Entrepreneurial Development in the Informal Economy In Search of Sustainable Entrepreneurial Development By Jim Mortensen, Kristie Seawright, Mikenze Bott, Quan Mai, and Jennifer Badger Brigham Young University, Provo, Utah, USA 84602 INTRODUCTION Sustainable Economic Development In the formal economy, it has long been recognized that entrepreneurship plays a key role. It stimulates economic growth, provides additional government revenues through taxes, and creates employment (Belton 2000, Reynolds, et al. 2002). These benefits have been one of the key drivers behind the surge of microcredit around the world. If large donors can stimulate the economies from the bottom up, they hope to accomplish the economic growth that macro policies and projects have failed to do. If the first assumption in the microcredit sphere is that micro-entrepreneurship automatically generates economic growth, then the second assumption is that credit is the water that will make economic deserts bloom. In fact, these assumptions have become axiomatic. Therefore, attention in the microcredit field has been focused on the sustainability of the institution. The belief appears to be that once sustainability of the microfinance institution has been guaranteed, donors will have created a perpetual motion machine of economic growth. The focus on the institution, and attendant lack of attention on the individual micro-entrepreneur, is not wholly unwarranted. Some outcome studies indicate increases in health, nutrition, self-determination and participation in education for micro-credit borrowers (Ahmed). Additional evidence indicates that microcredit can help move the poor towards what has been called the “subsistence plateau” (Haynes, Seawright & Giauque, 2000). However, recent research also finds increases in domestic stress, and the potential for degraded social networks and debt entrapment (Polakow-Suransky, 2003, web). The claim has often been made that when the poorest of the poor have nothing to lose, then any gain is better than nothing. Unfortunately, such a claim obscures the fact that many, if not most, microcredit programs depend on the capitalization of social collateral to underlie their lending practices. Therefore, the poorest of the poor do have something to lose: their social safety net. The mixed results found in the impact studies may be a signal that there is a need to re-examine the underlying assumptions of microcredit. As financial sustainability became de rigueur, many institutions began reducing or eliminating entrepreneurial training in their cost reduction efforts. In formal economies, significant percentages of business ventures fail in the first year, and almost half fail in the first five years. This is among populations with high percentages of literacy, ready access to credit, functioning markets, and a social safety net to catch them if they fail. It is likely that many micro- entrepreneurs operate enterprises without similar foundations. If this is the case, then the assumption that “micro-entrepreneur + credit = sustainable economic growth” might be somewhat simplistic. If, in fact, the equation has a reasonable possibility of being “micro-entrepreneur + credit = failure,” and failure for the micro-entrepreneur is the loss of even the social network which had been collateralized for the sake of the loan, then donors and practitioners alike share an ethical burden to mitigate the potential for failure. For the dual purposes of reducing potential failure and increasing the possibility of economic growth, a useful question is “What makes for an emerging entrepreneur?” Effectively answering this question allows practitioners to invest their lending ability in those that will create economic growth for all of the poor and not only those that beat the odds. It also empowers microlenders to reduce the risks to the poorest. For the purposes of this research, the working definition of an emerging entrepreneur is one who establishes or assumes a micro-business and grows it the point where it generates profits in excess of basic subsistence needs. The business most also have sufficient revenue to employee for wages workers from outside the immediate family. This may appear somewhat rigid, but the common commingling of funds within family micro-businesses makes it difficult to distinguish revenues, costs and profits created by the business from those resulting from other family activities. A growing body of literature identifies traits of successful entrepreneurs in formal economies, though the determination of which traits are inherent and which can be trained remains inconclusive (Mitchell, et al, 2000; Mitchell, et al, 2002). There is a dearth of research examining similar questions among micro-entrepreneurs in the informal economy. Rather than imposing the constructs of entrepreneurship in formal economies upon micro-entrepreneurs, we selected a research approach which allowed micro-entrepreneurs to identify the traits they found to be important. It is recognized that self-reports have a tendency towards bias, but it is expected that this bias will be less than that of force-fitting formal sector constructs on informal sector participants. METHODOLOGY Due to the paucity of research examining the process of successful microentrepreneurs in informal economies, we selected a qualitative research approach as the most effective method to identify emergent themes. The grounded theory methodology allowed the research subjects themselves to bring forward the key issues in their success. Research Participants: Successful and Less-than-Successful Entrepreneurs The research process began with the identification of groups of successful and less- successful micro-entrepreneurs throughout the Philippines. We use the term “less- successful” in our research, not to be politically correct, but because research has established that the process of successful entrepreneurship almost invariably includes periods of failure. Our selection method was a simple non-random convenience sample of students that had graduated from a non-profit small-business training academy in Cebu, the Philippines. These graduated students were divided into three groups: two groups whose participants had successfully grown their businesses to a point above the subsistence plateau, and one group consisting of people who had either