While in popular imagination entrepreneurs start businesses because they want to be their own boss, or to create and build something, or to become rich, the persistent small size of most microenterprises belies this image. A large literature has studied whether people start businesses because of these perks of entrepreneurship or as the fallback option when they cannot find adequate paid employment. This dichotomy is over-simplified in that the vast majority of people would prefer self-employment over sufficiently unattractive paid employment and would prefer a sufficiently attractive job over self-employment. Nonetheless, several studies have shed light on whether microentrepreneurs start businesses primarily because of their ambitions to run large successful companies.
This literature generally finds that most microentrepreneurs start businesses out of necessity. Some of the evidence for this is that, when asked, people say they would prefer jobs with steady wages (G¨unther and Launov, 2012; Calderon et al., 2016). Donovan et al. (2019) use data on employment transitions to investigate this issue. They use panel data on employment for several developed and developing countries and show that transitions from self-employment to being an employee are much more common in poor countries than rich ones, suggesting that self-employment is not an “absorbing state” in developing countries, but rather what many people do until they find paid employment. Nonetheless, other studies find that some individuals prefer entrepreneurial jobs to paid employment, with high ability individuals selecting into entrepreneurship (Falco and Haywood, 2016; Blattman and Dercon, 2018).
Another set of studies examines the characteristics of microentrepreneurs and shows that they more closely resemble people in paid employment than people who run larger firms. For example, de Mel et al. (2008b) compare traits of microentrepreneurs in Sri Lanka to two other groups: people running small and medium enterprises with employees and those employed by someone else. They find that microentrepreneurs resemble wage workers more than they resemble more successful entrepreneurs.
In a similar vein, Gindling and Newhouse (2014) use data for several countries and document that people who run businesses with no employees have less education, on average, than those in paid employment. While low education speaks to their absolute, not comparative, (dis)advantage in paid employment, this fact is suggestive of poor employment prospects leading to self-employment. This study also finds that, among business owners, education is the strongest predictor of having at least one employee. Interestingly, they find no gender differences between male and female entrepreneurs in the likelihood of having an employee.
Another piece of evidence that people are pushed rather than pulled into entrepreneurship is that negative shocks can trigger self-employment. Adhvaryu and Nyshadham (2017) document that people sometimes start businesses due to a prolonged illness, switching away from farm labor, which presumably is more physically taxing than their new occupation..
Finding the “constrained gazelles” or “gung-ho entrepreneurs”
One upshot of this strand of the literature is that, while most microentrepreneurs do not seem poised to run highly profitable, fast growing firms, an important subset of them are but are held back by policy-fixable constraints, such as imperfect capital markets. Higher social (and financial) returns could be achieved by targeted lending to this group with a high return to capital.
Grimm et al. (2012) use the term “constrained gazelles” for this group and identify them based on their resembling high-performing small businesses on observable traits yet not being high-performing. Banerjee et al. (2019) use the data from Banerjee et al. (2015a) to distinguish between “gung-ho entrepreneurs” (those whose target business size is large) and “reluctant entrepreneurs” (those whose target business size is small).
Hussam et al. (2018) crowdsource information from the community on which potential borrowers have a high marginal return to capital within villages in Maharashtra, India. They ask individuals to rank their peers in terms of the likely increase in profits from extra capital. By providing 100 USD cash grants to randomly selected individuals who vary in how the community rated them, the researchers show that the peer rankings have quite strong predictive power. This result suggests that eliciting the community’s views could be a feasible way to identify high-return micro-lending opportunities. There is also evidence of incentive problems when people know that their ratings will determine who receives grants, but the study suggests that it might be possible to ameliorate these problems by using an incentive compatible elicitation mechanism.
McKenzie (2017) uses a business plan competition to identify potential gazelles. In 2011, Nigeria conducted a national entrepreneurial incentive scheme named YouWiN! in which firms or people with ideas for firms competed to receive 50,000 USD in entrepreneurial grants. This amounts to 25 times GDP per capita. About 24,000 applications were received, and 6,000 were selected for a 4-day business plan course. The very top applicants were awarded grants, and then from among the 1,841 firms that submitted good-but-not-great applications that fell just below that top group, half were randomly assigned to receive the grant. The grants increased the likelihood of firm entry and survival and boosted sales, profits, and number of employees.
Recap
The literature makes a distinction between entrepreneurs by necessity, who might have modest growth ambitions and skills, and the potential gazelles. With this in mind, a recent line of research has aimed to classify microenterprises into these different categories in order to target policies accordingly. For example, microcredit or assistance with formalization could then be targeted toward the potential gazelles. Meanwhile, for many other microentrepreneurs, running a business is not a calling but, rather, the fallback option when paid employment is unavailable. But interventions are often designed with a grander vision of microentrepreneurship. There may be scope for research that thinks creatively about the needs of this group and how to redesign interventions to best improve their lives.
