Archives for category: Entrepreneurship

The question was asked on Quora. There are plenty of interesting answers:

In January 1914, Henry Ford announced a radical decision. He increased the worker wages from $2.34/day to $5/day and reduced the working time from 9 hours to 8 hours per day. Other businessmen derided Ford as a socialist, while common public heralded him as a hero. People even prodded him to run for a President. Even today, Ford’s 5 dollar workday is widely remembered in the US.

Puma paying Pele to tie his shoes in the middle of the field seconds before the kickoff of the World Cup final in Mexico (1970)… The camera made a close up and the whole world realized that the best player back then was wearing Puma shoes… Life changed for Puma after that event…

Oakley sent a pair of shades to the Chilean miners who were stuck in the mine. They sent them to protect their eyes from the sun after not having been exposed to it for a very extended period of time. When the miners emerged from the dark mine, the extremely extensive media coverage filmed and talked about how each one of them was wearing a pair of Oakley sunglasses.

And how Richard Branson started Virgin Atlantic.

In 1979, while on vacation with his fiancee in The British Virgin Islands, he was catching a flight to Puerto Rico which ended up cancelled. Richard decided to phone up some charter companies and chartered a plane for $2,000. After splitting the cost between the available seats, he grabbed a blackboard and wrote: VIRGIN AIRWAYS: $39 for a single flight to Puerto Rico.He walked around the airport terminal and soon filled every seat. When they arrived in Puerto Rico a passenger reportedly said: “Virgin Airways isn’t too bad – smarten up the services a little and you could be in business”.

More on Quora (you might have to sign up)


Paul Kinuthia (on the right) – Photo Credit: Business Daily

Paul Kinuthia started a small cosmetics business in the Kariobangi Light Industries (in Nairobi) 20 years ago with a start-up capital of 3000 KSh (less than 40 USD). He sold it to L’Oreal last week for over KSh 3 billion (about USD 35 million). Here’s the story on Forbes and on Business Daily.

Of course extreme success stories like Paul Kinuthia’s do not happen on a daily basis in Kariobangi. But, as I’ve said before, there is large diversity and growth potential in places like Kariobangi, although we like to call them “informal economy” or “survival clusters”. An excerpt from the Forbes article:

Kinuthia has a remarkable story. In 1995, he started off manufacturing shampoos and conditioners from a makeshift apartment in Nairobi with start-up capital of Ksh 3,000 ($40). He made these products manually using plastic drums and a huge mixing stick and heating oils, delivering his products by handcart to local salons and hairdressers. In the beginning, commercial banks refused to fund his venture while mainstream salons, beauty parlours and large retail outlets refused to stock his product because it was too native.

As the demand for his products grew, Kinuthia moved the business into bigger premises in downtown Nairobi and expanded his product range to include hair gels and pomades. While the bigger, sophisticated salons and supermarkets snubbed his products, they were very popular with street side local hairdressers because of their availability and significantly lower prices in comparison to the products on the shelves of the big retail outlets. As the products became more popular with local hairdressers, Kinuthia ploughed back his profits into moving into an even bigger place, financing growth, increasing his production capacity and extending his product range. In 1996, he incorporated a limited liability company and went on to produce body lotions and hair treatments. The new company set up better operational strategies, laying emphasis on quality and improving its packaging. By the late 90s, the company’s products were commercially available across Kenya’s mainstream retail and wholesale chains and were already commanding a sizable market share. By 2001, the company was already exporting its products to neighbouring TanzaniaUganda and Rwanda.

But despite the huge success of his business, Paul Kinuthia maintained one common characteristic of Kariobangi entrepreneurs – he doesn’t like questions from strangers. When Forbes called him for an interview, his secretary kindly relplied “Mr Kinuthia is not available”. I know the feeling very well.

More here

The state of Lagos in Nigeria decided to embrace de Soto’s “Legalist” idea of development and to start a process of mass formalization of the informal sector. I don’t know if Hernando de Soto will go there in person, but his Peru-based think tank – the Institute of Liberty and Democracy- is involved in the project. From an article in This Day Live:

The Lagos State Government has begun a comprehensive reform process, which it designed to formalise about 90 per cent assets currently locked in the state’s informal sector.

the state government had trained more than 100 enumerators in collaboration with the Institute for Liberty and Democracy (ILD), Peru to assist in data collation and information gathering under the state’s informal sector reform initiative.

.. Raji [Ministry of Commerce and Industry] said the state government was interested in having comprehensive information about the sector, and know why most people choose to operate informally, and, then work out modalities that will help in formulation policies that will encourage their migration to the formal sector.