not grown their businesses and/or were no longer in business for themselves. This segregation allowed for us to control for success. For additional comparative purposes, our sample also included one group which was a mixture of successful and less-successful entrepreneurs who had not graduated from the academy. This allowed us to control for training. Research Method: Grounded Theory The purpose of our research was to discover the emergent themes and patterns found in the data associated with successful micro-entrepreneurship. The main data collection activity was a series of focus groups of five to ten participants each. A single facilitator led the participants through several activities which asked them to identify and discuss various traits and business principles necessary for entrepreneurial success in the Philippines. The topics included: 1. traits of successful entrepreneurs, 2. motivations for starting a business, 3. initial business goals, 4. current business goals, 5. personal definitions of success, 6. keys to business success, and 7. tales of success stories. The discussions of the focus groups were observed by a team of trained researchers who focused on both content and process and noted their observations. The transcripts totaled 3,000+ lines and over 90 pages. For data analysis, the researchers conducted a line-by-line content analysis of the observers’ notes and open-coded the data for key topics or themes (Priest, 2002: 36). The open-coding was followed by an axial analysis in which “analysis explicitly compares each incident in the data with other incidents appearing to belong to the same category, exploring their similarities and differences” (Spiggle, 1994: 493-4). Throughout the process, the authors looked for common themes emerging from the data (Goulding, 2002). A concluding step in the data analysis was selective coding, wherein the researchers focused on a few core categories around which to build the grounded theory framework (Priest, 2002). Out of this concluding step, arose a few key concepts to be discussed in the following section. It is important to note that these results are not statistically generalizable and may not be representative of the general population of micro-entrepreneurs in the Philippines; however, the results do exhibit face validity when compared to the existing research on formal sector entrepreneurs. Thus, this study provides a starting point for further research. RESULTS When analyzing the results, we were looking for the differences in responses between the successful/emerging entrepreneurs (EE) from the entrepreneurs who had failed to maintain a thriving business, referred to herein as Subsistence Entrepreneurs (SE). As part of the coding process, the participants’ responses were labeled and categorized. Success Traits The participants in all of the focus groups were asked to identify the traits that lead to entrepreneurial success. Table 1 enumerates the top traits as identified by the key groups. Table 1. Success Traits Identified by Focus Groups EMERGING ENTREPRENEURS SUBSISTENCE ENTREPRENEURS Resilient Vision Agile Determination Leadership Hardworking Patience Emerging entrepreneurs identified vision, determination, and hardworking as the most important traits that lead the entrepreneurial success in the Philippines. These respondents found that the ability to see what needs to be done and proactive action to address those needs are essential for an entrepreneur to establish and grow a business. The success traits mentioned by the subsistence entrepreneurs were resilient, agile, leadership, and patience. This group of participants viewed passive traits with repeated effort as key characteristics of the successful Philippine entrepreneur. Motivations for Starting a New Business After identifying success traits, each group was given the opportunity discuss what motivations they had for starting a new business venture. We were interested to determine if initial motivations differed between each group. The subsistence entrepreneurs cited personal fulfillment as the primary motivations for venturing, while the emerging entrepreneurs exhibited primarily group oriented objectives. Table 2 lists the reasons given by the EE and SE groups. Table 2. Reasons for Starting a New Business Venture EMERGING ENTREPRENEURS SUBSISTENCE ENTREPRENEURS Family responsibility Self-actualization Social responsibility Innate drive Increased standard of living Initial and Current Goals One of the most revealing activities was the listing of goals when each participant initially started their own business versus their goals currently. In our analysis, the specific content of the goals was broken down in to key goal types. The initial goals of the Emerging Entrepreneurs fell into eight goal characteristics which they expressed more often than the other groups. These goal characteristics were: monetary, business- focused, personal, long, medium, and short-term, expansion-oriented, or financial security. The Subsistence Entrepreneurs did not demonstrate an appreciable dominance in any area of initial goals. Table 3 summarizes these initial goals. Table 3. Characteristics of Initial Goals EMERGING ENTREPRENEURS SUBSISTENCE ENTREPRENEURS Monetary goals Business-focused goals Personal goals Long-term goals No emergent themes Medium-term goals Short-term goals Expansion-oriented goals Financial security goals This changed significantly when the groups were given the opportunity to provide their current goals. The list of EE goal characteristics narrowed significantly as support for some types of goals dropped greatly. Table 4 summarizes the major classifications of goals that entrepreneurs expressed as current concerns. Notable is the evaporation of support for medium- and long-term goals by the EEs. However, the SEs adopted these types of goals as their own. The emerging entrepreneurs conveyed current objectives; however, their expressions of current goals embodied an unarticulated awareness of how these current actions supported medium- and long-term goals. In contrast, the subsistence entrepreneurs explained medium- and long-term goals, but lacked an understanding of current actions needed to achieve those goals. Table 4. Characteristics of Current Goals EMERGING ENTREPRENEURS SUBSISTENCE ENTREPRENEURS Short-term Monetary Business-oriented Medium-term