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How Paying–it–Forward Expands Entrepreneurial Functioning in Kenya’s Informal Settlements
Abstract
Existing theory has suggested that extreme events can induce a poverty–constrained mindset, however in our field work we found micro–entrepreneurs used a paying–it–forward mechanism to expand their entrepreneurial functioning by simultaneously improving others. We tested these counter–factual insights by using panel data covering the trading histories of 2,255 entrepreneurs who lived and traded in Kenya’s informal settlements. The results confirmed that paying–it–forward expands entrepreneurial functioning through two contrasting network interaction effects that either amplify or attenuate the pro–social impact of paying–it–forward on others’ welfare during the COVID–19 pandemic lockdown.
... In Zambia, SMEs account for 88% of employment; in Ghana, they contribute 80% to employment creation; and in South Africa, they provide up to 60% employment. Additionally, these enterprises contribute to innovation efforts, which are essential for the economic and social transformations of their citizens who are often trapped in poverty (Kuk et al., 2022). However, their innovations are carried out using limited financial resource-bases (Simba et al., 2021). ...
... Despite these financial difficulties, these enterprises engage in solving social problems by bringing much-needed technology-enabled services to the poor neighborhoods (see Diniz et al., 2019). Research suggests that they bring innovative services like digital currency systems that enable people in such neighborhoods to acquire basic human needs like clean water, food, and access to medical assistance (Kuk et al., 2022;Simba et al., 2021). Given the role of innovative SMEs in these neighborhoods, estimated to have over a billion inhabitants (UN, 2019), understanding the sources of financial resources these SMEs draw upon to innovate, operate, and survive is essential for fostering their continued development and long-term success. ...
... The innovation efforts of SMEs in developing countries are very important to many individuals who live in impoverished neighborhoods (Kuk et al., 2022). Considering their importance to over a billion individuals who inhabit such neighborhoods (UN, 2019), it is essential that research develops some understanding of where SMEs, in such contexts, obtain financial resources necessary for their innovations. ...
Purpose
The study aims to explore the role of non-mainstream financial schemes in supporting innovation within SMEs in developing countries, particularly in sub-Saharan Africa. It investigates how informal credit, business group affiliation and foreign and state ownership arrangements influence SMEs’ innovative activities in environments with limited access to formal financial resources.
Design/methodology/approach
The research utilizes data from the World Bank’s Enterprise Surveys, focusing on 8,466 firms across 11 sub-Saharan African countries from 2011 to 2020. A logistic regression analysis was conducted to assess the impact of various financial sources on SMEs’ innovation outputs, particularly incremental innovations, due to data constraints on radical innovations.
Findings
The findings reveal that informal credit significantly supports SME innovation, while business group resources can hinder innovative activities by restricting firms to routine tasks. State ownership positively influences innovation, whereas the impact of foreign ownership is inconclusive. These results highlight the critical role of alternative financial mechanisms in the innovation activities of SMEs in resource-limited settings.
Originality/value
This study contributes to the literature by providing empirical evidence on the effects of non-mainstream financial schemes on SME innovation in developing countries. It offers new theoretical insights into how SMEs navigate financial constraints to foster innovation and suggests policy implications for improving financial support systems for SMEs in such contexts. The research underscores the importance of contextualizing entrepreneurship studies to better understand the unique challenges and opportunities faced by SMEs in developing regions.
... Emerging scholarly research is beginning to recognise that when entrepreneurs are faced with adversities, they coalesce to confront them (see Kuk et al., 2022, Meyer, 2020, and their resultant acts often create some form of socioeconomic equilibrium (Kirzner, 1973;Schumpeter, 1934). Thus, and drawing from social embeddedness perspectives in entrepreneurship (McKeever et al., 2014), we foster an understanding of the processes underlying ways in which microentrepreneurs in rural China interact and act as they confront issues of microentrepreneurship in their weak institutional environment. ...
... Furthermore, we contribute knowledge on how such clusters spontaneously emerge as a response to emerging socioeconomic hardships. Moreover, we provide perspectives that advance the idea that when microentrepreneurs selforganise in localities facing multiple adversities, they can establish a socioeconomic equilibrium (Kuk et al., 2022). Such an understanding advances entrepreneurship as a process in a weak institutional environment by showcasing how microentrepreneurs influence their environment when they align their entrepreneurial action with local forces, including culture, economics, business ideologies, etc., to shape/define their social structures (cf., Frank et al., 2013). ...
... In summary, social relations and prior work experience were the two main factors that played some role in helping microentrepreneurs form and shape their entrepreneurial opportunities. With regard to the nature of the behaviours as they interacted in their social environment, there was a distinct pattern showing evidence of high-level pro-social actions based on reciprocal exchanges (cf., Kuk et al., 2022). This suggests that community cohesion and collectivism defined how entrepreneurs related to each other as they established localised entrepreneurial clusters. ...
Research overemphasises the facilitative role of institutions in cluster formation. It overlooks the collective actions by microentrepreneurs when confronting issues of microentrepreneurship in a weak institutional environment. Drawing from a social embeddedness perspective in entrepreneurship, we analyse the mechanisms underlying their methods of self-organisation for collective action, particularly in cluster formation. Interviews involving 19 microentrepreneurs in rural China revealed that they self-organised to form self-serving clusters by engaging in small-scale entrepreneurial acts of reciprocal and cooperative behaviours, solidarity, camaraderie, and by adopting Chinese business ideologies. Such an understanding contributes to research on clusters, as it reveals ways in which microentrepreneurs in a weak institutional environment leverage localised economic, social, and cultural forces to collectively form self-serving clusters. This foregrounds the role of microentrepreneurs in establishing a socioeconomic equilibrium in such an environment and it holds social, academic, and policy implications.
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