The New Meaning of "Small is Beautiful"

Small business is receiving a surge of interest in the developing world as it has never received before. Schumpeter's concept of "Small is Beautiful" is taking on new meaning as the international development community, is giving serious attention to the specific needs of businesses who are beyond the levels of subsistence concentrating on the needs of those businesses which have the opportunity, whether they be in Africa, Asia or Latin America, to build organizations with a potential multiplier effect on employment. Certainly in many instances there is an absence of adequate management talent, and most importantly a legal framework to create a more hospitable environment. But first and foremost is the need for patient double bottom line capital that is willing to sacrifice some degree of financial return in exchange for accomplishing worthwhile social objectives. This translates into accepting potential single digit returns in exchange for creating thousands of jobs over an extended period of time.

Just last week, two conferences with significant attendees from the development finance organizations such as the IFC, World Bank, DEG, FMO as well as SECCO, multilateral finance organizations, together with some of the worlds leading foundations such as Shell, Omidyar, Google, Rockefeller, Skoll etc., and 500 others were first present in Geneva, at a conference entitled Investing Private Capital in Emerging & Frontier Markets SMEs, run by Casin, The Center for Applied Studies in Negotiation immediately followed by a UN conference on the same subject. Back in New York over 2,000 individuals attended the Third Annual Clinton Global Initiative which had a clearly delineated track devoted to "Poverty Alleviation" where the focus of discussion was on SMEs -- Small and Medium Sized Enterprises what we tend to refer to in the developed world as "Venture Capital companies." For the first time since 2003, which was "The Year of Micro-Credit", attention was shifted and a clear delineation was made between lifestyle businesses and businesses prepared to enter the formal sector of their local society and meet the conditions of corporate governance, standard accounting practices, minority investor protection and, of course, legal governmental reform required to encourage such investment. Clearly, much has happened since the Monterey Conference of 2003. Today many more countries, particularly in Africa, have developed trained entrepreneurs awaiting the opportunity to implement well thought-out business plans to meet the enormous commercial opportunities which are available.

Consider for a moment the potential financing gap. The global availability of venture capital and private equity according to last year's figures were about 3% of GDP; in Kenya it was .07%; Uganda .05% which suggested that just for East Africa alone a financing gap of $100 million a year or $1 billion over the next decade, a figure which in some respects seems so small but on a local basis seems so very large.

New thinking, new instruments and a new vision are needed to encourage the increasingly educated and trained cadre of entrepreneurs, who have followed our advice of increasing skills and education, that opportunities do exist for those with good ideas trained to implement their vision.

The implementation of their ideas will not necessarily look like Silicon Valley, but the Steve Jobs, The Sergey Brins and Larry Pages as well as the Howard Schultzes and Ralph Laurens are out there and can not only generate businesses with local and international potential but serve as role models for other young men and women to follow.

Comments

[BRUMALIA]

E.F.Schumacher wrote the classic book SMALL IS BEAUTIFUL, not Schumpeter.But your piece regarding the resurgence of small business and entreprenurial development in the developing world is nonetheless extremely instructive and informative.

[SisterAnn]

What would do more than anything to promote new inventions would be a way to get the patent that is affordable.

$50,000 is too much. Some could get rich if they would take a tiny percentage to finance some of the ideas.

Also help in marketing would be nice,too.

[ThomH]

Microfinance is growing rapidly, enabling grass roots entrepreneurship. But it tops out at about $500, so ventures in the next tiers that need $1000 to $100,000 go unfunded. Needed now, as Alan Patricof points out, is capital at these higher levels, still low by US VC standards.
But more is needed than just capital.
In fact, given the right political and educational climate, small businesses can sometimes bootstrap on sweat equity alone, as is often done in Kagadi, a village in rural Western Uganda that has grown tenfold in the past 20 years.
The catalyst in the Kagadi area is URDT, the Uganda Rural Development and Training Programme, an educational complex devoted to promoting integrated rural development from the bottom up.
The URDT motto “Awakening the Sleeping Genius in Each of Us” underlies its very successful method of training people to make detailed visions and then taking action to realize those visions.
URDT programs include secondary and college level schools for women, a vocational training institute for both men and women, a community radio station, an active human rights program, a demonstration farm, and several small businesses that train potential entrepreneurs. See http://www.urdt.net
URDT is turning out the “educated…cadre of entrepreneurs… trained to implement their vision” that Alan describes, and “new thinking, new instruments” are needed to pair this human capital with modest amounts of financial capital to accelerate development dramatically in Uganda and elsewhere.
Good to know that the likes of Alan Patricof are chewing on this.

