Mobilizing Diaspora Entrepreneurship for Development
Originally published on the Migration Information Source, a project of the Migration Policy Institute.
November 2011 Entrepreneurs are people with a unique combination of traits: They are attuned to market openings and the investment environment, alert to opportunity, innovative, and tolerant of risk.
Migrants may not be the first group that comes to mind when considering who is likely to become an entrepreneur. But emigrants and their descendents are, in fact, uniquely positioned to recognize investment opportunities in their countries of origin and to exploit such opportunities by taking advantage of their ties in two worlds.
Development practitioners and policymakers are beginning to examine the role of diaspora entrepreneurs in directing investments toward their home countries, thereby promoting economic growth. Compared with remittances or diaspora bonds, entrepreneurial investments give diaspora members more direct control over the use of their funds. And diaspora members are often more willing than nondiaspora investors to risk starting or engaging in business activities in high-risk or emerging markets. Moreover, their knowledge of the local political, economic, and cultural environment, as well as their personal connections and linguistic abilities, may give members of diasporas a “first mover” advantage when investing in or starting businesses in their countries of origin.
Despite the advantages of attracting diaspora direct investors and entrepreneurs to their countries, many developing countries have experienced only limited success in actually doing so, particularly those at war or experiencing internal conflict and social upheaval. Complicated tax laws, limited access to local financing, and corruption are all conditions that can deter individuals from pursuing economic activities in a given country and persuade them to look for opportunities elsewhere.
This article discusses the nature of diaspora entrepreneurship, the conditions that best create opportunities for diaspora direct investment in countries of origin, and the various strategies employed by some organizations to support diaspora entrepreneurs and their ventures.
Why Focus on Diaspora Entrepreneurship?
Since at least the 1970s, researchers have studied entrepreneurship among immigrants in their countries of destination, emphasizing immigrants' contributions to local economies through the small and medium enterprises (SMEs) they establish and run, their role in fostering niche markets in immigrant communities, and their ability to offer jobs to the native born as well as other immigrants. Recent research also shows that entrepreneurship among immigrants living in the world's advanced economies is on the rise, especially in the retail, wholesale, restaurant, and catering businesses.
Little research has been done, however, on how diaspora entrepreneurs contribute to economic development in their countries of origin. There is reason to believe that through diaspora direct investment in their home countries, diaspora entrepreneurs can play an important development role. When successful, diaspora entrepreneurship fosters business development, job creation, competition, innovation, and the creation of transnational business networks. It can also tap into existing social capital in destination countries and generate new opportunities for economic, social, and political capital sharing through the global networks entrepreneurial activities create.
According to research comparing entrepreneurship in more than 40 countries, higher levels of entrepreneurship are positively correlated with higher levels of economic development. Though the causal relationship between the two variables is difficult to sort out – whether high levels of entrepreneurship spur economic growth, or high levels of economic growth encourage entrepreneurship – the link between the two is strong.
Still, not all forms of entrepreneurship contribute equally. Recent research shows the importance of distinguishing between “necessity entrepreneurs” and “opportunity entrepreneurs,” as the two groups have very different effects on development. A greater number of necessity entrepreneurs may not correlate with higher levels of economic growth. In fact, an abundance of necessity entrepreneurs may suggest that individuals are working for themselves because they cannot find opportunities in the labor market.
Necessity entrepreneurs are often defined as those who are simply self-employed. Unskilled immigrants or returnees who establish their own businesses to create employment for themselves have different networking opportunities and approaches to starting businesses than high-skilled immigrants with business experience abroad. Those running businesses that require little education and low start-up costs usually work in sectors that are oversaturated with competitors and have razor-thin profit margins. Thus, while self-employment can create value for the entrepreneurs themselves and any employees they might have, research shows that necessity entrepreneurship has no real effect on economic development.
