Approximately one in five people in the world lives in poverty. Even in many developed countries, such as the United States, poverty rates exceed 12 percent. Even in an era of incredible technological advances and dynamic social change, poverty persists.
As a professor of entrepreneurship, I am interested in a key question: Can poor people create their own path to prosperity? In other words, can venture creation be an effective tool for poverty alleviation?
My research shows that this is possible with the right support, which is often lacking.
A big part of the problem is ignorance: Most people don’t know much about poverty and entrepreneurship. There are many misconceptions about poor entrepreneurship, in part because of a lack of hard data on poor entrepreneurship.
These misconceptions influence public policy makers, economic development experts, and academics, who, as a result, tend to underestimate the important economic and societal role these companies play.
To set the record straight, here are six facts people should know about poverty and entrepreneurship.
Fact 1: Poor people start businesses – often
It’s a misconception that entrepreneurship is only for the rich. In fact, many ventures around the world are started by people from disadvantaged backgrounds. In fact, most of them are. Hard data is hard to come by, but the evidence we have is suggestive. In high-poverty countries in sub-Saharan Africa, for example, two in three adults run their own business or are in the process of starting one.
It is no exaggeration to say that these small businesses are the economic backbone of many developing countries, where more than 50 percent of the population lives in poverty, and even in developed countries, these ventures can be a significant component of gross domestic product.
Fact 2: Poor-owned businesses create value
The poor disproportionately start “survival businesses” that generate small profits, but it is a mistake to think that these enterprises are any less valuable. These businesses provide jobs and an economic lifeline for millions of poor people. They fill unattractive niches in markets and create value for incumbents.
And these businesses create more than just economic value: They are rooted in the fabric of their communities and provide a source of social stability. They pay taxes and can create ripple effects like reduced crime, higher school completion rates, and community pride.
Fact 3: Entrepreneurship helps alleviate poverty
A growing body of research suggests that higher levels of entrepreneurship are associated with greater poverty reduction: one analysis, for example, found that areas with the highest rates of entrepreneurship among the poor experienced the largest reductions in poverty over a six-year period.
This is not particularly surprising. After all, poor people often start survival businesses that generate small profits, but creating a venture is an important means of human resource development. People who start a business learn how to organize production, manage cash, deal with customers, set prices, and coordinate logistics.
Additionally, the entrepreneurial experience allows for independence, identity development, a sense of pride and purpose, and the ability to give back to society.
Fact 4: Off-book business is valuable to society
Poor entrepreneurs often start what economists call “informal” businesses — enterprises not registered with the government and operating out of sight — and they often come under fire.
But while off-the-books businesses may not be legal, the informal sector accounts for more than 50% of the economy in many developing countries and as much as 20% in some developed countries. The informal sector is a huge incubator for poor people to try out and learn business. In my opinion, this hidden entrepreneurial culture should be nurtured.
Fact 5: The biggest challenge isn’t always a lack of money
It is often thought that the key to helping poor businesses is to provide them with more capital. But despite the obvious need for funds, some entrepreneurs are not prepared to put additional funds to good use. Regardless of how motivated they are or how hardworking they are, a core problem for entrepreneurs is their ability to transform means into ends.
Research has shown that when entrepreneurs lack key competencies such as bookkeeping, sales, and inventory management, they need to combine funding with other forms of support to be effective. Investment can be more productive if it is coupled with participation in training and mentoring programs. Access to incubators, participation in networking events, and related development activities are also important.
Fact 6: There are many ways to be successful
The entrepreneurial world loves big success stories. It’s all about picking winners. That mentality disadvantages poorer entrepreneurs, who typically start basic businesses without new technology and who often have significantly more limited resources.
To realize the potential of entrepreneurship, it’s worth rethinking your definition of success. For poor people, success might mean establishing a business, making sales, and making a profit. Success might also be changing an entrepreneur’s economic situation, hiring employees (especially those who are poor) or adding another location.
It might be to survive a few years in business and leave some kind of legacy. Other indicators of success might be reducing reliance on your own labor, having happy customers, and being able to give back to the community.
After all, success is about living a better life, and research demonstrates how entrepreneurship can make this possible.
Venture creation is not a panacea. Poverty is complex and building sustainable businesses is hard. To realise the potential of entrepreneurship, we need to overcome these myths and create a supportive environment that provides a level playing field.
Michael H. Morris, Keough Professor of International Affairs, University of Notre Dame
This article is republished from The Conversation under a Creative Commons license. Read the original article.