More education and venture capital for developing countries

Translated from the original article in Swedish found here. A PDF version can be found here.

Microfinance funds are more popular today than ever. They attract billions from Swedish institutions and savers – even though researchers have not been able to confirm the benefits of microfinance. Swedish investors receive a high return on these investments, but the result for the poor entrepreneur ultimately becomes rather lean. Growth often fails. There are therefore reasons for politicians and decision-makers to consider whether other efforts and priorities are needed to create a more just world, where more people are given reasonable conditions to succeed.

Muhammad Yunus, founder of Grameen Bank and recipient of the 2006 Nobel Peace Prize, once compared people in poverty to a bonsai trees. He said that if a bonsai tree does not grow, the seed is not to blame – it is the soil that is insufficient. In a study that I have published with Alex McKelvie in the International Small Business Journal, we show how the soil, exemplified by poor financial literacy and lack of formal education, greatly affects microfinance’s chances of success. The often low level of education becomes the Achilles heel of microfinance itself.

Economic welfare in more developed countries is also not based on microfinance, but on the fact that talented small business owners and entrepreneurs are given better basic conditions to grow and become both nationally and internationally successful. Despite the obvious insight, efforts are often lacking in this group of companies in developing countries, although government development financiers want to focus on small and medium-sized companies.

New methods and processes are needed to enable and support private investments in smaller companies in developing countries. Today, this segment is mainly achieved through lending or grants. Loans are expensive for the small business, with interest rates exceeding 20 percent. And a loan that is not repaid can risk the company’s future. Grants require a great deal of knowledge about how applications are written. They are time-consuming, burdensome to report, associated with obligations – and difficult to obtain.

Instead, private equity is needed here, but since it is almost as demanding and costly to finance a company with a turnover of $ 100,000-200,000 as a company that has a turnover of $ 3-4 million, the investment often fails. The minimum level can be $ 3-5 million for a maximum ownership of 20-30%, which is impossible for a smaller company.

Despite the realization that education and financing of small businesses is the key to combating poverty, efforts remain modest and disproportionately distributed. The bonsai tree simply does not get the nutrition it requires.

In 2019 alone, Swedish government aid organization Sida’s aid budget is SEK 51 billion (USD 5.3 billion) for efforts to improve people’s living conditions. Of these, 5 percent go to education. To finance entrepreneurship, the sister organization Swedfund has invested a total of SEK 5 billion (USD 510 million) over 40 years, which has created 167,000 jobs. It is recommended that our politicians consider redistributing the contributions from Sida to Swedfund, and in the regulatory letter increase the investments in educational efforts.

About Pontus
Pontus Engström is an affiliated researcher at the House of Innovation, Stockholm School of Economics. He defended his PhD in 2016 and researches the informal sector and entrepreneurship in developing countries. Pontus is the co-founder of MTI Investment AS, which invests in smaller companies in East Africa. He can be reached at pontus.engstrom@hhs.se or pontus.engstrom@mti-investment.com.

On the benefit of switching towards financing SMEs rather than micro businesses

Published in Faedrelandsvennen 12 july 2018

Strømme Foundation changes its strategy from a focus on microcredit to a focus on financing small and mediums sized companies, in line with what my own research and experience indicates to be a better path towards prosperous economic development. I concur with this move and look forward to seeing the results from this change, and encourage more organizations and investors to follow this path. This is not to say that microfinance is not helping poor people. Someone said to me: “These microloans do help a little especially when it comes to women who can send their kids to school. Put a metal roof with monies earned from the small businesses they setup.” I completely agree, but by focusing on small and medium sized companies, we can help create even more jobs through scaling businesses led by competent managers. It is simply difficult to scale a small microentrepreneur with very limited personal capacity to lead a larger business. I simply suggest that there are other means which we also need to explore. Financing of SME´s has until recently been a forgotten area of focus, and more and more investors are shifting towards this group as well for more impact.

For Norwegian version, see this link: 2018-07-12_Faedrelandsvennen

For English transaltion, see this link: Strømme Foundation puts microfinance on the shelf.

The two secret ingredients needed for a great pasta sauce

Do your kids love spagetti with a pasta sauce? Well, you may have thought you made a good pasta sauce, but my friends, here is a recipe that takes the art of making a pasta sauce to another level, and reveals the simple truth of perfecting a pasta sauce.

Over the years I have been experimenting with various ingredients in the pasta sauces, and tested on my kids. In all honesty, it is because the list of things I at the moment can cook well, is short. The cooking has come with various level of success, and some complete failures. As a researcher I of course ask my self, why, what and how is this possible.

I have now successfully identified the two ingredients that make the pasta sauce move to another level, a level where you will start getting positive reviews on your cooking from your kids. Used properly these two ingredients which I am about to reveal, will make any kid or adult literally down the pasta and sauce in a few minutes, and they will go for a second round.