Opportunity entrepreneurs, on the other hand, are much more likely to have a positive impact on economic development. Skilled individuals who specialize in high-demand and rapidly growing sectors of the knowledge-based economy can create huge economic opportunities and profits for businesses and their countries. Even those with little education but strong business acumen may perceive and take advantage of market openings.
The roles of diasporas in developing knowledge-based sectors in China, India, Ireland, and Israel, for example, are now well known. They have provided venture capital and connections to trade networks, facilitated technology and knowledge transfers, and pioneered development of robust special economic zones in their countries of origin.
The Global Entrepreneurship Monitor (GEM) is an academic research consortium that tracks, evaluates, and compares the level of entrepreneurial activity in 54 developed and developing countries and analyzes how it relates to national economic growth. It finds that countries with a high opportunity-to-necessity entrepreneurship ratio tend to have higher levels of income, exports as a share of GDP, licensing receipts, R&D expenditures, and spending on education compared to those with a low ratio.
Moreover, GEM finds that necessity entrepreneurship plays a relatively small role in innovation-driven economies. Nonetheless, most governments in developing countries continue to promote necessity entrepreneurship rather than opportunity entrepreneurship.
The Opportunity Structure
Research shows that in addition to personal goals and inherent traits, a combination of economic, political, financial, and sociocultural factors influences an individual's decision to become an entrepreneur.
Individuals are more likely to start a business in a country with robust economic growth, a high level of formal sector participation, a high-quality and business-friendly legal and regulatory environment, and relatively easy access to finance. Economic growth, in turn, is positively correlated with new business registrations and entry rates. According to the World Bank's World Development Indicators, the time required to start a business has a strong negative correlation with a nation's overall income level. In other words, it takes significantly less time to start a business in high-income countries than it does in low-income countries.
Regardless of a country's level of economic development, however, investors favor good governance; that is, they favor countries with relatively little corruption and with well-functioning public institutions. According to the Doing Business Project, good governance is positively correlated with high rates of business entry. Furthermore, favorable policies, tax incentives, and even special privileges provided by governments have been shown to help attract diaspora entrepreneurs to invest in their countries of origin.
Access to financial capital is crucial for individuals seeking to pursue entrepreneurial activities. The micro-credit and micro-savings revolution has opened a path to entrepreneurs who operate on a very small scale. The clients for these tiny loans are typically necessity entrepreneurs at first, but some may be able to expand their businesses as loans enable them to take advantage of new opportunities. At the other end of the spectrum, diaspora investors may underwrite the creation of new industries and the growth of established sectors.
Interestingly, cultural perceptions of entrepreneurship can affect potential entrepreneurs as well. Some societies, such as that of the United States, attach high value to individual initiative and reward successful entrepreneurs with social status as well as wealth. These cultural predilections are conducive to entrepreneurship. Other cultures, however, favor group action and attach guilt or shame to individuals whose ventures fail. As a result, aspiring entrepreneurs may be discouraged from pursuing risky business ventures. In East Asia, for example, where such attitudes are prevalent, innovation is highly valued but relatively few individuals pursue entrepreneurial activities.
Diaspora members, for their part, often lead lives that transcend a single culture, and as such may develop different perceptions of entrepreneurship than those dominant in the country of their origin or ancestry. Bridging differences and introducing new business ideas and attitudes are some of the valuable contributions diaspora members are well positioned to make. Several countries, from India to Nigeria, have started to hold high-profile events that celebrate the accomplishments and contributions of diaspora entrepreneurs. China has made attracting diaspora entrepreneurs a pillar of its “One Thousand Talents” Initiative, an element of its high-profile National Medium- and Long-Term Talent Development Plan.
Individuals with high levels of human capital tend to be more entrepreneurial than those without. However, knowledge and education alone do not spur entrepreneurship. Individuals working in economic clusters or areas saturated with like-minded and experienced professionals in specific sectors have access to valuable social capital, including networks and knowledge transfers, which facilitates joint ventures and partnerships among current and former colleagues. Encouraging “hot spots” of technological and educational institutions can create conditions conducive to entrepreneurship, and several governments — such as those of China, Taiwan, South Korea, Mauritius, Chile, and India — have taken this step and encouraged diaspora members to take part.
