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The Melting Middle: Unleashing the Full Potential of Entrepreneurship through Public Policy

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R. Aidis (2014) The Melting Middle
The Melting Middle:
Unleashing the Full Potential of Entrepreneurship through Public Policy
Ruta Aidis, PhD
1
Abstract
All countries have successful entrepreneurs and in some cases, these entrepreneurs succeed in
seemingly unhospitable conditions. Given these factors, what role does public policy play in
entrepreneurship development? The melting middle perspective presented in this paper,
addresses this paradox. The melting middle identifies six entrepreneur typologies that exist along
a continuum. Each typology is differentiated by a specific combination of individual
characteristics and institutional conditions. Promising and potential entrepreneurs are identified
as the two types of entrepreneurs that are most affected by institutional barriers and where
targeted policy initiatives stand to have the greatest economic impact.
Keywords: Entrepreneurship, Institutions, Public Policy, Gender, Economic Development,
1. Introduction
The relationship between entrepreneurship, incentives and institutions is not a new area of
research. In 1993, William Baumol identified the important distinction between productive and
unproductive entrepreneurship development and the critical role incentives play in determining
which individuals engage in entrepreneurial pursuits. Several years earlier, Douglass North
highlighted the influence of formal and informal institutions on economic agents including
entrepreneurs (1990)
1
. Moreover, markets are influenced and shaped by formal and informal
institutions (World Bank 2012). Failures in formal and informal institutions lead to market
failures that result in unequal access to entrepreneurial opportunities.
In this paper, we build on the existing research shifting the focus slightly to differentiate how
existing impediments to entrepreneurship affect specific groups within a society differently. In
order to do this, first, we introduce a continuum for understanding entrepreneurship typologies
1
Senior Fellow, School of Policy, Government and International Affairs, George Mason University, Arlington VA
Email: raidis@gmu.edu
© Copyright Ruta Aidis (2014)
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R. Aidis (2014) The Melting Middle
highlighting the areas where public policy or institutions will have the greatest potential impact.
In the new globalized world economy and to ensure long term competitiveness and growth, it is
paramount that countries address existing domestic impediments that hinder a more diverse
cohort of entrepreneurs from successfully starting and scaling their businesses.
This paper is structured as follows: Section 2 introduces the continuum for entrepreneurship
development and provides examples of the personal characteristics and institutional effects that
characterize different types of entrepreneurs. Section 3 provides a discussion of how public
policy affects the continuum of entrepreneurs highlighting where policy initiatives are likely to
have the greatest economic impact. Section 4 presents the conclusion.
2. A continuum for entrepreneurship development
The melting middle perspective is based on a continuum of six main typologies of entrepreneurs
based on their personal characteristics and interaction with existing institutions. As shown in
figure 1, the first type are Privileged Entrepreneurs. This type refers to individuals who
experience less entrepreneurial impediments due to their elite or celebrity status. For example,
privileged entrepreneurs have access to networks and resources due to their social status and
family connections. Entrepreneurs in this category are not less capable than other entrepreneurs
rather in addition to their personal skill and talent, they enjoy privileges which allow them to
‘function’ above the normal limitations of the existing institutional environment. In this way,
they do not encounter the same regulatory barriers and have access to key resources such as
financing, contacts, connections and insider information not readily available to the unprivileged.
Figure 1: A continuum of entrepreneurship development
1.
Privileged
Entrepreneurs
2.
Die-hard
Entrepreneurs
3.
Promising
Entrepreneurs
4.
Potential
Entrepreneurs
5.
Reluctant
Entrepreneurs
6.
