneurs have greater liquidity constraints and generally find financial resources within their ethnic network (Toussaint 2008). Indeed, recent studies have found that due to their ignorance of business rules in host societies, their lack of access to formal financial sources, as well as institutional discrimination, these entrepreneurs have an easier time finding resources within their communities (Teixeira 2001; Toussaint 2008; Chrysostome and Arcand 2009). Smallbone et al. (2003) observe a large propensity within these groups to resort to informal sources of financing. As such, immigrant entrepreneurs rely on personal and community-based support networks to obtain both start-up and emergency loans. Considering Masurel et al.’s (2002) observation that capital is much easier to obtain through informal means, we note that these transactions within ethnic networks are based on trust. Furthermore, Morris and Schindehutte stress that ethnic solidarity provides entrepreneurs with “informal business support networks … , capital through informal financial markets” (2005, 473). Other authors observe that ethnically concentrated areas provide fertile ground for networking and social capital formation and for pooling resources such as ethnic labor and credit (Wang 2010). It is commonly accepted that cultural attributes and individual values influence entrepreneurial behavior (Morris and Schindehutte 2005). Beginning with Weber’s work on Protestant ethics, many scholars have focused on the influence of religion on entrepreneurship and business practices (Dana 2009; Ghoul 2011). Indeed, Weber considered religion as part of culture, stressing that it is internalized by the individual and serves as a basis for action, in addition to influencing economic behavior (Wuthnow 2005).

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In order to better understand how ethnic entrepreneurs access financing, we must therefore not only consider the cultural norms and ethnic resources of immigrant groups (Basu 2006) but also the role of informal networks (Masurel et al. 2002). Some communities, for example, have established business traditions and as a result promote entrepreneurship by encouraging hard work and self-sufficiency and by providing informal credit institutions (Casson et al. 2006). What is more, by nature, entrepreneurship research focuses primarily on entrepreneurs. By focusing on the creation phase, however, it becomes far easier to identify the other actors involved, such as business partners and various sources of financing (Davidson, Low and Wright 2001). Portes and Sensenbrenner (1993) observe that when immigrant entrepreneurs rely on their ethnic belonging within a community enclave, the result is the creation of quasi-institutions which come to replace the regulatory institutions outside the enclave. Notably, the authors describe the emergence of networks of informal loan operations with “little or no paperwork” (1993, 1333) in the Dominican community in New York. Other examples of informal credit associations can be seen in Chinese and Korean communities (Zhou 2004). These institutions are based on solidarity and trust among members. Rath et al. (2002) note that immigrant entrepreneurs use informal practices because of the competitive context in which they operate and the high rate of bankruptcy in ethnic entrepreneurship. Moreover, it is interesting to note that entrepreneurs acting outside the framework of regulated institutions often try to join their ranks once they have achieved financial stability for their enterprises (McDonald 2005, cited in Ireland and Webb 2007). In the case of Islam, entrepreneurs must abide by a specific code of conduct. Sharia, the moral code and religious law of Islam, defines prescribed behavior and actions for individuals as well as organizations. As such, entrepreneurs operate in a complex environment, in which there are values and standards to respect and religious prohibitions to conform to. In Islam, business practices result from the norms circumscribing relationships between human beings (mouaamalat). Those relationships are governed by Allah, or God (Ahmed 2009). For example, a creditor must be lenient towards debtors with problems repaying a loan. Moreover, Muslim entrepreneurs must undertake business in the name of Allah (Graafland et al. 2006), which implies that all their actions must follow Islamic rules. Financing is, therefore, a critical issue for IBBs. Furthermore, it is important to consider that Islam forbids interest-based financial transactions and prohibits gambling or taking unnecessary risks (Ahmed 2009). Although Edward (2011) notes that Muslims have the right to pursue economic interests within the framework of sharia,1 it is clear that these prohibitions push Muslim entrepreneurs to find informal startup funds within their community networks rather than through formal circuits and bank loans. As a result, these entrepreneurs are generally limited

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When Religion Meets Capitalism 213 to entrepreneurial activities requiring low entry funds (Kloosterman et al. 1999). Another option for Muslim entrepreneurs is to form an entrepreneurial team, defined as a group of two or more individuals who jointly start a business in which they have an equity (financial) interest (Kamm et al. 1990). With this in mind, Section II proposes four case studies relating to entrepreneurial teams. ETHNIC ENTREPRENEURSHIP IN MONTREAL AND ISLAMIC-BASED BUSINESSES Montreal has a long history of entrepreneurship among ethnic minorities. Indeed, over the last two centuries, a great number and variety of businesses have been founded by immigrants. Accessing data on Muslim entrepreneurs, however, is a significant challenge, not least because they do not automatically integrate their religion into their business through products, management processes and financing.2 In attempting to understand the Montreal context, we must therefore consider that the growth of the Muslim population, combined with the difficulties its members currently face on the local labor market, creates a positive driving force for the increase in Muslim entrepreneurship.3 What is more, this phenomenon tends to create new types of demands on the market for Islamic products (halal food, Islamic banks, specific clothing) and lead to an increase in IBBs. In the following subsection we present four cases to help draw a clearer picture of IBBs in Montreal. METHODOLOGY AND CASE STUDIES Our results come from a preliminary investigation conducted with North African entrepreneurs active in the Islamic products market in Montreal. We identified several factors, such as the creation of the Little Maghreb district,4 the lack of concrete recognition by formal market institutions for Islamic products and services and the impact of IBBs on the relationship between formal and informal economies, which combine to create propitious conditions for an analysis of this phenomenon in the Montreal area. In a previous study, we observed that Muslim entrepreneurs in Montreal employed a number of tactics to conform to religious guidelines. We also noted the absence of legal and/or formal financial solutions that respected Islamic financial laws (Stambouli 2010). Clearly, a good number of entrepreneurs use their ethnic networks to raise funds among Muslim businessmen, and as a result, values and virtues such as trust and good reputation play a major role in North African Islamic entrepreneurship. Because this area of investigation is relatively new, our research design involves an inductive approach influenced by the works of Yin (2009) and

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Eisenhardt (2007). This approach is common in the field of entrepreneurship, particularly when the theoretical framework is still in development (Urbano et al. 2012). Studies such as those conducted by Chetty (1996), Leung et al. (2006), Corbett, Neck and Detienne (2007), Chrysostome and Arcand (2009) and Arcand (2012) demonstrate the relevance of multiplecase research design. Content analysis allows us to interconnect the case studies, delve beyond the first level of analysis and broaden our reflections around the concepts of RBB and IBB (Yin 2009).

Case A This case concerns one of the first Islamic butchers in Montreal. The enterprise was created by a group of five North African immigrants in response to a demand for halal meat in the Muslim community. Our contact, the brother of one of the owners, currently owns his own boutique in Little Maghreb. This group created an entrepreneurial team in order to avoid the contentious issues of bank loans and especially financial interest on credit, which is prohibited by Islam. Each of the people involved invested both money and effort into the success of the project. Our contact told us “my brother respects Islamic values … he never starts an enterprise with haram money” (Stambouli 2010).5 It bears mentioning that none of these individuals had the means to start an enterprise alone, so they chose to build a team to meet their common goal. This case demonstrates how Muslim entrepreneurs succeed in overcoming institutional obstacles to financing while also conforming to religious laws.

Case B Our second case demonstrates the informal application of Islamic financial instruments nearly identical to those employed by Islamic banks. Our entrepreneur chose to employ these instruments at two different stages of the entrepreneurial process: first, to accumulate the necessary capital to carry out his project of opening a grocery wholesaler, and second, to acquire the commercial property. It is interesting to note the religious influence on his behavior, as his primary motivation for entrepreneurship was the fact that it would allow him to perform the five formal daily prayers required of all Muslims at the correct time of day. Upon arriving in Montreal, our interviewee had no family or friends. He stated that his first contact circle was formed at a mosque. He was then recruited by a merchant who attended the same mosque. This merchant proposed a deal whereby he would provide the financial capital and our interviewee would contribute his work and expertise. In the jargon of Islamic finance, this type of arrangement is called Mudaraba (Beaugé 2001), and profits are shared between the two at a pre-fixed rate. In the case of loss, the

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When Religion Meets Capitalism 215 trader loses his investment and the employee his work. In practice, their operation consists in buying goods from a wholesaler in Toronto, then selling them to retailers in Montreal. This initial phase allowed our entrepreneur to build capital to start his business. At the time of our interview, the entrepreneur had begun the acquisition of his commercial property through Musharaka, the process by which an Islamic bank buys shares of a company. The Musharaka takes two forms. The first, called simple Musharaka, is where the bank acquires enough shares to allow it to reap a corresponding portion of the gain on investment. A second form, called decreasing Musharaka, leads the entrepreneur to gradually pay off the capital invested by the bank from the company’s profits until the total depreciation of participation (Beaugé 2001). In this case, the entrepreneur’s partner played the role of the bank in a decreasing Musharaka operation. This informal operation allowed the entrepreneur to circumvent institutional obstacles while conforming to religious law.

Case C Our third case provides a pertinent example of the aforementioned informal loans with “little or no paperwork” (Portes and Sensenbrenner 1993), and illustrates the importance of religious values in RBB management. Here, the entrepreneur started as an employee, then became an associate, and finally bought all the shares of an enterprise. His associate is from the same village of origin, and the company operates in the religious clothing market. Notably, the entrepreneur rejected the term religious clothing, preferring instead traditional clothing since as he told us, religion plays no role inside the company. The agreement between the two partners stipulated that the buyer would acquire his partner’s shares over a five-year term without any interest. Despite the absence of a written contract approved by any Canadian institution, the entrepreneur stated that an oral agreement was more solemn and binding for him, morally and religiously. The agreement was made in the presence of two witnesses (also from the same village of origin), another Islamic requirement, and sealed by reading verses from the Koran because all transactions must be done in the name of Allah. Furthermore, our entrepreneur added that beyond the testimony of the two witnesses, “Allah is watching us.” In practical terms, “the payments are sent as financial performance allows. Otherwise, I inform my former partner by phone, and he gives me more time.” As mentioned above, Islamic values require the creditor to be lenient towards his/her debtor (Graafland et al. 2006). This scenario demonstrates how religion plays a role in commercial transactions and highlights the informal dimension of these agreements, which rely on very little paperwork. To better understand the importance of informal management practices in this enterprise, we asked him whether he had ever relied on governmental

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programs or assistance. He responded “I received those papers but I never paid them any attention.” As mentioned above, immigrant entrepreneurs prefer to rely on their community for information, financing and support.

Case D This enterprise was created by a group of three immigrants to cater to the Muslim community’s growing demand for pilgrimage travel packages to Mecca, a new niche in the tourism industry (Haq and Jackson 2009). Pilgrimage is the fifth pillar of Islam, and every Muslim who is physically and financially able, must perform the hajj. In 2009, 3,500 Canadian Muslims made the pilgrimage, a thousand of whom were from the province of Quebec, mainly from Montreal (Zabihiyan 2009). The average fare was CDN$4,500, and the total market turnover for 2009 was approximately CDN$16 million. Our three entrepreneurs sensed an opportunity in this rapidly growing market. However, they lacked the capital to each open their own travel agency. They therefore chose to create one company as an entrepreneurial team. Again, it is important to note that their decision to form a partnership was largely a result of Islam’s prohibition of financial interest on credit. One of the three entrepreneurs told us “I found a good location, but I had to wait a few more years to accumulate the capital I needed. I was afraid to miss the opportunity.” He discussed his plans with a colleague whom he trusted, who in turn introduced him to their third associate. The primary criterion for partnership was meeting “religious” requirements, as demonstrated by his description of his colleagues as “good Muslims” and “people we can trust.” The three partners shared no family ties and came from three different countries. They made equal financial investments and divided the tasks equitably. Significantly, the partners chose to assign all financial responsibilities to only one individual. The other two explained that “we trusted him, he is afraid of God’s judgment.” Despite his lack of formal training, this was their only basis for entrusting him with the company’s finances. The process of making arrangements for the annual pilgrimage (including acquiring funding for advertisement, booking hotels and flights, paying all local suppliers in Saudi Arabia, etc.) provides another example of how dayto-day management practices are guided by religious requirements. Despite having the option of taking a bank loan, the partners preferred to inject their own money to cover their expenses, thereby avoiding interest loans. CONCLUSION These four cases demonstrate that religion plays a significant role in the behavior and choices of the individuals we interviewed. While financing

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When Religion Meets Capitalism 217 opportunities are available in the formal banking system, these entrepreneurs chose community and ethnic financing so as to comply with religious precepts. According to Hafsi et al. (2007), the future prospects of Islamic banks are huge. Indeed, there is a growing demand from Muslims as well as “ethical investors” for products and services offered by Islamic banks, and many conventional banks around the world have created Islamic windows to meet this demand. Our analysis of IBBs in Montreal brings to light various aspects of the relationship between the formal and informal economies. Indeed, introducing identities and beliefs into the economic sphere contributes to opening formal economic practices and institutions to multiple peripheral manners of integrating capitalism and cultural diversity. We hope that experts and policy makers alike will come to regard this process as part of a broader economic system and that the scientific community will also participate in this process by placing greater emphasis on the relationship between religion and capitalism. With this in mind we have attempted to identify a number of key elements for policy makers to consider. Public-Policy Orientations • Create targeted investment programs for future investors from all ethnic communities. • Implement training programs for all local NGO workers on the specificities of Islamic law or any religious laws that have any kind of influence on economic practices. • Governments and NGOs working closely with entrepreneurs interested in starting a RBB must implement a communication strategy designed to demystify RBBs for the wider community, and demonstrate how they correspond to special needs while favoring broader economic development. • Provide information on local business practices to potential RBB entrepreneurs to limit potential cultural clashes stemming from business practices and products sometimes difficult to understand for the majority. • Assign government or NGO advisors to all entrepreneurs interested in founding RBBs. • Promote the concept of Islamic financing among financial institutions (e.g., propose “Islamic counters” like those existing in the United Kingdom). • Emphasize face-to-face contact with entrepreneurs in order to reduce paperwork. As RBBs continue to flourish, the empirical evidence alone of Islamicbased businesses justifies further exploration of how they modify the traditional tenets of capitalism and the economic integration of immigrants

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and ethnic minorities. While RBBs and IBBs are not dominant institutions, they do nonetheless shape and modify local and regional economies and contribute to bridging the gap between formal and informal economic practices. Moreover, IBBs contribute to the expansion of an international market where products and services are determined by specific cultural-based demands. As for the two questions posed in the introduction, we have drawn three conclusions. First, RBBs are located at the junction of formal and informal economic practices and are not fully integrated into either. Second, a better understanding of RBBs and how societies adapt their structures to this type of enterprise reveals how informal economic practices can become increasingly formalized. Third, while the principal role of institutions such as banks, as well as certain governmental agencies and NGOs, is to promote economic development, they must also strive to integrate RBBs into the formal economy. In concrete terms, it is not the integration of religious beliefs and practices into the institutional mainstream that favors religion-based businesses but rather efficient programs aimed at entrepreneurs of all origins and religious allegiances. As such, the IBB phenomenon must be treated like any other legal economic phenomenon, namely, through a neutral process of evaluation. We believe that taking these three elements into account will contribute to developing strategies for recognizing IBBs, respecting political liberal values, and the full participation of the Muslim population in society. In this light, political and economic institutions must encourage the creation of a legal Islamic framework designed to serve Muslim entrepreneurs and clients. This is the only way to improve the economic integration of members of Muslim populations and promote fully integrated economic activities. Indeed, providing IBBs with support and assistance would certainly serve the interests of Muslim communities and Western societies alike. This chapter attempts to further our understanding of RBBs and IBBs as well as the broader phenomenon of entrepreneurship among ethnic minorities. In linking an ethnic enclave approach to our four case studies, we hope to lay the foundations for future research.