Research suggests that highly skilled individuals make their decisions on where to migrate based on the presence of other talented professionals, capital infrastructure that promotes education and professional growth, and the promise of good returns on one's own human-capital investments.
Lastly, lifestyle plays a part in migration decisions as well, especially for diaspora entrepreneurs who return to their countries of origin having become accustomed to the amenities of life in the West. The government of Taiwan, for instance, constructed Western-style housing and upgraded neighborhood schools near the Hinschu Industrial Park to attract returning migrants and diaspora members. Amenities such as good transportation infrastructure and recreational facilities may make a difference as well.
Levels of Commitment to Diaspora Entrepreneurship
Over the past decade, a number of governments and other organizations have established programs to encourage emigrants and their descendents to invest in their home countries. Initiatives range from privately run and funded to government-led, but most involve some sort of public-private partnership. Many organizations are hybrids and promote activities in several categories, including networking, mentoring, investment, venture capital, and strategic partnerships.
Networking organizations promote diaspora entrepreneurship by offering opportunities for diaspora and local business leaders and professionals to meet one another (either in person or via the internet) and discuss potential business and investment opportunities in the homeland. Some networking organizations are involved in public-private partnerships to facilitate meetings between locals and members of the diaspora, while others promote networking among diaspora business leaders to foster partnerships and opportunities in countries of origin.
Prominent examples of networking organizations include the Mexican Talent Network, The African Network, the Business in Development Network, the South African Diaspora Network, and the Korean IT Network.
Mentoring organizations are more actively involved in supporting entrepreneurship among diaspora members than pure networking organizations, in that they try to match aspiring entrepreneurs or business owners seeking to expand their operations abroad with seasoned diaspora experts and business leaders. Some mentors offer one-off services, while others provide internships or even job opportunities in their corporations. GlobalScot, Armenia 2020, and The Indus Entrepreneurs are examples of mentoring organizations.
Training organizations help aspiring diaspora entrepreneurs acquire the knowledge and skills to set up and run a successful business. Training programs range from transferring knowledge from diaspora experts to country-of-origin entrepreneurs to offering lessons on business management to providing guidance on how to find financing. The Ethiopia Commodity Exchange, IntEnt in the Netherlands, and the Economic Initiatives and Migration Program (Programme Solidarité Eau) in France are successful examples.
Investment organizations provide initial start-up funds or subsequent capital infusions, usually in the form of pooled private and public funds or matching grants. Some investment organizations take a hands-off approach to the money they offer entrepreneurs, while others are more involved in overseeing how their money is spent at various stages of project implementation. The African Diaspora Marketplace, which was a business competition that first took place in 2009 and is beginning its second cycle this year, and the 1x1 Program in Mexico have provided tens of thousands of dollars in start-up funds to diaspora entrepreneurs.
Venture capital and partnership organizations provide more than just start-up funds, and usually are heavily involved in business projects that they believe will be profitable. Often they form strategic alliances with other venture capitalists, business leaders, engineers, and other professionals. For these organizations, the number of strategic partnerships or projects supported by venture capital usually matters less than the quality of the proposed investment, the high potential for return on investment, and the impact of such partnerships and investments on economic growth in strategic sectors. For others, strategic partnerships are about fostering trust and long-term relationships among key institutions in countries of origin and destination.
Prominent examples of venture capital and partnership organizations include Fundación Chile, The International Organization for Migration's Migration for Development in Africa program, and the African Foundation for Development.
Organizations that support diaspora entrepreneurship take on multiple roles, sometimes creating networking opportunities among business leaders and at other times forming strategic institutional partnerships to foster long-term economic growth in knowledge-intensive sectors.
