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Entrepreneurship, Economic Growth and Microfinance.

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Title: Entrepreneurship, Economic Growth and Microfinance.


1
Entrepreneurship, Economic Growth and
Microfinance.
  • Chantelle Blachut and Ichiro Uehara.
  • (9/12/2010)

2
Outline.
  • ? Introduction
  • ? Link Between Entrepreneurship and Growth
  • ? Empirical Evidence
  • ? Policy Implication
  • ? Microfinance Entrepreneurship (connections
    and basic literature ideas)
  • ? India Microfinance
    (current problems)
  • ? Concluding Remarks

3
Linking Entrepreneurship and Economic Growth
  • Some economists say input factors are...
  • Technology (A)
  • Capital (K)
  • Human and physical
  • Labor (L)
  • AND Entrepreneurship (E)
  • Y A Ka Lß E1-aß

4
Paper
  • Linking Entrepreneurship and Economic Growth by
    Wennekers and Thurik (1999)

5
Entrepreneurship and Economic Growth
6
Dictionary Definition of Entrepreneur
  • Someone who stars a company, arranges business
    deals, and takes risks in order to make a profit
  • By LONGMAN Advanced American Dictionary

7
Definition of Entrepreneurship
  • Entrepreneurship is the manifest ability and
    willingness of individuals, on their own, in
    teams, within and outside existing organizations,
    to
  • Perceive and create new economic opportunities
    (new products, new production methods, new
    organizational schemes and new product-market
    combinations )
  • Introduce their ideas in the market, in the face
    of uncertainty and other obstacles, by making
    decisions on location, form and the use of
    resources and institutions

8
Roles of Entrepreneur
  1. Person who assumes the risk associated with
    uncertainty
  2. Supplier of financial capital
  3. Innovator
  4. Decision-maker
  5. Industrial leader
  6. Manager or superintendent
  7. Organizer and coordinator of economic resources
  8. Owner of an enterprise
  9. Employer of factors of production
  10. Contractor
  11. Arbitrageur (Trader)
  12. Allocator of resources among alternative uses
  13. Person who realizes a start-up of a new bussiness

9
Types of Entrepreneurs
  • Entrepreneurial v.s. Managerial
  • Self-Employed v.s. Employee

10
Types of Entrepreneurs
  • Real Entrepreneurs
  • Schumpeterian Entrepreneurs own and direct
    independent firms that are innovative and
    creatively destroy existing market structure
    mostly small firms
  • Intrapreneurs embodiment of leadership in
    entrepreneurial ventures in large firms e.g.
    Employee of RD Department in a firm
  • Managerial business owners e.g. franchisees

11
Dynamics of Entrepreneurship
12
Entrepreneurship in Neo-Classical Model
  • Entrepreneurship does not fit in Neo-Classical
    models
  • Perfect competition thus no profit
  • General equilibrium models do not take into
    account the dynamics of innovative
    entrepreneurship

13
Neo-Classical v.s. Endogenous Models
14
Couclusion Linking Entrepreneurship and Economic
Growth
  • Three main field of research
  • Measuring entrepreneurship
  • Development of typologies of entrepreneurship at
    micro level
  • Operationalization of a multidimensional concept
    of entrepreneurship at higher levels of
    aggregation (industries and nation)
  • Determinants of entrepreneurship
  • In what condition?
  • Impact of entrepreneurship on economic development

15
Couclusion Linking Entrepreneurship and Economic
Growth
16
Empirical Evidences
  • The Effect of Entrepreneurial Activity on
    National Economic Growth by Stel, Carree and
    Thurik (2005)
  • Used Global Entrepreneurship Monitor (GEM) data
    2002 and Growth Competitive Index (GCI) 2001
  • ?GDPtaßTEAt-1?log(GDP/capitat-1)dGCIt-1??GDPt
    -1e

17
Empirical Evidences
  • Result Total Entrepreneurial Activity (TEA) is
    not significant.

18
Empirical Evidence
  • Interpretation in developing countries, there
    are not enough large companies and entrepreneurs
    have lower human capital levels
  • Potential Problem
  • Selection Bias
  • One African Country
  • Most of them are developed counties
  • Endogeneity

19
Empirical Evidence
  • Update Stels work
  • GEM 2006 and GNI 2007
  • Add Human capital variable
  • Average Education expenditure between 1993 and
    2007
  • ?GDP08aßTEA06?log(GNIC07)dGCI07??GDP93-07?ED
    U93-07e