NOTES 1. The normalization of recommendations given in the Quran and the traditions of the Prophet Mohammed. 2. In Canada, there are an estimated 3 million Muslims (Ghoul 2011). In Montreal, the last five years have seen a steady increase in both the size of the Maghreb (Algeria, Morocco, and Tunisia) community and the number of Islamic associations. Immigrant entrepreneurs represent 20% and visible minorities 25% of knowledge-based businesses (Maalouf, 2010; Industry Canada 2009). In Montreal, between 2004 and 2005, the percentage of people born outside Canada who were in the process of starting their own business was

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When Religion Meets Capitalism 219 10.5%, whereas the percentage for native-born Canadians was 7.9% (Global Entrepreneurship Monitor 2007). 3. In a previous study, we identified 30 governmental organizations and NGOs dedicated to helping new and future entrepreneurs, as well as two programs specifically targeted toward immigrant entrepreneurs. In addition, several NGOs working closely with immigrants offer their own programs and mentoring services on entrepreneurship (Stambouli and Arcand 2011). 4. Little Maghreb refers to a specific sector in Montreal characterized by a large concentration of businesses selling Islamic products and services. In 2007, an association operating under the name Little Maghreb was created to promote the economic development of this sector. 5. Haram is Arabic for “illicit,” the opposite of halal, or “licit.”

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Part VI

The Role of Informal Entrepreneurship in Economic Development

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15 Informal Economy and Women Entrepreneurs A Case Study of Senegal in Africa Alpha Ayandé

Over the past two decades, there has been a revival of interest in the informal economy because of its impact on the reality and daily lives of African people. This interest is based on the fact that the local populations perceive the informal economy as an alternative economic development model, which, in turn, raises many questions from both local and international public authorities about how to implement a tailored development strategy to allow for a surge in the economy of African countries. The informal economy is characterized by a multiplicity of micro, small and medium family businesses, individual and/or collective, which base their rationale on the solutions they provide in meeting the needs of local and proximate customers. If informal activities are conducted outside the strict observance of the laws in force or due to a legal vacuum or inadequacy of local regulations, then they highlight the complexity of conditions that predetermine the emergence of the informal economy on the one hand, and supplant some of the sovereign prerogatives of the State regarding resource allocation policies designed for employment, vocational training, apprenticeship, SME financing and the implementation of minimum income for all on the other. At present, however, the informal economy has evolved in a context of globalization through which more subtle forms of informal employment and enterprises are rooted in the well-structured economic sector. As such, “while the informal sector refers to informal enterprises, informal employment refers to informal jobs. This leads to employment in the informal economy, which can be defined as the sum of employment in the informal sector and informal employment found outside the informal sector” (International Labour Office [ILO] 2011b). In fact, many researchers, politicians and policy makers have become increasingly aware of the relevance of the informal economy in the process of local development. Most of them agree on the “extreme complexity of this very ancient phenomenon” (Stevenson and St-Onge 2011; Charmes 2002; Chen et al. 2002; Becker 2004; Ayandé 2006) and also attempt to justify its place in the quest for a better quality of life. Therefore, understanding the logic that underlies the attitude of women who develop their informal

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business becomes even more difficult to accomplish when considering their economic, social and family status in society. Taking into account changes in practical and theoretical concepts of the “informal sector” and various forms of informality in employment or entrepreneurial activity, the objectives of this study are defined as follows. RESEARCH OBJECTIVES The main objectives of this chapter are: to shed light on the activities of women entrepreneurs in the informal economy; to provide a better understanding of the dynamics and logic behind the actions of these categories of entrepreneurs; to highlight some aspects of the deep motivations of the women and the business strategies they adopt in an environment which is not often conducive for them to appropriately play their roles in economic and social development; to sensitize decision makers so that the economic potential of women entrepreneurs is taken into account at its fair value; and to contribute to furthering knowledge about the specificity of women’s entrepreneurship so that the constraints limiting the expansion of peri-urban business promoters are reduced. This chapter also seeks to identify strategies to be implemented and actions to be proposed. SPECIFIC OBJECTIVES To meet these main objectives, this chapter aims to specifically answer the five following research questions: (1) Are women’s needs in terms of entrepreneurship skills still being satisfied in relation to the current socioeconomic context? (2) Does culture in the local or traditional sense hamper them? (3) Is the local entrepreneurship culture a factor of cohesion and of galvanizing ideas about creativity and innovation? (4) Are the formal models of financing available to and adequate for women entrepreneurs in Dakar’s suburban areas? (5) Are there really any gender issues when it comes to women entrepreneurs running a business in the informal economy? LITERATURE REVIEW The specificity of women in the world economy and the relevance of development programs raise the critical question of the theories and development practices regarding the empowerment of those categories of entrepreneurs in the search of a better quality of life and harmonious economic development. In Africa, informal work during the past decade is estimated to have accounted for almost 80% of nonagricultural employment, over 60% of urban employment and over 90% of new jobs. For women in sub-Saharan

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Informal Economy and Women Entrepreneurs 227 Africa, the informal economy represents 92% of total job opportunities outside of agriculture (versus 71% for men). Almost 95% of these jobs are performed by women as self-employed or own-account workers, and only 5% as paid employees. In the same vein, women’s access to the Senegalese labor market seems to be more difficult than for the men. These difficulties can be highlighted by their weak representativeness on the level of paid employment, discrimination at the time of recruitment, family responsibilities their lack of qualifications or quite simply for lack of places of work (National Statistics Office, Senegal [DPS]/United Nations Program for Development [UNDP] 2003). In sociodemographic terms, women represent 52% of the Senegalese population, 37% of the working population, 70% of the labor force in rural areas, 70% of the informal economy, 15% of the workforce in the public sector, 35% of the workforce in the formal private sector and 80% of workers arms in agricultural production (DPS/UNDP 2003). In Senegal, public authorities understood this very early by organizing the networks of female groupings and adopting several measures intended to protect women’s individual safety and their rights at various levels: marital status, parental authority, property, wages, succession, equity in terms of political representation and place of work (i.e., the creation of the Ministry for the Status and Advancement of Women, 1990; the ratification of the CEDAW 2001; Wildaf 2004; Decree No. 77–894 of 10.12.1977; Law No. 82–019 adopted on January 22, 1982 allowing women to access senior official positions; Secretariat General of the Government [SGG] 2010). More recently, Law No. 2010–11 adopted on May 28, 2010, established an absolute parity between men and women and was adopted by the Senegalese parliament for fully or partially elective employment positions. Indeed, few studies specifically address the issues of women entrepreneurs in Dakar’s suburban area. However, the entrepreneurial activity of Senegalese women was highlighted in the 17th century, when some of them were involved in the slave trade as well as the trade in gold, gum, wax, leather, ivory and ebony (Sarr 1998). In Dakar, studies by Le Cour-Grandmaison (1972) show a society in which women had real economic power. They were already engaged in fishing, transportation and trade. Sarr (1998) highlights cases of entrepreneurs who are largely in the informal economy and addresses the changing role of women in a modernizing society where they are involved in more productive activities. Wone (2002) highlights the sexual division of labor in traditional Senegalese society as well as the role of women confined to domestic activities. This traditional status has undergone changes with the advent of a monetary economy (Sow 1995). Beyond their conferred roles as wives, mothers and the caretakers of cultural heritage and family, they continue to be on the sidelines of the opportunities providing access to resources and economic decision-making power to improve their own condition (Diop 1985). This form of organization of roles in the Senegalese family is not really the one we know today. Many women are becoming the

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“head” of the family, especially since the man can no longer assume all costs related to maintaining the family. In the research field, some prospective studies (Ministry of SMEs, Female Entrepreneurship and Microfinance [MFFR] 2005) have analyzed the economic and social situation of women between 1980 and 1990 and made projections for the next 20 years. While Savané (1986) and Sow (1992) argue that development policies do not implicitly include the concerns of Senegalese women and could constitute obstacles to their advancement, Sow (1989) and Boye and Sow-Barry (1987) show that measures have been taken at the governmental levels to ensure access and promotion of women in employment, education and health services. Unfortunately, the results have been mitigated since the structural adjustment policies and the disengagement of the State reduced the financial resources available for implementing an effective strategy for the promotion of women. Studies by Ndongo and Ouédraogo (1991) consider that women entrepreneurs’ economic activity outside the household (even those out of the market) generates sufficient revenue to maintain and further develop this activity. Clearly, women entrepreneurs are those whose principal activities are performed on a regular basis. METHODOLOGY To meet this chapter’s specific research objectives, a survey questionnaire was administered to 321 women entrepreneurs in Dakar. To supplement the information gathered on this category of entrepreneurs, we carried out three focus group interviews. After securing the agreement of the company owner and an invitation to conduct an interview, we went directly to the workplace or production site to collect information from business leaders operating in the informal economy. The information collected relates to a diagnosis of their environment of activity (external analysis) as well as the conditions of exercise (internal analysis) of their businesses. We used a structured, selfadministered questionnaire. The questionnaire used a five-point Likerttype scale to measure the attitude of the respondents with regard to the importance and effectiveness in launching and managing their informal business. Each statement was measured on a five-point scale: (1) Strongly Disagree, (2) Disagree, (3) Undecided, (4) Agree, and (5) Strongly Agree. The questionnaire contained sufficient questions to enable us to collect the information needed to meet our research objectives. In fact, the questionnaire contains many sections related to entrepreneurial skills, namely: (1) marketing and management strategy implemented; (2) personal motivation and motivating people; (3) managing conflicts and solving problems; (4) gender issues and performance appraisal; (5) networking and recording transactions; (6) pricing and writing a business plan; and (7) perception of their business environment. It also included questions intended to elicit more accurate personal information about the entrepreneurs, such as their economic sectors, their

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Informal Economy and Women Entrepreneurs 229 annual turnover, number of employees involved in the business, methods of recruitment and remuneration of apprentices, marital status, age, education level and the nature and characteristics of the capital and investment used to create and develop their businesses. With SPSS software, we used principal factor analysis in order to identify the relationship between the sections of the questionnaire and the key information emanating from the respondents’ answers. SURVEYS The second part of this research shows the results of the surveys administered to a sample made up of micro- and small enterprises (MSE), in the cities of Pikine, Guédiawaye and Rufisque, the principal localities of Dakar’s suburban zone. This questionnaire enabled us to initially collect the following data relating to women, their production activities and their business environments. By microenterprises we mean companies with one to five employees and annual sales of $4,000 or less. For their part, small businesses have a workforce of between 6 and 15 employees and annual sales not exceeding $12,000.

Sample Characteristics The business owners surveyed can be broken down as follows: 30% are microenterprises (ME), and 70% are small enterprises (SE). The surveyed MSEs are located in Pikine (45%), Guédiawaye (35%) and Rufisque (20%). The survey sample is divided into the country’s main ethnic groups: Wolof (29%), Pulaars (26%), Sereres (21%), Diolas (15%) and Soninkes (6%). The balance (3%) was of foreign origin. In terms of age, 7% of the women entrepreneurs were between 18 to 25 years old and 37% between 25 and 39 years old. The 40-to-59-year-old group is the largest (45%). Those 60 and older make up only 11% of our sample. Only 24% of the women surveyed have completed primary education, whereas 12% have reached secondary school. As for nonformal education and vocational training techniques, we found that 51% of the women had to undergo some training. Those who had reached the university level constitute only 7% of the sample, whereas 5% (the smallest fringe) has not had any training. Only 6% of the women surveyed reported being single, whereas 57% of them said they were married; 19% indicated that they were divorced, and only 18% said they were widowed.

Assessing the Validity and Reliability of the Research Instrument A factor analysis was used to assess the validity and Cronbach’s alpha to assess the reliability of the questionnaire.