Not
Entrepreneurs
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R. Aidis (2014) The Melting Middle
Examples of privileged entrepreneurs are often found among the siblings, in-laws and children of
the ruling elite. Isobel de Santos and Valentin de Luz Guebuzza enjoy this type of privileged
status. Isobel is the daughter of Angola’s President and Valentin is the daughter of
Mozambique’s President. An example of a US based privileged entrepreneur is Ivanka Trump,
daughter of entrepreneur superstar Donald Trump. Another form of privileged entrepreneurs
include celebrities who are able to leverage their status and popularity as moviestars, models,
athletes or entertainers to launch businesses. Examples of successful celebrity entrepreneurs
include Magic Johnson (USA), Gisele Bunchen (Brazil), Jessica Simpson (USA) and Dr. Dre
(USA). Brief descriptions of these seven privileged entrepreneurs are given below:
Isabel Dos Santos is a successful businesswoman and Africa’s richest woman. She is also the
daughter of Angola’s President, Jose Eduardo Dos Santos. Through her various holding
companies, Isobel controls a 25 percent stake in the Angolan mobile telecom operator Unitel, a
25 percent stake in Angola’s Banco BIC, 25 percent of ZON Optimus, a listed Portuguese cable
TV company, and just under 20 percent of Banco BPI, one of Portugal’s largest publicly traded
banks. In 2014, Isobel partnered with Sonae, Portugal’s largest retailer, to launch five new food
hypermarkets in Angola (Forbes 2014).
Valentina da Luz Guebuza is the 33 year-old daughter of Mozambique’s President Armando
Guebuza. Valentina heads Focus 21 Management & Development, a large family-owned
investment holding company with interests in banking, telecommunications, fisheries, transport,
mining and property. In addition, Focus 21 owns significant stakes in Beira Grain Terminal and
Chinese Pay TV Company StarTimes operations in Mozambique (Gundai 2013).
Ivanka Trump is the daughter of American business magnate Donald Trump. Before joining
the family business, Trump worked for Forest City Enterprises. Later she developed her own
brand and introduced a line of jewelry (the Ivanka Trump collection) which was launched at her
first flagship retail store called Ivanka Trump on Madison Avenue. Ivanka is principal of Ivanka
Trump Fine Jewelry and she is also Executive Vice President of Development & Acquisitions at
The Trump Organization. She has further released her own line of Ivanka Trump Lifestyle
Collection which includes fragrance, footwear, handbags, outerwear and eyewear collections.
Her estimated net worth is $150 million USD.
Magic Johnson is well-known as a former US basketball player and but Magic is also an
exceptional entrepreneur. During his playing career, Magic earned just over $18 million in salary
and several million more in endorsements. When he retired, Magic used his earnings to launch a
business empire called Magic Johnson Enterprises that is currently valued at over $1 billion
USD. Magic Johnson Enterprises owns Magic Johnson Theaters, a movie studio and a
promotional marketing company. In 1994 Magic paid $10 million USD to buy 4.5 percent of The
Lakers which he sold in 2010 to billionaire Patrick Soon-Shiong for a reported $50-60 million
USD. In 2010 Johnson also sold his chain of Starbucks for $75 million USD. In 2012, Magic and
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R. Aidis (2014) The Melting Middle
a group of partners purchased The Los Angeles Dodgers from Frank McCourt for $2 billion
USD. Magic’s personal net worth is estimated at $500 million USD
2
.
Brazilian born Gisele Bundchen has been the world’s top earning model for over a decade
making close to 50 million USD a year for her modeling work. But she has also been a highly
successful entrepreneur by ‘branding herself’ through licensing her name to products ranging
from jewelry to lingerie and eco-friendly cosmetics. In 2010 she launched her own lingerie
company and continues to own a stake in the company. More recently, Gisele founded an eco-
friendly cosmetics company Sejaa Pure Skincare where she is the sole owner. Her branding and
businesses have been a huge success for Gisele who is likely to soon become the first billionaire
supermodel and Brazil’s first female self-made billionaire (Antunes 2014).
Jessica Simpson is an American recording artist, actress and television personality who made
her debut in 1999. In 2006 Jessica launched the Jessica Simpson Collection with a line of shoes
in collaboration with the brand Nine West and co-founder Vince Camuto. Later, Jessica’s brand
expanded into a line of hair and beauty products and designed fragrances, handbags and dresses
for women. As of December 2010, the Jessica brand is carried in 650 department stores across
the US in both upscale and midscale stores. The collection earned $750 million in 2010, making
it the top selling celebrity clothing empire. In 2013, she sold over $1 billion worth of products
making Jessica the first celebrity owned clothing line in history to earn $1 billion in annual sales
(O’Connor 2014).