20
Empirical Evidence
  • TEA is marginally significant 10.2

21
Empirical Evidences
  • Entrepreneurship, Innovation and Economic Growth
    by Wong, Ho, and Autio (2005)
  • Used GEM data
  • Total Entrepreneurship Activity (New Firm
    Creation) was not significant Innovation was

22
Empirical Evidences
  • How is Entrepreneurship Good for Economic Growth?
    By Acs (2007)
  • Necessity Entrepreneurship became an
    entrepreneur because no other choice (undeveloped
    economy)
  • Opportunity Entrepreneurship an active choice to
    start a new enterprise because of unexploited or
    underexploited business opportunity

23
Empirical Evidences
  • How is Entrepreneurship Good for Economic Growth?
    By Acs (2007)

24
Policy Implication
  • How is Entrepreneurship Good for Economic Growth?
    By Acs (2007)
  • For developing countries
  • Improve national economic condition and
    entrepreneurial environment
  • Underdeveloped countries
  • Focus on bringing in FDI
  • Moving people from agriculture and
    self-employment (necessity-entrepreneurship)
  • Elementary and secondary education

25
Policy Implication
  • How is Entrepreneurship Good for Economic Growth?
    By Acs (2007)
  • Less developed countries
  • Strengthen small and middle sized businesses
  • Financial assistance, management assistance,
    training and reducing regulatory burdens
  • Reduce number of self-employed

26
Policy Implication
  • How is Entrepreneurship Good for Economic Growth?
    By Acs (2007)
  • For developed countries
  • Strengthen entrepreneurial condition
  • Make early stage funding available
  • Strengthen technology transfer
  • Support entrepreneurial activity
  • Focus on high value added, high technology,
    innovation and technology commercialization
  • Higher education

27
Entrepreneurship and Microfinance A Review and
Research Agenda
  • ? (Phillip H Phan)

28
Paper.
  • ? Examines 54 papers (1998 - 2008) whose research
    questions are related to microfinance and
    entrepreneurship.
  • ? Aim Highlight the most common questions /
    methodological approaches and key findings.
  • This would take forever for us to talk about so I
    want to focus on the point that I feel is most
    important
  • ? The papers discussion on the general economic
    theory behind microfinance. (mental model)
  • After this we will then discuss the example of
    what is right now occurring in the Indian state
    of Andrah Pradesh. (reality)

29
Theory (mental model).
  • ? A communities productivity is correlated with
    accumulated Human Capital and also Capital Stock.
  • ? In subsistence economies the capital component
    of production functions is small.
  • ?CPF is given by available HK. For the community
    to rise above the CPF it must accumulate capital
    at a faster rate than consumption.
  • ?When the energy expended by community to engage
    in consumption (eg. searching for water) does not
    yield a production surplus (that can allow for
    deferred consumption) this is called an energy
    deficit.
  • ?Deferred consumption is critical for consumption
    smoothing (During a drought we cant eat all of
    our stored grain - we need to save seeds to plant
    for next season).
  • ?gt poverty trap. Constantly reliant on external
    resources.

30
? Key Arguments (mental model).
  • ? One way to break the poverty cycle is to
    encourage petty entrepreneurship amongst poor
    (fosters production surpluses).
  • ?Done by increasing the capital component of the
    entrepreneurial production function (as SR
    productivity of HK cannot be significantly
    improved).
  • ?gt elimination of the energy deficit gt capital
    accumulation gt breaking free of poverty trap.
  • ? MICROCREDIT (more capital) main input to kick
    start entrepreneurial production process.
  • (Which is then meant to kick-start everything
    else).

31
? Basic mechanics.
  • ?Loans generally from a few to 200.
  • ?Creation of local committee to oversee the loans
    (generally elders).
  • ?Loan committee offers loans to Solidarity Groups
    (4-5 ppl, known to each other, some MFIs disallow
    family).
  • ?Whether or not a loan is re-payed affects the
    entire group
  • (if yes all granted access to future credit,
    if no not).
  • ?Weekly meetings (discuss business, plans,
    problems, family, anything that may impact timing
    of payment - often believed to have spillover
    effects (HK and SK) ).
  • ?Program officers offer financial advice act as
    counsellors.

32
Other Important Points.
  • Concept of (Social) Collateral.
  • ?Seen to be important factor accounting for
    higher repayment rates than traditional
    institutions.
  • Theory of MF gained recognition following the
    publicity won by the Grameen Bank.
  • ?Seen as a panacea / Silver Bullet.
  • ?Before social policy could not reconcile high
    IRs.
  • ?Higher IRs due to greater costs (more smaller
    loans).
  • Changing understandings of MFIs
  • ?Efficient aid distributors (helping to alleviate
    poverty).
  • ?Sustainable business (less loan forgiveness /
    higher IRs).
  • ?Sustinable MFI has greater reach into poor areas.

