Differentiation, Property Rights, and the Performance of Microentrepreneurs

This project aims to develop a research programme that investigates the role of innovation in micro-enterprises’ marketing practices in driving performance.

Microenterprises (businesses that employ less than five employees) are the most common type of businesses in the world. They are especially common in the developing world. Most micro-entrepreneurs operate at subsistence level: their businesses are informal, unprofitable, and offer very limited employment opportunity. Microenterprise is characterized by high inter-firm homogeneity, leading to a high number of poorly performing businesses that are incapable of scaling up. The researchers argue that this lack of scaling is largely due to entrepreneurs’ inability to innovate. Most micro-entrepreneurs are dependent on one main supplier, who often dictates prices as well as the product assortment offered. Hence many micro-entrepreneurs are left with very little room for differentiation and innovation. Diversifying the supplier network is often prevented due to a high degree of perceived uncertainty about the quality of other suppliers. The researchers plan to demonstrate that reducing the perceived risk of changing suppliers will allow the micro-entrepreneur to break out of supplier dependency and hence increase their ability to innovate on pricing and product assortment.

To investigate the reasons behind such a dependency the researchers conducted several interviews that indicated that breaking out of a supplier relationship is risky and could result in undesirable outcomes for the micro-entrepreneur. To test their hypothesis, the researchers plan to run a randomized control trial in which the experimental group is offered a deal with a new supplier in the slum who reduces the perceived risk of changing the supplier network, by offering product delivery to the store, to reduce the additional hassle and providing a product free of charge that the micro-entrepreneur did not offer before.

Despite the recognised importance of ownership in the performance of businesses, in many developing countries, governments have made little progress in developing and enforcing strong property right regimes. In the Egyptian sample of microentrepreneurs, only 6% have formal title over the land on which they operate. In the absence of ownership, the leasing of productive assets can be a strong driver of differentiation (and performance). The results may point to the promise of leasing programmes as a feasible intermediate solution until property rights are more fully enforced.