globalEDGE Blog: Understanding Entrepreneurship in Developing Countries

Understanding Entrepreneurship in Developing Countries

In economies that are slightly behind their modern industrial counterparts, entrepreneurship is often viewed as an important component in stimulating economic growth, innovation, competitiveness, and even alleviating poverty for these countries. However, before that is accomplished, there are several unique features that affect entrepreneurship in developing countries. While some of the distinct aspects of developing countries inhibit entrepreneurship, others enable entrepreneurial activities and allow start-up businesses to be successful despite great odds.

The first and perhaps most obvious factor affecting entrepreneurship in developing countries is the lack of capital and financial innovation. Many people in these countries have limited personal savings and lack the necessary capital to start their own business. Entrepreneurs must then turn to external financing where they are charged high interest rates due to the risky nature of new business projects. With underdeveloped financial markets and expensive borrowing rates, entrepreneurs in emerging economies often use informal sources of finance to start their businesses and generate income from multiple jobs or businesses. With that being said, this is where an advantage of developing countries comes into play.

Having multiple jobs and running several start-up businesses at one time provides a unique advantage for entrepreneurs in developing countries. For example, an entrepreneur may have a farming business while at the same time be involved in carpentry, construction, or commodity businesses to generate income for his farming business. This wide-ranging business nature is common in developing countries and allows entrepreneurs to successfully eliminate high levels of different market risks as they follow a diversified portfolio strategy.

Along with this diversification effect, the needs and opportunities are more widespread in developing countries—meaning start-ups can pursue profits in different markets of need. In developed countries, growth-oriented firms usually focus on one niche market as there are less needs and major markets are crowded with other businesses. Interlocking businesses in several markets of need also allow entrepreneurs in developing countries to develop a broader pool of skills, build diverse customer relations, and if successful, create a brand name that can be leveraged across several markets.

Last, but not least, is the cultural aspect of developing countries that affects entrepreneurial practices. A professor from the University of Utah has conducted research that stresses the importance of culture interplay in understanding entrepreneurship in different countries. Culturally based beliefs and different ways of thinking affect how entrepreneurs operate their businesses. Understanding these differences and becoming culturally aware are critical components in fully comprehending the entrepreneurial activities of developing countries. While entrepreneurs in emerging economies face many challenges in starting businesses, their efforts and dedication to creating new ideas provide a promising future for their respective countries.

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