India: Can you really teach entrepreneurs?

My article on the Be! Fund this week showcased how the non-profit is applying the principles of venture capital to create entrepreneurs in India's poorest communities — and building businesses that employ people and address social or environmental problems.  But can these entrepreneurs really bring about large scale change?

Nobody at the Be! Fund is arguing that self-employment can take the place of large scale industrial development in bringing Indians out of poverty. Their goal is to create self-made "heroes" that can inspire a generation of kids to stay in school and learn to think for themselves — a serious problem in India's educational system. But the question of "scaling up" is always directed at anybody with an idea that works, and the Be! Fund's Lisa Heydlauff has already been asked how big she thinks she can get.

The answer is troublesome, according to an article in this week's Economist. 

"Of the millions of small enterprises in poor countries, hardly any grow big and strong," the magazine writes in an article on the World Bank’s new World Development Report, which "looks at what can be done to help start-ups in poor countries become the next Google."

 In America, if a company lasts 35 years, it becomes on average ten times as productive and employs ten times as many people. If an Indian one lasts that long, its productivity merely doubles and its headcount actually falls (see chart). The bank’s survey of 54,000 firms in 102 developing countries finds that large firms (those with over 100 workers) have higher productivity and higher wages, are more likely to export and are more innovative than small firms (those with fewer than 20 employees). Big firms are more likely to add a new product, incorporate new technology or upgrade a product line. Small firms tend to stay small.

As a result, folks are increasingly growing skeptical about the potential of what Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology call “reluctant entrepreneurs”—poor people who run their own businesses only because they cannot find a job, according to the magazine. 

But fans of the Be! Fund shouldn't get too discouraged. Not every poor entrepreneur is a reluctant one. And there are success stories to go along with the pessimism. India's Amul dairy cooperative became a billion dollar corporation, and still employs millions of farmers, though the effects on their standard of living have not matched the co-op's massive increase in sales volumes. And Bangladesh's Desh garments firm virtually created the country's modern economy by sending 130 employees for training at a South Korean plant in 1979, according to the Economist. How? When they got back, they created their own textile firms. 

"Today Bangladesh has 3.6m textile workers, 80% of them women, generating $13 billion of exports a year," the magazine concludes.