Stimulating entrepreneurship in emerging markets

This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.

Many entrepreneurs lack the managerial experience and expertise to grow their businesses from one-person operations into more substantial enterprises. This deficit of ‘managerial capital’ extends to the capabilities and confidence associated with managing cash, customers, competition, capital and constraints within businesses. 

Improvements in managerial capital therefore offer the possibility of enhanced growth and prosperity – however this type of training comes at a cost, so we need to ensure that any ‘interventions’ (which normally takes the form of subsidised programmes for small-business owners) focus on those issues that critically impede improvement in growth and prosperity of firms. It’s also vital to know what ‘type’ of business will benefit the most from any programme so that resources can be targeted on those business-owners genuinely constrained by a deficit of managerial capital. 

Despite the importance of this field, few researchers so far have examined this phenomenon empirically, and those studies that have been conducted did not show conclusively which interventions had an impact on business growth, job creation or poverty alleviation. 

Prior work has also tended to focus on interventions designed to improve finance/accounting practices (e.g. book keeping), or efficiencies in operations (e.g. quality control), which should lead to greater bottom-line profits.  Little emphasis has been placed on the enhancement of marketing and sales practices which have the potential to increase top-line revenues and, in turn, stimulate firm growth and job creation.  

Another potential issue is that existing studies typically involve offering business skills programs to a broad mix of entrepreneurs, the majority of whom are self-employed out of necessity and would prefer jobs in the formal sector.  Greater selectivity in the recruitment of candidates for managerial capital programs might offer greater potential for business transformation.  

Our team from London Business School, Stanford GSB, Chicago Booth and Harvard Kennedy School has launched a series of ambitious research projects to provide answers to some of these questions – and thus provide governments, agencies and charities with solid evidence on which to target their interventions (scarce funds) more effectively and efficiently.  

The research is based in Uganda and Rwanda, which like many emerging markets, are dominated by millions of tiny businesses that do not grow into anything larger. The entrepreneur-owners of these micro- and small-sized enterprises operate with a handful of employees and with limited odds of economic advancement.  These countries are therefore ideal locations in which to conduct the kind of robust research that necessitates large sample sizes and control groups to measure the real impact of different types of intervention. 

Our first study, carried out in partnership with the GROW Movement, studies the impact of a particularly intense intervention that involves remotely (e.g. via Skype) teaming up experienced business professionals with micro-entrepreneurs, thereby building one managerial capital ‘growth project’ at a time. Prior to the study intervention, we carried out a screening survey to identify a sample of around 1,200 established and growth-oriented micro/small enterprises in and around the greater Kampala metropolitan area. We then randomly assigned participants into one of two groups:

1. A ‘treatment’ group of approximately 600 entrepreneurs destined to receive a high quality consulting programme provided by Grow Movement. This managerial capital intervention represents a novel model for delivering free, high quality business advice to entrepreneurs in the world’s poorest countries via emails, mobile phone calls and Skype video conferencing.

2. A second group of group 600 entrepreneurs (‘comparison’ group) who do not receive any intervention during the course of the research project – though they will be given access to the consulting program after the project ends.

After completing the program, all 1,200 participants have their business practices and performance outcomes measured using post-intervention surveys. These are conducted after six and twelve months. By comparing the performance of the two groups before and after the intervention, we hope to determine the effectiveness of the GROW consulting program. 

To date we have successfully identified a sample of 1,500 higher growth-oriented entrepreneurs out of an initial sample of 4,200 small-scale enterprises surveyed across the greater Kampala area. We have randomly assigned entrepreneurs into the ‘treatment’ and ‘comparison’ groups. The consulting interventions are close to completion. We can then start to measure the impact with follow-up surveys in June 2016 and the second in February 2017. 

The impact of managerial information

In the second project we’re studying the impact of tools that improve an entrepreneur’s access to information about their own business performance. This should improve their practices and performance. Most emerging market micro-entrepreneurs do not maintain records of their business and therefore lack the metrics and analytics (business intelligence) needed to understand their business contexts and make decisions to overcome constraints or exploit opportunities. 

Fear of theft, family demands or government taxation may cause some entrepreneurs to avoid this practice though we have found from prior research that many entrepreneurs simply do not know what to record and, once recorded, they do not know how to organise and analyse the information in a way that allows them to make effective business decisions. 

Our research is designed to test the impact of increased access to two types of management information: marketing and finance information. We have designed and developed two tools (MARKETmanager and MONEYmanager), which collect weekly business performance data from entrepreneurs directly via SMS, summarising this information in monthly reports on a secure online platform.

Six months prior to the intervention, a screening survey is used to identify a sample of 1,500 established and growth-oriented business owners (that is, those who have the motivation and potential to grow their businesses) in and around the greater Kigali, Gitarama, Ruhengeri and Butare areas of Rwanda.  Participants are then randomly assigned into one of three groups:

1. One group of 500 entrepreneurs will receive our MONEYmanager tool – allowing them to track key metrics related to their business finances (e.g. revenues, costs, profits, etc.) Entrepreneurs will be provided with regular summary reports of their current business performance and how they compare with past performance. This tool is designed to increase entrepreneurs’ access to – and ability to act on – information about their own business practices and performance by encouraging them to pay attention to their internal business activities and external business environment in a systematic manner.

