I just noticed that my documents folder called “African development literature” is starting to look like a wildlife safari brochure: I have “Lions on the Move“, “Cheetahs VS Hippos“,”Are the Cheetahs Tracking the Tigers?“, “The Informal sector Elephant“, “Milking the Elephant“, “Stock markets in Africa: Emerging lions or white elephants?“. I haven’t seen any rhinos or giraffes, so maybe I will keep them for my dissertation title.

This morning’s addition was “Constrained Gazelles: High Potentials in West Africa’s Informal Economy” (link fixed) by Michael Grimm, Peter Knorringa and Jann Lay. Although I am not a big fan of the title, the paper does a great job in identifying a third type of entrepreneur in informal markets in addition to the well-known “survival” and “growth-oriented” businesses. The abstract:

The informal sector is typically characterised as being very heterogeneous and possibly composed by two clearly distinct segments, sometimes called the lower and upper tier. However, empirical evidence shows that even among lower tier entrepreneurs profitability can be quite high. We combine these findings and develop an innovative empirical approach to identify what we call ‘constrained gazelles’, next to the survivalists in the lower tier and growth-oriented top-performers in the upper tier. Our representative sample of informal entrepreneurs in seven West-African countries allows us to link the relative size of these three groups of entrepreneurs to the structural and macroeconomic environment in these countries.

As I mentioned in a recent post, growth-oriented enterprises emerge also in very difficult environments. The problem for academics, and even more for MFIs and banks, is to identify those who are more likely to innovate, create employment and be successful in the market, and to design specific financial products for them. Though, as the Roving Bandit reported recently, this is everything but an easy task.

Here’s an excerpt of Grimm et al ‘s  conclusions:

We empirically identify a third segment of entrepreneurs that are neither top performers nor survivalists. This group – which we label ‘constrained gazelles’ – shares many characteristics with top-performers, they even show similar managerial abilities in running their firm, but they operate with substantially lower stocks of capital. Their stock of capital is almost as low as that of most survivalists. However, they are much more productive and can thus earn much higher returns to capital than survivalists. If we take the mean value added-capital among constrained gazelles as reference, we find that an investment of Intl. $ 10 leads to a monthly increase in value added of almost Intl. $ 4.5. Amongst survivalists, in contrast, we estimate the marginal return to capital to be around Intl. $ 0.4 only, i.e. less than a tenth of it.