04 October 2010

Developing World’s Entrepreneurs Must Overcome Obstacles

This is the third article in a four-part series on small businesses in hard times.

By Katherine Lewis
Special Correspondent

Washington — For some entrepreneurs, all times are hard times.

In developing countries with not-so-friendly business climates, small business owners often face more daunting and persistent hurdles than their counterparts in the developed world. Those hurdles range from onerous government regulations to corruption to poor infrastructure.

Small firms deal with these challenges in one way or another. They find public-sector “patrons” or build their businesses under the radar, which avoids government registration; and they resort to street smarts to overcome other obstacles. But they sometimes pay a high price for such convoluted tactics. Yet, with determination and persistence, they often succeed against many odds, particularly if they can turn to local, regional or international networks for advice, mentorship or investment.

SO SIMILAR, SO DIFFERENT

General rules for small businesses to succeed in the developing world are not that different from those in the developed world.

“Entrepreneurs need to exhibit passion and commitment to delivering value to customers,” said Ken Morse, a serial entrepreneur and visiting professor at ESADE Business School in Barcelona, Spain. “You need customers to focus your development, to help recruit ‘A players’ to your team, and of course, there’s no way you can raise outside funding unless and until you have customers which prove your value proposition.”

What is different between the developed and developing business worlds is the level of energy and perseverance required just to start and sustain a business in the latter.

“It takes a great willpower to do business in my country,” said Kneeyee Alex, founder of ESTREET, a foundation promoting entrepreneurship in Nigeria. He said Nigerian small business owners must make sacrifices that often are not required of their developed-world counterparts.

It’s important to distinguish between small businesses, which the founders create to provide income for their families, and true entrepreneurial ventures, which aim to fill a hole in the marketplace and have the potential to grow, employ large numbers of people and contribute in a significant way to the local economy.

Those in the first category are simply interested in survival, with little ambition for large-scale wealth generation, and many avoid government registration because it would take too much time and expense. But that limits their ability to grow and hurts their home country, which cannot track or effectively tax these unregistered businesses.

“Putting impediments to new businesses drives business to informality,” said Julio De Castro, a professor of international entrepreneurship at Babson College in Wellesley, Massachusetts. And informal businesses have higher capital and transportation costs, more storage problems, greater difficulty hiring quality staff and less ability to enforce contracts.

In India’s capital, New Delhi, there are 1 million rickshaw carts that provide a livelihood for their operators, but only 99,000 are registered with the government, according to Irfan Alam, who founded the SammaaN Foundation to modernize the rickshaw-pulling sector in Bihar state. The huge number of unregistered operators poses a danger to the public and also cheats the government of revenue — not only registration fees but also the bribes that rickshaw operators pay the police and administrators. “The size and layers of the [bureaucratic] systems make it difficult for entrepreneurs,” Alam said.

NETWORKING AND INTEGRITY

To deal with this and other challenges, Alex recommends that entrepreneurs share their stories with each other. “Usually there will be someone with a solution,” he said.

Another advantage of networking is that other entrepreneurs or business experts may eventually become investors or customers. When two female entrepreneurs started the Egyptian equivalent of the Barnes & Noble bookstore chain, the support they received from the international community gave confidence to their vendors and customers, said Ayman El Tarabishy, professor of entrepreneurship at George Washington University in Washington.

“These networks can make a difference. It’s mentorship: introducing them to the right individuals who will say, ‘I’m going to get you in as a vendor in my company,’” El Tarabishy said. “That little extra push makes a difference.”

But entrepreneurs must resist corruption and establish a reputation for high ethics, said Shaffi Mather, a social entrepreneur in Kerala, India. “Stand firm on ethics and radiate it around you and simply be persistent,” Mather advised other entrepreneurs.

As governments recognize the importance of entrepreneurship to economic growth and their national competitiveness, they are slowly loosening regulations, implementing programs to support entrepreneurs and even granting government contracts to startups.

“Governments understand that young companies and the entrepreneurial ecosystem are an important part of creating an innovative competitive culture,” Morse said. He noticed positive changes in attitudes toward entrepreneurship in Jordan, Lebanon, the United Arab Emirates and Pakistan. In China, where until the 1990s the economy relied almost exclusively on state-owned large companies for growth, now small and medium-size enterprises represent 60 percent of industrial output and 75 percent of employment, according to International Entrepreneurship, a group that promotes small business.

(This is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://www.america.gov)