Dr. Dre (born: Andre Romelle Young) gained fame as a groundbreaking rapper. His album
Straight Outta Compton released in 1988 was certified double platinum and was recognized as
one of the most pivotal albums for hip-hop. In the 1990’s, Dre established Aftermath
Entertainment and started his acting career appearing in several films. In 2008, Dre was
commissioned by Monster Cable Products to design a line of premium headphones. He went on
to co-found and co-own the headphone company Beats by Dre. In 2014 Apple Inc acquired Beats
by Dre for $3 billion USD (Dre owned 25 percent of Beats). Dr. Dre’s personal net worth is
estimated at over $780 million USD.
The second type of entrepreneurs are called Die Hard Entrepreneurs. As the name suggests,
these entrepreneurs start businesses no matter what the conditions. Often, these individuals
started engaging in precursors to entrepreneurial activity as children such as selling to classmates
in the schoolyard. While people around them may bemoan the regulatory burden, the high level
of corruption or lack of financing, Die Hard entrepreneurs are able to make ‘lemonade from
these lemons’, undeterred they develop strategies to overcome barriers. Examples of Die hard
entrepreneurs include US entrepreneur Tyler Dikman and Hassina Syed in Afghanistan. Both
entrepreneurs are described below. Hassina Syed’s case depicts how an entrepreneur can become
successful against the odds. Stories such as Hassina’s often take on an unbelievable ‘larger than
life’ quality and it is often hard for the population at large to relate to these exceptional
individuals.
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R. Aidis (2014) The Melting Middle
Tyler Dikman started out earning money like most other kids in the US, by mowing lawns,
running lemonade stands, and babysitting. At ten years of age, Tyler got his first computer which
he took apart to study from the inside out. As he learned more about computers, he began
repairing them for his teachers in the eighth grade, which led him to the revelation that he could
charge others for repairs of their machines.
While babysitting, Tyler landed a job watching the children of the Vice President of a large
wealth management company. Afterwards, he was offered an internship at this company which
led to a full-time job around two weeks later. Tyler was put in charge of computer acquisition,
setup, training, and troubleshooting. As a hobby, at age 15, he started Cooltronics, a business
that repaired computers. He hired a few friends as employees and working long hours, he was
able to develop a one-stop company that sells, delivers, and sets up PCs for customers. In 2001,
at age 17, Tyler was making a million dollars in sales, as well as through subscriptions and
advertising. He was named by Businessweek as one of the top 25 entrepreneurs under the age of
25, and continues to grow his business, which now generates millions of dollars in sales each
year (Larson 2013).
Despite numerous obstacles, including threats by warlords, government officials and rival male
interests who deeply resent a female in their presence, Hassina Syed ranks as one of the most
successful entrepreneurs in Afghanistan. She is the only female member of the 3,000 member
Afghan Chamber of Commerce and Industry (ACCI) and the only woman to have taken part in
official trade delegations led by President Hamid Karzai to Europe and Asia.
Hassina was born in Afghanistan but due to the war, fled to Pakistan with her family when she
was only four years old. Hassina says that she always wanted to go into business, but her father
wanted her to be a doctor, so she studied medicine. But after three years, her family could not
afford the tuition fees so she could not continue her studies. After getting married to an
Englishman, Hassina’s entrepreneurial career began. In 2003, w\With only $500 USD startup
capital, Hassina founded the Syed Group of Companies. All her businesses are based in Kabul,
Afghanistan and range from hotels to agriculture to vehicles, etc. She is one of the few
successful female entrepreneurs in Afghanistan (Girardet 2009).
