Want to Support Entrepreneurs in Rural Africa? Invest in Bigger Companies

It’s 11:30 at night in rural Uganda and the bus pulls over to the side of the road, just ahead of the next meagre trading center.  It’s pitch black outside apart from the soft moonlight vaguely illuminating faint shadows of banana trees and a few humble households.  There’s no announcement as to why we’ve stopped.  A break down?  A police check?  A pee break?

Suddenly we hear voices outside shouting from all around the bus.

“Amaazi, soda, biscuit!  Amaazi, soda, biscuit!”  (Amaazi is the Luganda word for water.)  Outside are two young men hefting amidst the deserted darkness crates of water, soda, and biscuits (the crunchy English kind, not the warm, fluffy American kind), hoping to sell a few through the bus windows to the temporarily stranded passengers.

After four years in this country, I was still taken aback by the existence of these two micro-entrepreneurs and how, in this place, at this hour, they had managed to capitalize on the opportunity to sell refreshments to a bus in the mere 5 minutes it was stopped there.  How did they even know a bus would be stopping right there?  (It must have been a police check).  What a great example of micro-entrepreneurship in action!

But what did they have to show for their late night efforts?

Total sales: a water and a box of biscuits.

Net profit to the entrepreneurs: about 16 cents.

A recent survey determined that Uganda was the world’s most entrepreneurial country, with 28% of adults having started a business in the last 42 months.  But that news isn’t as good as it sounds at first.  Most of these entrepreneurs are probably running their own business out of necessity rather than choice – they’d rather be securely employed in a salaried position with an organization (the types of positions most of us in the West choose for ourselves).

And when you see examples like the water hawkers above, it’s not hard to see why: they’re enterprising, hard-working, opportunity-finding—and just not very profitable.

BBOXX does credit assessments of all our customers, and indeed, many do own small businesses—retail shops being the most common.  But a typical retail shop in our surveys made only around $15-20 in profit per month: a much smaller share than agriculture (which typically brought in $50-80 per month).  While an extra $15 is a nice boost for someone living on $50, it’s hardly the sort of transformative change in an economy to bring masses of people into the middle class.

The types of micro-businesses you normally see—retail shops, hair salons, small bars and restaurants—seem more like attempts to “buy a job” than to launch and grow a business, as Abhijit Banerjee and Esther Duflo put it in Poor Economics.  Indeed, the language used in this space is telling: development organizations commonly talk more about “livelihoods” and “income-generating activities”, rather than “business” or “enterprise.”  But giving someone a loan to open the 10th retail shop in town doesn’t create new wealth, it just means some of the money that was already being spent at one shop will be spent at another one instead.

This is not to say that people are not clever or ambitious, because they are.  But even in those cases of driven entrepreneurs who want to grow big, one big problem lies in the way: the lack of customers with purchasing power.

Take, for example, a solar agent we had from Bundibugyo District, Uganda.  Amanya John was a perfect fit for the business: his town, Nyahuka, has a busy market (especially during the cocoa harvest), and Amanya John is well-known in the community, serving a network of savings groups who made a ready customer base.  It started like the classic entrepreneurial story: at first he had only enough money to buy two lights, but he sold them, reinvested his profits, and increased to 3 lights on his next order, then 5, then 8, then 10 – at that point accessing a volume discount that increased his profits even more.  Soon we could count on him for 20 sales per month, which were earning him $250 per month!

Then suddenly the orders stopped.  We’d occasionally get orders from Amanya John for 2 or 3 lights, but that was it.

What had happened?

He never told us exactly, but this story is so common that I think there’s only one explanation: he’d just run out of customers in his network.

When you live in a rural community in a poor country, there just aren’t that many people near you, and the people who are near you don’t have much money.  Moreover, it’s very likely the money they do have, they really don’t want to spend: with an unstable source of income like a farm or small business, they save what they have since they are not sure of when they’ll get more.  In other words, small-scale entrepreneurs don’t make very good customers.

Someone who is employed, on the other hand, can spend his money without fear because he is confident of earning more next month.  It’s with the growth of large-scale employment that the sort of environment in which entrepreneurs can thrive is born.

Interestingly, then, it means that going around villages teaching people to be entrepreneurs has got it the wrong way around.  It’s a little like teaching someone to fish in a village where no one likes fish: your piscine entrepreneur may be a very good fisherman, but he won’t make very much money if there’s no one to buy his fish.

In the same way, organizations interested in reducing poverty ought to be investing in already-successful small companies that employ a few people, and helping them grow into big companies employing many people.  That is, instead of teaching business skills to people with no prior experience, who don’t have many customers and are unlikely to grow anyway, find the people who have already managed to build successful businesses with the little they have, and help them reach more customers and hire more staff.  In doing so, they’ll create the customer based needed to attract new entrepreneurs into the game.

In the case of the midnight biscuit hawkers, they don’t need to work harder, receive more capital for bigger stocks, or have better accounting skills: they just need more buses.

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