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Validity Before a factor analysis could be conducted, the Kaiser-Meyer-Olkin measure of sampling adequacy (KMO) was conducted to determine whether there was an adequate correlation between the individual items contained in each of the questionnaire’s sections. A KMO statistic, an associated Bartlett’s p-value and an anti-image correlation statistic were determined when using these tests. A KMO statistic of greater than 0.7, an associated p-value of less than or equal to 0.05 and an anti-image correlation statistic of greater than 0.6, indicated that there was sufficient correlation to justify a factor analysis. For each of the questionnaire’s identified sections, the KMO statistics were greater than 0.7, the associated Bartlett p-values were less than or equal to 0.05 and the anti-image correlation statistics were greater than 0.6 between the items of each section. Once the adequate correlation is found between the items assessed within an identified dimension, a factor analysis of the dimension can be performed. Principal factor analysis (true–factor analysis) was used with an oblique rotation (in other words, direct oblimin for extraction and the Varimax with Kaiser normalization). A factor loading of  0.3 is an indication of a relationship between items. The structural validity results for each of the dimensions, as well as the subsequent factor analysis, are reported in Table 15.1. The factor analysis revealing five groups of factors are as illustrated in Table 15.1. These five factors are named in accordance with the similarity of items between them during the factor analysis: Table 15.1 Structure validity and reliability statistics Sections

Dimension

KMO Bartlett’s Cumulative% of Cronbach’s statistic p-value variance explained alpha

1

Motivation to launch an informal economic activity

0.766

0.000

47.745

0.817

2

Strategy implemented 0.892 to develop the business

0.000

56.739

0.942

3

Business support and associative experience

0.835

0.000

53.531

0.851

4

Gender issues and business development

0.772

0.000

45.705

0.798

5

Global perception of the business environment

0.779

0.000

48.213

0.812

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Informal Economy and Women Entrepreneurs 231 Factor 1: Motivation to launch an informal economic activity Factor 2: Strategy implemented to develop the business Factor 3: Business support and associative experience Factor 4: Gender issues and business development Factor 5: Global perception of the business environment

Thus, the validity of the information collected also reflects the linkages among the different aspects of external and internal diagnoses, that is, their activity environment as well as their conditions of exercising the business in terms of creation, development and business management. Reliability Cronbach’s alpha was used to determine the internal reliability of our questionnaire. Values range between 0 and 1.0; where 1.0 indicates perfect reliability and 0.70 is deemed to be the lowest level of acceptability. It is clear from Table 15.1 that Cronbach’s alpha for each of the identified factors is well above the lower limit of acceptability (0.70). The results indicate that the questionnaire used in this study has a high level of reliability. Tables with the item-to-total values for the individual items of each of the identified factors have not been included here but are available upon request. These tables indicate that each of the items relates to the identified factor and that the coefficient alpha value of the identified factor does not increase if some of the items are left out. The structural validity results for each of the dimensions and the subsequent factor analyses are reported in Table 15.1. In accordance with the commonality of the items determined during the factor analyses, we take into account the five factors identified above (see Table 15.1). The reliability statistic for each of the identified factors is also presented in Table 15.1.

ANALYSIS AND DISCUSSION We then conducted the analysis of the percentages (P) and means (M) of each item in the factors identified in this study. The key findings are discussed below and we extracted two main items considered to be the most critical for each factor. The results observed in the analysis of the five factors identified above are as follows.

Factor 1 Motivation to Launch an Informal Economic Activity Factor 1 reveals two main aspects that predetermine which women entrepreneurs will launch a business informally. As shown in Table 15.2, there

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Table 15.2 Analysis of findings Statement

1 (%)

2 (%)

3 (%)

4 (%)

5 (%)

Mean

Standard Deviation

Factor 1 Motivation to launch an informal economic activity 7.5

19.5

22.3

27.1

23.6

3.27

1.08

I acquire the materials and equipment needed to start my business around the neighborhood and/ or from an informal network.

13.6

40.0

30.0

15.0

1.4

1.95

0.92

I have an informal network that allows me to get the raw materials needed to start my small business.

14.4

28.4

28.6

15.7

12.9

2.27

1.12

I have easy access to land or to a specific local needed to run my small business.

20.2

35.5

35.5

5.1

3.7

1.31

1.04

I am obliged to run my small business in the informal economy to cover the basic needs of my family.

15.3

18.4

25.2

32.8

8.3

2.43

0.88

I have a lower level of schooling or vocational training, which does not enable me to be hired in the formal labour market.

12.2

19.3

23.2

13.2

32.1

2.98

1.02

I got capital to start my small business with the support of my family ties or friendly ties.

Factor 2 Strategy implemented to develop the business I work closely with the support of a cooperative or an association

18.2

12.6

15.1

21.4

32.7

4.34

1.06

I share with other women business owners the workplace, know-how and processes or services essential to the survival of my small business.

11.2

23.6

32.5

28.6

4.1

2.35

1.13

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Informal Economy and Women Entrepreneurs 233 1 (%)

2 (%)

3 (%)

4 (%)

5 (%)

Mean

Standard Deviation

4.3

22.6

30.4

24.3

18.4

2.67

1.02

I use recovery techniques or recycling of materials that allow me to gain customers in the formal and informal economy.

12.3

15.4

21.6

27.2

23.5

4.21

1.03

I acquire information easily on the growth markets and credit in order to promote my services and production.

30.4

13.3

12.5

25.6

18.2

3.02

1.08

I use new information and communication technologies in order to gain more market share.

45.4

31.1

16.5

4.5

2.5

1.26

0.99

Statement I am focused on meeting the immediate needs of my neighborhood and the local market.

Factor 3 Business support and associative experience I had support from formal microfinance institutions in creating my small business.

37.2

21.7

24.2

15.1

1.8

1.97

0.92

I am supervised and monitored in my business activities by local and public agencies for the promotion of MSEs.

42.3

32.1

17.4

7.2

1.0

1.31

1.02

My husband supports me in promoting my smallbusiness activities.

58.0

18.0

19.0

2.0

3.0

1.26

0.85

I use a labor force consisting of young girls who were excluded from the circuits of modern teaching and training.

21.0

26.0

27.0

11.0

15.0

2.15

0.86

I received loan support as a member of a local and traditional cooperative or association.

15.0

11.0

25.2

38.3

10.5

3.17

1.11

(Continued)

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Table 15.2 (Continued) Statement I inherited very specific assets to develop my small business in the informal economy

1 (%)

2 (%)

3 (%)

4 (%)

5 (%)

Mean

Standard Deviation

16.3

13.0

21.0

24.0

25.7

3.29

0.82

Factor 4 Gender issues and business development I have difficult relationships with my husband because of my frequent absences from home and/or the time I spend running my small business.

16.9

21.4

15.9

13.3

32.5

2.71

1.02

As a girl, I grew up in accordance with religious values and/or cultural norms that do not automatically allow girls the choice to attend school.

10.3

18.4

21.6

27.5

22.2

4.17

1.01

I could do better in organizing and effectively managing my business if I had support for the care and education of my children.

34.3

20.8

18.7

12.3

13.9

3.92

1.08

I am a member of a professional group or supporter of a women’s association for the improvement of our economic and social status.

26.8

16.7

12.9

19.4

24.2

2.64

1.11

I have difficulties planning or managing my business’s operating budget.

21.0

4.0

5.0

11.0

59.0

4.64

1.09

I do not have the necessary skills to manage an organization that goes beyond the status of a micro- or small business.

22.3

13.0

14.2

28.9

21.6

3.32

0.93

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Informal Economy and Women Entrepreneurs 235 Statement

1 (%)

2 (%)

3 (%)

4 (%)

5 (%)

Factor 5 Global perception of the business environment I pay the taxes required to 18.5 27.1 12.8 21.4 20.2 perform my business activities.

Mean

Standard Deviation

2.93

1.05

I respect professional regulations in carrying out my business activities.

23.1

53.3

6.8

7.7

9.1

2.02

1.12

I know my competitors and the reality of the local market.

34.3

36.1

13.5

8.7

7.4

2.01

1.09

My family, religious beliefs and cultural values impact on my business.

32.3

24.2

27.1

6.9

9.5

1.97

1.01

I am satisfied with the support granted by public authorities for the setting up and running my business.

23.8

34.7

17.4

10.6

13.5

3.21

0.89

At present, I do not pay any registration formalities required for this job.

28.7

13.6

14.2

17.2

26.3

2.85

1.11

are several aspects that can be taken into account in identifying the conditions of women’s motivations to set up informal businesses. It should be pointed out that the two major motivations are those inherent in: • Lack of access to formal finance institutions: mean (M) = 3.27 • Lower level of education and training: M = 2.98 The absence of adequate loan facilities from formal institutions and lowlevel vocational training are factors that put women entrepreneurs at a disadvantage when compared to other social groups. The results also show that, paradoxically, women entrepreneurs who are active in the informal economy are trying to fill this gap by investing in any business at all so as not to be left out of society. As noted during the focus group discussions, “they remain in the informal economy because they have no other professional option.” Some women entrepreneurs also discussed the need for professional training and supervision in order to formalize and implant their business in the modern circuits of the local economy. These remarks highlighted by the

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women entrepreneurs surveyed lead to a negative response to the question of whether women’s needs are met in terms of the development of entrepreneurial skills.

Factor 2 Strategy Implemented to Develop the Business Factor 2 emphasizes the two main strategies implemented by women entrepreneurs in developing their business. Table 15.2 shows that the major business strategies implemented by women to develop informal activities are: • Working closely with cooperatives or associations: M = 4.34 • Using recovery techniques and recycled materials: M = 4.21 In fact, the ability of women entrepreneurs to develop strategies aimed at using recycled materials is a very important aspect of their propensity to innovate and to always seek the best ways to sustain their business. This observation leads us to respond positively to the question of whether local entrepreneurship is a factor of cohesion, galvanizing ideas of creativity and innovation. In this regard, the discussions conducted with the focus groups revealed the ability of some contractors to collaborate on the basis of values, such as solidarity, trust and loyalty amongst members and supporters of their respective informal organizations or cooperatives: “They consider that these values are a guarantee for success in their various endeavours.”

Factor 3 Business Support and Associative Experience Factor 3 reveals the various forms of support that women entrepreneurs received as they were creating and developing their businesses. Throughout the analysis of the different items relating to business support and associative experience, we identified, as indicated in Table 15.2, two main features: • Acquisition of specific inherited assets: M = 3.29 • Acquisition of support from traditional cooperatives: M = 3.17 Traditionally, Senegalese society is caste structured and since time immemorial, certain trades have been reserved for very specific social groups. Beyond these aspects related to support for and promotion of women entrepreneurs in suburban Dakar, it should be noted that although culture, in the case of belonging to a family or a particular social group, might indeed be a motivator, it might also restrain the ability to create and develop businesses in the informal economy. This state of affairs leads to a mitigated reply to the question of whether culture in the local and traditional sense is an obstacle to women developing their businesses in the informal economy.

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Informal Economy and Women Entrepreneurs 237 Indeed, in our group discussions with women entrepreneurs from this area, we observed that opinions were split on the issue of the impact of family and local culture on the development of their businesses.

Factor 4 Gender Issues and Business Development Factor 4 addresses gender issues in the dynamics of creating and developing informal businesses by women entrepreneurs. Table 15.2 illustrates the two main gender issues hinder women entrepreneurs in this regard: • Skills for planning and managing an operating budget: M = 4.64 • Social and cultural pressure on female entrepreneurs: M = 4.17 Whereas some women entrepreneurs think they cannot fully assume their role in the world of work, others do not want their business to grow beyond a certain limit. Indeed, social and family pressures force some entrepreneurs not to develop sustainable business enterprises. In fact, gender equality issues were highlighted in our focus group discussions. We found that many women entrepreneurs in the informal economy have considered the fact that “they were gnawed by the desire to meet the needs of their offspring while simultaneously meeting the ongoing challenge of managing the business well.” With regard to the question of whether gender issues are at play for Senegalese women managing their own business, we confidently confirm that Senegalese society is still relatively conservative when it comes to the traditional roles of men and women.

Factor 5 Global Perception of the Business Environment Factor 5 assesses the impacts of the different perceptions of women entrepreneurs in the socioeconomic context in which they operate. The findings illustrated in Table 15.2 highlight the two major business environment perceptions by women entrepreneurs in the informal economy: • Satisfaction with the support granted by public authorities: M = 3.21 • Need to pay the taxes on operating the business: M = 2.93 Women in the informal economy have very different perceptions of their business environment. Indeed, what emerges from our focus groups is that most women entrepreneurs do not understand why “the infrastructure essential for the development of their businesses was not fully taken into account by governments when they pay taxes on some of their business operations.” Some of the women felt that “paying the taxes required by their work was sufficient to have a very good perception of their overall business environment.” Along the same lines, many other women entrepreneurs felt

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that the misperception or negative perception (i.e., market requirements and competitiveness) they had of their business environment was due to the inadequate support provided to them by government. RECOMMENDATIONS In light of the various aspects discussed in the context of this study on women entrepreneurs in the informal economy in Dakar’s suburbs, we recommend: • Governments must take specific actions to finance these women entrepreneurs in order to better meet their needs for business development and the creation of meaningful employment for youth and for women workers in the informal economy in Dakar’s suburbs. For instance, formal funding and credit institutions must review their funding strategies in order to give more consideration to the practical aspects related to the ability of entrepreneurs to carry out their projects rather than focusing their efforts on preparing and executing an impeccable business plan. • Public authorities must make real efforts to promote vocational training for these categories of entrepreneurs. • Associations, cooperatives and groups of women entrepreneurs in the informal economy must be better organized in order to increase their visibility in the eyes of the policy makers and public authorities, and in this way, move towards a formalization strategy for their business: an essential step in receiving support from local and international partners. CONCLUSION Throughout this study, we find that women business owners in the informal economy suffer from a lack of technical competence and/or professional know-how in order to raise their business to more structured organizational forms able to take replace survival activities and cope with underemployment and massive, long-term unemployment. The women entrepreneurs who participated in this survey did not wait to receive support from the government. Given the urgency of their daily needs, they got started themselves and coped as best they could. We emphasize that the needs of informal women entrepreneurs in the peri-urban Dakar are to obtain adequate funding and vocational training to facilitate greater involvement in credible, beneficial markets. We also noted that local culture and tradition play a more or less ambiguous role in strategies to be implemented to promote the launching and development of genuine formal enterprises run by women. The fact that many women entrepreneurs organize themselves into cooperative associations in the informal economy highlights a common need in

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Informal Economy and Women Entrepreneurs 239 confronting the problems they face in promoting their social status and, therefore, their entrepreneurial activities. It is also a sign that they want to play a leading role in decisions about the economic and social development of their community.

