Examining the entrepreneur gender gap

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  • 2011•08•16

    Wim Naudé and Maria Minniti

    Female entrepreneurs in developing countries

    Photo: McKay Savage

    In recent years, the rate of new business formed by women has significantly outpaced the rate of new business formed by men across all ethnic groups in the United States. Similar trends are found across the developing world.

    Why, then, do women still own and manage significantly fewer businesses than men? To what extent does the behaviour of female entrepreneurs in terms of traits, motivations and success rates, and their gender-related distinctiveness, provide an answer?

    Despite a growing literature, more research on female entrepreneurship  is needed, particularly in developing countries, where we are seeing a growing number of initiatives aimed at promoting entrepreneurship and empowering women in the process. The latter tendency reflects a growing interest in female entrepreneurship in developing countries (which, in turn, is due to greater interest in the role played by entrepreneurship in economic development).

    Women have been assigned a special role not only because they stand to benefit from entrepreneurship, being the gender that is poorer and suffers from more discrimination, but also because they are seen as a critical driver of entrepreneurship in light of their unique role in the household and the rise in female-headed households across the developing world.

    The United Nations University World Institute for Development Economics Research (UNU-WIDER) project on Promoting Entrepreneurial Capacity turned its focus towards a fresh look at female entrepreneurs in developing countries. The resulting research was published as a special section of the European Journal of Development Research. This article provides a brief overview of some of the key findings and recommendations contained in the special section of that journal.

    Some stylized facts from three decades of research

    What stylized facts have we learned from the past 30 years of research on female self-employment and new business creation?

    For one thing, we know that significantly fewer women than men own and manage businesses worldwide. This could be because women fail more often than men, or because fewer women than men start businesses to begin with, or both. However, evidence suggests that, after correcting factors such as the size of the business and sectoral distribution, women’s failure rates are not that significantly different from those of men. Thus, at least a portion of the difference between genders must be due to the fact that fewer women than men start businesses.

    Evidence to date suggests that a variety of factors contribute to explaining observed differences in entrepreneurial behaviour across genders and that such differences have significant implications at the macroeconomic level. Perhaps women and men have different socioeconomic characteristics and, if we were to correct factors such as education, wealth, family and work status, those differences would disappear.

    Indeed, quite a bit of empirical evidence shows that such differences do exist. Also, women tend to possess less experience then men and to concentrate in different sectors. In addition, the propensity of women to start a business may differ from that of men for cultural reasons, such as discrimination.

    The businesses owned and managed by men and women are also different. We now know that women’s businesses tend to be smaller and to grow less than those owned by men. Also, women’s businesses tend to be less profitable than those of men and to generate lower sales turnover (even in same-industry comparisons). Maria Minniti (2009) provides a comprehensive and up-to-date review of the literature on women entrepreneurs and their businesses.

    Female entrepreneurs in developing countries

    What do we know about female entrepreneurship in developing countries? Do the “stylized facts” briefly noted above also apply in the context of a developing economy?

    The general question is whether the characteristics and role of female entrepreneurship vary across countries at different stages of development. Recent evidence shows that prevalence rates of female entrepreneurship tend to be relatively higher in developing countries than in developed countries.

    This traditionally has been explained by the fact that women in developing economies face higher barriers to entry in the formal labour market and must resort to entrepreneurship as a way out of unemployment (and, often, out of poverty). Research on female entrepreneurship in Latin America and the Caribbean, for example, found very high rates of female entrepreneurship in the poorest countries of the region (up to 35 percent in Peru). Only 13 percent of women entrepreneurs in the region, however, indicated that they expected their firm to grow over the following five years. In many cases opportunities and incentives are unfavourable to women who wish to begin businesses, even when they have the abilities and knowledge.

    Asking what variables are systematically associated with female entrepreneurship, and whether there are differences when countries at various levels of economic development are considered, is another way to look at the issue. It was found that the variables associated with entrepreneurial decisions tend to be the same for men and women and across countries, regardless of level of development, and that gender differences in entrepreneurial behaviour tend to be remarkably stable across countries.

