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Microentrepreneurship in Developing Countries

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Handbook of Labor, Human Resources and Population Economics

Abstract

This chapter reviews the recent literature in economics on small-scale entrepreneurship (“microentrepreneurship”) in low-income countries. Major topics in the literature include the determinants and consequences of joining the formal sector, the impacts of access to credit and other financial services, the impacts of business training, barriers to hiring, and the distinction between self-employment by necessity and self-employment as a calling. This chapter devotes special attention to unique issues that arise with female entrepreneurship. Several themes emerge. First, policies that encourage microenterprises to formalize do not unleash growth or increased profits for these firms, in most cases. Second, the evidence is mixed on whether business training improves business performance, which partly reflects weak statistical power in many studies. Third, women’s limited agency in many developing countries may constrain their ability to put knowledge gained from business trainings into practice. Fourth, several studies find that grants to small businesses have large impacts on profits, but there is weaker evidence of profit gains when capital is offered in the form of microcredit loans. Fifth, women entrepreneurs face greater pressure to share income, including business grants, with household members, which is one reason that grants to women often do not improve their businesses’ performance; in-kind transfers might be preferable as a result. Sixth, interventions that make it easier and less risky for businesses to hire nonfamily workers, for example, by providing detailed information about applicants’ skills or providing training for new hires, rarely induce microentrepreneurs to expand their workforce. Finally, in many cases, microentrepreneurship was the fallback option for someone when paid employment was unavailable. The best interventions to improve the well-being of these “microentrepreneurs by necessity” are likely very different from the best interventions to enable “microentrepreneurs by choice” to unlock their businesses’ high growth potential.

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Notes

  1. 1.

    For a complementary review, see Quinn and Woodruff (2019), who review the literature on randomized experiments used to understand entrepreneurship in developing countries.

  2. 2.

    See Bruhn and McKenzie (2014) for a review of the literature on formalization of firms in developing countries.

  3. 3.

    A paper similar in flavor examines how wages vary with age (rather than job tenure) and finds that the age-wage profile is less steep in developing than developed countries (Lagakos et al. 2018).

  4. 4.

    Hardy and Kagy (2020) provide demand shocks to male and female microentrepreneurs in the garment industry in Ghana and find that women’s businesses have more slack. This research points to another potential source of the gender profit gap, namely demand constraints.

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Acknowledgments

Responsible Section Editor: M Niaz Asadullah

The chapter has benefitted from valuable comments of the editor. I thank Akhila Kovvuri, Jamie Daubenspeck, and Caitlin Rowe for excellent research assistance. There is no conflict of interest.

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Authors and Affiliations

  1. Northwestern University, Department of Economics, Evanston, IL, USA

    Seema Jayachandran

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  1. Seema Jayachandran
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Correspondence to Seema Jayachandran .

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Editors and Affiliations

  1. UNU-MERIT & Princeton University, Maastricht, The Netherlands

    Klaus F. Zimmermann

Section Editor information

  1. Faculty Of Economics And Administration, University of Malaya, Kuala Lumpur, Malaysia

    M. Niaz Asadullah

  2. Centre on Skills, Knowledge & Organisational Performance, University of Oxford, Oxford, UK

    M. Niaz Asadullah

  3. Dept of Economics, University of Reading, Reading, UK

    M. Niaz Asadullah

  4. School of Education, Environment and Development (SEED),, University of Manchester, Manchester, UK

    M. Niaz Asadullah

  5. IZA Institute of Labor Economics, Bonn, Germany

    M. Niaz Asadullah

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Jayachandran, S. (2021). Microentrepreneurship in Developing Countries. In: Zimmermann, K.F. (eds) Handbook of Labor, Human Resources and Population Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-57365-6_174-1

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  • DOI: https://doi.org/10.1007/978-3-319-57365-6_174-1

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