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POVERTY REDUCTION THROUGH JOB CREATION & GDP GROWTH:Understanding the Potential of High-Impact Entrepreneurship

THE POWER OF HIGH-IMPACT ENTREPRENEURSHIP

by Ashley EberhartSummer Research Associate

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Executive Summary

Key Points

Stable, Equitably-Distributed Jobs Help Reduce Poverty and Inequality

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Economic Growth Through High-Impact Entrepreneurship is Good for the Poor

Conclusions and Recommendations

The Power of High-Impact Entrepreneurship

This level of income makes it difficult to manage daily uncertainty and nearly impossible to make long-term financial planning decisions. Trivial events become household emergencies. A breadwinner’s broken leg might cause eight months of lost income and medical care. Parents are forced to choose which of their children will be sent to school. Complicating

Every day, more than three billion people survive on less than $2.50, barely the cost of a single New York City subway ride .

Executive Summary

factors abound, but the root problem is clear: this population is almost without exception unemployed, underemployed, or working in the informal economy with little income stability. It is a group that needs jobs.

One obvious way to employ more people is to facilitate job creation. A popular approach, extending microloans to help the world’s

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poorest create “tiny businesses,” has transformed the lives of perhaps millions of people since the early 1980s. However, while exceptions do exist, the microenterprises that tend to arise from this financing approach generally grow slowly and do not create many jobs. Complicating the issue, even large-scale macroeconomic programs implemented by governments often decrease unemployment rates but increase the number of the working poor – those who are employed but still impoverished. By contrast, this report adds to existing research by focusing specifically on the poverty reduction potential of high-impact entrepreneurs (HIEs) – individuals who develop and lead companies with higher job creation and wealth generation than their peers.

This report explains how building capacity in high-growth small- and medium-sized businesses

1. World Bank, World Development Indicators, 20082. Collins, Daryl, Morduch, Jonathan, et. al. Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton University Press, 2009.3. Kiva, "About Microfinance." http://www.kiva.org/ about/microfinance. 4. Morris, Rhett. “2011 High-Impact Entrepreneurship Global Report.” Center for High-Impact Entrepreneurship at Endeavor, 2012.

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Poverty Reduction through Job Creation and GDP Growth:

Understanding the Potential of High-Impact Entrepreneurship

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can create quality jobs more effi-ciently than other approaches.It also demonstrates the poten-tial of high-growth businesses to contribute to GDP growth, which has been shown to have a strong relationship with poverty reduction. It concludes with brief recommendations for governments interested in promoting high-impact entrepreneurship.


Key Points

Unemployed individuals increase their risk of poverty with every month of unemployment. Those hit hardest by increases in unemployment rates are economically vulnerable populations prone to inequitable

Stable jobs that are equitably distributed help reduce poverty, and high-impact entrepreneurship efficiently generates these types of jobs.

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1% rise in mean income or consumption expenditures

3% reduction in the proportion of people below the poverty line

employment such as women, the young, and, in some regions, ethnic minorities. Research by Endeavor suggests that high-impact enterprises can generate 100 times more jobs than a microenterprise in the same period of time.

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By one calculation, just a 1% rise in mean income or consumption expenditures in a country corresponds with a 3% reduction in the proportion of people below the poverty line. On average, the employees of HIEs report a full

Rising income levels are related to lower poverty rates, and high-impact entrepreneurs’ employees are paid better than comparable jobs.

In an MIT-Columbia study of the African continent, and a subsequent Endeavor Insight analysis of emerging middle-income countries, GDP growth was found to have a nearly- direct inverse correlation with extreme poverty rates.

Economic growth is good for the poor, and high-impact entrepreneurship significantly contributes to economic production.

100% rise in income after being hired. Additionally, jobs in high-growth firms tend to be more stable, higher paying, and offer more benefits than other opportunities, improving quality of life.

Because HIEs contribute revenues and production to their national GDPs more quickly than smaller ventures, this could indicate that promoting high-growth enterprises is an effective way to reduce extreme poverty.

