The Cross-Border Transfer of LowIncome Business Models
Institutions and the Global Growth of
Microfinance
Joshua K. Ault
University of South Carolina
1
Dissertation
• Applies concepts from the “cross-border transfer”
literature to the study of business models in lowincome and subsistence markets
• Uses microfinance business model to test and extend
those ideas
– Quantitative study of the global growth of microfinance
across 139 countries
– Qualitative study of model adaptation in 3 countries
(Ethiopia, Uganda and US)
• This presentation provides preliminary results for the
quantitative study
2
Agenda
• Theory
– Emergent research stream on business models in low-income markets
– Cross-border transfer literature
• Phenomenon
– Microfinance as widespread, innovative business model
– How well does microfinance travel?
• Hypotheses
– Microfinance will grow best in countries similar to Bangladesh
(informality, moderate stability)
• Methodology and Results
– Found that institutions matter in the global growth of microfinance
• Next Steps
– Qualitative analysis of adaptation and change of microfinance model
3
Emergent Research Stream into
Low-income Business Models
•
Untapped market of 4 billion (Prahalad, 2005)
–
–
•
Adaptation of business model is needed
–
•
Potential of $13 trillion in spending power
Reaching these markets improves economic and social conditions
Need to understand local environment (London and Hart, 2004)
Can you adapt and still reach 4 billion people?
–
–
–
Some argue that social & business cases overstated (Karnani,
2007)
Issue of scalability rarely addressed, but critical to further
knowledge and practice
Little empirical research to test competing claims
4
The Cross-Border Transfer Question
• Literature often formulates the question as whether
there is a business case for low-income business
model
• This study focuses on the question: under what
conditions does a business case hold?
– Goes beyond identifying models that work to understanding
their diffusion
– What works in one society may not work in another
– Questions of scalability, adaptation and strategy
5
Perspectives on the Cross-Border
Transfer of Business Models
Summary
Representative
Authors
Focus
Roots
CAGE Distance
Institutional Distance
Comparative Institutionalism
Cultural, administrative,
geographic, and economic
differences will determine capital
flows
Differences in institutional profiles
will determine knowledge transfer
and entry mode
Institutions provide resources and
capabilities for some models but
not others
Ghemawat (2007); Tsang & Yip
(2007)
Kostova (1999); Xu & Shenkar
(2002)
Guillen (2001); Aguilera & Jackson
(2003); Westney (1987)
Trade, FDI
MNC/Subsidiary Transfers, Entry
Mode
Organizational Models, Emerging
Economies, Adaptation
Business Economics
Neo-Institutional Theory
Historical/Comparative
Institutionalism
6
Implications for the Transfer of LowIncome Business Models
1. How does institutional “fit” affect the transfer of lowincome business models across national boundaries?
–
Will the microfinance business model “fit” in every low-income
society?
2. How does adaptation affect transferability?
–
–
–
Will the microfinance business model adapt to “fit” different
environments?
What adaptations will occur?
What are the microprocesses by which this occurs?
Quantitative study focuses primarily on the first question
7
The Case of the Microfinance Business
Model
• Microfinance “provides very poor families with very
small loans to help them engage in productive
activities or grow their tiny businesses” (Microfinance
Gateway, 2008).
• Microfinance presents a unique empirical setting to
address these questions
– Business model has been developed over 30 years of
experimentation
– Transferred across multiple countries
– Transitioning from non-profit to for profit
8
Development of the Grameen Model
• Began in 1976 as an academic research project in the
village of Jobra, Bangladesh
– Yunus, an economics professor found the western theories he
was teaching “maddeningly irrelevant” for Bangladesh (Bruck,
2006)
• Three years of observation of the environment,
experimentation, and trial and error to match the model to
the institutional conditions in Jobra
• Expanded out of Jobra in 1979 with the sponsorship and
support and of the Bangladeshi Central Bank and national
banks
• In just 30 years, has transferred to numerous countries
across the globe
9
Grameen Business Model (2008)
Clientele
• Exclusive focus on the very poor
• Exclusive focus on rural
population
• Emphasis on women
Loan Characteristics
• Small (~$75 on average)
• Relatively high interest rates
(~20%)
• Non-collateralized/ undocumented
• Intended for income generation
• Usage is self-determined
• Insistence on repayment (no
charity)
Governance Mechanisms
• Group lending
• Borrower homogeneity
• Compulsory savings
• Weekly repayment schedule
• Progressive lending
• Decentralization of authority and
decision making (low-level staff)
• Borrower training program
• Complete transparency in all
transactions
Organizational Characteristics
• Legally registered
• Financially sustainable
• Private sector
• Broader social agenda
Sources: Grameen Foundation (2008);
Grameen Bank (2008)
10
General Group-Lending Model
(Beyond Just Grameen)
Clientele
• Focus on the poor
• Emphasis on women
Loan Characteristics
• Small (< $1,500)
• Relatively high interest rates
• Non-collateralized/
undocumented
• Usage is self-determined
• Insistence on repayment
Governance Mechanisms
• Group lending
• Savings
• Frequent repayment schedule
• Progressive lending
• Decentralization of authority
and decision making (low-level
staff)
Organizational Characteristics
• Legally registered
• Focus on profitability
• Private sector
Sources: Westley (2007), Center for Global
Development (2006), Robinson (2001), CGAP
(2008); MiX (2008)
11
Microfinance Designed and Tied to the
Institutional Environment
• Designed for institutions different from those in developed
countries
– A model specifically designed to work in environments with
poor “institutional quality”
– Institutional environments differ across emerging and
developing countries as well
• Comparative Institutional Advantage -- “The institutional
structures of a particular political economy provide firms with
advantages for engaging in specific types of activities there”
(Hall & Soskice, 2001: 37)
– Does the microfinance model have a comparative advantage
in certain types of institutional environments?