2. A second group of 500 entrepreneurs will receive our MARKETmanager tool. This tracks and delivers key business metrics related to entrepreneurs’ marketing practices (e.g. customers, prices, best-selling products, promotions, etc.)

3. A third group of 500 forms a comparison group that does not receive any intervention during the course of the research project. All those in the control group will be given access to the business information tool after the project ends.

Like the first study, we will conduct comparisons of entrepreneurs’ business practices and performance before and after the intervention.  Twelve months and eighteen months after the treatment groups have received the business information tools all 1,500 participants have their business practices and performance outcomes measured using post-intervention surveys. 

We have negotiated a partnership with each of the major telecommunications companies in Rwanda, including MTN, Tigo and Airtel. SMS messages get sent from our cloud-based server (hosted by an India-based IT firm called InnovAccer) to customers of MTN, Tigo and Airtel via a third-party platform integrator called InterVas. Clients receive a series of SMS messages each week related to their business finances (treatment 1) or their marketing (treatment 2). Clients respond to each SMS free of charge to them (that is, the cost of the SMS is charged to our project) using a short-code designated for our project.

We have completed testing both the MONEYmanager and MARKETmanager SMS tools, and recently launched the relevance testing/piloting with a small group of 20 entrepreneurs. This pilot has allowed us to iron out the technical bugs associated with any new technology and collect feedback on user friendliness and uptake. Piloting will continue until early 2016, insights from which will be used to inform our large-scale product launch scheduled to launch in February 2016.

The impact of selection

Our third study uses data from the first two studies to find out whether offering entrepreneurship support programmes to a targeted group of higher growth-oriented entrepreneurs leads to greater returns on investment. This necessitates identifying the characteristics of these higher growth-oriented entrepreneurs – what it is that makes them different to subsistence entrepreneurs and how those differences can be quantified in a way that allows us to cleanly separate those with greater potential to grow.

A number of characteristics are already suggested in the literature – cognitive ability, motivation, competitive attitudes, higher educational attainments and previous work. We’ve built these characteristics into a new survey that gives each business owner a growth potential index (GPI) score. Once again this approach necessitates ‘pounding the pavement’ of the greater Kampala and Kigali metropolitan areas, going from business to business to  identify entrepreneurs who (1) have been trading for no less than 3 months, and (2) operate their businesses out in a permanent physical location. 

This sampling approach will be used in both Uganda and Rwanda to identify a sample of around 3,000 higher growth-oriented micro and small entrepreneurs. Each will be offered access to consulting or our business information tools. These two randomised evaluations allow us to determine the impact that consulting and access to business information have for a sample of high growth-oriented entrepreneurs. 

But that’s only half the story. To complete the picture we also need to ask whether, interventions aside, would entrepreneurs with higher GPIs grow their businesses more, over time, than entrepreneurs with low GPIs? To answer this, we will randomly sample 300 entrepreneurs from the bottom 1,000 GPI scorers in each country. A survey team from IPA will then administer the same baseline survey with this group of 300 entrepreneurs with low GPIs. By comparing changes in business performance and practices between high GPI scorers and low GPI scorers over time, we will be able to determine whether our GPI targeting tool is effective at predicting higher growth outcomes. We also expect to provide further insights on which psychometrics (measured during baseline and follow-up) correlate most highly with firm growth which we can incorporate into our growth orientation survey to further improve our ability to identify higher growth-oriented entrepreneurs in the future.

To date, we have completed the baseline survey with 300 entrepreneurs with low GPI scores in Uganda. A follow-up survey with this sample of low GPI scorers will be conducted immediately after the first follow-up survey of our RCT participants (i.e. high GPI scorers) in June 2016. In Rwanda, entrepreneurs with a low GPI score will be surveyed concurrently with the entrepreneurs in our RCT sample (i.e. high GPI scorers).

Impact – at a cost

We hope we’ve given a sense of the potential impact of these studies. We think that the results are of immediate value to policy makers wishing to stimulate employment creation and economic growth among the poor in developing countries.  However they are also important to foreign and domestic firms who rely on legions of micro and small enterprises as customers and suppliers of their goods and services – in terms of selection, training and provision of management information. 

We also hope that the reader appreciates the gigantean and herculean efforts needed to collect these data. It’s an enormous and costly undertaking as different as it’s possible to be from the secondary dataset-driven desk research that characterises so much academic research. We’re indebted to our local partners [Innovations for Poverty Action, Grow Movement] and to those who continue to provide financial support [the Deloitte Institute at London Business School, the Economic and Social Research Council and the Department for International Development, CEPR’s Private Enterprise Development in Low-income Countries, and Stanford’s Graduate School of Business].