The melting middle is made up of the third and fourth types of entrepreneurs. These promising
entrepreneurs encounter impediments in their ability to start their businesses while potential
entrepreneurs experience barriers in growing their businesses. Promising Entrepreneurs are
individuals who could be entrepreneurs due to their personal characteristics such as skills,
interests, human capital and experience yet these individuals have not engaged in any start-up
activity. In most countries, it is possible to estimate the percentage of promising entrepreneurs
yet the exact numbers are unknown. In contrast, Potential Entrepreneurs have a business but
experience specific informal and formal institutional restrictions that interfere with their business
growth. These impediments include institutional barriers such as legal restrictions and
regulations, market failures and restricted access to resources. But may also include informal
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R. Aidis (2014) The Melting Middle
institutions such as attitudes and social norms that demean, belittle or directly interfere with
starting and scaling a business. Prejudice based on gender, race, religion, caste, class, sexual
preference, age and disability further affect an individual’s entrepreneurial pursuits.
A recent study in India exploring the influence of religion and caste on women entrepreneurs
uncovers some unexpected relationships (Field et al 2010). The study finds that Hindu women’s
experience differed quite strongly depending on the woman’s caste. Upper caste women faced
significantly more restrictions than scheduled castes which are the lowest group in the caste
hierarchy. These results imply is that women who are in upper castes and who also tend to be
better educated, are constrained by their caste from starting and growing businesses. Moreover, it
was found that Muslim women in India face the greatest restrictions for mobility and social
interactions making it even more difficult for them to engage in entrepreneurship.
This potential pool of entrepreneurs may appear or disappear due to prevailing conditions and
public policy can play a pivotal role in identifying and rectifying the existing imbalances. In
some countries, the conditions can be so harsh that these entrepreneurs may be unrecognizable or
simply nonexistent. Imagine taking an ice cream cone into a sauna. In the heat, the ice cream
changes dramatically. Within minutes the ice cream melts away and does not resemble ice cream
any longer. Similarly, when conditions for entrepreneurship are harsh due to excessive
corruption, regulation and lack of equal rights, this type of entrepreneur seems to disappear or
may even appear non-existent. But, at the same time, while in the sauna, the ice cream melts but
the cone stays intact. In this example, the cone represents entrepreneurs such as celebrity and die
hard entrepreneurs who are less affected by the prevailing conditions.
An example of specific impediments that affect women entrepreneurs globally are gendered legal
restrictions, attitudes and expectations. A recent study by Women Business and the Law
3
indicates that more gendered legal restrictions results in fewer female-owned businesses (World
Bank 2014). Specifically, unequal inheritance rights and access to property ownership for
women
4
as well as work restrictions limit their access to startup capital and collateral which are
critical for business startup and growth. Moreover, in 28 countries, married women must defer to
their husbands, since by law, the husband is legally considered the final decision-maker for the
household (ibid.).
Even in countries where legal rights are insured, the gender wage gap continues to affect women
as a group from wealth accumulation. For example in the US, in 2013, the ratio of women’s to
men’s median annual earnings was only 78.3 percent for full-time, year-round workers
(Hegewisch and Hartman 2014). Paradoxically, and contrary to popular opinion, the pay gap was
not found to be specifically related to women working in different industries or because mothers
choose to work less hours than other workers (Labaton 2014). In addition, in spite of women
gaining ground in education, the gender wage gap is persisting and is not decreasing rapidly.
Less personal wealth combined with more limited access to external financing influences the
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R. Aidis (2014) The Melting Middle
pervasive undercapitalization of women’s entrepreneurial pursuits that in return stay small and
do not grow.
Moreover, for women, lack of external financing often becomes a self-fulfilling prophecy. A
recent study in Mexico found that over 90 percent of the women surveyed, did not seek bank
loans because they did not think they would get it (Aspen Institute 2014). In developed and
developing countries alike, women entrepreneurs have severely limited access to equity capital.
According to the 2014 report Bridging the Gender Gap in Venture Capital, only 2.7 percent of
venture capital-funded companies had a woman CEO (Ibid.) Paradoxically, the report also found
that businesses with women entrepreneurs perform as well as or better than those led by men
5
(Brush et al. 2014).
