Transforming the missing middle

1801London Business School seeks to boost economic growth in Africa

African business owners living on less than $2 a day could lift themselves out of poverty if new research succeeds in helping micro-entrepreneurs overcome the barriers that prevent them from growing their businesses into profitable small and medium sized companies.

Stephen Anderson-Macdonald, PhD Candidate at London Business School, and one of the principal investigators, explains: “There are roughly two billion people in the world living on less than $2 per day; half of them run businesses. We believe there can be major reductions in poverty in developing countries if these micro enterprises are better able to develop and grow their businesses into larger enterprises.”

Micro-enterprises are by far the most common form of businesses in developing countries. But few among these businesses grow to become small or medium sized businesses. This failure to scale leads to a vast missing middle in these economies, with most entrepreneurs barely eking out a living. London Business School has secured funding from organisations including The World Bank, USAID, and DFID to develop and test new ways to help micro-entrepreneurs achieve profitability and scale.

Anderson-Macdonald says: “Micro-entrepreneurs in developing countries face many constraints. For example, they have limited access to capital. A good deal of money has gone into aid and micro-finance, but the results of these efforts have been mixed at best. Micro-entrepreneurs also tend to have poor business skills. Our research investigates ways in which the private sector can help micro-entrepreneurs overcome these constraints. ”

The researchers are currently working on two projects, in South Africa and Ghana. In South Africa the researchers are addressing the business skills constraints that micro-entrepreneurs face. Stephen Anderson-Macdonald is working with Rajesh Chandy, The Tony and Maureen Wheeler Chair in Entrepreneurship and Academic Director of the Deloitte Institute for Innovation and Entrepreneurship, London Business School and Bilal Zia, Economist at The World Bank. The researchers have also partnered with Business Bridge, an NGO founded by Michael Hay, a Professor of Management Practice, London Business School.

Business Bridge offers mini MBA training sessions to around 1,000 growth oriented entrepreneurs. The selected entrepreneurs are receiving intense training in marketing and sales or finance and accounting. The control group aren’t receiving training. The researchers are analysing the impact and outcomes of the training the entrepreneurs receive.

The Ghana project focuses on financial constraints micro-entrepreneurs face. Stephen is working with a local financial institution, Financial Republic; Professor Om Narasimhan, London School of Economics, Anja Lambrecht, Assistant Professor of Marketing, London Business School and Professor Chandy to test new banking products tailored to fit the realities of business in developing countries. The researchers hope to succeed in boosting business growth where foreign aid grants and traditional micro-lending have failed.

The new loan products will be offered to over 3,500 local businesses, and will be tied to the purchase of assets like equipment, construction or vehicles. The results will be compared with those from a typical cash loan product that is not tied to asset purchase.

The researchers, In South Africa are currently examining preliminary results from the study.