The five types of involvement listed above — networking, mentoring, training, investment, and venture capital and partnerships — describe ascending levels of commitment to the entrepreneurial project (see Figure 1). While a combination of all five levels of engagement is likely to foster entrepreneurship, for a variety of reasons — including availability of resources and time, and the different actors involved at each level — the more passive forms of support (toward the base of the pyramid) are likely to proliferate and dissipate more quickly than the more active forms of support near the peak.
Organizations such as those mentioned above that support entrepreneurship among the diaspora provide a wide range of services and differ in many key ways. Organizations tend to have varying targets, in that some focus on developing the national economy while others focus on developing the entrepreneurial skills of individual diaspora members. Some organizations restrict their membership to professionals or to members of a specific diaspora, while others are open to individuals of all nationalities and skill levels.
Various organizations also focus on different economic sectors or industries, offer different types of services (e.g., financial services, mentoring, or networking), and foster entrepreneurship in different geographical areas, be it one town or an entire region.
An entrepreneur undertakes new ventures which, if successful, create wealth and jobs. Having feet in two worlds, diaspora entrepreneurs are uniquely well equipped to recognize opportunities in their countries of origin and can be especially motivated to contribute to job creation and economic growth in their homelands. It is little wonder that development practitioners are interested in trying to harness this tremendous force for economic growth and dynamism.
Encouraging members of the diaspora to pursue entrepreneurial ventures seems a matter of common sense as an element of development policy. But it is also sometimes controversial — especially in countries where state intervention in business is strong. State-run enterprises may see diaspora entrepreneurs as threats, and local businesses may resent incentives given to the diaspora. A more fundamental concern is over-reliance on diaspora entrepreneurship as a panacea for sluggish job creation and economic growth.
Interventions to promote entrepreneurship must walk a fine line between opening opportunity and distorting markets. Development will not benefit from the creation of firms too weak to survive in a competitive environment; if enough businesses are created that survive only with external support, they may become a strong enough lobby to demand subsidies and exclude more competitive businesses.
Additionally, research confirms that potential diaspora entrepreneurs are discouraged from investing or starting businesses if their home countries are wracked by violence; lack transparent local information on investment risks; exhibit a poor business environment; and lack infrastructure and amenities. Peace, stability, and the construction of basic infrastructure are prerequisites for substantial diaspora investment.
Members of a diaspora have both advantages and disadvantages in pursuing investment opportunities in their countries of origin. They are more likely than people without ties to the country to see opportunities, understand the opportunity structure, and have connections and “cultural capital” that facilitate their undertakings. On the other hand, diaspora entrepreneurs often encounter entrenched attitudes, resentment from nonmigrants, and administrative barriers in their home countries.
Governments, multilateral institutions, diaspora organizations, and other civil society groups can help diaspora entrepreneurs to tap the resources they need and clear obstacles to realizing their ventures — or at the very least, they can get out of the way.
This article is based on a report by the same name, "Mobilizing Diaspora Entrepreneurship for Development," by Kathleen Newland and Hiroyuki Tanaka and originally published in October 2010. The full text of the report, which includes a more in-depth discussion of prior research, the various support organizations, and policy recommendations, is Available online.
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Kathleen Newland is the director of Migrants, Migration, and Development and Refugee Protection Programs, and Member of the Board of Trustees. Kathleen Newland is Co-Founder of the Migration Policy Institute and directs MPI's programs on Migrants, Migration, and Development and Comprehensive Protection for Refugees. Her work focuses on the relationship between migration and development, governance of international migration, and refugee protection. Ms. Newland is the author or editor of seven books, including The State of the World’s Refugees for UNHCR in 1993, No Refuge: The Challenge of Internal Displacement for the United Nations in 2003, and Diasporas: New Partners in Global Development Policy for MPI in 2010. She has also written 11 shorter monographs as well as numerous articles and book chapters. Ms. Newland is a graduate of Harvard University and the Woodrow Wilson School at Princeton University. She did additional graduate work at the London School of Economics.
Hiroyuki Tanaka is a co author of the Mobilizing Diaspora Entrepreneurship for Development article.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.