This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting edge ideas and advice for global leaders about emerging markets.
The Role of Developmental Assistance in Entrepreneurship
In recent years, management scholars have begun to pay more attention to the role of management and companies in addressing society's ‘grand challenges', such as climate change, inequality, and poverty alleviation, for which economic development plays a key role. At the same time, due to the global financial crisis, government budgets have been reduced, and more emphasis has been placed on private sources of development aid.
Official development assistance (ODA) is defined as financial aid that is given by government agencies to help with economic development, poverty relief, public health, education, and other development priorities. This aid can take the form of grants or loans, and it can be given to other governments or to international organizations. Research on the effectiveness of ODA shows mixed results. Some studies show that ODA is effective in promoting economic development, while others show that it is not.
Donors send aid to promote economic growth and development, alleviate poverty, provide disaster relief, or accomplish other social objectives. Aid comes from a variety of donors, including national governments, international organizations, and private organizations. Each source has different motivations, which affects how the aid is distributed and what its potential impacts are. Multilateral aid is politically neutral and comes from international organizations, while bilateral aid is not politically neutral and comes from donor governments. Private aid is politically neutral and often bypasses national governments.
Recent research shows that the source of a country's aid – whether it be from governmental organizations, non-governmental organizations (NGOs), or foreign investors – affects the way that local entrepreneurship develops in that country. When a country receives aid primarily from NGOs and private investors, there is more “bottom-up” entrepreneurship, which is defined as entrepreneurship that is driven by individuals and groups within a society. In contrast, when a country's aid comes mainly from governmental organizations, there is more “top-down” entrepreneurship, which is defined as entrepreneurship that is driven by changes in a country's institutional framework.
Institutional Support in Promoting Entrepreneurship
For entrepreneurship to flourish, institutional conditions must support new business formation and growth. There are two critical features of this relationship: institutional supports and institutional voids. Institutional supports are elements that help construct and stimulate clearer rules and guidelines, while institutional voids are gaps or weaknesses within a country's institutional framework. Both supports and voids are critical to a comprehensive understanding of the role that institutions play in promoting entrepreneurship.
One of the main decisions that an entrepreneur must make is whether to formally register their business or not. This decision is often influenced by the country's institutional conditions. Formal entrepreneurs follow the national regulatory institutions by paying taxes, abiding by intellectual property rights legislation, and avoiding corrupt practices. On the other hand, informal entrepreneurs operate outside of the legal institutional framework by not registering their business, not paying taxes, and avoiding government regulations and enforcement mechanisms. In some cases, the absence of clear and well-established processes can push prospective entrepreneurs into the informal sector. Developing an understanding of the differences between the two types of entrepreneurship can help uncover insights as to the potential policies and practices that contribute to new business formation and associated economic development.
Main Findings and Policy Implications
- Using data for 49 countries across the years 2002-2015, this research shows that multilateral aid (i.e., aid via multinational institutions such as the World Bank) has no effect on the number of formal entrepreneurs in a country, while bilateral (i.e., aid from one country to one other country) and private aid have a significant negative impact. Additionally, multilateral aid discourages informal entrepreneurship, while bilateral and private aid encourage informal entrepreneurship.
From a practical standpoint, these findings emphasize the importance for aid donors to better identify recipient targets, based on the entrepreneurial needs of a country. For instance, countries with sizable rural populations or countries that have strong reliance on informal institutions and community dependence may solicit more private aid. Instead, countries looking to develop more formal entrepreneurs and to improve their formal institutions, such as emerging markets and middle-developed countries, would more likely benefit from reduced levels of bilateral aid.
Moore, E. M., Dau, L. A. & Doh, J. (2020). Does Monetary Aid Catalyse New Business Creation? Analysing the Impact of Global Aid Flows on Formal and Informal Entrepreneurship. Journal of Management Studies, 57(3): 438-469.
If you are interested in learning more about this work, contact Professor Moore.