Research Implications The issues faced by Senegalese women entrepreneurs in the informal economy testify to a growing consideration for the role they play in the framework of trade activities and the production of goods and services. The informal economy should be promoted in such a way as to offer its stakeholders opportunities for adequate financing to build their businesses in the local economy. Of course, the complexity involved in ensuring access to financing at this level is as diverse as the entrepreneurial spirit. Moreover, the need for financing is equally wide and varied when it comes to improving business growth. The methods and processes are revealed to be necessarily different when dealing with a very small or small- to medium-sized business. This difference requires that the companies’ development policies be more focused towards economic actors of this type of informal activities given that they have a role to play in the economic and social development.

REFERENCES Ayandé, Alpha. “Women Entrepreneurship Development and the Informal Economy in Dakar’s Suburban Areas.” PhD diss., Business School Lausanne, 2006. Becker, Kristina Flodman. “The Informal Economy,” 76. Department for Infrastructure and Economic Co-operation, 2004. Boye, M. M., and Sow-Barry, A. “La condition juridique et sociale de la femme dans quatre pays du Sahel.” In Boye Abdel Kader, ed., Etudes et travaux de l’USED, no. 9, 1987. Charmes, Jacques. Estimations and Survey Methods for the Informal Sector. St. Quentin en Yvelines: University of Versailles, 2002. Chen, Martha Alter, et al. Supporting Workers in the Informal Economy: A Policy Framework. ILO, 2002. Diop, Abdoulaye Bara. The Wolof Family: Tradition and Change. Paris: Karthala, 1985. International Labour Office (ILO). “Statistical Update on Employment in the Informal Economy.” Report. Geneva: ILO Department of Statistics, 2011. Le Cour-Grandmaison, Colette. “Women of Dakar, Traditional Roles and Urbanization.” Annals of the University of Abidjan, F-Series, no. 4, 1972. Ministry of SMEs, Female Entrepreneurship and Microfinance (MFFR). “Report on the Promotion Strategy.” Dakar: Ministry of SMEs, 2005. National Statistics Office, Senegal (DPS) / United Nations Program for Development (UNDP). “Poverty in Senegal: From the Devaluation in 1994 and 2001–2002.” Strategic paper on poverty reduction in Senegal; a Survey on the perception of poverty, 2003. Ndongo, B., and Ouédraogo, L. “Women and Entrepreneurship in the Sahel.” Lecture Series, no. 30. Centre Sahel: Laval University, 1991.

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16 Enhancing Well-Being at the Household Level The Impact of Informal Economy Activity on Poverty Reduction in the Traditional Ankole Kingdom of S.W. Uganda Emmanuel Mutungi and Tony Ghaye The purpose of this chapter is to explore the extent to which four important informal economy “craft” activities (pottery, carving, basketry and iron work), which constitute what we call “material culture” have the potential to enhance well-being at the household level in 10 districts of the traditional Ankole Kingdom of S.W. Uganda. In doing so, we seek to determine how far these informal activities might play a significant role in poverty reduction and what transferable lessons might be learnt. Research shows that in Uganda, most of the poor people live in the informal economy and work in small, informal businesses and that there are correlations between poverty and informality (Keene-Mugerwa 2006). Ocici (2006) further posits that the informal business dominates the private sector in Uganda. Many of the businesses (approximately 97%) are not registered and 80% of the citizenry are employed in the sector. More than 80% of the population lives in rural areas (UBOS 2010) and integrate traditional skills and knowledge for their livelihood. Our general and underlying purpose is to explore these links, or corelations, because of our concern for the well-being, interests and agency of local people and their participation in informal economy activities that promotes the benefits of material culture. THE TRADITIONAL ANKOLE KINGDOM The traditional Ankole kingdom is a region in mid-South-Western Uganda. It has both equatorial vegetation and savannah grasslands. Its land area is about 16,182 square kilometers and it has a population of approximately 1.9 million (Uganda Bureau of Standards 2009). The region is comprised of districts carved out of the traditional Ankole kingdom created by the British colonial government after the 1902 agreement bringing together the different kingdoms and chieftainships for easier administration. The region is occupied by the Banyankole who practice cattle keeping (abahima),

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cultivation of crops (abairu) and a mixture of both. It is in this setting that we discuss the informal economy as a backbone of community well-being and argue that it is one of the ways to reduce chronic poverty at the household level and to enhance well-being. Arguably, enhancing well-being at the household level is fundamentally about establishing contexts in which more people are able to fulfill their potential, mobilize resources and flourish. This gives rise to a number of questions, each one adding more weight to our concern. For example, (1) What can be done at the local level to enhance well-being? (2) What kinds of informal activity, which could be regarded as “decent work,” could make a positive difference to poverty reduction at household level? (3) What material culture activities need to be amplified, what needs to stop and what needs to change in the traditional Ankole kingdom region to enhance well-being? ENTREPRENEURSHIP IN THE INFORMAL ECONOMY ACTIVITIES IN UGANDA Since colonial times, Uganda’s history has been shaped by ideas from the colonial masters and what we will call the outside-in flow. This flow affected most sectors of the economy. As such, the education system, which is considered the key to well-being, does not give much consideration to informality as a vehicle for sustainable livelihood. Arguably, this has discouraged the entrepreneurial spirit among many people who could have otherwise benefited from using their indigenous knowledge and skills which by nature constitute “the people’s economy.” Moreover, Ocici (2006, 2) observes that the characteristics of entrepreneurship in Uganda are “not championed in the traditional educational system, and it is just recently that it was introduced in the curriculum of institutions of higher learning” and that “in Uganda there is no clear definition of an entrepreneur. People try to start all sorts of businesses and when they succeed they are referred to as entrepreneurs.” Yet, “informal Micro, Small and Medium sized Enterprises (MSMEs) are important providers of decentralized employment and income, and contribute to poverty reduction in the Sub Saharan Africa region” (Halfdan 2002, 6) It is not surprising, therefore, that in the Southern African Development Community (SADC) region, “the MSMEs in the informal sector alone account for an estimated 60% of Gross National Product (GNP)” (Halfdan 2002, 6), which supports our argument that material culture can contribute to improving household incomes. On the other hand, in looking at farmer entrepreneurship, the Participatory Ecological Land Use Management (PELUM 2011) argues that entrepreneurs face many challenges: limited market options, fluctuations in commodity prices, limited postharvest handling and value added techniques, access to timely market information, limited access to investable capital, and lack of bargaining power and capacity to manage profitable enterprises. We concur with this argument and argue

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Enhancing Well-Being at the Household Level 243 that whereas agricultural produce requires heavy investment, relies heavily on climatic leniency and requires postharvest technology, material culture depends on the traditional and indigenous knowledge and skills abundant in the communities. Moreover, the raw materials are found in the surrounding environment. So why not use these assets? INFORMAL ECONOMY ACTIVITIES (POTTERY, CARVING, BASKETRY AND IRON WORK) IN THE CONTEXT OF MILLENNIUM DEVELOPMENT GOALS It is now commonly accepted that attaining full and productive employment and decent work for all are the main routes for people to escape poverty. After all, when world leaders adopted the Millennium Development Goals (MGDs) at the Millennium Summit in 2000, one of the goals (MDG 1, Target 1b) was to halve the proportion of people living on less than US$1 a day. This forms the general geo-political context of the present chapter and the International Labour Organisation’s (2007) Decent Work Programme. Consequently, many reports have focused on monitoring progress towards this goal and forecasting whether the world would meet it. Although Uganda is on the right track to meeting the 2015 target of reducing poverty levels by half (Uganda MDG report 2010), the measures put in place by the government may not guarantee this projection unless there is a shift away from the current interventions that spearhead agricultural activities with unequal participation and benefits to other alternatives that favor participation of all household members. It is important to note from at the outset that 80% of Uganda’s population, to which the people of the Ankole region belong, live in rural areas and mostly depend on agriculture. Interestingly, in Uganda, agricultural production still relies heavily on the availability of and access to land and favorable weather. However, land throughout Uganda is still in the hands of a few individuals, with women owning about 7% (Ministry of Finance, Planning and Economic Development 2006), and agricultural activities largely consist of subsistence farming (PEAP 2004/5). Arguably, the promotion of material culture as a viable source of income would greatly improve wellbeing at the household level and be of particular help to those with limited access to land since it uses readily available, if often undervalued indigenous knowledge and skills found in communities. Although the government has created a number of programs such as PEAP, PMA, and NAADS, issues relating to land ownership (the key factor for productive agriculture) are not adequately streamlined. Uganda’s socioeconomic context reveals that, for example, its income poverty figures stood at 38% in 2003, with 42% and 12% among the rural and urban dwellers respectively. The majority of the poor are subsistence farmers and for the most part solely engaged in crop production. Unfortunately, women and

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youth are the most vulnerable since they do not own land and participate little in decision making. Uganda’s unemployment rate is high and estimated at 3.2% (346,000) and underemployment affects 65% of the employed. The ILO and the MDGs Technical Working Group on Employment have recommended indicators for a new target that would create full and productive employment and decent work for all, including women and the young. The acceptance of this new target by the international community is a major achievement because it establishes decent and productive work as a vehicle for poverty reduction as a priority (ILO 2007). Using evidence-based arguments, it is our contention in this chapter that material culture, an informal economy activity, is a decent work activity that enhances well-being at the household level. We argue that Uganda’s formal sector is too small and insufficient to accommodate the growing number of skilled and unskilled job seekers. Moreover, what is considered the informal sector is growing in size and employs about 2.5 million people in Uganda (about 1.8 million households) notwithstanding the fact that traditionally most families operated informally in the informal sector. Survey evidence reveals that the informal sector constituted 150,138 businesses, 87% of all 160,883 businesses. About 39% of those employed in the informal sector are female. Snyder (2000) argues that women are most likely unpaid helpers. There is evidence to show that most families rely on the informal sector even when they are involved in what would be considered formal sector, such as commercial farming. In the following section, we present how pottery, basketry, carving and iron work (i.e., what we call “material culture”) is produced alongside what is considered to be the formal sector and how this activity contributes significantly in raising incomes at the household level in the Ankole region. ON WELL-BEING The concept of well-being is somewhat elusive, and attempts to translate it into practice are comparatively rare. It means different things to different people. We hope that this chapter goes some way to addressing this deficit. The widespread reference to well-being in international development masks considerable differences in the way the term is used. In some cases, well-being may simply be used as a new word to relabel development. Alternatively, a measure of “subjective well-being” may replace conventional material indicators of development. In other cases well-being includes everything that development did, but with the addition of a psychological, subjective perception or satisfaction measure. Finally, well-being can be seen to incorporate some aspects of development approaches (such as the importance of combating poverty and inequality) while questioning or reorienting others. In particular, it challenges the primary value given to economic growth by emphasizing environmental sustainability and human fulfillment.

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Enhancing Well-Being at the Household Level 245 It opens a space to talk about the quality of people’s experience, mind, body and spirit (White 2009, 2010). Chambers’ (2004) notion of responsible well-being is particularly interesting and appropriate to raise in this chapter, which focuses on well-being at a the household level. It is a counterbalance to development approaches which place significant weight on material and measurable factors and power only. Anxious to guard against a simply pleasure-seeking view of well-being, he states: “When well-being is qualified by equity and sustainability, it makes responsible well-being” (2004, 12). Chambers’ notion of responsible wellbeing is essentially a moral and philosophical position building strongly on his earlier work. It is founded on a model of change which stresses the “primacy of the personal”—that larger institutional change will occur through individuals changing their behavior (2004). In this chapter, we propose that well-being is closely connected with livelihood development and suggest that the role material culture can play in enhancing this development should be a significant part of any strategic national development plan. This strategy might require a balance between meeting immediate household needs and accumulating sustainable livelihood capital and capabilities over the longer term. We also suggest that a strategy for enhancing well-being through material culture development should reflect the marketplace and build from existing assets and activities. At the very least, we suggest that enhancing well-being at the household level requires (1) an understanding of what current material culture activities exist at household level; (2) an appreciation of the existing repertoire of material culture assets and capabilities; and (3) the codesign positive interventions that assist households in addressing chronic barriers or in seizing key opportunities. DATA GATHERING Data for this chapter were gathered in the field over a five-year period. We organize it in such a way as to illuminate the extent to which material culture (and specifically, four informal economy activities) produced in local communities, which is part of their way of life, uses locally available resources (materials, technology, skills and labor) to enhance well-being at the household level. We used a life-history method brought alive by ethnographic principles and historiography approaches and more specifically, focused interviews and reflective conversations, all within a social constructivist framework. We selected data from 112 participants in the 10 districts making up the traditional Ankole kingdom and known to one of the authors. Participants in informal economy activities were positioned in one of four categories: (1) informants, (2) active producers, (3) former producers, and (4) users of material culture. Informants were members of the community

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who had a wealth of historical knowledge about material culture. Active producers were those still involved in the production of informal economy activities such as pottery, carving, basketry and iron work. Former producers were those who had previously produced material culture but had since moved to other activities, such as agriculture or livestock rearing or those who stopped due to old age. Users of material culture were those families who currently used the informal economy products in their homes. In this respect, we present a poly-vocal account in the form of a patchwork of participant voices and photographs that explores the impact of informal economy activity on poverty reduction in this region. HOW MATERIAL CULTURE TRANSLATES INTO HOUSEHOLD INCOME

AuQ1

Carving, iron smelting, pottery and basketry, which constitute what we call material culture, are important activities that contributed and still contribute to the well-being of many families among the Banyankole. These activities were central to the lives of the Banyankole regardless of caste. The production and use of various artifacts was influenced by the lifestyles of each individual community: how and why such items were made, their role in society and their contribution to family welfare. Our evidence-based argument is that material culture can still be used in the current economic dynamics to generate income for poor communities. To establish whether the promotion and use of material culture enhances the well-being of households, we sought the views of 112 respondents on whether families still treasure, keep or use some aspects of material culture. We found that most homes either produced or used material culture, irrespective of status. Material culture is used collectively by family members or as exclusively by some family members. For example, a spear was found in all 63 families of the respondents. The spear (icumu; see Figure 16.1A) and a panga (omuhoro; see Figure 16.1B) are defense weapons, and each adult male is supposed to have one. In each home, a spear for the head of the family is kept in a sacred place forbidden to children. In addition, adult males still living with their fathers also own spears. Bwankanda, one of our respondents, informed us that “Omwaana w’omwoojo kwakura ishe omukwatsa icumu, amakuru gaakyo ngu yaba omushaija (when a male child came of age, the father gave him a spear as symbol that that he was now a man).” At marriage, his father would hand him his spear and his cows to start an independent home. Arguably, if all families still keep spears, and new independent homesteads are being created as boys get married, then the producer of the spear will still have a market. What needs to be strengthened and what we advocate for is recognition of and support for the production and use of material culture items.

