From Afghanistan to Zambia, governments in the world’s most disadvantaged countries must prioritize dynamic enterprises and enact policies to help them thrive, create jobs, innovate and transform the economy, according to the Least Developed Countries Report 2018: Entrepreneurship for Structural.
Subtitled beyond business as usual, the report released by the United Nations Conference on Trade and Development (UNCTAD) looks at the conditions for creating and growing high-impact businesses in the least developed countries (LDCs), a group of 47 nations that includes most of sub-Saharan Africa, some Asian countries, and several island states.
The group qualifies for preferential treatment in world trade and climate-change arrangements due to chronic disadvantages that leave them among the world’s poorest nations.
“The report establishes a more active stance for the state in steering the emergence of dynamic and transformational local entrepreneurship,” UNCTAD Secretary-General Mukhisa Kituyi said.
“By encouraging policymakers to value the benefits of entrepreneurship, this report makes an invaluable contribution to efforts to add value to the least developed countries’ implementation of the 2030 Agenda for Sustainable Development.”
Several structural features of the economies of LDCs tend to weaken entrepreneurship and the growth of enterprises, including limited finances, insufficient infrastructure, lack of institutions, poverty, restrictions on women’s empowerment, high registration costs, and elevated political, economic and environmental risks, according to the report.
The result is that most firms in LDCs are micro- or small enterprises and 58% of the formal firms have at most 20 employees.
The report says that large numbers of people in LDCs are forced into small-scale, low-value entrepreneurship by necessity. Entrepreneurship is dominated by self-employment (which accounts for 70% of total employment), informal micro- and small enterprises with low chances of survival and growth and little propensity to innovate.
Small companies account for 58% of all firms in these countries.
The report also reveals that the vast majority of entrepreneurs in LDCs are “necessity-driven”. There are 1.7 times as many early-stage entrepreneurs in LDCs on average who describe themselves as “opportunity-driven” than there are who say they are “necessity-driven”, compared with 2.8 times as many in other developing countries.
Governments in LDCs should therefore focus on boosting entrepreneurs and established firms that seize opportunities to create innovative products and services, employ more people and grow dynamic businesses that have a transformative, ripple effect throughout the economy.
Fostering the type of enterprises that matters for root-and-branch economic transformation means, going beyond the “business-as-usual” approach of establishing an enabling environment for business, correcting market failures and supporting small enterprises.
“Importantly, the report calls upon the least developed countries not to overlook the pivotal and complementary role played by large enterprises, alongside medium-sized and smaller enterprises, with a view to formulating deliberate strategies to nurture entrepreneurship that has impact,” Dr. Kituyi said.
While at least 20 out of the 47 LDCs have national industrial policies that articulate to a various extent the interface between entrepreneurship and structural transformation, the report says that much less attention is currently devoted to the determinants of entrepreneurship.
The report calls for a renewed “developmental state” that engages in transformative, mission-oriented investments and involves the private sector in a strategic vision that charts a clear path for development.
Policymakers should provide support that is tailored to the life cycle of firms (start-up, scale-up, maturity), based on objective selection criteria and linking clearly communicated time-bound rewards, advantages and incentives to performance.
Entrepreneurship policies need also to foster linkages between firms of different sizes, stages of maturity and sectors, for instance by means of business clusters, networking and alliances which allow for a sustained flow of new ideas into firms throughout their life cycle and enable dynamic growth.
Greater attention needs to be given to the development of domestic supply chains, since linking LDCs to global value chains has not provided any significant boost to local enterprise development.
Coherence and coordination between entrepreneurship policies, industrial policies, rural policies and policies for science, technology and innovation are also critical, as is entrepreneurship skills development in education.
The report says that a pragmatic, strategic and evolutionary approach is needed to increase public-sector capabilities, enact locally-appropriate institutional reforms, build on centres of excellence, promote policy learning and nurture coalitions for change.
The 47 countries currently designated by the United Nations as LDC include Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Central African Republic, Chad, Comoros, the Democratic Republic of the Congo, Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Lao People’s Democratic Republic, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, South Sudan, the Sudan, Timor-Leste, Togo, Tuvalu, Uganda, United Republic of Tanzania, Vanuatu, Yemen, Zambia.
This list is reviewed every three years by the Committee for Development Policy, a group of independent experts that reports to the United Nations Economic and Social Council (ECOSOC).
In reporting to ECOSOC, the committee may recommend countries for addition to, or exclusion from (so-called “graduation” from), the list of LDCs.
The committee used per-capita income, human assets, and economic vulnerability criteria in its most recent review in March 2018 (see box below). For all three criteria, the committee uses different thresholds to identify countries to be added to the category and for countries which will graduate.
