Nearly 1 in 5 people in the world lives in poverty. Even in many developed countries such as the U.S., poverty rates exceed 12%.
As a professor of entrepreneurship, I’m interested in a critical question: Can people in poverty create their own path to prosperity? In other words, is venture creation a viable poverty alleviation tool?
My work has shown that it can be. However, the support is often lacking.
Part of the problem is ignorance. Most people simply don’t know much about poverty and entrepreneurship.
And misconceptions have influenced public policy officials, economic development professionals and academics. They tend to undervalue the important economic and social role that these businesses play.
In an attempt to correct the record, here are six facts about poverty and entrepreneurship.
Poor people start businesses – lots of them. It’s a myth that entrepreneurship is just for the rich. In fact, most ventures across the globe are started by people in disadvantaged circumstances. Such small businesses are the backbone of many developing economies. Even within developed economies, such ventures can be responsible for a meaningful component of gross domestic product.
Businesses run by poor people create value. Although people in poverty disproportionately create “survival businesses” that generate small profits, it’s wrong to assume that makes these ventures less valuable. Such businesses provide jobs to millions of impoverished people. They create value in the marketplace and are embedded in the fabric of communities, providing a source of social stability.
Entrepreneurship can help alleviate poverty. A growing body of research suggests that higher levels of entrepreneurship are associated with greater reductions in poverty.
While people in poverty often create survival businesses that generate small profits, venture creation represents a critical vehicle for human capital development. People who start businesses learn how to organize production, manage cash, serve customers, set prices and coordinate logistics.
Off-the-books businesses have value for society. Poor entrepreneurs often start what economists call “informal” businesses. But while they may not be legal, the informal sector represents 50% or more of the economy in many developing countries, and as much as 20% in some developed nations. It represents a vast incubator that sustains the poor as they experiment with businesses and learn.
The biggest challenge isn’t always lack of money. People often assume that the key to helping ventures of the poor is to provide more capital. But some entrepreneurs may not be ready to make effective use of additional money.
When an entrepreneur lacks key capabilities, such as bookkeeping, selling or inventory management, research suggests that to be effective, funding should be coupled with other forms of support. An investment is likely to be more productive when it is tied to participation in training and mentoring programs. Access to incubators, attendance at networking events and related developmental activities also are important.
There’s more than one way to succeed. To realize the potential of entrepreneurship, it’s worth rethinking the definition of success. For the poor, success could be getting the business established and making sales, earning a profit. It could be changing the entrepreneur’s economic circumstances and hiring employees.
Poverty is complex, and building a sustainable business is difficult. Realizing the promise of entrepreneurship requires that we get past these myths and develop the kinds of supportive environments that level the playing field.
Michael H. Morris is a professor at the Keough School of Global Affairs at the University of Notre Dame. Distributed by The Conversation and The Associated Press.