5. Note: Poverty can be defined in many different ways. In this paper, “extreme poverty” will indicate incomes that average less than $1.25 per day, PPP-adjusted. References to people under the “national poverty line” refer to figures found in the CIA World Factbook.6. Agenor, Pierre-Richard. Unemployment-Poverty Trade-offs. 2003. World Bank, Washington D.C.7. Ravallion, Martin & Shaohua Chen, 1996. "What can new survey data tell us about recent changes in distribution and poverty?," Policy Research Working Paper Series 1694, The World Bank.8. "Endeavor's Impact Dashboard." Endeavor Global. Web. 18 July 2012. <http://www.endeavor.org/impact/assessment>.9. Sala-i-Martin, Xavier, and Maxim Pinkovskiy. African Poverty Is Falling...Much Faster than You Think! Working paper no. 15775. Cambridge: National Bureau of Economic Research, 2010.

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Stable Jobs Help Reduce Poverty and Inequality

In the bottom 25 countries, unemployment is at least 30%. These figures factor in neither the number of people underemployed (commonly known as “the working poor”), nor residents so discouraged by the lack

of jobs that they have effectively stopped looking. Unemployment puts both individuals and the economy as a whole at risk in a number of ways, including:

Over one-quarter of the world’s countries have unemployment rates of 15% or higher.

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A study in Australia found that an unemployed person, unsur-prisingly, is seven times more likely to fall under the poverty line than an employed person, and that the risk of poverty rises dramatically with each additional month of unemployment. Other research has emphasized the psychological costs of chronic unemployment, its long-term impacts on asset depletion (including, in industrialized nations, retirement savings), and the emotional toll it inflicts on families and relationships.

Individuals

When unemployment rates are high, governments simultaneously bring in less revenue from income tax, and pay out more revenue in unemployment services, where applicable. An extended period of high unemployment may lead the federal government to borrow money, which is sometimes financed through taxing businesses or trade. These higher taxes can create a negative loop by discouraging businesses to hire more employees.

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Economy

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populations that have a higher likelihood of

vulnerable employment

Women

Youth

The ethnically oppressed

The populations most at-risk in employment crises are those that face a higher likeli-hood of vulnerable employment in the first place namely women, the young, and, in some regions, the ethnically oppressed. For instance, a recent study found that the unemploy-ment rate for Egyptian women between 15 and 29 years old was approximately 32 percent, which is 2.5 times greater than that of men in the same age group. In South Africa, the unemployment rate for white residents of working age was 4.6% in 2008, while more than 25% of black South Africans in the same age group were out of work.

Many governments, social organizations, and researchers have promoted job creation through entrepreneurship development. This movement began, particularly in emerging economies, in the 1980s with the advent of microfinance programs designed to empower marginalized individuals to create their own small enterprises. Its flagship, Grameen Bank, founded in 1983 by Muhammad Yunus, is a respected and impactful institution, serving four million clients annually. But microfinance is just one way to support business development. In general, entrepreneurship programs and policies can be classified into two categories:

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Broad-Based Entrepreneurship

High-Impact Entrepreneurship

programs and initiatives are targeted primarily at small businesses of all kinds, especially start-ups, to offer subsidies, loans, and tax breaks. Microfinance falls into this category, but national small business administration offices and regional tax breaks for new ventures are also common tactics, especially in the government policy space.

programs are directed toward select entrepreneurs launching and leading SMEs with high-growth potential to invest resources – in terms of human capital, financial investment, or both – with the goal of facilitating their transformation to large firms. For instance, many incubators and accelerators are geared specifically towards ventures with growth potential.

showed that, while only 4% of the entrepreneurs identified in the dataset were classified as high-growth entrepreneurs, they generated 38% of all jobs created by entrepreneurs in the survey. Metrics for comparative job creation show that, on average, supporting the expansion of a high-growth small or medium-sized enterprise (SME) creates up to 100 times the number of new jobs as a new microenterprise. Thus, while social sector support of microenterprise can be a useful tool for the extreme poor, and its value should not be disregarded, high-impact entrepreneurship organizations work to close the gap between microcredit programs and macro-level government finance projects to efficiently generate employment.

