Pain Points and Unmet Needs for Micro-Merchants, Globally
Lack of formalization, a corrupt environment, and lack of employee representation are additional pain points faced by micro enterprises. However, numerous measures have been proposed to address these and other issues. Furthermore, studies performed in different countries have assessed the effectiveness of these measures, reporting mixed results.
Micro Enterprises Pain Points
Lack of Formalization
- According to the Overseas Development Institute (ODI), micro enterprises account for the majority of informal activity. In addition, the International Labor Organization (ILO) has reported that approximately 61% of the employed population worldwide works at an informal job.
- There are different causes for the high prevalence of informality among micro enterprises. Government regulations and structural issues are considered the main reasons for this pain point.
- Studies have found that lack of information about regulations plays a significant role. In countries like Sri Lanka, 17% of owners of micro informal businesses knew the cost of registering their business, with only 2% knowing that they had tax exemptions.
- The situation was even more critical in Bolivia, where only 10% of informal owners knew what the commerce registry was.
- However, intervention studies in which owners are informed about the registration process and exempted from all costs have been ineffective. It has been theorized that the additional costs that come with registrations, which include accounting expenses and employee costs are the biggest deterrents for informal micro enterprises.
- Other identified causes of this pain point include the poor business environment in which these enterprises are, an interest in maximizing benefits, poor enforcement mechanisms, and social conditions that lead to the exclusion of certain groups.
- Interestingly, the percentage of informality across these enterprises varies widely, from 5% in countries like Austria to 90% in countries like Cote d'Ivoire.
- Overall, microenterprises show dominance in the informal sector in North Africa, Subsaharan Africa, Latin America and the Caribbean, and the Middle east.
Vulnerability to Bureaucratic Corruption
- According to the Organization for Economic Co-Operation and Development (OECD), microenterprises are especially vulnerable to acts of corruption committed by the public sector.
- These injustices can take many forms, including benefits limited to state-owned enterprises and a lack of access to preferential treatment.
- This has been reported in South Africa, where it is recognized that the government often benefits enterprises in which they have an interest, decreasing equal opportunities in the business sector.
- On the other hand, as complex bureaucracy difficulties things for small and micro enterprises, these are more likely to make illegal payments.
- The causes for this include that owners of these enterprises rarely have the resources necessary to meet regulations and requirements, lack of information, and lack of capacity to respond for mistakes they might have made.
- A study in Papua New Guinea found that 40% of owners of microenterprises found government corruption as a small obstacle for their businesses, while 60% claimed it was a big obstacle.
- This corresponds to a study performed by the World Bank, in which it was found that 70% of micro enterprises and small enterprises considered corruption a big obstacle.
- In addition, this study identified a statistically significant association between additional policy regulation and lower employment growth among micro enterprises.
- In Indonesia, it has been reported that owners of micro enterprises have to bribe government officials to be able to register their business. This, among other corrupt practices, is cited as one of the reasons why they remain as informal businesses.
Lack of Employee Representation
- According to an ILO-Eurofund report, workers at micro enterprises are less likely to receive social support from colleagues.
- This is supported by the fact that trade unions are least likely to be present in microenterprises, with only 1.7% doing so.
- In contrast, trade unions are present in 84% of large enterprises. This can be explained by the fact that these organizations usually can only be formed when there are at least 25 employees.
- The result of this is that employees are not properly represented, making it more difficult for them to advocate for their rights and express their opinions.
- According to the European Agency for Safety and Health at Work, monitoring health conditions at work in micro enterprises is more difficult due to this lack of representation.
- Furthermore, according to this agency, managing work-related health risks is increasingly difficult for smaller enterprises.
Measures to Address Micro Enterprises Pain Points
- One of the recommendations made by the ILO is promoting that micro entrepreneurs have access to low-cost training in the area of business management.
- A study was conducted for over three years in Kenya, to determine the effectiveness and benefits of training owners of micro enterprises. It was observed that, compared with those who had no training, businesses from trained micro entrepreneurs had 15% higher profits as well as 18% higher sales.
- TechnoServe is a non-profit that provides training to micro entrepreneurs in Guatemala, Nicaragua, and El Salvador. A study found that those who received initial training are 16-18% more likely to either open or expand their existing business.
- The non-profit offers further training as well, and 40% of those who performed this training were more likely to either open or expand their business.
- A study performed in Malaysia revealed that after training, micro entrepreneurs were more able to recognize opportunities, establish relationships with their employees, and their organizing skills were also significantly affected.
- The Small Business Act, created by the European Union, establishes education and training for entrepreneurship as one of the most important factors to consider when promoting legislation that affects these enterprises.
- Studies performed in Indonesia and Chile have highlighted the importance of personalized consultancy to help micro entrepreneurs grow and succeed.
Greater Access to Credits and Grants
- The International Labor Conference (ILC) recommends increased access to credit and equity. It has been observed that loans and grants have a positive effect on male-owned micro enterprises.
- Interestingly, a study performed in Uganda found that when comparing loans and grants, loans were more successful, helping to increase profits by 50%.
- Despite this, different studies performed in India, Mongolia, and Mexico have reported that this is not true in all cases, finding that on numerous occasions there was no increase in income after a microcredit was provided.
- The observed gender differences require further examination. It has been proposed that as micro entrepreneurs often have difficulty separating home expenses from business expenses, women are more likely to use grants to pay for household necessities.
- Reasons for this behavior include societal, marital, and family pressure. However, when a female micro entrepreneur receives the grant or loan in-kind instead of as a cash transfer, the overall effects for the growth of the business largely improve.
- Conversely, a USAID report proposes that female access to microfinancing can improve their control over financial decisions as well as their self-esteem.
- This report also remarks on the importance of financial training, as literacy in this area can increase the durability of the positive effect obtained from being able to access microcredits.
- Formalization of informal micro enterprises is one of the most popular measures proposed to address the pain points faced by these firms.
- A study performed in Vietnam showed that transitioning to the formal business environment led to an increase in profits, revenue, and value.
- Different intervention studies have reported both successful and unsuccessful formalization strategies. It has been observed that despite receiving information and easy access to registration, micro entrepreneurs in Colombia, Indonesia, and Brazil chose to remain informal.
- However, it has been established that in-person assistance is more effective to achieve formalization than simply handing out brochures to micro entrepreneurs.
- A study performed in Malawi reported that the highest benefit could be obtained when an intervention included business registration as well as assistance in setting up a business bank account. This combined intervention resulted in 15% higher profits.
- In addition, these micro entrepreneurs had easier access to credit, which as has been mentioned before, could be beneficial for their businesses.