Want to increase profits of low-income business owners? Don't just teach business skills. Promote entrepreneurial mind-sets.
Palladium's Agata Slota explains why promoting an entrepreneurial mind-set may be more effective in improving the success of micro-businesses than building classic business skills
Last year a study on entrepreneurship made headlines by arguing that teaching personal initiative was more effective in boosting small businesses than traditional business training. The study was carried out in Togo with a sample of 1500 micro-enterprises which were divided into three groups - a control group, a group that received traditional business training and a group that received personal initiative training. The traditional business training covered accounting and financial management, marketing, human resources and formalisation. Personal initiative training looked to change mind-sets so that people were more self-starting, persistent and future-oriented. Two years later, the personal initiative training increased the enterprises profits by 30%, as compared with a statistically insignificant 11% for the traditional training.
This was not the first study showing the benefits of personal initiative training – in fact, there is a considerable amount of evidence that boosting personal initiative has positive effects on entrepreneurship, including in lower and lower middle income countries.
On the other hand, there is very mixed evidence on the benefits of traditional training on business success. Some studies have shown that traditional training leads prospective entrepreneurs to launch businesses more quickly. But the effects of such training on the survivorship or profitability of existing businesses have been modest at best.
Personal initiative and poverty
What exactly do the personal initiative characteristics mean? Being a self-starter means being motivated to act from an internal drive. Persistence means being resilient and ready to overcome challenges that appear along the way. Being future-oriented means anticipating and preparing for potential opportunities and threats – assembling resources now to be able to take advantage of future opportunities quickly and planning for contingencies.
The characteristic of being future-oriented is particularly interesting in the context of low-income entrepreneurs running micro-businesses because research suggests that the poor tend to be more present-focused than the better off. The poor tend to discount future costs and benefits more and place a higher value on near-term costs and benefits. A study in Europe, for example, has shown that the poorest individuals are most likely to prefer smaller rewards sooner over larger rewards later, and a survey assessing levels of present bias in Turkey found that 29% of low-income individuals exhibited present bias compared to 6% of high-income individuals.
It is not that poor people happen to be more present biased. It is that poverty makes them so. This may have to do with uncertainty about the future - some research suggests that having a high income may make you feel more in control of the future and therefore less present bias.
It also likely has to do with the cognitive impact of poverty. In Scarcity: Why having too little means so much, economist Sendhil Mullainathan and psychologist Eldar Shafir write about how scarcity focuses the mind so much on whatever we feel we don’t have enough of (whatever is scarce) that we become less effective in other areas of life. Scarcity actually changes the way we make decisions, in particular how we weigh the costs and benefits of anything that is outside of our pressing area of focus. In contexts of poverty, scarcity of money makes people less forward thinking and less self-controlled because it tunnels people’s thinking so much on current money worries.
Which brings us back to personal initiative and future-orientation. If poverty makes people less future-oriented, it would mean that poverty would impact on personal initiative. And, therefore, boosting personal initiative through training could be particularly fruitful for improving business success of poor micro-entrepreneurs. As such, programmes that aim to help low-income individuals by strengthening their capacities to run micro-businesses should consider - if not completely replacing traditional business training - at least adding personal initiative training to their repertoires. The positive impact might be very large indeed…