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.

Advertisements

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.

img_7037

What is the Informal Economy?

This interesting TED-talk by Diana Enriquez provides a nice introduction to what my PhD is about, the Informal Economy. In India, about 84% get their employment from the informal economy, that is a little bit more than 4 out of 5 jobs. The informal economy exists even in Europe, the US and other developing countries. The informal economy is everywhere, but a lot more in developing economies. Informal businesses are businesses which operate out of sight of government regulations, either completely or to some degree. My PhD looks at how finance and specific skills like financial literacy can enhance the micro businesses of the informal economy. Currently I am working on finishing the 3-4 papers which will be used in my PhD dissertation, with the intention to submit later this year. Cheers, Pontus

Entreprenörskap

Lyssnade precis på en oklippt intervju med Steve Jobs från 1990 där han beskriver lite om varför han startade ett företag. Han berättar där att han och en kollega gick till Atari och HP för att skapa det nya datorkoncept man kommit på. Man fick avslag båda av Atari och HP.

“We started a company because it was the only alternative left, not because we wanted to” (10 minuter in i sändningen)

“We were out to build computers for our friends, no idea of starting a company” (19 minuter in)

Sen diskuterar han en del kring personlighet och entreprenörskap:

“The doers are the major thinkers. The people that really create the things that change this industry, are both the thinker doer in one person.” (37 minutes)

Nyföretagande kräver ny form av finansiering

Nyföretagande kräver ny form av finansiering

(entrepreneurship needs new form of financing)

Me and Professor Lars Oxelheim write about entrereneurship and how the Nordic Investment Bank could be used to support initiatives among groups who lack access to traditional banks, or are in an earlier stage of the start-up process