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Enhancing Well-Being at the Household Level 247

Figure 16.1 (A) Spears (amacumu) and (B) Panga (Omuhoro gw’orunana)

A pounding mortar (enshekuru; see Figure 16.2A), a winnowing tray (orugari; see Figure 16.2B) and serving baskets (endiiro; see Figure 16.2C) were other material culture items found to be widely used in crop cultivating homesteads while a milk platform (orugyeegye; see Figure 16.2E) and its items such as milk pots (ebyanzi; see Figure 16.2D) were found in most pastoral families. These items were mostly used and taken care of by women, irrespective of the family’s status and income. Both crop cultivating and pastoral families use these items to generate income in one way or the other. The items are either sold to those who want to use them or are used by families in income-generating activities. Such activities include, for example, harvesting farm produce and preparation of food for sale or home consumption. On the other hand, these items were found to be commonly used in ceremonial functions, such as weddings, where they are given as gifts. Looked at differently, although government policy is focused on agriculture as the main tool for reducing household poverty, agricultural practices are still predominantly subsistence oriented. Consequently, families use these items to harvest or prepare produce for sale and for preserving and churning milk. In light of the fact that many rural families are either involved in cultivation or keep animals, we argue that the demand for these items provides an ideal market and can be a viable source of income for better rural community livelihood. We further argue that if most families still treasure these items of material culture, the producers of these products have a market. Moreover, the Uganda National Household Survey (2010) confirms our argument when it states that 80% of Ugandans participate in cultural activities and that 71.7% of the population of the western region (where this study was conducted) attend ceremonies like introductions, funeral rites and marriages.

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Figure 16.2 (A) Pounding mortar (enshekuru), (B) Winnowing tray (orugari), (C) Serving baskets (endiiro), (D) Milk pots (ebyanzi), (E) Milk platform (orugyeegye)

These activities are at the epicenter of where material culture products are used, which reveals the fact that there is a demand for them. In the following section, we analyze the incomes of families actively engaged in material culture production and those in agricultural production. Our aim is to establish their respective incomes and how one can supplement the other. INCOMES OF FAMILIES ENGAGED IN MATERIAL CULTURE We visited families engaged in the production of material culture. Most of these families or individuals so engaged either learned the relevant skills from their parents who recruited them into the practice or were sent by their parents to learn from their friends. This type of training demonstrated the cultural transfer of indigenous knowledge and skills, something which is being eroded by the current education system because it captures little if any of the traditional knowledge and skills.

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Enhancing Well-Being at the Household Level 249 We visited 25 families engaged in material culture production in their workshops and interacted with women in their homes. Unlike men, most women produce their material culture while attending to other family responsibilities, such as preparing food or attending to young children. Both men and women produce material culture products to supplement their family incomes and improve their livelihood. We clustered the families into four vocations: carving, basketry, iron work and pottery. Income from material culture production and from other activities was recorded to establish their profitability. Being an informal sector activity, the income was not based on account book because none of the respondents had an organized chain of production. We recorded their income as told to us by the producers, who based their estimates on the monthly markets where most of the items are sold. In some cases, the sales were recorded immediately after a market day, which increased the accuracy of what they reported as their income. Income over a three-month period was assumed to be representative because material culture income was compared with income from crops, whose harvesting time is usually after three months. Table 16.1 shows income from material culture and from other activities for a period of three months. From the recorded incomes of the 25 families covered by the study, it was established that families get more money from material culture items than from other sources. The total income from material culture was found to be 7,090,000 shillings, with a mean income of 374,800 shillings compared to 2,280,000 shillings from other activities. Of the four vocations, carving generated more money. We found that apart from growing food for consumption, 11 of the 25 families (44%) concentrated on material culture production for their livelihood. There was a notable disparity in the time, concentration and inputs employed in production of material culture between men and women. In most cases, men worked only on material culture whereas women in some families would start with working in the garden and then work on material culture. However, all in all, the ultimate goal was to improve family well-being. We also looked at families in the same locality who use rather than produce material culture from time to time in their homes. We compared their incomes to those producing material culture so as to establish (1) whether they earn more, and (2) whether they can be a viable market for material culture products. A total of 21 families who use material culture products such as milk pots, baskets or other farm tools were considered. As in producer category, incomes in this category were based on three months, when crops are harvested and sold. The pastoralists either sell milk and ghee or sell cows in monthly markets. The cows are always sold to pay for school fees, hospital bills and clothes or food during the dry session. For the farmers, income is from the sale of crops like maize, ground nuts, millet, bananas (matooke), beans, cassava, and potatoes. It is from the sale of these items that families raise the money to buy the material culture they require in their homes. We recorded the incomes of the 21 families according to their area

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Table 16.1 Incomes of families engaged in material culture production for three months in Ug.shs Family

Vocation

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Pottery Iron work Basketry Basketry Pottery Pottery Basketry Iron work Iron work Carving Pottery Basketry Pottery Basketry Carving Pottery Basketry Iron work Pottery Basketry Basketry Carving Carving Iron work Carving

Total

Income from material culture 360,000 280,000 70,000 180,000 250,000 160,000 120,000 360,000 280,000 400,000 100,000 90,000 180,000 240,000 360,000 140,000 120,000 360,000 200,000 280,000 460,000 450,000 750,000 500,000 400,000 7,090,000

% 100 65 50 51 56 52 100 71 100 74 45 100 100 57 100 50 44 100 44 65 100 100 100 100 73

Income from other activities 00 150,000 70,000 170,000 200,000 150,000 00 150,000 00 250,000 120,000 00 00 180,000 00 140,000 150,000 00 250,000 150,000 00 00 00 00 150,000 2,280,000

% 00 35 50 49 44 48 00 29 00 26 55 00 00 43 00 50 56 00 56 35 00 00 00 00 27

Total Income 360,000 430,000 140,000 350,000 450,000 310,000 120,000 510,000 280,000 650,000 220,000 90,000 180,000 420,000 360,000 280,000 270,000 360,000 450,000 430,000 460,000 450,000 750,000 500,000 550,000 9,370,000

of production and established the mean of both animal and crop production, which we later compared with material culture producers. There was an income difference between crop and animal production and among families engaged in animal or crop production. Animal and crop production had a lower mean than that of material culture producers. We believe the reason for this discrepancy stems from the fact that families try to undertake commercial farming without the necessary capital for elements such as land, proper animal breeds and seeds and a sustainable income to buy the required farm inputs to realize high yields. We posit that if people used their indigenous skills and knowledge they could generate sustainable incomes which they could eventually use to set up commercial farms alongside these well-grounded activities passed down to them by the older generation. We also looked at 17 families that were at one time involved in material culture production in one or more of the four vocations mentioned above.

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Enhancing Well-Being at the Household Level 251 The findings revealed that all retired carvers turned to keeping cows, and all the iron workers turned to farming. A possible explanation could be the historical classification of Ankole social systems. Cattle keepers were historically considered superior to crop-cultivating families. Ankole actually followed a caste system (Karugire 1971; Kamuhangire 1993). According to Gureme (interview 2009), there were indigenous people in the area before the arrival of the Banyankole. When the two classes of Banyankole (Bahima and Bairu) arrived, they conquered the local people. The Bairu were craftsmen who were good at iron smelting and making fighting weapons whereas the Bahima were fighters. The Bahima preferred to remain closed so as not to reveal their fighting techniques. As a result, they married amongst themselves. On the other hand, the Bairu mixed with the local people in the area because the locals did not have the technology to produce farm and hunting tools from iron, which Bairu were good at. Rather, they used wooden and stone tools. The Bairu made them iron hoes, spears and other iron items. This commerce led the Bairu to mix freely with them since transactions took the form of barter. As a result, there were intermarriages and the locals were eventually assimilated into the Bairu caste. Whether this story can be verified or not, it does help us to understand, correlate and triangulate our information with the mythical story of Ruhanga and his sons (Morris 1962).1 This could be the reason why once carvers accumulate money, they prefer keeping cattle than cultivation because cows put them in a better social class. In contrast, iron workers moved to farming because of their association with croppers. Farm tools were the most rewarding trade for iron workers, which inclined them to farming. We conclude by comparing all the incomes of the three groups of active material culture producers, former producers and users in order to

Table 16.2 Incomes of the sample for three months No. of Respondents

Total income

Mean

Incomes of families engaged in material culture production

25

9,470,000

370,000

660,000

Incomes of families using but not producing material culture

21

5,860,000

279,047

810,000

Incomes of families formerly producing material culture

17

6,640,000

390,588

2,050,000

Family

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Range

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understand whether material culture production can make a significant contribution to raising household incomes and lead to reduced poverty levels. The incomes of the three categories are compared in Table 16.2. The total three-month incomes for the three categories of participants are recorded, and their mean and range calculated to establish how each category contributes to poverty reduction. Families using material culture, but not participating in production, were found to have the lowest mean, whereas families that were former producers had the highest. The same families that once produced material culture were also found to have the highest range (2,050,000) compared to 660,000 and 810,000 for families engaged in production and families using material culture, respectively. We further established the distribution of this income to different family members because poverty affects family members differently. We discovered that the Ankole region, like most other regions in Uganda, operated on the patriarch system and decision making at family level was more in the hands of men than women. PEAP (2004/5) and Cultural Policy (2006) observe that women have limited access to productive resources, land in particular. In traditional Banyankole culture, a female child did not inherit any property from her parents. After marriage, the girl moved in with her husband’s clan, which meant that her inheritance was supposed to be at her husband’s home, not at her father’s. However, even there, she never had a share because property also belonged to male adults. This meant that women had no property of their own, despite their participation in ensuring the family’s well-being. Although this state of affairs is gradually changing among progressive families, this mindset still influences the rural community. This mindset is increasingly affecting many families because men want to benefit from the current competitive economy to the detriment of a landscape already biased against women. Further evidence to justify the importance of material culture in poverty reduction was based on the fact that since ownership of property and productive resources was in the custody of men, women would benefit from sale of material culture products whose raw materials were available in the community. Among the 63 families interviewed, control in 47 families was in the hands of men. This imbalance meant that women had less access to ownership of property and could not control income and expenditure in homes. Even our questions about who controls spending at the household level reveled that only 18 women out of 63 participants controlled income and 11 respondents spent their money together. In this light, one could argue that material culture, dominated by women in production and use, can help in uplifting the voice of women in issues related to how family income is spent. We argue that there is need for government policies to promote material culture production as a source of income in families where women are involved in production material culture. What we observed and where emphasis needs to be put is in including income from material culture in national

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Enhancing Well-Being at the Household Level 253 statistics. The Statistical Abstract (2010) lists the areas from which communities get their incomes. However, material culture is not included at all, despite the fact that the Uganda National Household Survey (2009/10, 129) states that “a good number of households were earning income from the sale of cultural commodities such as crafts, backcloth and herbal medicines, among other things,” which products are part of material culture. SOME CONCLUSIONS We conclude the chapter by addressing three critical challenges which emerge from our data. We identify these challenges and argue that if they are be properly addressed, material culture could become a viable source of income at the household level and contribute to poverty reduction. These challenges are:

Balance Unbalanced poverty reduction strategies and interventions by governments are universal. However, it is worse and not uncommon in resourceconstrained developing countries such as Uganda. Yet most communities in these countries have indigenous knowledge and skills which could be used as resources to improve their livelihood. They are an underused povertyreduction resource. Our argument is that if there were more of a balance in activities conduced at the household level, informal economy activities of the kind we describe could enhance well-being at the household level.

Priorities Although the International Monetary Fund (IMF) and World Bank have prescribed policies that influence poverty reduction strategies and interventions in many developing countries, using indigenous knowledge and skills to produce material culture products as a source of income is not a priority for many governments. Yet these items are appreciated both locally and internationally and could be a valuable resource for the purposes of poverty reduction. Considering the usage and appreciation of material culture products in homes and in the international community, we argue that through positive influencing strategies at local, regional and national level, the informal economy activities described in this chapter have the potential to enhance well-being at the household level.