12
Informal Economic Systems
• Informality:
– “Those actions of economic agents that fail to adhere to the
established institutional rules or are denied their protection” (Feige,
1990)
• Literature suggests microfinance is designed as an
informal lending model (Servon, 2002)
– However, microfinance institutions embrace certain forms of
informality, but not others
– E.g., Group lending and no collateral, but legally registered
– Need to understand differences in types of informality to
understand the transfer of microfinance across borders
• Transfer not just about market size, but also institutional
conditions
13
Literature Has Developed Around Types
of Informality
• Horizontal informality (North, 1981; Acemoglu &
Johnson, 2005)
– E.g., Informal housing contracts in Peru (De Soto, 1989)
• Vertical informality (North, 1981; Acemoglu &
Johnson, 2005)
– E.g., Bribing officials in Zaire (Portes, 1994; Evans, 1995)
14
Horizontal Informality
• Use of informal means of contracting between actors
– Likely to be high in institutional contexts where the state is
ineffective in facilitating economic exchange
– In formal systems, state acts as arbiter of contracts (North, 1981;
Acemoglu & Johnson, 2005)
• Microfinance most suited for contexts where the state
does not enable formal contracting
– While informal mechanisms are viable, they have a cost relative
to formal mechanisms
– These costs limit the advantages of informal mechanisms in
formal systems
15
Hypothesis 1
The greater the strength of
contract enforcement at
the national level, the
weaker the growth of
national-level commercial
microfinance lending.
Contract Enforcement
High
Informal Lending
• Poor customers
• Lack of collateral
• Small loan sizes
Low
16
Political Stability as Moderator of
Horizontal Informality Type
• Literature identifies at least three types of horizontal
informal contracting (Portes, 1994)
– Growth (ex: Italy)
• Often legal enterprises working in stable communities
• Gain advantages in flexibility through networks
• Often subcontract to, and competes with, the formal sector
– Survival (Ex: Bangladesh)
• Some uncertainty, less stability
• Very small enterprises with few ties to formal sector
• Actors rely on reputation-based social arrangements
– Violent and criminal (Ex: Zaire)
• High uncertainty
• Power and connections create high returns (i.e. wealth
redistribution)
• Truck and barter transactions
17
Best Institutional “Fit” for Microfinance
is “Survival” Informality
• Absence of formal state regulation will not necessarily
lead to the type of informal contracting most suitable for
microfinance
– Ability of communities to either confer status on individuals or
ostracize them is the key governance mechanism in the
microfinance model
– Presence of pre-existing social pressure in economic relations
acts as a source of institutional advantage for microfinance
• Survival informality most likely to provide this resource
– Not just lack of formal enforcement, but also some degree of
stability in the state
18
Hypothesis 2
National System of Exchange
Formal
Informal
Political Stability
National-level political
stability will moderate the
relationship between
contract enforcement and
microfinance lending such
that the effect will be
greatest at medium levels
of stability. That is, the
moderating effect of
stability will be curvilinear.