The fifth type of entrepreneurs are called Reluctant Entrepreneurs. These are individuals who
are engaged in business due to economic necessity but if given the option, would rather choose
another means for making a living. Examples of the near poor or poor engaged in this type of
entrepreneurship are described in great detail in the book Poor Economics by Abhijit Banerjee
and Esther Duflo (2012). Through their research, the authors find that though the poor are more
likely to run their own business, this is due mostly to lack of other viable choices for earning an
income. More importantly, when asked, most of these entrepreneurs aspire to be civil servants or
factory workers. Muhammad Yunus, founder of the Grameen bank often describes the poor as
‘natural entrepreneurs’ (Ibid.). However, Banerjee and Duflo find that it would be more
appropriate to describe the poor as ‘doing whatever it takes to survive’ or even ‘buying a job’
when conventional employment opportunities are non-existent. Under these circumstances,
‘entrepreneurs’ often do not enjoy running their own business and have no intention of
expanding it. This type of entrepreneurship resembles the holding pattern of airplanes circling
the airport before they are finally able to land.
Reluctant entrepreneurs are especially visible in countries where unemployment is high and a
social safety net is lacking. In these cases, entrepreneurship is often considered an ‘acceptable’
means for making ends meet as a form of subsistence income. These entrepreneurs populate
informal markets, engage as petty traders or run small shops.
Exceptions do exist for this category. For example, countries undergoing rapid economic
transition can create new and specific opportunities for entrepreneurship unprecedented in more
established market economies. Under these circumstance, individuals may start out their
businesses reluctantly but transition into opportunity driven entrepreneurs as a result of business
success. This was the case, for example after the collapse of the Soviet Union. In the former
Soviet Union and satellite countries, entrepreneurship was for the most part prohibited and
despised (Smallbone and Welter 2001; Aidis 2003). In addition, selling goods for a profit was
considered exploitative and akin to thievery (Aidis 2006). When the old socialist system
collapsed, many individuals found themselves unemployed, unemployable and scrambling to
make ends meet. Petty trading at informal markets became one of the only viable means for
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R. Aidis (2014) The Melting Middle
economic survival. Many of these early entrepreneurs had no previous interest in
entrepreneurship and begrudgingly engaged in entrepreneurship activities. Yet, for some, the
tremendous demand for western consumer goods provided expanding market opportunities that
inspired them to commit to their entrepreneurial ventures. A new class of entrepreneurs thus
emerged many having started purely out of need since no other options were available (Aidis and
van Praag 2005). This was the case throughout the mid to late 1990’s but by 2005, the level of
entrepreneurship in these countries approached the pattern seen in other countries with similar
economic conditions.
The sixth and final type are Not Entrepreneurs. As the name suggests, not entrepreneurs are
individuals who do not want to be entrepreneurs. Unlike reluctant entrepreneurs who engage in
entrepreneurial activity out of economic need, not entrepreneurs do not view entrepreneurship as
an option. This may be due to various reasons, such as personal conviction based on moral or
religious beliefs. A survey based study in India, it was found that some religions, such as Islam
and Christianity, were more conducive towards entrepreneurship, while others, such as
Hinduism, inhibit entrepreneurship (Audretch et al. 2007)
6
. In addition, individuals belonging to
a backward caste exhibited a lower propensity to become an entrepreneur. Thus, the empirical
evidence suggests that both religion and the tradition of the caste system influence
entrepreneurship (ibid).
In sum, to a certain extent there is movement between types of entrepreneurs on the continuum.
For example, if a promising entrepreneur marries into the ruling elite or clan, they can suddenly
become ‘privileged’ entrepreneurs. In the same vein, a privileged entrepreneur could lose their
privileged status and transition to potential or even reluctant entrepreneurship.
3. Public policy and the entrepreneurship continuum
As figure 2 indicates, potential and promising entrepreneurs tend to be the most receptive to
public policy initiatives. In contrast, policy would have little effect on privileged entrepreneurs
unless it acts as a restraint to exercising privileged status which then could limit the growth and
further development of businesses started by privileged entrepreneurs. Public policy would also
have little effect on die hard startups, since these entrepreneurs tend to start businesses regardless
of the prevailing conditions. However, it may facilitate the growth and further development of
these businesses.