    The intensity with which each of these variables influences individuals, however, does vary significantly across gender and across countries depending on their level of development. As a result, on average, participation rates for men tend to be 50 percent higher than those of women, thus creating a “gender gap” in entrepreneurship.

    Gender gaps in start-up activity are larger in middle-income countries, whereas they tend to be narrower in lower-income countries. This is probably because many women start businesses out of necessity. Surprisingly, women in poorer countries tend to be more self-confident about their abilities (skills and knowledge) to become entrepreneurs and are less afraid of failure compared with women in middle- and high-income countries, notwithstanding subjective and possibly biased perceptions about self-confidence, fear of failure, and existence of opportunities or significant and systematically associated determinants of the gender gap across all countries.

    Women in developing countries, like their counterparts in more developed ones, rely more than men on extended families which, in many rural settings are often their major (or only) social network. This is often constraining, since women’s marriage status, and the assets and incomes brought to their marriages, emerge as important determinants of their entrepreneurial decisions.

    Married women with young children are more likely to enter entrepreneurship than waged labour, and are more likely to be entrepreneurs than non-married women. On the other hand, they are also more likely to quit a business voluntarily.

    As far as the performance of female entrepreneurs’ firms is concerned, the evidence from developing and developed countries is somewhat similar. Women tend to have lower growth expectations, and their firms tend to grow slower in both sales and employment than those of men even if one controls for sectors.

    Some evidence suggests that women in many developing countries are primarily concerned not with growth but rather with survival. This may be a reason for the finding that habitual female entrepreneurs in developing countries tend to be portfolio rather than serial entrepreneurs, as they attempt to diversify income sources and survival chances.

    Avenues for further research

    We conclude our overview by noting a few avenues where further research is warranted. Six stand out.

    First, we need more theory, as theoretical developments have not kept pace with the large amount of empirical studies.

    Second, a significant and yet unresolved issue concerns what variables should enter the utility function of individuals when studying their allocation of time between household production, waged labour and self-employment. This is true particularly in developing economies and when alternative views of the family unit are considered. And when applied to serial entrepreneurship, the theoretical and empirical literature has very little to say about women in developing countries.

    Third, questions related to cultural factors and migrations among the self-employed provide a very fertile area of inquiry for both theory and empirical work — with the possibility of making not only a significant contribution to science but also to policy and management practices. As migration becomes an important coping mechanism in the face of development shocks, further research would be very desirable especially at the under-researched intersection between gender, ethnicity and migrant status.

    Fourth, discrimination has been suggested as a possible explanation for the gender gap in entrepreneurship and this is likely to be more significant in poorer countries (although the evidence is mixed). Discrimination against women often is the result of gender beliefs inherent in a culture or society. This may have the effect of not only reducing both women’s likelihood of becoming entrepreneurs and their earnings as entrepreneurs, but may also reduce the non-pecuniary benefits women receive from entrepreneurship.

    Fifth, very little is known about how the level of aggregate activity influences women’s decisions about entrepreneurship, and even less is known about how the latter contribute to growth. Although a significant amount of anecdotal evidence and some very good case studies exist on this topic, the lack of a systematic approach and data so far has prevented the formulation of a comprehensive and robust theory of female entrepreneurship and growth. No “women only” theory is necessary, of course, bit a solid understanding of how the distinctive characteristics of female entrepreneurship are accounted for by existing models of growth would be very desirable for both science and policy.

    Finally, the study of institutions and how they promote or discourage female entrepreneurship is particularly needed for its policy implications. This is especially true for developing countries, where issues of institutional development have in recent years been emphasized. Within this context, a post-institutional approach based on insights from economics and organization theory seems promising, as well as economic approaches that integrate tools and methods from anthropology and ethnography.

    This article originally appeared as “Female Entrepreneurship in Developing Countries” in the August 2010 edition of the UNU-WIDER newsletter WIDER Angle.