A New Effort to Boost Small Businesses in Emerging Markets

Posted by: Steve Hamm on April 01

Microfinance has improved the quality of life for millions of people at the bottom of the world’s economic pyramid, yet studies have not shown much of an impact on the economies of developing (or declining) nations. Microfinance, whether delivered via Grameen Bank-style rural distribution systems or direct loan operations like Kiva, just isn’t enough of a job creator. That’s why a number of economic development organizations are focusing on the next tier up—small but growing companies. The theory is that if these outfits get their hands on capital, they’ll hire employees and the economic growth snowball will start rolling.

The latest effort to get the ball rolling is the Aspen Network of Development Entrepreneurs. It’s an offshoot of the Aspen Institute and has about 35 members, including such stand-out organizations as Root Capital, Endeavor, Acumen Fund, and TechnoServe. Altogether, they have some $750 million they plan on investing in entrepreneurs and economic development projects over the next five years. ANDE is funded by a bunch of heavyweight philanthropies, of both the new and old schools. The nouveau riche: Gates Foundation, Skoll Foundation, Google.org, and Omidyar Network. The older money: Rockefeller, Shell, and Citi. “If you care about the global economy, this is where you’d put your stimulus money,” says Walter Isaacson, CEO of Aspen Institute.

ANDE will have a small staff that will work with people from the member organizations to develop tools and training designed to improve the flow of capital to potentially fast-growing businesses in developing nations, and also to provide entrepreneurs with management training and business advice. The focus is on entrepreneurs, rather than social entrepreneurs, says Randall Kempner, ANDE’s executive director. “Our ultimate goal is not to create more jobs for the TechnoServes of the world. It’s to create thriving business sectors. If we succeed, NGOs can leave these countries,” he says. The organization’s sweet spot is companies with between five and 250 employees. The investments contemplated range from $25,000 to $2 million. .

Why the focus on small businesses? ANDE commissioned Dalberg Global Development Advisors to do a study investigating the link between small business vitality and economic growth. The results show that small businesses in high-income countries produce 57% of the total employment, while the share in low-income countries is just 18%. They show a strong correlation between the level of employment provided by the small business sector and per capita GDP (Another way of saying the same thing, I guess.). The study results also show that investments in small businesses can have ripple effects that positively impact the local economy, including wage increases, improved quality and prices of goods, increased tax revenues for governments, and development of the social infrastructure. The average economic rate of return (including all of those factors) for 10 case studies was 83%, while the average financial return to the company that received the investment was 26%. That’s a pretty impressive pay off for companies and their communities.

The ANDE approach to boosting the fortunes of smaller businesses was pioneered by Endeavor, a 12-year-old New York-based non-profit that operates a bit like a venture capitalist—but without the capital investments. Endeavor’s target is medium-size businesses, which overlaps with ANDE’s focus. It organizes groups of business leaders in emerging markets who then select entrepreneurs to support and provide them with mentoring and steer them toward sources of capital. The results are pretty impressive. The 372 companies it has helped in eight countries have created 91,000 jobs.

Of course, ANDE won’t cure the world’s economic ills in one bold stroke, but it’s a smart program that seems likely to do some good. One thing I like about it is it’s highly leveraged. A small staff (rather than a huge, slow-moving do-gooder bureaucracy) spreads good ideas and creates tools that can be shared by many.

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