Public policy could have the greatest effect on promising entrepreneurs by diminishing or
removing the barriers that are preventing these individuals from business startup. Public policy
can also exert a tremendously positive effect on potential entrepreneurs through mitigating the
barriers that are preventing these entrepreneurs from growing or expanding their businesses.
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R. Aidis (2014) The Melting Middle
Figure 2: Public policy and the entrepreneurship continuum
In most cases, initiatives supporting reluctant entrepreneurs could more appropriately be viewed
as extensions of the social safety net than entrepreneurship development. Few of these
entrepreneurs will grow their businesses or contribute to job creation. But when employment is
scarce, the economic benefits of policies supporting these types of entrepreneurship may be
beneficial since they can have a positively effect on the entrepreneurs, their families and
communities. The not entrepreneurs group, however, do not need entrepreneurial support, rather
they may benefit from policy initiatives that support the melting middle and result in the creation
of viable employment opportunities.
4. Conclusion
Entrepreneurs start and grow their businesses in all countries under all conditions. However, as
this paper outlines, prevailing institutional conditions combined with individual characteristics
will determine which types of entrepreneurs will engage in entrepreneurial pursuits. Public
policy can and should play a pivotal role in improving the conditions to foster an expanding pool
of potential and promising entrepreneurs to start and scale their businesses.
Social bias and prejudice limits entrepreneurs from achieving their fullest potential. For women,
pervasive gendered impediments form additional barriers that tend to affect potential and
promising women entrepreneurs from starting and growing their businesses. In countries where
gendered restrictions are especially great, successful women entrepreneurs may seem non-
existent. Yet as the ice cream cone analogy presented in this paper illustrates, these women who
constitute the melting middle, could be more fully engaged as entrepreneurs. In these cases,
Public Policy
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R. Aidis (2014) The Melting Middle
targeted public policy initiatives are needed to mitigate gendered impediments to unleash an
expanding pool of these types of women entrepreneurs.
The melting middle perspective forms a fruitful area for further research. The next step needed in
operationalizing the melting middle perspective is data driven analysis. Quantitative,
comparative analysis would provide important insights into the country level dynamics of the
typologies within the melting middle perspective. In addition, an inventory of best practices from
existing policy initiatives would help support countries in crafting their policies to address
existing bottlenecks.
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R. Aidis (2014) The Melting Middle
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Notes
1
Formal institutions refer to all aspects that pertain to the functioning of the state, including laws, regulatory
frameworks, and mechanisms for the delivery of services that the state provides (such as judicial services, police
services, basic infrastructure, health, and education). Informal social institutions are the mechanisms, rules, and
procedures that shape social interactions but do not pertain to the functioning of the state such as gender roles,
beliefs, social norms, and social networks (World Bank 2012).
2
Sourced from internet search including http://www.celebritynetworth.com/richest-athletes/nba/magic-johnson-net-
worth/.
3
Calculations are based on the Women Business and the Law database: World Bank World Development Indicators
database and World Bank Enterprise Surveys.
4
Increased numbers of women have loans in economies that grant women the same property rights as men (World
Bank 2014).
5
Businesses with a woman on the executive team are more likely to have higher valuations at both first and last
funding (64 percent higher and 49 percent higher, respectively) (Brush et al. 2014).
6
These results are based on a gender-neutral survey. Interestingly, these results contradict the findings of the
influence of religion and caste on entrepreneurship specifically for women in India by Field, et al. (2010).
... The melting middle perspective identifies six main types of female entrepreneurs (Aidis, 2014). "Privileged entrepreneurs" make up the first type. ...
... It should be noted that in the reluctant entrepreneur type, some individuals may transition from reluctant to potential entrepreneurs. The purpose of these six broad categories is to identify the general trends (Aidis, 2014). ...
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Laws and Customs: Entrepreneurship, institutions and gender during economic transition
  • R Aidis
Aidis, R. (2006) Laws and Customs: Entrepreneurship, institutions and gender during economic transition, SSEES Occasional Book Series, University College London.