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Policy makers in developing nations are trying to formalize entrepreneurial ventures that otherwise exist in informal contexts, such as non-regulated street vending, as a means to growth. The formalization of a business—or, the government-regulation of a business—promotes growth particularly in developing markets because it provides access to material and intellectual resources that boost customer bases and improve strategies. However, programs attempting to mobilize business formalization are not always designed with the implications of social capital in mind.
Social capital, which refers to the wealth of one’s “connections”, are fundamental to subsistence markets. For example, a street vendor with friends near his selling location may end up having more customers.
Government-regulation programs are often designed under the assumption that materially-based incentives are enough to attract entrepreneurs, but the reality is that many entrepreneurs choose to remain informal for the sake of their relationships. Research from the Journal of Public Policy and Marketing examines this behavior by monitoring and interviewing entrepreneurs in Bogotá, Colombia and their perceptions of business-regulating agency Instituto para la Economia Social (IPES).
Four Types of Entrepreneurs
IPES seeks to register entrepreneurs for formalization by providing them with incentives like tents, bathrooms and seed money. In their study, authors Andrés Barrios and Chirstopher P. Blocker identified four distinct categories into which local entrepreneurs fell. Here are the entrepreneurial paths:
In this path, the interviewed entrepreneurs rejected IPES out of a fear of losing social connections with loyal customers, the flexibility to operate businesses where they liked and from the perception that steps toward formalization would be complicated.
Marketing to this category: “For entrepreneurs… who eschew formalization entirely, promotional materials could be developed to foster greater trust in the program itself as well as in the sincerity of the (nongovernmental) organizations behind it. Relationship marketing initiatives designed to build trust might foster greater identification with the organization.” One such method of relationship-marketing could be executed through seasonal token gestures to participants without the expectation of return.
Entrepreneurs in this category were willing to participate in IPES, but only for the immediate benefits, like use of a tent and access to bathroom facilities, rather than business-oriented reasons.
Marketing to this category: “…Marketing materials might promote services that appeal to their lifestyle needs such as retirement benefits or insurance… Skepticism toward governmental programs might be assuaged if policies would allow them to allocate small portions of their tax payment to protection-related categories that benefit them directly, such as health care.”
This route consisted of individuals who registered with IPES while a family member or friend continued their informal business without them. In this way, entrepreneurs were able to “test” a formalization program without giving up entirely on their original business methods.
Marketing to this category: “…Policy programs could offer family enterprise programs… built around a family with a particular skill or craft and offer mentoring and training to help families learn and share a new craft. In addition, entrepreneurs in this path complained about initial sales decreases…thus policy programs could develop stimulus packages or ramp-up periods for taxation.”
The community trajectory involved entrepreneurs who were willing to formalize a business together as a communal effort. That is to say, without the inclusion of other social connections, an individual would otherwise not have enrolled.
Marketing to this category: “…Policy programs might help [cooperative groups in this category] create community-level brands [brands created by people sharing a common interest] …Beyond positive consumer perceptions, the process of co-creating these brands can become a fruitful and enjoyable team-building exercise that enables street vendors to bond with one another as well as learn and develop something new together.”
In impoverished markets, entrepreneurship means innovation, job creation and poverty alleviation. As a result, the formalization of business which promotes business growth and improvement exists as a valuable goal for both businesses and society.
Andrés Barrios and Christopher P. Blocker (2015) “The Contextual Value of Social Capital for Subsistence Entrepreneur Mobility“. Journal of Public Policy & Marketing: Fall 2015, Vol. 34, No. 2, pp. 272-286.