These jobs tend to be high-quality, and can be inclusive of diverse skill sets and education levels. Research by Endeavor has found that high-growth entrepreneurs pay wages that are higher than national averages and instill very high levels of job satisfaction. An example of this can be found in Cynthia Mkhombo, a South African entrepreneur who is part of Endeavor’s global network. Cynthia leads a high-growth firm called Masana Hygiene Services that has

Numerous studies highlight the remarkable ability of high-impact entrepreneurship to create jobs. In a five-year survey of 800,000 randomly chosen adults in over 60 countries, the Global Entrepreneurship Monitor (GEM)

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Job Creation in Different Types of Enterprises

Masana trains its workers upon hiring. The company also offers upward mobility: four of the six operations managers started their careers as cleaners in the company.

Higher average incomes for workers like the employees at Masana also contribute to lower poverty rates on a national level. One World Bank report suggests that a 1% rise in mean income or consumption expenditures in a country corres-ponds with a 3% reduction in the proportion of people below the poverty line.

contributed to reducing inequality suffered by women in her country, where the unemployment rate for black women is as high as 31%. Ms. Mkhombo’s 923 contract cleaners (scaled from just 7 in 2004) are 95% female and earn 40% more than the minimum wage. Showing how high-growth companies do not necessarily require employees with advanced degrees or highly technical skills,

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The employees of high-impact entrepreneurs supported by Endeavor, on average, reported a 100% rise in income after being hired. These results are striking when placed alongside other policies. Self-employment, as through microenterprise, can lead to income improvement for some individuals (the average microenterprise in most countries will only employ 2-3 people), but high-impact entrepreneurs do so for hundreds of employees on average. It is clear that high-impact entrepreneurship’s potential to raise incomes for large numbers of people can have a significant impact on decreasing both unemployment and poverty rates simultaneously.

10. “Country Comparison: Unemployment Rate.” CIA World Factbook. Web. 18 July 2012 <https://www. cia.gov/library/publications/the-world-factbook/ rankorder/2129rank.html>11. Saunders, Peter. The Direct and Indirect Effects of Unemployment on Poverty and Inequality. Discussion paper no. 119. Sydney: Social Policy Research Centre, 2002. 12. Note: Vulnerable employment, as defined by the International Labor Association, is employment that is less likely to have formal work arrangements or contracts, and thus more likely to lack decent work conditions, job security, benefits, or union protection.13. El-Naggar, Mona. “In Egypt, Women Have Burdens but No Privileges.” New York Times, 13 July 2010.14. “Black women South Africa's most unemployed.” AFP News Service, 28 August 2008.15. Yunus, Muhammad, and Alan Jolis. Banker to the Poor: Micro-lending and the Battle against World Poverty. New York: PublicAffairs, 1999. Print.16. Shane, S. "Why encouraging more people to become entrepreneurs is bad public policy.” World Economic Journal, 2009.17. Morris, Rhett. "2011 High-Impact Entrepreneurship Global Report.” New York: Endeavor Global, 2012. 18. "Country Comparison: Unemployment Rate.” CIA World Factbook. Web. 18 July 2012 <https://www. cia.gov/library/publications/the-world-factbook/ rankorder/2129rank.html>19. "High-Impact Entrepreneurship” Endeavor Global. Web. 18 July 2012. <http://www.endeavor.org>.20. Ravallion, Martin & Shaohua Chen, 1996. "What can new survey data tell us about recent changes in distribution and poverty?," Policy Research Working Paper Series 1694, The World Bank.21. "Endeavor's Impact Dashboard." Endeavor Global. Web. 18 July 2012. <http://www.endeavor.org/ impact/assessment>.22. "2011 Impact Report.” Endeavor Global. Web. 18 July 2012. <http://www.endeavor.org/blog/2011- impact-report>.

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Economic Growth Through High-Impact Entrepreneurship is Good for the Poor

A recent study by Maxim Pinkovskiy and Xavier Sala-i-Martin, researchers at MIT and Columbia University, showed that GDP growth and extreme poverty rates across Sub-Saharan Africa were almost perfect mirror images of each other. When GDP per capita increased, poverty decreased. When GDP per capita went down, poverty went up. Their conclusion – that “the driving force that explains the substantial reduction in [African]

poverty…is economic growth” – has important implications for high-impact entrepreneurship. This inverse relationship was consistent across all types of countries (coastal or landlocked, resource-rich or poor, etc.).

Around the globe, high-impact entrepreneurs have shown their potential to impact growth rates in a comparatively short period of time. As high-growth companies build revenue,

High-impact entrepreneurship, a powerful engine for job creation, may also be an effective poverty-fighting tool by fostering GDP growth in developing countries.

