Social capital and networks

Fafchamps (2004) argues that the distinct patterns of ethnic concentration in business can to a large degree be explained by a restricted entry process in business networks and by network externalities. Since network externalities bestow comparative advantages in business on network members, minority communities earn rents and become dominant in particular segments of the economy.

The puzzle of successful minority-run businesses in developing countries: A review 45

Members of a minority community typically share the same values, traditions and cultural beliefs. This facilitates the development of trust and social relationships within a community. Phenotypical or cultural characteristics that set the community apart from the majority population can give rise to prejudice and discrimination outside the community. This in turn fosters sentiments of in-group solidarity among its members (Portes & Sensenbrenner, 1993). Exit options, such as the return of migrant entrepreneurs to their home countries may not be readily available. Therefore, the importance of the community is reinforced.

Results of micro-economic game experiments show that people tend to have more trust in people of the same race or nationality than in other people (Buchan et al., 2002; Glaeser et al., 2000). Survey data of manufacturing enterprises in Kenya, Tanzania, Zambia and Zimbabwe show that trust forms the basis for market exchange in these contexts. Interviewed firms generally deal with a single supplier of a particular input on a regular basis (even when they have a choice among different sources of supply), and the average length of the relationship exceeds seven years (Bigsten et al., 2003). Minority entrepreneurs show a low propensity to use mainstream business support agencies, often relying instead on self-help and informal sources of assistance through their social network (Carter & Jones-Evans, 2009; Ram & Smallbone, 2002).

Social capital is accrued through social networks (Lin, 1999). Whereas the structure of the social network determines the kind of resources a person may be able to access, social capital allows the transaction to take place. Small, homogenous and cohesive networks may be more suited to reduce uncertainty and overcome credit constraints, whereas numerous and diverse contacts may transmit better information about technologies and markets (Barr, 2002).

Barr (2000) demonstrates that Ghanaian manufacturers with large and diverse contacts outperform less connected firms, suggesting that these networks facilitate knowledge flows between enterprises. Looking at the structure of entrepreneurial social networks, Rooks et al.

(2009) show that a strong overlap of the personal and business network hampers innovative performance of urban entrepreneurs in Uganda. Investing time in cultivating a redundant contact at first increases innovation by solving information and cooperation problems.

However, if there are many connections between the entrepreneur’s relations information will be less diverse and redistributive kinship pressure may play a more important role, draining entrepreneurial resources. McCormick (1995) compares the networks of Asian and Kenyan garment producers in Nairobi. Whereas Asian networks appear very conducive to business growth - comprising textile wholesalers, shop owners, bankers, other garment producers, sewing machine vendors and a wide range of middle-income consumers – the networks of

46 The puzzle of successful minority-run businesses in developing countries: A review

African entrepreneurs are more limited to their family, often based in rural areas. Ali and Peerlings (2011) find that maintaining ethnic ties in trade relationships reduces the business profits of small-scale producers in the handloom sector in Ethiopia. The negative effect of having limited flows of new business-related ideas in closed social networks appears to offset the benefits of ethnic ties. Whereas migrant entrepreneurs often stay in contact with their kinship and social ties back home, indigenous African business networks are typically not linked to other groups outside the region that could provide important models, ideas and resources.

The social network may also act as an impediment to entrepreneurial dynamics. This may be the case when less successful members of the kin confront economically successful entrepreneurs with sharing obligations. These obligations may require entrepreneurs to transfer money, employ kin in their enterprise or host relatives in their home (Hoff & Sen, 2006;

Platteau, 2000). In principle, these transfers may occur voluntarily and even foster entrepreneurial activities through providing access to supportive network services. However, if insurance or societal pressure for redistribution are the main motivating factors these networks might hinder capital accumulation and put brakes on entrepreneurial activity. Forced solidarity can increase the operating costs of firm owners and adversely affect their incentives to pursue and develop their business. Platteau (2000) presents a game-theoretical analysis showing that sharing norms can block economic growth in conditions where actors have differential capacities for material advance and where economic individualism entails costs by eroding mutual insurance potential and encouraging positional externalities.

Forced solidarity is usually exercised by family or kinship. The main difference between family and kinship ties, on the one hand, and the social network as a generic set of individuals who interact, on the other, is that family and kinship ties can be seen as largely exogenous and can be changed only at high psychological costs (La Ferrara, 2010). Migration and religious conversion are two routes that an entrepreneurial individual can take to escape the constraints on private wealth accumulation posed by sharing norms in traditional societies. Being strangers, migrant entrepreneurs stand outside of the complex web of social obligations that surround economic transactions in their host country. Similarly, religious conversion may serve to shun involvement in customary kinship networks and may partially explain the relative entrepreneurial success of religious minorities. Jehovah’s Witnesses, for example, are disproportionally represented in the commercial farmer and shopkeeper business in Zambia (Platteau, 2000). In contrast, entrepreneurial resources, such as information, capital and labour are usually mobilized within the wider social network. Dynamic entrepreneurs may also receive

The puzzle of successful minority-run businesses in developing countries: A review 47

demands from members of their wider network but here deviant behaviour (such as default on a loan) is less socially accepted and easier to sanction.

The aspect of forced solidarity has not been adequately taken into account in many empirical studies trying to establish the net effect of social capital on business success. To date, there is little empirical backup for the existence of negative effects of social networks. Some related evidence, however, indicates that the composition and structure of the household matters for capital accumulation, e.g. that larger polygamous households find it more difficult to save and accumulate (Morrisson, 2006). Duflo et al. (2011) put forward a similar argument, when showing that impatient Kenyan farmers forgo highly profitable investments in fertilizer. The authors argue that the impatience is partly rooted in the difficulty of protecting savings from consumption demands. Di Falco and Bulte (2011) present evidence that kinship size is associated with higher budget shares for non-sharable goods. Baland et al. (2011) analyse borrowing behaviour in Cameroun and find that some people take up credit even without liquidity constraints to signal to their kin that they are unable to provide financial assistance.

Anderson and Baland (2002) provide some evidence that women in Kenya participate in Rotating Saving and Credit Associations (ROSCAs) to protect savings against claims by their husbands. Applying a field and real effort experiment in Burkina Faso, Hadnes et al. (2013) show that implicit and explicit solidarity obligations as well as the expectation of future claims for financial support lead to a significant reduction in the productivity of tailors.

The opportunities or advantages of some entrepreneurs pose a constraint to others. The benefits of networks, for example, are confined to its members, and they will often be the larger the more imperfect the environment. Even though the network and social capital literature has focused on case studies on how specific groups benefit from preferential access, more recently the other side of this coin – exclusion for other groups – has been addressed more systematically (Staveren & Knorringa, 2007; Turner, 2007).