The scale of microenterprise activity around the world makes it an area that’s impossible to ignore for anyone interested in advancing broadly shared economic growth. Even in the United States, for example, by one estimate, a staggering 98% of businesses meet the definition of a microenterprise: one with 10 or fewer employees. But it’s in the developing world where microenterprises hold significant untapped potential for economic inclusion. In developing economies, many microenterprises operate in the informal sector outside of both government regulations and government protections and support.To understand the potential of microenterprises to contribute to inclusive economic growth in the informal economy, we spoke with economist Laura Tyson, our new senior advisor for microentrepreneurship, and director of the Institute of Business and Social Impact at the Haas School of Business at the University of California at Berkeley. As Tyson explains, in developing economies, being both micro and informal poses constraints on growth—but luckily, the combined efforts of governments, nonprofit actors and private businesses in the formal economy, even large multinational companies, can help address these constraints.
Start by understanding: Why are there so many microenterprises in the developing world and why are so many of them operating in the informal sector?
“Microenterprises are involved in generating income and economic activity. They usually engage more than a single person and many of them have been in operation for a considerable period of time. There are many reasons they come into being. In many African countries, for example, there are relatively few medium- and large-scale firms compared with countries in Asia. And the medium- and large-scale firms that do exist in Africa tend to be less linked to the markets of the global economy, so they don’t serve large global markets and therefore they do not generate a sizeable number of jobs. In the absence of employment opportunities in the formal economy, many African citizens must come up with their own jobs to generate income. In addition, many of the people starting microenterprises don’t have the skills or the network to compete for available jobs in the formal sector. In short, microenterprises are started out of necessity, they serve small local markets and they are informal by necessity.”Microenterprises, even in the informal sector, are an important first step toward economic inclusion—but they cannot be the last.
“Microenterprises are important for inclusive growth because they are often the only way that a large fraction of the disadvantaged or ‘bottom of the pyramid’ populations in developing economies can generate income. But being micro and informal also presents constraints on growth: If you have an informal microenterprise, chances are you’re trying to sell to a small, local community market where resources to spend and invest are limited. And, if you’re not connected to the formal economy and its distribution networks, you are missing out on ways to link to larger markets that you need to grow your business.”
If you want to help striving microentrepreneurs thrive and scale, then remember: strivers need connectors
“There are a number of factors that can help microenterprises scale and thrive. One of the most obvious is capital, and here governments, multilateral organizations and nonprofits can use a wide range of measures to increase the capital available to microenterprises. Governments and private sector actors can also support literacy and education programs for those who create and those who work for microenterprises, enhancing their efficiency and scalability. Providing more training and education for those who work in microenterprises also increases their ability to compete for jobs in the formal sector.
Training programs are valuable not just in terms of skills, but also in terms of how they serve as networking opportunities. To grow, microenterprises need both supply-chain networks to help them locate the resources and inputs they need to produce and distribution networks to help them reach more customers. Companies in the formal sector can help microenterprises in the informal sector develop these networks by purchasing the goods produced by microenterprises and by linking them to distribution networks in the formal sector.
Many large multinational companies operating in developing economies have introduced programs to bring local microenterprises into their supply chains and distribution channels.
The answers all come back to finding ways to provide microenterprises in the informal sector with more capital, more training and more links to larger market opportunities. Strivers in informal microenterprises need ‘connectors’ to help them overcome the constraints on their growth.”