Plans Uganda’s Poverty Eradication Action Plans of 1997, 2000, 2004/5 and National Development Plan (NDP) (2008) did not consider the potential of

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off-farm informal economy activities, such as material culture production and use as viable and valuable means to reduce poverty. We argue that the government needs to include material culture production and use at the household level and in the agricultural sector. Our argument is that through enhanced politico-economic acuity, entrepreneurial support and local resource mobilization, the informal economy activities described here have the potential to enhance well-being at the household level. We suggest that a major challenge is not, as it is often assumed, to simply “do something.” Matters are subtler than this. The challenge is to positively engage and support people at the household level who are (1) already to a certain extent economically active but focused on the immediate need of household economic survival, and (2) desire more sustainable and socioeconomically constructive livelihood pathways. We feel that the informal economy activities described here holds this promise. NOTE 1. H. F. Morris (1962) talks about the three sons of Ruhanga and how the three social classes of Bakama, Bahima and Bairu were formed.

REFERENCES Chambers, Robert. Ideas for Development: Reflecting forwards. IDS Working Paper 238. November, 2004. Halfdan, Farstad. Integrated Entrepreneurship Education in Botswana, Uganda, and Kenya. Review commissioned by World Bank, National Institute of Technology Oslo, Norway, 2002. Kamuhangire, Ephraim. “The Pre-colonial History of the Salt Lakes Region of South Western Uganda, C.1000–1900 A.D.” PhD Thesis, Makerere University, 1993. Karugire, Samwiri. A History of the Kingdom of Ankole in Western Uganda to 1896. Oxford: Oxford University Press, 1971. Keene-Mugerwa, Lillian. LabourRrights in Uganda. Presented at National Consultation Conference: Legal Empowerment of the Poor, Speke Resort, Munyonyo, November 24–25, 2006. ILO. Uganda Decent Work Programme, Final Text. ILO Office for the United Republic of Tanzania, Kenya, Somalia and Uganda, 2007–2010, Published ILO May 2007. Lutalo, Stella Grace, and Kerstin Lange, eds. PELUM Approaches for Achieving Farmer Entrepreneurship in Uganda: Case Studies of PELUM Uganda Member Organizations. PELUM Association, 2011. Ministry of Finance, Planning and Economic Development (MFPED). Poverty Eradication Action Plan (PEAP) 1997, 2000, 2004/5–2007/8. Kampala, Uganda: MFPED, December 2004. Ministry of Finance, Planning and Economic Development (MFPED). Gender Inequality in Uganda: The Status, Causes and Effects. Discussion Paper 11. 2006. www.finance.go.ug. Morris, Harry. A History of Ankole. Uganda Literature Bureau, 1962.

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Enhancing Well-Being at the Household Level 255 Ocici, Charles. A Working Paper on Entrepreneurship. National Consultation Conference: Legal Empowerment of the Poor, Speke Resort, Munyonyo, 2006. Republic of Uganda Ministry of Finance, Planning and Economic Development. Millennium Development Goals Report for Uganda 2010. Special Theme: Accelerating Progress towards Improving Maternal Health. Kampala, Uganda: MFPED, September, 2010. Snyder, Margaret. Women in African Economies: From Burning Sun to Boardroom. Kampala, Uganda: Fountain Publishers, 2000. White, Sarah. “Bringing Well-Being into Development Practice.” WeD Working Paper 09/50, University of Bath, UK, 2009. White, Sarah. “Analysing Well-Being: A Framework for Development Practice.” Development in Practice 20, no. 2, 158–72, 2010.

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Author Query 1. In the caption to Figure 16.1 you changed icumu to amacumu. Should that change be made in the text as well?

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Part VII

Concluding Remarks

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17 Informal Economy Entrepreneurship and Policy Implications Léo-Paul Dana

Informal exchange in developing countries and transitional economies has long been an important subject of interest for researchers (de Soto 1989; Foster 1948; Foster 1961; Geertz 1962; Koo and Smith 1983; Morris and Pitt 1995; Portes, Castells and Benton 1989; Rosser, Rosser and Ahmed 2000; Tokman, 1978). Although the level of technology involved is often limited, there are nevertheless benefits derived from this kind of activity. At the household level, informal entrepreneurship can reduce poverty (see Mutungi and Ghaye, Chapter 16). Thai and Turkina (see Chapter 1) confirm that informal entrepreneurship is more vibrant in poorer countries than elsewhere. As suggested by Ayandé (see Chapter 15), informal entrepreneurs may remain in this sector and never formalize due to a lack of managerial knowledge. In industrialized contexts, however, Schumpeterian (1912, 1928, 1934) since the 18th century innovation has become the flagship of new ventures, with formal structures and the separation of wholesale from retail trade (Weber 1950). Still, in today’s world, the phenomenon of traditional opportunity-seeking entrepreneurship is also studied in the informal sector of industrialized nations (Dana 1995; Meis-Mason, Dana and Anderson 2009; Williams 2011), and it may be high tech in nature (see Han, Chapter 7). Light (2006) noted evidence that pointed to the increase of informal enterprises in Los Angeles in recent years. Williams (2007) critically evaluated the “marginalization thesis” and found that while recent years have seen the emergence of an informal sector in Western countries (mirroring the representation of informal workers in a third-world context), entrepreneurs in the informal sector are not necessarily informal because of necessity alone. To remain in the informal economy, entrepreneurs take care not to create very visible economic growth. Employment is thus limited as is its benefit to society. What are the prospects for economic development in a scenario in which entrepreneurs choose to remain below the radar? A change in policy may encourage informal entrepreneurs to shift to the formal sector. For example, when prostitution was illegal in New Zealand,

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women operated outside the formal sector, whereas now that the profession has been legalized, women are GST-registered and profit from related tax benefits. In other countries, entrepreneurs suffer from relatively heavy economic regulation (Levi and Dexter 1983), paperwork requirements (Peterson and Peterson 1981), nontariff barriers (Dana 1990) and complex tax requirements (Dana 1996a). Might policy changes encourage entrepreneurs of the informal economy to create more tax-paying jobs? Chinchilla and Hamilton (2001) found that most Central American street vendors in Los Angeles had worked up to informal self-employment (from wage work in the informal sector), and two-thirds of their employees were Latinos, mostly coethnics and working illegally. Can it be implied that entrepreneurship in the informal sector is a phase between wage work in the informal sector and entrepreneurship in the formal sector? Han (see Chapter 7) suggests informal online entrepreneurs could be led to the formal economy. However, given that unrecorded cash sales circumvent tax and regulations, there are individuals who have no intention of formalizing (see Williams, Chapter 11). FORMAL ENTREPRENEURSHIP Formal entrepreneurship takes place in bazaars/souqs as well as in the firmtype sector. Readers are likely to be most familiar with the firm-type sector, an economic institution that involves a mode of commercial activity in which industry and trade take place primarily within a set of impersonally defined institutions. In this sector of the economy, the decision space is occupied by product attributes and the buyer and seller are secondary, if not trivial, to the transaction decision. The interaction between the buyer and the product is deemed more important than that between the buyer and the seller. It is assumed that profit-maximizing transactions will occur based on rational decision making rather than on the nature of personal relationships. The focus is on impersonal considerations, as described in Weber’s (1924) thesis. Formalization involves reliance on official rules (Burns and Stalker 1961). Prices are tagged, reflecting market forces. While Western marketing principles (Gronroos 1989) apply to this sector, market-orientation is linked to the maturity of the industrialization process. In contrast, the bazaar is a social and cultural system, a way of life and a general mode of commercial activity, in which interpersonal relationships are central to recruitment, retention, promotion and purchasing decisions, and nepotism often takes priority over merit (Dana 2010). The price and the level of service quality reflect the relationship between the buyer and the seller. In this scenario, consumers do not necessarily seek the lowest price or the best quality. An individual gives business to another with whom a relationship has been established, to ensure that this person will reciprocate. Reciprocal preferential treatment reduces transaction costs (Coase 1937). The multiplicity of small-scale transactions in the bazaar results in

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Informal Economy Entrepreneurship and Policy Implications 261 a fractionalization of risks and therefore of profit margins; the complex balance of credit relationships is carefully managed, as described by Geertz (1963). Prices in the bazaar are negotiated as opposed to being specified by the seller. In contrast to the firm-type sector, in which the primary competitive stress is between sellers, the sliding price system of the bazaar results in the primary competitive stress being between buyer and seller (Parsons and Smelzer 1956). The lack of information results in an imperfect market and with few exceptions, such as basic food staples, retail prices are not indicated but determined by negotiations. The customer tests price levels informally before bargaining begins. It is often the buyer who proposes a price, which is eventually raised. As discussed by Geertz, the “relatively high percentage of wholesale transactions (i.e., transactions in which goods are bought with the express intention to resell them) means that in most cases both buyer and seller are professional traders and the contest is one between experts” (1963, 33). Once a mutually satisfactory transaction has taken place, the establishment of a long-term relationship makes future purchases more pleasurable, and profitable. As noted by Webster (1992), building long-term relationships can be viewed as a social and economic process. Unlike Western customer-centered relationship marketing, whereby a seller seeks long-term business relationships with clients (Evans and Laskin 1994; Zineldin 1998), the focus in the bazaar is on the relationship itself. In the bazaar, both the buyer and the seller seek a personal relationship. Firms in the bazaar are not perceived as rivals of one another. THE PARALLEL ECONOMY: INFORMAL, INTERNAL AND COVERT Under central planning in Cuba (Dana 1996b), Eastern Europe (Dana 2010), and elsewhere (Dana 2002), the absence of a legal market economy led to permanent shortages. Survival strategies often involved the emergence of entrepreneurs in the parallel economy, where inefficient regulations could be circumvented. According to Grossman (1977), this underground activity increased the overall efficiency of resource allocation under central planning. The problem was that a mindset evolved, equating efficiency with evading regulation. As illustrated in Table 17.1, forms of entrepreneurship in the parallel economy may be internal, covert or informal. While recent years in transitional economies were characterized by reform, change in mindset has not kept up with reforms in regulatory framework (North 1990). As a consequence of their experience under central planning, many people equated entrepreneurship with the avoidance of communist law. When new regulations were introduced to usher in market economics, people continued to circumvent business law. As evident from Feige and Ott (1999), during the transition period, evasion and noncompliance with

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Table 17.1

Formal & tructured

Parallel

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Yes

No

Internal Illegal

Yes

Bazaar

Informal

Yes

Firm type

Covert

Business transaction

Economic activity

Forms of Enterprise

Networks Maintenance

Informality

None

Networks

Through mergers, acquisition, volume, expansion

Growth orientation

Illegal cash

Subsistence

Relationship

Product / Service

Focus

Barter, street vending, unrecorded cash sales

Prostitution, drug dealing

Subsistence agriculture, hunting, fishing

Fish market, souq

Factory, department store

Examples

Informal Economy Entrepreneurship and Policy Implications 263 new rules renders them ineffective. Thus, where economic reform has been faster than the ability of people to adapt, inertia has delayed actual transition. Štulhofer (1999) used the term cultura inertia to describe a collectivist legacy that survived from the past. Conditions in transitional economies thus made internal subsistence activity often necessary for survival while covert and informal entrepreneurship became popular, avoiding all forms of taxation. Internal subsistence activity (Cole and Fayissa 1991) is often necessary as a means to adapting to rapid reform. Whereas McClelland defined the term entrepreneur as an individual who has “some control over the means of production and produces more than he can consume in order to sell (or exchange) it” (1961, 65), internal subsistence activity refers to that which is consumed internally rather than sold. Thus, this category of economic activity is described as internal because it does not involve an external exchange—no business transaction takes place. Although wealth is created, nothing is sold for profit and that which is created is consumed or saved for personal use. Internal subsistence activity includes subsistence agriculture and subsistence fishing. Both are legal but involve no market transaction external to the producer. While internal economic activity exists as an activity of choice even amid the most advanced and industrialized backdrop (Dana 1995), for some people in transitional economies, this is the only available survival strategy. In Moldova, for example, where prices have escalated while pensions have not, retired professionals have been growing food that they otherwise could not afford. Covert economic activity involves illegal transactions and which are therefore conducted in a covert way in order to avoid punitive measures from law-enforcing authorities (Fadahunsi and Rosa 2002; Feige and Ott 1999; Haskell and Yablonsky 1974; Henry 1978). Since the liberalization of the marketplace has facilitated organized crime, many entrepreneurs have set up businesses that sell children into the sex trade. This is a growing issue in Eastern Europe as young women are being enticed into prostitution as a means to a “better future.” In the case of Albania, prostitutes are considered to be the nation’s “most profitable exports.” While Cantillon (1755) referred to self-employed prostitutes as entrepreneurs, today’s covert activities include the large-scale transnational trafficking of human beings. Officials estimate that each year, 100,000 people become enslaved prostitutes against their will. In Moldova, observers report that 400,000 women have been sold into prostitution since the country’s independence. Ethnic Albanian entrepreneurs in Kosovo, Macedonia and Serbia are using the flesh trade to finance their separatist movements. For a detailed discussion of the sex trade in Eastern Europe, see Jacobs (2002). In Macedonia, a Minister for Interior Affairs publicly announced that police are on the payroll of covert smugglers. Informal entrepreneurship exists around in the world, although the size of the parallel economy and the level of corruption (Boylan 1996; Feige and Ott 1999; Glinkina 1998; Keller 1988; Oliver 1991; Shleifer and Vishny

