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By Choice and by Necessity: Entrepreneurship and Self-Employment in the Developing World

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Abstract

Over half of all workers in the developing world are self-employed. Although some self-employment is chosen by entrepreneurs with well-defined projects and ambitions, roughly two-thirds results from individuals having no better alternatives. The importance of self-employment in the overall distribution of jobs is determined by many factors, including social protection systems, labor market frictions, the business environment and labor market institutions. However, self-employment in the developing world tends to be low-productivity employment, and as countries move up the development path, the availability of wage employment grows and the mix of jobs changes.

Abstract

Plus de la moitié de la population active dans les pays en développement travaille à son compte. Bien que travailler à son compte est l’option que choisissent les entrepreneurs indépendants ayant des projets et des ambitions bien définis, environ deux tiers des individus choisissent cette voie par manque d’alternative. L’importance de l’emploi indépendant dans la distribution totale des postes est déterminée par de nombreux facteurs, y compris les systèmes de protection sociale, les tensions sur le marché du travail, l’environnement commercial, et les institutions du marché du travail. Cependant, l’emploi indépendant dans les pays en développement a tendance à regrouper des activités à basse productivité, et au fur et à mesure que les pays se développent, la disponibilité de l’emploi salarié augmente et le mélange des postes change.

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Notes

  1. See Desai (2009) for a discussion of some of these issues.

  2. www.ilo.org/global/statistics-and-databases/statistics-overview-and-topics/status-in-employment/current-guidelines/lang--en/index.htm.

  3. Contributing family workers are defined as people ‘…who hold self-employment jobs in an establishment operated by a related person, with a too limited degree of involvement in its operation to be considered a partner’.

  4. See Bergmann et al (forthcoming) for a specific discussion of the advantages and disadvantages of the GEM data for academic research. Relative to other individual databases, some of its primary disadvantages relate to sample size, sampling strategies and transferability of the developed country questionnaire to the developing country context.

  5. See Tybout (2000). More recently, Sandefur (2010) shows that 85 per cent of manufacturing firms in Ghana in 2003 had fewer than 10 employees per establishment.

  6. Dillon et al (2012) show, for example, that proxy response does not generate significant errors in the much more sensitive case of child labor reports in Tanzania.

  7. See Weber and Denk (2011) for a detailed discussion of imputation techniques for labor market data.

  8. Mauritius and South Africa were the only two countries in the SSA region that produced data for LABORSTA every year between 2000 and 2008.

  9. It is important to note that the I2D2 sample used by Gindling and Newhouse (2012) covers an estimated 63 per cent of the population of low- and middle-income countries, and 60 per cent of all countries worldwide. The main loss of worldwide population comes from the lack of data on China (coverage of East Asian and Pacific developing countries is only 21 per cent) and some larger Middle Eastern and North African countries, such as Algeria, Iran, Iraq and Lebanon (regional coverage among MENA developing countries is 46 per cent).

  10. TEA is defined (Xavier et al (2013), p. 13) as the sum of nascent entrepreneurs (those starting new enterprises less than three months old) and new business owners (former nascent entrepreneurs who have been in business for more than three months, but less than three and a half years).

  11. Established businesses are those that have been in existence for more than three and a half years (Xavier et al (2013), p.13).

  12. Most surveys in the GEM data use telephone interviewing, which will tend to under-sample poor households who cannot afford telephones and may be more likely to be subsistence entrepreneurs.

  13. The Gindling and Newhouse (2012) results weight the averages by population (larger countries get more weight), while Xavier et al (2013) equally weight countries in their tables.

  14. See, for example, Fields (2012) or Poschke (2013a) for the ‘necessity’ perspective and some of the work of David McKenzie and co-authors (such as de Mel et al (2008)) for the ‘opportunity’ perspective. Perry et al (2007) presents both sides in a study on Latin America, while Bosch and Maloney (2010) present an empirical analysis of transitions into and out of self-employment.

  15. Schoar (2010) uses an alternative distinction between subsistence and transformational entrepreneurs, but her categories often resemble those found elsewhere in the literature. Papers such as de Mel et al (2010a) address this distinction directly.

  16. Poschke (2013b, 2013c) and Margolis and Robalino (2013) present decision-theoretic frameworks for modeling entry into self-employment, and subsequent success, in the developing world.

  17. See the World Bank’s ASPIRE database for details (datatopics.worldbank.org/aspire/).

  18. See, for example, the IFS-World Bank Doing Business database (doingbusiness.org) or the Global Entrepreneurship Monitor’s National Expert Surveys (www.gemconsortium.org).

  19. Djankov et al (2007) examine constraints to accessing capital in 129 countries.

  20. See de Mel et al (2008, 2012a) and McKenzie and Woodruff (2006). See Karlan et al (2012) for an explanation as to why high returns on capital may not be more frequently observed.

  21. See Djankov et al (2002). Djankov (2008) provides a more recent survey of the literature linking regulations to entry in developing countries.

  22. See Bruhn (2011) for the case of a reform of business registration procedures in Mexico.

  23. See de Mel et al (2012b) for an experiment that provided information and lowered the cost of formalization in Sri Lanka.

  24. Kaplan et al (2007) and Kaplan and Sadka (2011) provide evidence on the effectiveness of the legal system for resolving disputes in Mexico.

  25. See Djankov and Ramalho (2009) for an overview.

  26. See Margolis (2014) for a discussion of the implementation of minimum wages in the developing world and Gindling (2014) for an overview of their effects.

  27. For a recent assessment, see Charmes (2012).

  28. Betcherman et al (2004) survey the impact of employment programs, including wage subsidies, in developing countries and conclude that the impact is limited, at best, yet imply important deadweight losses and substitution costs.

  29. See Bögenhold et al (2013) for a different perspective on this distinction.

  30. The issue of measurement of entrepreneurship relative to self-employment in the developed world has been addressed by Bjuggren et al (2010).

  31. Random House Dictionary (dictionary.reference.com/browse/entrepreneur?s=t).

  32. Collins English Dictionary – Complete & Unabridged 10th Edition (dictionary.reference.com/browse/entrepreneur?s=t).

  33. Schoar’s (2010) definition of ‘transformational’ entrepreneurship corresponds more closely to this distinction, although one might further disaggregate her categories into truly transformational entrepreneurs (with revolutionary ideas and high growth potential) and more traditional, vocational entrepreneurs.

  34. Xavier et al (2013) present somewhat counterintuitive results drawn from these data, such as higher necessity-driven TEA in non-EU Europe, where formal social protection systems exist, than in any other region, including Sub-Saharan Africa, where they are often inadequate or entirely absent. These results may be driven by sampling issues, but suggest that the variables should be used with caution.

  35. See Gries and Naudé (2010) for a model along these lines.

  36. This mechanism is a common feature of endogenous growth models; see the October 1990 issue of the Journal of Political Economy for a series of papers all adopting a similar framework.

  37. Development processes such as those described in Figure 4 have been modeled extensively in the macroeconomic dynamics literature (see, for example, Alvarez-Cuadrado and Poschke, 2011; Gollin et al, 2002, 2004; McMillan and Rodrik, 2011).

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  1. Paris School of Economics-CNRS, Centre d’économie de la Sorbonne, Paris, France

    David N Margolis

  2. IZA, Bonn, Germany

    David N Margolis

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Margolis, D. By Choice and by Necessity: Entrepreneurship and Self-Employment in the Developing World. Eur J Dev Res 26, 419–436 (2014). https://doi.org/10.1057/ejdr.2014.25

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