Giving more recognition to informal operators is undoubtedly a good thing, but I wonder how far this can go. The Legalist school argues that formalizing property rights in the informal sector would trigger a virtuous cycle: business formalization turns “dead capital” (i.e. capital without property rights) into real collateral. Real collateral allows access to formal finance and new markets. Increased access to formal finance encourages business investments. Increased investments … I bet you can guess the rest of the story.

I used to like de Soto’s ideas, and to some extent I still do: as simple as they are, they point to the right direction – informal economies have a large development potential. But I turned more critical when I realized that his simple arguments have transformed into an over-simplification of reality. The equation “business registration=formalization” neglects that most activities in the informal economy are sustained by an infrastructure of (non-formal) regulatory, financial and welfare institutions beyond the reach of official governance. The central question raised in Lagos, “to know why most people choose to operate informally, and, then … encourage their migration to the formal sector” misses the point. The question should be reversed: we should try to understand how informal firms and their institutions work in practice, and to determine how formal institutions can “scale-down” and become appropriate for their needs – definitely not the other way around.

Konza Technological City

After Tatu city –a multi-million real-estate project to build a satellite town in the outskirt of Nairobi, the Government of Kenya has planned a new mega-project called Konza Technological City, already dubbed “African’s Silicon Savannah”, which is supposed to become the largest hub for high-tech and ICT firms in Africa.

The government bought a large piece of unused land in Machakos county, about 60 kilometres south of Nairobi, with the plan of investing $200 million in basic infrastructure (sewage, roads, electricity, etc); the rest of the investment should come from the private sector through public-private partnerships. There’s nothing official yet, but it looks like Boeing, Fedex, Huawei, RiM and Samsung are already lining up in the project. The main Kenyan interest is coming from Safaricom, Wananchi Group, the University of Nairobi and Jomo Kenyatta University for Agriculture and Technology among others. According to the promoters of this project, Konza will create 20.000 skilled jobs in the next 3 years, 200.000 by 2030.

Of course there’s great excitement all over Kenya. I was in a restaurant in downtown Nairobi yesterday and I noticed that most tables around me were talking about it. Though, thrill was mixed with a good dose of skepticism  I wondered myself: is this really going to work out?

To some extent, it looks like the government is playing Sim City, a popular video-game where you build cities from scratch. You have a budget, you start building roads, power-plants, water and sewage systems and you assign different areas of your city to industrial plants, commercial activities or residential houses. But the difference is that in Sim City you start with small projects and eventually, if you are successful, you expand them. Konza seems to be the product of a grand-design, a city where everything is pre-planned, and nothing is supposed to evolve through trial-and-error. There will be no space to figure out what works and what doesn’t.  It either goes the way that planners have in mind, or it will just be a great failure.

This reminds of the debate on charter cities. The main difference is that Konza will not be managed by foreign governments, with foreign rules and foreign institutions, so unlike charter cities Konza will not revamp any memories of colonialism. On the other hand, just like charter cities, I’m not sure whether cities with no history can grow out of nothing.

In one of my favorite articles on urban development, Edward Glaeser shows the development of New York since the early 19th century. The city grew thanks to an endless sequence of innovative ideas and entrepreneurialism, none of it happened because of a grand scheme. I recommend reading the whole article, but if you don’t have time, Glaeser basically shows how (1) New York initially developed due to a natural and geographic advantage; (2) it grew when an entrepreneur changed the logistics of trans-Atlantic trade; (3) increased trade helped the development of the sugar refining industry, apparel manufacturing and printing.(4) The economy eventually turned into real estate and the garment industry and  finally, (5) the finance sector boomed.

This is a terrible summary of a great article. But the point is that the development of the city did not follow a straight line. The face of the city and its economy changed completely over a relatively short period of time. Of course Konza is not New York, but I do not think that the dynamics of urban development are so different. Just like New York, Konza will not succeed unless it develops gradually through entrepreneurialism and innovative ideas. A small push from the government will be helpful; having bureaucrats playing a real-life version of Sim City will end up in certain failure.

But let me get back to the restaurant conversations I overheard yesterday. What was the skepticism about?

Criticism of Nairobians did not involve Edward Glaeser, New York or Sim City –It was much more practical. The most common points were rather spot on:

  • Konza city is ultimately a real estate project, not a technology one. The real goal is to increase the value of the land
  • Most businesses interested in the project are not Kenyan, what about the plan to promote local entrepreneurship?
  • Corruption will be all over the project.
  • How do you get thousands of skilled workers and their families to move from Nairobi to Konza? Customers will not move to Konza as well. Logistics will be an issue, especially for smaller businesses.

These are all interesting points, and a lot of food for thought.