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1993a) vary greatly. Johnson, Kaufmann and Shleifer (1997) estimated that the unofficial economy was 15% in Poland, compared to 50% in Russia and the Ukraine. Johnson, Kaufmann, McMillan and Woodruff (2000) reported that Russia and the Ukraine had higher levels of unofficial business and corruption than was visible in Poland, Romania and Slovakia. Informal economic activity can take the form of an impromptu stall or itinerant vending. Unrecorded cash sales circumvent taxation as well as regulation. Although the law is often bent, authorities generally tolerate the sector. A relevant discussion from Dana (1992) is presented concisely by Chamard and Christie (1996). Johnson, Kaufmann, and Zoido-Lobaton (1998) discuss discretion in the sector. Barter, selling from an impromptu stall and itinerant vending are considered as forms of informal economic activity. In Ho Chi Minh City, a shed serves as an informal pancake restaurant when it is not being used as a bus depot. Not far away, a woman sits on the sidewalk feathering ducks. A man unloads fresh pork from a wooden container onto the street. Nearby, fish are being laid out in tidy rows, with some of the fish are still flopping on the hot pavement. Such sidewalk activity involves no license, no rent, and no taxation. Likewise, in the Kyrgyz Republic, informal vendors sell refined vegetable oil from USAID, labeled “Not to be sold or exchanged.” No transaction is declared. An individual selling books at an impromptu stall can be seen between a newspaper stand and a watch repair kiosk. Across the street, there is a table displaying sunglasses imported from China. It is all informal enterprise. Meanwhile, in Burma, a self-employed individual sells air for vehicle tires. Another fixes umbrellas on a street corner, and on the same broken sidewalk, a barber has set up an impromptu stall. A tourist is being shaven for the price of a coconut. Nearby, a microscale merchant sells flashlights and lighters. Another vendor is weighing nails. A woman walks by on her way to the station with food she has prepared to sell to passengers on the train. All of these activities are examples of informal economic activity involving unrecorded sales. Entrepreneurship also flourishes in the informal sector of Europe, the Americas and beyond. At Montmartre in Paris, for example, numerous vendors open blankets of goods and try to peddle them primarily to tourists. In New Zealand, an electrician gives his customers reduced hourly rates if paid in cash. In Canada, many manicurists and hairdressers conduct business from their homes and never declare any of their earnings to the government. Moreover, informal self-employment is often a supplement to wage or welfare income. IMPLICATIONS FOR POLICY MAKERS It is common knowledge that countries that strictly control and regulate the convertibility of their currency are likely to have a black market that

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Informal Economy Entrepreneurship and Policy Implications 265 maintains a currency exchange rate more indicative of supply and demand than the official rate. So, too, we might correlate entrepreneurship in the informal economy with regulation. Smith (1892) discussed the importance of a stable legal framework. This is crucial even today. O’Driscoll, Holmes and Kirkpatrick (2001) found that in the absence of a firm commitment to solidly established rule of law, even a decline in government intervention has not led to economic freedom. Where bureaucrats are insufficiently trained and where controls are lacking, vague laws provide opportunities for inconsistent discretionary treatment, which opens the door to corruption. Much literature discusses the fact that the demand for bribes by government employees decreases the attractiveness of being an entrepreneur in the formal sector (Cornelius and Lenain 1997; Johnson, Kaufmann, McMillan and Woodruff 2000; Johnson, Kaufmann and Zoido-Lobaton 1998; Shleifer 1997; Shleifer and Vishny 1993b, 1994). A priority for governments should be to determine the appropriate degree of regulation to enact and to enforce, such that the benefits to society exceed the costs of compliance. Mill (1869) argued that the only purpose for which power can be rightfully exercised over a member of society against his or her will, is to prevent harm to others. While some regulation is required to ensure order, excessive intervention is counterproductive, as was acknowledged in the Bologna Charter. Experts have become skeptical of targeted economic development programs, because they often subsidize the wrong people, with no lasting benefits. While microfinance programs and credit-guarantee schemes seem to be most appropriate in some contexts, no funding should be distributed without postloan or postgrant training. Recipients should be familiarized with finance, tax and payroll issues. Otherwise, of what use is capital without knowledge about how to invest it? To be effective, policies and programs should be appropriate to a society’s culture. Policymakers should be aware of the cultural attributes of different ethnic groups, and policy should consider these differences. Keeping in mind that the key to economic growth is granting enterprises and consumers the economic freedom to respond to incentives, policy priorities should include: (1) reduction of poverty by accelerating technological development and in some cases by controlling population growth; (2) improvement of property rights and the legal basis for commerce; (3) strengthening financial infrastructure; (4) further liberalization of trade; (5) revision of policies to attract foreign investment, with an understanding that investment takes place when there is an expectation of adequate return; (6) improvement of the management of government expenditures; and (7) reform of tax policies to broaden the state’s revenue base in a fair manner and without creating disincentives to existing entrepreneurs (e.g., a tax holiday for new entrants could prompt existing firms to close and restart to benefit). As Bird (see Chapter 10) argues, effective interventions require policymakers to question implicit assumptions. In addition, existing labor regulations should be enforced (Light 2006).

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Informal Economy Entrepreneurship and Policy Implications 267 Geertz, Clifford. 1962. “The Rotating Credit Association: A ‘Middle Rung’ in Development.” Economic Development and Cultural Change 10 (3), April, 241–63. Geertz, Clifford. 1963, Peddlers and Princes: Social Development and Economic Change in Two Indonesian Towns. Chicago, IL: University of Chicago Press. Glinkina, Svetlana P. 1998. “The Ominous Landscape of Russian Corruption.” Transitions 5 (3), 16–23. Gronroos, Christian. 1989. “Defining Marketing: A Market-Oriented Approach.” European Journal of Marketing 23 (1), 52–60. Grossman, Gregory. 1977. “The Second Economy of the USSR.” Problems of Communism 26 (5), 25–40. Haskell, Martin R., and Lewis Yablonsky. 1974. Crime and Delinquency. Chicago: Rand McNally. Henry, Stuart. 1978. The Hidden Economy: The Context and Control of Borderline Crime. London: Martin Robertson. Jacobs, Timothy. 2002. “Sex Trade Scars Baltic Women.” Baltic Times 7 (302), April 11, 1–2. Johnson, Simon, Daniel Kaufmann, John McMillan, and Christopher Woodruff. 2000, “Why Do Firms Hide? Bribes and Unofficial Activity after Communism.” Journal of Public Economics 76, June, 495–520. Johnson, Simon, Daniel Kaufmann, and Andrei Shleifer. 1997. “The Unofficial Economy in Transition.” Brookings Papers on Economic Activity 2, Fall, 159–239. Johnson, Simon, Daniel Kaufmann, and Pablo Zoido-Lobaton. 1998. “Regulatory Discretion and the Unofficial Economy.” American Economic Review 88 (2), 387–92. Keller, Bill. 1988. “In the New Russia, New Greed: Growing Private Sector Brings Crime and Corruption,” International Herald Tribune, July 26. Koo, Hagen, and Peter C. Smith. 1983. “Migration, the Urban Informal Sector, and Earnings in the Philippines.” Sociological Quarterly 24 (2), 219–32. Levi, Maurice D., and Albert Dexter. 1983. “Regulated Prices and Their Consequences.” Canadian Public Policy 9, 24–31. Light, Ivan Hubert. 2006. Deflecting Immigration: Networks, Markets, and Regulation in Los Angeles. New York: Russell Sage Foundation. McClelland, David Clarence. 1961. The Achieving Society. Princeton, NJ: D. Van Nostrand. Meis-Mason, Aldene, Léo-Paul Dana, and Robert Brent Anderson. 2009. “A Study of Enterprise in Rankin Inlet, Nunavut: Where Subsistence Self-employment Meets Formal Entrepreneurship.” International Journal of Entrepreneurship and Small Business 7 (1), January, 1–23. Mill, John Stuart. 1869. On Liberty. London: Longman, Roberts and Green. Morris, Michael H., and Leyland F. Pitt. 1995. “Informal Sector Activity as Entrepreneurship: Insights from a South African Township.” Journal of Small Business Management 33 (1), January, 78–86. North, Douglass. 1990. Institutions, Institutional Change, and Economic Performance. Cambridge: Harvard University Press. O’Driscoll, Gerald P., Kim R. Holmes, and Melanie Kirkpatrick. 2001. 2001 Index of Economic Freedom. New York: The Wall Street Journal. Oliver, Katerina. 1991. “Bribes and the Mafia Still Rule Moscow Life.” The European, October 25–27, 5. Parsons, Talcott, and Neil Smelzer. 1956. Economy and Society. Glencoe, IL: Free Press. Peterson, Rein, and Mari A. Peterson. 1981. “The Impact of Economic Regulation and Paperwork.” Regulation Reference Working Paper Series. Ottawa: Economic Council of Canada.

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Portes, Alejandro, Manuel Castells, and Lauren A. Benton, eds. 1989. The Informal Economy: Studies in Advanced and Less Developed Countries. Baltimore: Johns Hopkins University Press. Rosser, J. Barkley Jr., Marina Rosser, and Ehsan Ahmed. 2000. “Income Inequality and the Informal Economy in Transition Economies.” Journal of Comparative Economics 28, 156–71. Schumpeter, Joseph Alois. 1912. Theorie der wirtschaftlichen Entwicklung: Eine Untersuchung über Unternehmergewinn, Kapial, Kredit, Zins und den Konjunkturzyklus. Munich: Dunker und Humblat. Schumpeter, Joseph Alois. 1928. “The Instability of Capitalism.” Economic Journal 38, 361–86. Schumpeter, Joseph Alois. 1934. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA: Harvard University Press. Shleifer, Andrei. 1997. “Joseph Schumpeter Lecture: Government in Transition.” European Economic Review 41 (3–5), April, 385–410. Shleifer, Andrei, and Robert W. Vishny. 1993a. “Corruption.” Quarterly Journal of Economics 108 (3), August, 599–617. Shleifer, Andrei, and Robert W. Vishny. 1993b. The Grabbing Hand: Government Pathologies and Their Cures. Cambridge, MA: Harvard University Press. Shleifer, Andrei, and Robert W. Vishny. 1994. “Politicians and Firms.” Quarterly Journal of Economics 109 (4), November, 995–1025. Smith, Adam. 1892. Inquiry into the Nature and Causes of the Wealth of Nations, vols. 1 and 2. Reprinted from the 6th edition with an introduction by Ernest Belfort Bax. London: George Bell & Sons. Štulhofer, Aleksandar. 1999. “Between Opportunism and Distrust: Socio-Cultural Aspects of the Underground Economy in Croatia.” In Underground Economies in Transition: Unrecorded Activity, Tax, Corruption and Organized Crime, edited by Edgar L. Feige and Katarina Ott, 43–63. Aldershot: Ashgate. Tokman, Victor E. 1978. “Competition between the Informal Sectors in Retailing: The Case of Santiago.” World Development 6 (9), September, 1187–98. Weber, Max. 1924. The Theory of Social and Economic Organization. New York: The Free Press. Weber, Max. 1950. Economic History. Glencoe, IL: Free Press. Webster, Frederick E. 1992. “The Changing Role of Marketing in the Corporation.” Journal of Marketing 53, October, 1–17. Williams, Colin C. 2007. “The Nature of Entrepreneurship in the Informal Sector: Evidence from England.” Journal of Developmental Entrepreneurship. http:// www.worldscinet.com/jde/mkt/archive.shtml?2007&12 12 (2), pp. 239–254. Williams, Colin C. 2011. “Entrepreneurship, the Informal Economy and Rural Communities.” Journal of Enterprising Communities 5 (2), 145–57. Zineldin, Mosad Amin. 1998. “Towards an Ecological Collaborative Relationship Management.” European Journal of Marketing 32 (11/12), 1138–1164.

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Contributors

Ahmed Agyapong, Kwame Nkrumah University of Science and Technology (KNUST), Ghana Ahmed Agyapong is a doctoral student in corporate strategy and also a lecturer at the Kwame Nkrumah University of Science and Technology (KNUST) School of Business. Ahmed Agyapong lectures in strategic management, and his research focuses on corporate strategy and strategies for small and medium family businesses. Sébastien Arcand, HEC Montreal, Canada Sébastien Arcand obtained a PhD in sociology at the University of Montreal and is currently an associate professor in the Department of Management at l’École des Hautes études commerciales in Montreal. His main interests are economic integration of immigrants and ethnic minorities, cross-cultural management and organizations, identities and culture. He conducts research on different subjects such as socioeconomic integration of North African population in Montreal, entrepreneurship among first- and second-generation immigrants and language skills and professional mobility in the area of Montreal. Alpha Ayandé, University of Quebec at Montreal (UQAM), Canada Alpha Ayandé is a researcher specialized in international development and strategic management of organizations. His research interests focus on issues of women entrepreneurship development, gender equality, informal economy, management strategy execution and organizational leadership for performance development. He has served on many occasions as a mentor, consultant and trainer with national and international private and public organizations. He coordinates a research and intervention program aimed at improving strategic management practices in largescale companies.

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Mathew Bird, Universidad del Pacifico, Lima, Peru Matthew Bird is an assistant professor in economics at Universidad del Pacifíco in Lima, Peru. He received his PhD from the University of Chicago, where he studied cultural influences on economic decisions during Peru’s market reform era, with a focus on SMEs. His ultimate goal is to translate these insights into action tools to help policymakers, managers and social entrepreneurs learn how to harvest local cultural solutions to common social challenges. His research has been funded by grants from the National Science Foundation, Fulbright-Hays, the National Institute of Mental Health and Innovations in Poverty Action. After completing his doctorate, he worked as a research associate at the Harvard Business School and as research director for the Harvard Advanced Leadership Initiative. He holds a BA in History from Yale University. Richard K. Blundel, The Open University, Walton Hall, UK Richard Blundel is a member of the Centre for Public Leadership and Social Enterprise at the Open University, UK. His current research interests include historical perspectives on organizational growth, artisanal industries and emerging models of socially and environmentally-oriented enterprise. He is a board member of the Institute of Small Business and Entrepreneurship (www.isbe.org.uk), chair of ISBE’s conference track on Social, Environmental and Ethical Enterprise and deputy chair of the Social and Sustainable Enterprise Network. His work has been published in several international journals, including Entrepreneurship & Regional Development, Enterprise & Society, Industry and Innovation and Management & Organizational History. He is editor of the Quarterly Survey of Small Business in Britain and coauthor (with Nigel Lockett) of Exploring Entrepreneurship: Practices and Perspectives (Oxford University Press, 2011). Léo-Paul Dana, University of Canterbury, New Zealand Léo-Paul Dana is senior advisor to the World Association for Small and Medium Enterprises with United Nations advisory status. He has been tenured at the University of Canterbury since 1999. He joined GSCM– Montpellier Business School as an adjunct professor in 2007. He served as Expert Witness for the Government of Canada, House of Commons Standing Committee on Transport. He began lecturing at Concordia University in 1984 and he taught at McGill University from 1992 to 1997. He then joined the University of Pittsburgh Semester at Sea Program, in conjunction with the Institute for Shipboard Education. In 1998, he joined Nanyang Business School, where he served as deputy director of the International Business MBA Program. He holds BA and MBA.