Entrepreneurial landscape in Least Developed Countries
• Nearly 270 million workers in LDCs were self-employed in 2017, which is usually considered as a form of entrepreneurship. This amount corresponds to 70% of total employment, compared with 50% in other developing countries.
• Close to half of the adult population in LDCs is engaged in some form of entrepreneurial activity, of which 29% in early-stage entrepreneurial activity and 18% in established businesses. Adults in LDCs are twice as likely as those in other developing countries to be engaged in (broadly defined) entrepreneurial activities.
• The shadow economy (economic activities hidden from official authorities for monetary, regulatory or institutional reasons) accounts for, on average, 35% of GDP in LDCs.
• There are 1.7 times as many early entrepreneurs in LDCs that describe themselves as opportunity-driven rather than necessity-driven, compared with 2.8 times as many in other developing countries and 3.6 times as many in developed economies and transition economies taken together.
• 63% of early entrepreneurs in LDCs and 57% of established businesses are engaged in consumer-oriented services, typically activities which imitate already existing businesses, with low margins.
• Survival rates for start-ups are low; more than 50% of new firms exit the market within the first five years.
• 28% of early entrepreneurs in LDCs are young adults (18–24 years), while those aged 25–34 account for another 35%.
• While women participate nearly as much as men in early-stage entrepreneurship, they are five times less likely to own a company.
• Rural households closer to large population centres are more likely to be engaged in non-farm entrepreneurship because they have easier access to market, credit and telecommunications facilities.
• The distribution of formal firms in LDCs is heavily skewed towards smaller establishments and displays a “missing middle”: 58% of firms have less than 20 employees, while only 12% have more than 100 employees.
• Smaller and younger firms are critical for creating jobs, yet larger firms play a key role in deepening capital and upgrading productivity.
Local entrepreneurship in global production systems
• LDC participation in global value chains (GVCs) remains low and concentrated in goods that are vulnerable to global demand shocks.
• LDC exports linked to GVC participation grew only slowly between 2010 and 2017 (average annual growth of 2 per cent), in contrast to the expansion in total exports of manufactures, which increased by 8 per cent annually over the same period.
• The predominant mode of entry by LDCs in GVCs is foreign direct investment rather than through the growth of local entrepreneurship.
• LDC participation in GVCs is primarily downstream (i.e., raw material exports that become inputs to other countries’ manufacturing), while the share of foreign value added used in producing LDC exports — 9%— is the lowest among developing countries. This shows that GVC participation is not yet a significant source of economic diversification and structural change for most LDCs.
• Several LDCs have expanded exports through participation in clothing GVCs, but the potential to increase value addition and expand local entrepreneurship remains constrained by heightened competition and lead firms’ strategies to maintain a competitive advantage.
• Nearshoring strategies favours skills development and upgrading of local labour and small entrepreneurs in Asian and Southern African LDCs.
• Evidence suggests that high-impact local entrepreneurs do exist in LDCs and have the necessary capabilities to overcome barriers and successfully unlock and exploit entrepreneurial opportunities in LDC domestic markets. However, this potential is not fully exploited.
Constraints to the emergence and growth of firms
• Three quarters of firms in LDCs are affected by electrical outages, with ensuing additional costs particularly for micro- and small enterprises.
• In 2017, 17.5% of the population in LDCs used the internet, compared with 41.3% in developing countries and 81% in developed countries.
• The gender gap in internet use is wider in LDCs than in other developing and developed countries, with 14.1% of women using the internet, compared with 21% of men.
• 32 LDCs have laws that prevent women from working in specific jobs, potentially constraining the performance of women-owned firms.
• Median start-up costs in LDCs were 40% of per capita income in 2015–2017, compared with a world average of 26%.
• In 21 out of 46 LDCs, the number of procedures required to start a business exceeds the world average.
• In relation to the ease of doing business (as conventionally captured by the corresponding index of the World Bank), 32 of the 47 LDCs are in the lowest quartile, pointing to a challenging business environment.
Current policy frameworks
• In just one-third of development plans in LDCs, micro-enterprises and SMEs are viewed as potential engines of economic growth and sources of employment and income to reduce poverty.
• Entrepreneurship is explicitly mentioned in 36 national development plans and poverty reduction strategic frameworks reviewed, but specific policy actions are generally limited and sometimes vague.
• At least 20 LDCs have national industrial policies which articulate, to a various extent, the interface between entrepreneurship and structural transformation; however, much less attention is devoted to the determinants of entrepreneurship, and to tailoring support adequately across all the life cycles of enterprises.