It is always boring to talk about definitions, but when it comes to SMEs (small and medium enterprises), the matter is extremely urgent. I’ve read between 1 billion and 1 trillion papers on SME finance over the last few months, and I’ve come to the conclusion that SMEs are a place in the heart of the people (imagine the hard-working entrepreneur paying taxes and tuition fees), rather than any identifiable component of the private sector. The term SME is used by politicians to gain consensus, by non-governmental organizations to attract donor funding and by academics to publish papers. The problem is that there is absolutely no agreement about what we are talking about. Just imagine an evil corporate multinational exploiting workers and the environment. Now think the opposite: there we go, that’s a SME.

I hope I’m not going too far with my rant here, but lately I’ve started to think that the term “SME” is used in policy-making circles in the exact same way the term “Africa” is used among do-gooders in the aid community: it tells us no detail about the topic of the conversation, but it surely hits a soft spot. Who would say anything against SMEs? Who would say anything against Africa? Let me quote my favourite line in Binyavanga Wainaina’s classic essay: “Never, ever say anything negative about an elephant or a gorilla”. In some odd way, I feel we are all talking about the same problem here.

Now I’ll stop the rant and try to get closer to the core of the problem. I’ve had many meetings over the last few months with government institutions, banks, research organizations, NGOs, and academics about the potential of expanding SME finance in Kenya and Africa at large. As soon as the term SME is brought to the table, you see confusion in the eyes of the people: what are we talking about? Are we talking about the informal sector? Are we talking about formal businesses? Which ones exactly? This discussion usually lasts until the end of the meeting.

The confusion is very easy to spot online. I just googled “SME + Africa” in the news section and that’s what I got: Source: “The Star” (a Kenyan newspaper). Title: Kenya: SME Authority to Be Set Up”. First line: “OPERATIONS of micro and small and enterprises will soon be coordinated by …” You probably notice that the “M” of SME does not mean “medium”; in this case it is used as “micro”. The entire definition of SME is therefore shifted down a notch. You’ll see similar confusion in many other venues, for example bankers all over Africa define SMEs by the size of the loans instead of the size of the businesses. That definition tells us nothing about the actual characteristics of the enterprises using financial services and a whole lot of crucial knowledge is wasted for no good reason.

So, I use this blog to make an appeal to the development community through the web: let’s find a common definition for SMEs. This would allow banks, governments and researchers to collect data in a more meaningful way making it comparable across sectors and across countries. This would be in EVERYBODY’S interest and our understanding of the private sector would increase enormously. Personally, my impression is that the term SME should be refined in a complex economy like Kenya – more precision is necessary especially for the lower end of the market. I’d like to see, for example, small enterprises divided in “lower end” and “upper end”. Medium enterprises divided between “lower middle” and “mid-corporate”. Of course there would be plenty of space also for micro-enterprises, which should also be divided between lower and upper ends (survival and growth oriented), or something like that.

Having a common understanding of SMEs nowadays has become more important than ever. Now that “job creation” and “industrialization” are slowly reappearing in the development agenda, we need to come up with good definitions before it’s too late, or we will end up wasting entire meetings not knowing what we are talking about.

Thorsten Beck, one of the world’s major experts in SME finance, argues that the “size” of the SME sector in an economy does not really matter for economic development. What counts is its dynamism:

Policy efforts targeted at SMEs have often been justified with arguments that (1) SMEs are an engine of innovation and growth and (2) they help reduce poverty because they are labor-intensive and thus stimulate job growth, but (3) they are constrained by institutional and market failures. Cross-country, country-level, and microeconomic studies, however, do not support these claims. One study shows that, although faster-growing economies have a higher share of SME employment in their manufacturing sectors, it is not the size of this segment that drives growth.

… The empirical evidence thus points to the entry of new firms—which are mostly small at entry—and the possibilities for successful SMEs to grow as decisive. It is not the size of the SME segment but their dynamism that helps economic development. Recognizing dynamism rather than size of the SME sector as the source of economic development identifies another important distinction that analysts should make among the firm population: informal microenterprises, the establishment of which is often the result of a lack of alternative economic opportunities, and small formal enterprises, some of which might have high growth potential.

I do not entirely agree on the last point. Although it is true that many businesses operate for survival, my experience in Kenya is that the distinction between “informal microenterprise” and “small formal enterprise” is just not clear in the real economy.

I see this blurry boundary as a sign that dynamism can occur at an extremely small scale, namely the “micro-to-small” (MSE) segment. If we go to an even smaller scale, the “graduation” of some businesses from “self-employment” to “micro-enterprise” is also very interesting. In other words, whenever a business is growth-oriented, no matter how “micro” it is, should get more attention

More (from Thorsten Beck’s paper) here

For a long time Africa has suffered from a terrible representation in the media, but we must admit that things have changed quite a lot recently. Except for the campaigns of some visibility-hungry organizations (see  “Kony 2012” or “A day without shoes”, among others), the number of articles that refer to “Africa” as the “next big thing” has reached an historical high:  “Africa the next investment frontier”, “Africa the next consumer market”  “Africa the next big food trend” “Africa and the upcoming fashion industry”. I’ve always enjoyed reading about innovation and positive change rather than the usual pity-news. But a recent tweet by Linda Polgreen, mentioned in Africa is a Country, unveils an interesting new side of the story:

What is more insulting than the idea of “positive news” from Africa? As if the continent was a dull witted child in need of encouragement.