33
So theory is great and all but what about
something happening in real life?
  • ? We actually want to hear YOUR opinions on this
    so jump in at anytime.

34
? BEFORE we look at whats currently going on in
AP lets consider something
? However to do this I need your help. ?I need
you to do the following shout out as quickly
and loudly as possible the colour that is on the
screen
35
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BLUE
40
Mostly, the intuitive, or mental models that we
use to understand the world match
reality (sometimes they dont).
41
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42
So whats happening in India?
  • ? A replay of the American subprime debacle.
  • D. Roodman (CGD)
  • ? Many layers but heres the basic idea
  • ? End of 2004 - 1 million micro-loans.
  • ? Present - 27 million micro-loans (1/3 in AP).
  • ? Bubble (IRps 225b).
  • ? Not uncommon to have 3 - 4 loans.
  • ? Reports of suicides accumulating from 2010.
  • ?At present only anecdotal evidence (although
    cited in October 14 Ordinace).

43
? Anecdotal Evidence.
My wife who committed suicide, had taken 8 loans
and had to pay back 2 loans on Monday, 1 Tuesday,
1 Wednesday, 1 Thursday, 1 Friday, 1 Saturday
(every fortnight one), and 1 once a month. There
was no respite during the week and on Saturday,
she felt happy that Sunday was the next day but
that was short lived as we had to make payments
from Monday again and the whole cycle continued.
When one has to pay loan repayments on 6 days a
week and people will not leave without collecting
payments, it is downright harassment.
44
? AP MFI Ordinance 2010.
  • ? An ordinance to protect the women Self Help
    Groups
  • who are being exploited by private MFIs
    through usurious interest rates and coercive
    means of recovery resulting in their
    impoverishment in some cases leading to
    suicides
  • ? Repayments now monthly instead of weekly and
    must be paid at Panchayat Offices.
  • ? All micro creditors must register and provide a
    list of borrowers to the district in which they
    operate.
  • ?All loans in respect of which an MFI has
    realised from the borroweran amount equal to
    twice the amount of the principal shall stand
    discharged

45
However
  • ? Inherent purpose of ordinance is to protect
    women in SHGs (State Led Program) not to
    specifically those indebted to micro creditors.
  • ? AP has 1m SHGs (each 10-12 members) approx.
    1bl from World Bank.
  • ? Women were reneging on SHG loans before micro.
  • ? Seems micro credit became a threat to the
    government program (key agents in writing the
    ordinace were those running government program).
  • ? Regional offices are now being told to
    encourage citizens not to repay micro creditors.
  • ? Apparently more powerful than the formal decree.

46
Something else
  • ? According to (formally) calculations by David
    Roodman (CGD) - interests rates for one MFI
    (Grameen) in Bangladesh (not India) were
    initially believed to be around 24.
  • ? However, he then discovered that borrowers are
    allowed to top-up (or borrow back again) their
    loans after having re-paid at least half. This
    increases the average loan amount without
    altering the rate.
  • ? By his calculations this means that the true
    interest rate would be closer to 17 - 20 (not
    accounting for inflation)
  • ?Compares to credit card rate for US consumer.
  • India Most at about 30 (many larger MFIs cap
    24).
  • Break even 20 - 38.

47
? Some Questions.
  • ?So we are left with the questions of whether
    this is simply a political campaign or whether
    Indians simply got caught up in the fast growth
    of credit access? (some combination?)
  • ?Can you have too much of a good thing?
  • ?Help, kill or dont change microfinance in
    India?
  • ?Are MFIs really to blame for expectations so
    high they are impossible to fulfil in such a
    short period?

48
Concluding Remarks.
? More research is needed to examine the exact
nature of the relationship between poverty,
microfinance and entrepreneurship.
49
? References.
  • ? Phan, PH (2009-11) Entrepreneurship and
    Microfinance A Review and Research Agenda,
    Working Paper, Carey Business School JHU.
  • ? Worth a look David Roodmans Microfinance
    Open Book Blog. http//blogs.cgdev.org/open_book/
  • ? October 14 Ordinace, Andrah Pradesh, India.
    http//indiamicrofinance.com/wp-content/uploads/20
    10/10/Andhra-MFI-Ordinance.pdf
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