The nr 1 key ingredient is Tabasco. Any other spices simply do not compare to the wonders made by a few drops of Louisiana Tabasco into the sauce. The other key ingredient, not to be taken lightly, is to make sure you mix in a butter or margarine with the pasta. Here, the trick is to use a lot of it. The Tabasco gives a warmth and yumminess to the pasta sauce that makes it hard to resist and really completes the pasta sauce. The butter or margarine makes the pasta itself delicious. Also make sure to boil the pasta exactly according to the instructions, too short or too long can result in a complete disaster. Believe me. Lastly, I have noticed that the type of pasta that taste the best together with my kids is the regular spagetti.

Ingredients:

  1. Minced meat or meat substitute such as quorn
  2. Pepper and salt – modest amount
  3. Garlic – do not be a coward, use plenty
  4. One onion – the bigger the better
  5. Crushed or strained tomatoes – but not too much
  6. Red pepper (not the strong one) –  it is more for the visual effect
  7. Grated carrot – use the smaller option such that you do not really see the carrot in the sauce
  8. A few drops of Tabasco
  9. Spagetti
  10. Margarine or butter

Sure, if you have time to let it boil for a long time, that may make wonders, but I would say this can be completed in 20-30 minutes.

Other potential ingredients:

  1. Mushrooms – as replacement for the quorn or meat
  2. A little bit cream in the sauce – just a small amount

Enjoy!

Best regards,

Pontus

 

 

 

Tidningen entré skriver om min mikrofinansforskning samt MTI Investment — investerar i växande små och medelstora företag i Östra Afrika

I senaste numret av entré skriver journalisten Maria Linde om min avhandling samt om vårt jobb med MTI Investment AS – det nordiska investmentbolaget som investerar i växande små och medelstora företag i Östra Afrika.

För att ladda ner delen som har med min forskning att göra klicka här:

Pontus Engström_entre-nr-4-2016

För att ladda ner hela tidningen, klicka här:

http://www.esbri.se/pdf/entre/4_2016.pdf

The Role of Finance and Microentrepreneurship in the Informal Economy

On June 20 2016 I defended successfully my thesis at the University of Agder in Norway. Since then I am affiliated with the Stockholm School of Economics, where I do research, supervise students and teach in courses related to entrepreneurship both in the Executive MBA program and also in the Master program. I also hold a position as an Associate Professor at Hauge School of Management at NLA Høgskole in Oslo, currently teaching a bachelor course in Entrepreneurship and Innovation. My focus area is on financing of entrepreneurship. Building on the learnings from my thesis, I  founded MTI Investment AS together with my supervisor, Professor Trond Randøy, and two fellow PhDs from Tanzania, Dr. Neema Mori and Dr. Gibson Munisi. It is my firm belief, that while financing microentrepreneurs in the informal economy do help people make more money, and also stay away from criminal activity, informal societies and developing countries need more small and medium sized businesses. We seem to be fixated with this romanticized idea that all people are entrepreneurs, but if we were to go back 100 years in time and look at Norway and Sweden from a distance – would we have suggested microfinance as the solution to get people out of poverty. While it is helpful, why shy away from financing the real job creators in an economy, the small and medium-sized firms.

 

A research mention in “Vårt Land”

The Norwegian newspaper Vårt Land writes in the Monday issue (October 17, 2016 p. 8-9) about my research in an article with the title “Therefore microfinance is not that effective” (Derfor er mikrofinans lite effektivt). While my findings do find that microfinance does add extra income to an individual´s business, it also shows that size can act as a counterbalancing factor such that income actually is reduced with increased sized. The economies of scale are in other words negative in the early phase of the firm. My research also points to the fact that growth in sales or assets does not seem to be related to taking on microloans. This is not controversial. What is obvious and perhaps more relevant from my research is that the level of financial literacy among poor microentrepreneurs is VERY low, and then one should take into account that the clients I surveyed were not the poorest of the poor, but merely poor. Little research is still however done in this area, and much more is needed. There is even research pointing towards the odd fact that those with more education actually do worse. This

Little research is still however done in this area, and much more is needed. There is even research finding in some informal economies that those with more education actually do worse (Honig, 1998). This is counterintuitive, and much more research is needed here. I am currently working on a paper which looks at the role of Financial Literacy, Role Models and how these two concepts affect firm performance in the informal economy. Research in the left tail of human capital among the poorest individuals on the planet is still in its infancy, but over time we will eventually learn how to effectively lift the human capital and sustain individuals in an improved economic state. The practical example of MTI Investments, and other pioneering firms, financing small and medium-sized firms, may be leading the way in this regard, where more investments are allocated towards small and medium sized firms, rather than mostly microenterprises today.

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