Is this “positive-news-hype” part of the same paternalistic approach towards the continent? Is it time for Binyavanga Wainaina to write a new “How to write about Africa” making fun of this extreme afro-optimism?

The obvious answer is that we need a balanced coverage. But we also need to realize that the negative portrayals of the past are very “sticky” and they represent a serious obstacle to change. “Rebranding”, if done in the proper way, does not mean inventing a fake reality -it means emphasizing the processes of change that are actually happening.

As the Roving Bandit wrote last week, ignorance about the country-specific contexts in Sub Saharan Africa had negative consequences in terms of foreign direct investments:

due to lack of knowledge about the countries in the continent, investment decisions are often not guided by country-specific conditions but rather based on inferences from the environment of neighbouring countries. Thus, to some extent, foreign investors evaluate African countries as if the countries in the continent constitute “one big country.”

… after controlling for the main determinants of foreign investment; including openness to trade, infrastructure, and average returns to capital, sub-Saharan African countries still have FDI/GDP ratios 1.3% lower than comparable countries

Moreover, in my experience in the Kariobangi Industrial cluster in Nairobi, the issue of “rebranding” the area comes up nearly every week. I wrote a few weeks ago about how development research could be bad news for businesses. Since I wrote that post, I realized that entrepreneurs in the area are trying VERY hard to change the image of the cluster. For example, more than a hundred entrepreneurs joined forces and bought land in a nearby neighborhood. Their dream is to start a new industrial park and get the rid of the “jua kali” reputation (i.e. being informal). I’ll write more about it in future posts. In another interview, the owner of a shoes-manufacturing business told me that the quality of its boots are so high “that people don’t even realize we are from Kariobangi”. I laughed when another entrepreneur told me that the problem is with the word “bangi”, which means marijuana is Swahili, “people think we are all stoners”.

So, to conclude, I believe that rebranding is very important when sticky old reputations represent an obstacle to change. If it means only hiding the bad news, then I’m all against it.

It’s fuzzy, it’s trendy, and it’s not even clear how new the whole concept really is. The passions triggered by the new breed of enterprises we now call social may even appear to some almost cultish.

They operate as private enterprises, often with a strong entrepreneurial and innovation culture, but claim to have a broader purpose than just maximizing financial returns for shareholders. They aim to be sustainable (i.e. commercially viable) though they don’t shun grant money from foundations and aid programs to get them started […]

Social enterprise investment has the potential of taking the mantle from microcredit, a movement which galvanized people from the left and the right alike around the notion that poor people could be helped to help themselves. Microcredit ultimately failed to build on its own success: products remained narrow, inflexibly designed and very expensive, and the notion that there was a causal link between microcredit and micro-entrepreneurship is proving tenuous. Social enterprise investment is a much more open-ended –and hence potentially more flexible and holistic—approach to spurring entrepreneurship at the base of the pyramid.

Check out the full article. Interesting throughout.

The past month has probably been the most exciting (and busy!) of the entire fieldwork. After spending a lot of time meeting entrepreneurs and introducing ourselves in Kariobangi, we realized that we achieved the greatest of our goals: entrepreneurs started to trust us and our project – doors started to gradually open up for the collection of (what looks like) really good data.  Ah, the greatest joy for a researcher!

We were not that confident a few months back; we realized that in a context of informality and semi-formality like Kariobangi, entrepreneurs aren’t always willing to share private info with us. Sloppy data collection will easily get us trapped in the infamous GIGO rule  “garbage in, garbage out”: no matter what fancy econometric techniques we use, if the data is inaccurate, our work has no chance but being garbage. That’s when we decided not to rush in filling up questionnaires and to make several pre-visits to get to know the entrepreneurs and their business. It was worth investing the time.

We also realized that within our sample, semi-formal businesses complying with some (but not all) government regulations are more afraid to share information than the very informal businesses, which comply with no legal requirements. Last week, an entrepreneur of a semi-formal business made this point quite clearly:

 It can be riskier to comply with some regulations than not  complying at all. Informal self-employment is generally tolerated by the authorities. They say it alleviates poverty and it helps people to make an income. But as soon as you try to expand your business and to become a little more ‘formal’, problems start coming. Having a ‘Semi-formal’ business – as you call it – can be risky. The moment you try to expand is the moment you start being worried about people asking questions

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.