Expansion Long-term Achievement-oriented Increased standard of living We realize that participant expressions of perceptions in another time period are not as valid as expressions of current perceptions. But, the comparison does establish constructs that may be helpful if measured appropriately in future research. Personal Definitions of Success In an effort to avoid imposing the biases of Western industrialized nations on these groups of entrepreneurs, each group was invited to provide their own definition of success. The EE participants identified financial and personal freedom, as well as an increased standard of living as being the key indicators of having achieved success. This economic orientation of the EE group reflects a drive toward business success. On the other hand, the SE respondents focused on self-actualization and fulfillment of their need to use their innate skills as they defined success. This personal fulfillment focus concentrates on personal rather than economic needs. These themes are presented in Table 5. Table 5. Definitions of Success EMERGING ENTREPRENEURS SUBSISTENCE ENTREPRENEURS Financial freedom Self-actualization Personal freedom Fulfillment of need to use Increased standard of living innate skills Keys to Business Success After being asked to define success, each of the participants then had the opportunity to identify the keys necessary for making success happen. The Emerging Entrepreneurs responded with outward, forward looking characteristics. The SEs showed a tendency towards more inner-focused, tactical-operations type issues. See Table 6 for a list of themes that emerged from the participant responses. Table 6. Keys to Business Success EMERGING ENTREPRENEURS SUBSISTENCE ENTREPRENEURS Opportunity Seeking Business Operation Vision Strategy Education Marketing Oriented Business Oriented Personal Attributes Skill Acquisition There were a total of 20 different responses given in this activity of the focus groups. However, no one in any of the groups identified money or credit as one of the keys for creating a successful business. Success Stories In the final activity of each of the focus groups, participants were encouraged to tell a success story in their own words. They could share their own story or that of someone they knew. As researchers, we focused on identifying common threads throughout the stories. These themes are presented in Table 7. At least half of the stories told by the Emerging Entrepreneurs contained elements of recognizing existing opportunities and networking to create opportunities or acquire resources. Other common threads included the use of technology, moving out of poverty, and business expansion. Subsistence Entrepreneurs had fewer themes, with almost all of the stories mentioning the idea of starting small. Additional topics included persistence, vision, using the skills they possessed, and seeking for opportunities. Table 7. Success Story Themes EMERGING ENTREPRENEURS SUBSISTENCE ENTREPRENEURS Opportunity recognition Start small Networking Persistence Use of technology Vision Moving out of poverty Using skills they possess Business expansion Seek for opportunities Overview Observations As part of the analysis, we also looked at the level of participation of each group to see if any group contributed more to a particular activity. When the data was reviewed it revealed that the EEs surfaced as the dominant group in almost 40 percent more categories or themes than the group of SEs. The activities where the EEs were most dominant is telling. They surpassed the other groups in the themes they generated in both the processes of identifying initial business goals and the telling of success stories. They were weakest in identifying specific success traits. On the other hand, the SEs, as a group, they to coalesce sufficiently in the following activities to register much impact in the analysis: identifying 1) initial business goals, 2) keys to success, 3) reasons for starting a business, and 4) defining success. DISCUSSION The review of the results of this first round of research leads to a series of fairly broad conclusions. There is clearly a difference between the groups of Emerging Entrepreneurs and the Subsistence Entrepreneurs. From the data we can infer a number of characteristics for each group. Most telling about the Emerging Entrepreneurs is that – not content to march in place – they continually returned to the theme of business expansion. This is symbolic of their outward-facing, business-growth orientation. EEs turn to social networks for resource support and marketing. They tend to demonstrate a pro-active, forward looking perspective which is focused on leveraging short-term opportunities. An initial balance of short-, medium-, and long-term goals gives way to an emphasis on the here and now. The EEs’ comments and contributions indicate a lack of introspection on personal issues and traits. The Subsistence Entrepreneurs present an entirely different set of qualities. They can be described by three basic commonalities. First, the SEs are pulled towards internal business operations. Second, this internal focus is reflected in their continual reference to innate traits and the drive to fulfill internal needs. And finally, their passive approach to obstacles reflects regional cultural artifacts, such as patience, resilience and persistence. These characteristics lend themselves to good management, and indeed, with the training the SEs received at the business training academy, they have a grasp of the basic concepts necessary to manage the operations of many small businesses. Next Steps The next steps for this research will be to validate the constructs identified in the grounded theory process. This requires the development of a quantitative survey instrument. Once the questionnaire is created, it will be tested in a number of locations. Further research will focus on identifying universal principles and commonalities across cultures and geographies. Targeted geographies include several countries in Southeast Asia, as well a location in South America and Polynesia. If these constructs demonstrate reliable validity, the goal is to create a filtering instrument that will empower microlenders to target appropriate interventions for each type of entrepreneur. 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