[RumiSouth]

The examples of Kenya and Uganda struck a chord. Aren't these nations notorious for cronyism, corruption, and regulatory opacity? NEWS FLASH TO GOVERNMENT DE-REGULATORS: Investors WANT a strong government that enforces good rules!

http://www.osborneink.com

[Kansas Evans]

I've heard that much of the cronyism, corruption, etc you mention are due to the policies of IMF and the World Bank which more or less encourage major export of a single commodity as opposed to diversification. Because of the focus on a single commodity, being in govt is kind of the only way to have any considerable wealth, for which, of course, people are willing to kill for.

Essentially, what I'm saying is that the problem is as much an IMF, World Bank international problem as a problem on a state level from one nation to another. The answer, I believe, is for diversification starting with small businesses.

[WoodRiver]

It was nice of Alan Patricof to remind us of that important book of 1973, Small Is Beautiful: Economics as if People Mattered. However, it was not written by Joseph Schumpeter, but by E. F. Schumacher. I highly recommend re-reading Small Is Beautiful, especially the essay, "Buddhist Economics."
Schumpeter was the Austrian economist of the first half of the twentieth century who discovered 'creative destruction' in capitalism. A good antidote to that would be the new book by Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism.

[Wiredwilly]

Wahoooo ! I forgot about "Small is Beautiful" by Schumacher.
Great book. Thanks for the reminder.

[January]

The substitution of a capitalist exploiter for a conservationist is emblematic of this article's theme: teach more people how to burn up our resources faster!

What this planet needs least of all is a worldwide repeat of what is happening in India. Ignoring Ghandi, worshipping the wealth of the West, India now has 6% annual growth in GDP.

The melt on the glaciers in the Himalayas means lack of fresh water there beginning in 20 years, but we can take the money today and run--or try to.

Tell the IMF with its neo-liberal b.s. to take a hike.

[dchavern]

Micro-credit and, to a lesser extent, micro-investing is a proven model in developing countries. It has great potential to both help countries develop and provide an economic challenge to local elites (which is a precondition to development in most poor countries). Unfortunately, we can't count on public institutions (governments and multilaterals) to do this. Their administrative costs are too high, as is their political need to get behind the biggest dollar projects possible. Even worse, public institutions feel that they have a political need to embrace local elites -- which makes true venture capital impossible for them. You won't get behind the next Apple or Google if you are working hard to make Microsoft happy.

Good post. I hope it encourages private investors with means to look at opportunities in the developing world.

[Kansas Evans]

Good post. I hope it encourages private investors with means to look at opportunities in the developing world.
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[pollye]

E.F.Schumacher is the author of "Small Is Beautiful: Economics As If People Mattered" not Joseph Schumpeter.

[dadw5boys]

The RED CROSS or Salvation Army would be the best people for these Micro Loan Programs.
I don't trust charities. I have seen them living in high dollar homes with servants and swimming pools driving expensive vechiles and giving out very little aide.
Christain Charites setup T.V. Stations with moeny collected for food, water, and health care in a lot of countries.

[nickyboy1]

I know of someone who owns 15 "not-for-profit" debt counselling companies.

[sorenmeetsdylan]

Micro-lending and the development of entrepreneuralism in the developing world is a far better model than the old one of "investing" in large capital projects. Funny, wonder who else was working to further such micro-lending at one point? Ask Andrew Young, who defended his work.