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Contributors 271 degrees from McGill University and a PhD from the Ecole des Hautes Etudes Commerciales (HEC Montreal). He has an extensive research background studying entrepreneurship in different cultures and is the author of a number of books and articles on the subject. Several of his papers appear in the Journal of Small Business Management. He is the founder of the Journal of International Entrepreneurship and has produced 15 educational documentary films. He is currently the editor of the Polar Journal and the Journal of Enterprising Communities: People and Places in the Global Economy. His current research focuses on sustainable development and social issues in expanding the oil and gas activities in the Arctic. Les Dlabay, Lake Forest College, US Les Dlabay, Professor of Business, Lake Forest College, Lake Forest, Illinois, has taught more than 30 courses, which include coverage of the informal economy in “African Cultures and Business Development,” “Cross-Cultural Marketing Research,” and “Asian Business Cultures and Trade Relations.” He is author of several textbooks, including International Business 4e, Principles of Business 8e, and Personal Finance 10e. He works with NGOs that emphasize microenterprise development through microfinance programs. His research emphasis involves informal economic activities and alternative financial services in developing economies, such as ROSCAs, ASCAs, VSLAs and hawalas. Tony Ghaye, Reflective Learning-International, UK Tony Ghaye is a positive psychologist, a social entrepreneur and strengthsbased, organizational strategist. His professional background is in education, health care, high performance, innovation and organizational development. His cross-cutting activities link entrepreneurship with community strengthening, social justice and sustainable development. Tony Ghaye has written 24 academic textbooks for major publishing houses such as Routledge, John Wiley and Blackwell Science, all in the field of personal and collective strengthening through reflection and positive action. He has also written 107 papers for refereed journals and book chapters for various audiences. He endeavors to make community action, research-enriched and research, practice sensitive. His enduring commitment is to try to use strengths-based reflective practices to enhance entrepreneurship, community engagement and develop well-being. This involves strengthening people through positivity, building optimism and resilience so that they are able to act creatively, ethically and with moral courage. He is the editor-in-chief of the international and multidisciplinary journal Reflective Practice, published by Routledge, Taylor & Francis, Oxford, UK.

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Amanda Min Chung Han, DongHua University, China Dr. Han is Assistant Professor, New York Institute of Technology Nanjing Campus, teaching college students international business, cross-cultural communication, corporate communication and economics. She obtained her PhD in foreign trade management at Sungkyunkwan University of South Korea. Her research interests are electronic trade and commerce for small and medium-size companies, electronic government projects (single window) and e-marketing. Before embarking on her academic career, she was a financial/business journalist with wide experience in all aspects of the media, including both print and broadcast, with 11 years’ experience in Korea and Singapore. She is still a regular contributor to many business magazines. Scott A. Hipsher, Fort Hays State University, China Campus Dr. Hipsher is current a visiting professor at Fort Hays State University in its operations in China. He has extensive international experience working in academia, private enterprises, NGOs and the military. He has lived and worked in the US, Canada, China, Japan, Thailand and Vietnam. He is the author of a number of academic books, book chapters, academic journal articles, conference papers and newspaper and magazine articles. Dr. Hipsher is currently working on a book which focuses on the private sector’s role in poverty reduction in Asia. Edmundo Isidro, Philippine Venture Capital Investment Group, Philippines Edmundo Isidro is chairman and president of the Philippine Venture Capital Investment Group in Manila, Philippines. Mr. Isidro was also CEO of one of the largest food and diary MNCs in the Philippines. Currently, he is active in facilitating investment deals between private investors and SMEs and recently organized the Philippine Business Angel Network. Mr. Isidro received his MBA from the University of Minnesota and completed the Advanced Management Program at Harvard University. Thawatachai Jittrapanun, Chulalongkorn University in Bangkok, Thailand Thawatchai Jittrapanun is a commissioner for the National Broadcasting & Telecommunication Commission in Bangkok, Thailand. Previously, he was the chair of the Bachelor of Arts Program in Economics at Chulalongkorn University in Bangkok. Dr. Jittrapanun’s research focuses on private equity investing in Thailand. Dr. Jittrapanun is responsible for developing an annual macroeconomic database and index for the Thai government. Dr. Jittrapanun received his PhD in Finance from the University of Alabama.

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Contributors 273 Marcus Møller Larsen, Copenhagen Business School, Denmark Marcus Møller Larsen is a PhD student at the Department of Strategic Management and Globalization, Copenhagen Business School. His research interests are related to international management and organizations and in particular to the processes of offshoring and outsourcing. Ivan Light, UCLA Department of Sociology, US Ivan Light is Professor of sociology at the University of California, Los Angeles. He is the author of numerous articles and of six books on immigration, entrepreneurs and urban sociology. His earliest book is Ethnic Enterprise in America (University of California, 1972). The next book, Cities in World Perspective (Macmillan, 1983) is a comparative and historical treatment of urban societies around the world. His next two books were Immigrant Entrepreneurs: Koreans in Los Angeles (University of California, 1988; in collaboration with Edna Bonacich) and Immigration and Entrepreneurship (Transactions Publishers, 1993; in collaboration with Parminder Bhachu). There followed Race, Ethnicity and Entrepreneurship in Urban America (Aldine de Gruyter, 1995; in collaboration with Carolyn Rosenstein). Co-edited with Richard Isralowitz is Immigrant Entrepreneurs and Immigrant Absorption in the United States and Israel (Avebury, 1997), which brings together articles that compare Israel and the US as immigrant-reception societies. In collaboration with Steven Gold, he published Ethnic Economies (Academic, 2000), which integrates the voluminous international literature on that topic. His latest book is Deflecting Immigration: Networks, Markets, and Regulation in Los Angeles (Russell Sage, 2006) Emmanuel Mutungi, Kyambogo University, Uganda Emmanuel Mutungi is an artistic professional expert with 15 years of progressive experience, working as a director of the National art gallery; an expert in application of art for community/communication interventions (10 years) in a wide range of development issues including refugees, MDGs, Health, children and good governance, poverty reduction; seven years as University lecturer in sculpture and in charge of research in the department; an executive member of Ngoma International Artists, and Community Based Initiative—NGOs that promote artists’ networks and community initiatives. He is a member of a team of six professionals assigned by the Bank of Uganda to research and analyze community perceptions of banknotes in circulation; he also designed the new family of banknotes and won the world 2010 IBNS note of the year for the 50,000 banknote.

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Bernard A. Obeng, Ghana Institute of Management and Public Administration, Ghana Bernard Acquah Obeng is a lecturer at the Graduate School, Ghana Institute of Management and Public Administration (GIMPA) and an international research fellow at the Open University Business School, UK. Dr Obeng’s teaching and research interests are in the fields of entrepreneurship, small business management and marketing. His work has been published in international journals such as Small Business Economics, International Journal of Finance and Policy Analysis and Frontiers of Entrepreneurship Research. He has also presented papers at international conferences including the British Academy of Management, Babson College Entrepreneurship Research Conference, and RENT (organized by the European Council for Small Business and Entrepreneurship). Michael J. Pisani, Central Michigan University, US Michael J. Pisani is Professor of International Business and holds the Jerry and Felicia Campbell Endowed Professorship for Research at the College of Business Administration, Central Michigan University. Additionally, Dr. Pisani is an affiliated faculty member in Latino entrepreneurship with the Julian Samora Research Institute at Michigan State University. He received his BA (Latin American history and international relations) from the University of California, Davis, his MA (Latin American Studies) and MBA (international management) from the University of New Mexico, and a PhD (international business) from the University of Texas–Pan American. His research interests include the intersection of international business and development, informality, sustainability, cross-border business and economic phenomena, and entrepreneurship and microenterprise development primarily within Central America and the US–Mexico borderlands. Dr. Pisani’s research has appeared in numerous journal outlets including Business Horizons, Entrepreneurship & Regional Development, Estudios Interdisciplinarios de América Latina y El Caribe, International Business Review, International Trade Journal, Journal of Borderlands Studies, Journal of Business Ethics, Journal of Developmental Entrepreneurship, Latin American Research Review, Management International Review, Perspectives on Global Development and Technology, Review of Development Economics, Social Science Quarterly, and Thunderbird International Business Review. Professor Pisani is coauthor of The Informal and Underground Economy of the South Texas Border (University of Texas Press, 2012). William Scheela, Bemidji State University, US William Scheela is a professor of business administration at Bemidji State University, which is part of the Minnesota State University System.

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Contributors 275 Professor Scheela’s research focuses on the development of the private equity industry (venture capital and business angels) in the emerging economies of Southeast Asia. Professor Scheela received his PhD in strategic management from the University of Minnesota’s Carlson School of Management and has also taught in Hong Kong, the Philippines and Vietnam. Bernard Sinclair-Desgagné, HEC Montreal, Canada Bernard Sinclair-Desgagné is the International Economics and Governance Professor and Chair of the International Business Department at HEC Montréal. He holds a PhD in managerial economics from Yale University and taught first at INSEAD and then at the École polytechnique de Montréal before joining HEC Montreal in 2001. His main fields of research and expertise are the economic analysis of organizations, environmental economics and technological risk management. He has published articles on these subjects in major scientific journals such as Econometrica and Management Science. Dr. Sinclair-Desgagné has also worked as a consultant with a number of government agencies. In 2004 he was elected Fellow of the European Economic Association in recognition of his scientific work. In December 2006 he received the “Finance and Sustainability” European Research Award for his article “On Precautionary Policies,” which gives a practical view of precautionary policies. Jamel Stambouli, HEC Montreal, Canada Jamel Stambouli is a PhD candidate in management and research assistant at HEC Montréal and Immigration et Métropoles/Métropolis Center of Montréal. He received a BSc in Management at the Faculté des Sciences Economiques et de Gestion de Tunis, and completed an MA in urban and regional planning at Institut d’Urbanisme et d’Aménagement Régional d’Aix en Provence. His main interests are on entrepreneurship, migration, ethnic business and religion. His thesis is a study of North African entrepreneurs involved in the Islamic products market in Montreal. Mai Thi Thanh Thai, HEC Montreal, Canada Mai Thi Thanh Thai is a Vietnamese with extensive international experience. Before her world adventure, she was an entrepreneur and a journalist in Vietnam. She has always been keen on learning entrepreneurial best practices and sharing her knowledge with both academics and practitioners. After obtaining an MBA in the US and a PhD in Switzerland, she has become one of the pioneer researchers who examine the link between entrepreneurship and its socioeconomic, cultural and political contexts. He work focus on how these contexts influence the internationalization of small and medium-sized enterprises and start-ups, entrepreneurial motivations and migration of entrepreneurs. In addition to being

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a full-time faculty member at the International Business Department of HEC Montreal in Canada, she is an associate researcher at the Asia Research Centre of the University of St. Gallen in Switzerland. She is also an editorial board member of Reflective Practice and Journal for International Business and Entrepreneurship Development as well as a guest editor of Journal of Enterprising Communities and International Journal of Business Globalization. Marsha A. Tongel, President of Tongel Consulting Group, Inc. (TCG), US Since 1990, Dr. Marsha Tongel has been a social entrepreneur. As president of Tongel Consulting Group, Inc. (TCG), she assists organizations undergoing change by helping them to create leadership that embodies change, organizational designs to manifest change, an organizational culture that embraces change and communities that support change. She focuses on organizational culture, diversity in organizations and the importance of collaboration and brings a unique perspective on women-led organizations and businesses. She also teaches at Point Park University in the graduate Organizational Leadership program. She has a BA from Duquesne University, an MSc from Xavier University and a PhD in organizational development/behavior from Union Institute and University. Ekaterina Turkina, HEC Montreal, Canada Assistant Professor Ekaterina Turkina has been with HEC Montreal since 2010. Her main research areas are international political economy, innovation networks and innovation clusters, interfirm networks, and sociocultural and politico-economic factors in international business. She has a PhD and MA from the Graduate School of Public and International Affairs, University of Pittsburgh. She has received several grants and awards, including a Social Sciences and Humanities Research Council of Canada postdoctoral fellowship, a European Union Dissertation Fellowship, a US State Department Young Russian Leaders Scholarship, and the British Chevening Award. Dr. Turkina has also extensive experience in working in international organizations such as International Marketing Solutions. Colin C Williams, University of Sheffield, UK Colin C Williams is Professor of Public Policy in the Management School at the University of Sheffield in the United Kingdom. His research interests include the informal economy, work organization and the future of work, subjects on which he has published some 20 monographs and 280 journal articles over the past 25 years. His recent books include Informal Work in Developed Nations (2010, Routledge), Rethinking the Future

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Contributors 277 of Work: Directions and Visions (2007, Palgrave Macmillan), The Hidden Enterprise Culture (2006, Edward Elgar), A Commodified World? Mapping the Limits of Capitalism (2005, Zed) and Cash-in-Hand Work (2004, Palgrave Macmillan). Youssef Youssef, Humber Institute of Technology & Advanced Learning, Canada Youssef Youssef is Professor of Entrepreneurship in the School of Business at Humber Institute of Technology and Advanced Learning in Canada. He is also the founder and president of the Federation of Canadian Brazilian Businesses (FCBB), a not-for-profit organization that aims to foster innovation and entrepreneurial initiatives between Canada and Brazil. His research interests include informal entrepreneurship in emerging economies, entrepreneurship and sustainability and knowledge management, and he has published several books and scholarly articles.

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