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attract foreign investment, and increase demand for associated products and services, they contribute to the economic productivity of their countries. While poverty rates are affected by a variety of factors, and there is a healthy empirical conversation about which types of GDP growth have equal impacts on lower socioeconomic segments, the striking sensitivity of poverty rates to GDP per capita strongly

$1/ Day Poverty and Growth in Sub-Saharan Africa, 1970-2006

GDP per capita Poverty rate

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suggest that growth is, in general, good for the poor. Because HIEs raise GDP on a macroeconomic level, the MIT-Columbia conclusions have important implications for high-impact entrepreneurship as an economic development strategy.

But do these findings actually hold true for countries outside of Africa that have large populations living in poverty?

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Original graph: Sala-i-Martin and Pinkovskiy, 2010


Data analyzed by the Endeavor Insight team suggests yes. Using the same methodology as the Africa study, Endeavor analyzed the BRICS countries - Brazil, Russia, India, China, and South Africa – where approximately 40% of the world’s extreme poor are estimated to live.

As in Africa, GDP per capita and extreme poverty rates ($1.25 per

day, PPP-adjusted) in the BRICS nations approximately mirrored one another (below). Poverty rates responded dramatically to fluctuations in GDP, suggesting that extreme poverty is sensitive to macroeconomic conditions in emerging economies.

GDP Per Capita and $1.25 per Day Poverty in Brazil, 1980-2009

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

1985 1990 2000 2009

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GDP per capita Poverty headcount ratio at $1.25 a day (PPP) (% of population)

23. Sala-i-Martin, Xavier, and Maxim Pinkovskiy. African Poverty Is Falling...Much Faster than You Think! Working paper no. 15775. Cambridge: National Bureau of Economic Research, 2010. Print.24. Note: Derived from World Bank data on the global total and individual national populations under the $1.25 poverty line in 2008.

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1993 1999 2002 2004 2006

GDP Per Capita and $1.25 per Day Poverty in the Russian Fed., 1989-2009

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

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2008

GDP Per Capita and $1.25 per Day Poverty in India, 1978-2009

$700

$600

$500

$400

$300

$200

$100

$800

$900

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1978 1983 1988 1994 2005 2010

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GDP Per Capita and $1.25 per Day Poverty in South Africa, 1990-2009

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

1993 1995 2000 2006 2009

30%

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20%

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$1.2

5 a

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1981 1990 1995 1999

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$2,000

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$1,000

$500

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2008

GDP Per Capita and $1.25 per Day Poverty in China, 1978-2009

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Conclusions and Recommendations

In the midst of a global financial crisis, job creation and poverty reduction are on the minds of government leaders everywhere. President Barack Obama, for example, continues to urge the U.S. Congress to pass his proposed American Jobs Act, designed to “start building an economy that lasts into the future – an economy that creates good, middle-class jobs that pay well and offer security.” President Jacob G. Zuma of South Africa focused his 2012 State of the Nation address on job creation, arguing, “The solution for the country…is higher growth and job creation to reduce and ultimately eradicate poverty

and inequality.” It is clear that both highly developed and emerging markets are feeling the unemployment squeeze of the worldwide recession. But what types of policies can launch widespread, inclusive job creation without sacrificing wages or taking years, even decades, to achieve real results?

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Some countries have recognized the importance of supporting SME growth in creating high-quality jobs. In May 2012, Mr. Olusegun Aganga, Nigeria’s Minister of Trade and Investment, called the SME subsector the


Culture

“backbone of the development of any economy and the driving force of national growth” and announced his goal to promote job creation through removing major barriers to SME growth. Other nations, including the Netherlands, Indonesia, and Egypt, have unrolled a range of initiatives designed to help SMEs grow. However, there is no single policy or initiative to spark a movement towards high-impact entrepreneurship in a country.

To spark an entrepreneurial movement, policymakers should target professionals in sectors that are already thriving in their regions, and add a focus on what entrepreneurship can do to improve them. For instance, Mayor Bloomberg of New York City launched a series of initiatives that targeted fashion designers, artists, mobile application programmers, and immigrants with the intention of showing them how to harness the power of entrepreneurship to generate higher returns on their professions and passions. Cities or regions looking to do the same might consider applying to the Regional Entrepreneurship Acceleration Program (REAP), a certificate course taught at the MIT Sloan School of Management. This two-year program accepts multidisciplinary teams composed of regional leaders and provides assessment, strategic planning, and implementation tools designed to complement a region’s existing strengths.

