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”

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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