In general, we recommend that countries seeking to promote high-impact entrepreneurship concentrate on building a comprehensive entrepreneurial ecosystem. Broadly speaking, policies should focus on three primary areas of development:

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Access to FinanceGovernments should strive to develop a climate of support for high-growth entrepreneurship that includes robust opportunities for venture capital. An important example of success in this area can be found in Israel, where the government launched Yozma Venture Capital in 1993, which provided matching investments with a USD$100 million public sector-owned venture fund in order to increase the growth of its VC industry. When a sufficient level of trust was achieved, Israel transferred ownership to the private sector so that it did not prove too cumbersome for the government to handle. As a result of this policy, which increased national VC outlays from $58 million annually in 1993 to $3.3 billion by 2000, Israel has a higher VC investment per capita than anywhere in the world, and Tel Aviv is the number two urban area in terms of venture activity after San Francisco.

Entrepreneurial Capabilities

When considering how to best increase the abilities of entrepreneurs in a country, policymakers should work to accelerate the work of institutions and organizations that have demonstrated success in supporting the growth of high-impact companies. For example, Brazil’s Primeira Empresa Inovadora (PRIME) program outsources its services to four of Brazil’s most successful, proven incubators. In doing so, the government saves time and resources, which both initially shortened the implementation process and currently allows the program to issue grants for up to 10,000 ventures over four years.

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25. Address by U.S. President Barack Obama to a Joint Session of Congress, 8 September 201126. South African State of the Nation speech, delivered by His Excellency Jacob G. Zuma, 9 February 201227. http://bankaccount.com.ng/federal-government-moves-to- position-smes-as-growth-drivers.html28. Policy: 2011 Microfinance Scheme for SMEs, Dutch Ministry of Economic Affairs29. Policy: 2009 One-Stop Shop (OSS) business registration program30. Policy: General Authority for Investment (GAFI) SME Clinics and Investment Matching Services

High-impact entrepreneurship is not the only strategy necessary to eradicate poverty, but it is a highly effective and important part of the ultimate solution. By aggregating existing regional talent through targeting high-growth businesses to create efficient growth, policies directed toward high-impact entrepreneurs make effective use of limited resources – an Endeavor report showed that 97.2% of the entrepreneurs it supports have remained in operation, maintaining an average payroll of more than 250 employees. Meanwhile, 50% have started a second company, and 48% of their employees seek to be entrepreneurs themselves. High-impact entrepreneurship builds not only jobs, but entire entrepreneurial ecosystems – networks with the power to transform the way we approach poverty reduction worldwide.

31. Note: These three elements of an entrepreneurial ecosystem have been selected from a set of six Entrepreneurial Determinants as defined by the OECD. In an ongoing Endeavor study of global entrepreneurial ecosystems, Culture, Access to Finance, and Entrepreneurial Capabilities were most frequently cited by the Aspen Network of Development Entrepreneurs (ANDE) as being top priorities in the space. A full list of determinants and sub-determinants can be found in A Framework For Addressing and Measuring Entrepreneurship, OECD 2007.32. Morris, Rhett. “2011 High-Impact Entrepreneurship Global Report.” Endeavor, 2012.

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Endeavor is leading the global high-impact entrepreneurship movement to catalyze long-term economic growth. Over the past 10 years, Endeavor has selected, mentored and accelerated the best high-impact entrepreneurs around the world. To date, Endeavor has screened more than 30,000 entrepreneurs and selected 676 individuals leading 422 high-impact companies. These entrepreneurs represent over 180,000 jobs and over $5 billion in revenues in 2011 and inspired future generations to innovate and become entrepreneurs too.

Endeavor Insight is the research arm of Endeavor that seeks to deepen understanding of how high-impact entrepreneurs contribute to job creation and long-term economic growth in order to educate key constituencies, such as policy makers. In addition, Endeavor Insight seeks to serve as a knowledge center for high-impact entrepreneurs, VCs and others in order to provide useful information and tools that assist high-impact entrepreneurs as they grow their business

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