High
Growth
Embedded in
formal contracts
Low
Survival
Violent
19
Vertical Informality
• Informality that is designed to hide or avoid state
intervention
– Determined by the degree to which the state provides checks
against abuse by political elites (North, 1981; Acemoglu &
Johnson, 2005)
– Unlike with horizontal informality, there are few alternative
mechanisms to circumvent abuse by elites
– Actors forced underground (Portes, Castells, & Benton, 1989)
• Microfinance:
– Not like loansharking, which is conducted without reference or
recourse to legal system
– Whereas loansharking derives from bottom-up demand,
microfinance derives from top-down supply (Schreiner, 2001)
20
(Hypothesis 3)
The greater the
constraints on abuse by
political elites at the
national level, the greater
the growth of nationallevel commercial
microfinance lending
Constraints on Elites
High
Legal Registration
• Access to formal capital
• Licenses for savings
Low
21
Preliminary Analysis
• 9-year longitudinal, cross-sectional study of 139
countries using random-coefficients modeling (RCM)
– RCM is “an extremely powerful tool of comparative analysis”
– Controls for causal heterogeneity (Beck, 2006)
• Variables
– Dependent variable: number of commercial microfinance
borrowers per capita (MiX)
– Independent variables:
• Contract Enforcement: World Bank’s “Doing Business Project”
“Enforcing Contracts
• Political Stability: Kaufman, Kraay, and Mastruzzi (2006) “Political
Stability and Absence of Violence”
• Covariates: Per-capita GDP, Literacy
22
Countries Plotted by Informality and
Stability with Number of Microfinance
Borrowers Indicated
Number of microfinance borrowers > 25 per thousand citizens
Number of microfinance borrowers < 25 per thousand citizens
23
Model Results
SE
95% CI
lower
boundc
95% CI upper
boundc
-0.25
0.28
-0.80
0.30
-0.92
0.91
0.16
0.60
1.22
32.01 **
1580
0.17
0.14
-0.10
0.44
1.90
1580
-0.01
0.01
-0.03
0.01
1.00
GDP per Capita (intercept)
131
0.24
0.34
-0.43
0.91
7.59 **
Literacy (intercept)
131
-0.19
0.26
-0.70
0.32
0.44
Informality (intercept)
131
0.00
0.31
-0.61
0.61
3.40
Stability (intercept)
131
-0.28
0.36
-0.99
0.43
0.48
Stability 2 (intercept)
131
0.06
0.26
-0.45
0.57
3.67
131
-0.01
0.28
-0.56
0.54
0.81
Informality X Stability (intercept)
131
-0.05
0.19
-0.42
0.32
4.10 *
GDP per Capita (slope)
1104
-0.42
0.19
-0.79
-0.05
9.29 **
Literacy (slope)
1104
0.34
0.15
0.05
0.63
0.17
Informality (slope)
1104
0.46
0.18
0.11
0.81
3.73 *
df a
Parameter
estimateb
131
Linear Trend
1104
Quadratic Trend
Cubic Trend
Model and parameter
F Valued
Final Level 1 model
Intercept
Final Level 2 model
Informality X Stability (intercept)
2
Stability (slope)
1104
-0.21
-0.20
0.18
-0.60
1.49
Stability 2 (slope)
1104
-0.35
0.15
-0.64
-0.06
4.51 *
Informality X Stability (slope)
Informality X Stability 2 (slope)
1104
1104
-0.28
-0.22
0.16
0.11
-0.59
-0.44
0.03
-0.01
0.98
4.11 *
24
Results: Hypothesis 1
• Microfinance most likely at high levels of informality
• Coefficient for Informality = 0.46
– F = 3.73
– P < 0.05
25
Borrowers per Thousand Population
Predicted borrowers per thousand
population for each year as a function of
Informality (I).
9.00
8.00
High I
7.00
6.00
5.00
4.00
Mean I
3.00
Low I
2.00
1.00
0.00
1998
1999
2000
2001
2002
2003
2004
2005
2006
26
Results: Hypothesis 2
• Tests the interaction between informality and the
squared term for political stability
– Microfinance most likely at high levels of informality and
medium levels of political stability
– Hypothesized sign is for coefficient is negative (interaction is
with an inverted-U shape)
• Coefficient for Informality X Stability2 = -0.22
– F = 4.11
– P < 0.05
27
Borrowers per Thousand Population
Predicted borrowers per thousand population for
each year as a function of the
Informality
(I)/Stability (S) interaction.
12
High I Med S
10
8
6
Low I Low S
4
High I Low S
Low I Med S
2
Low I High S
0
1998
1999
2000
2001
2002
2003
2004
2005
High I High S
2006
28
Robustness
• Fully-pooled longitudinal models
– Panel-corrected standard errors with AR(1) disturbance
– Heteroscedasticity-consistent standard errors
• Additional covariates
– Regime type
– Openness to trade
– Population
• Alternate measure for stability
– State Fragility Index (Polity IV)
• Results similar
29
Next Steps
1. Extensions to the quantitative model
–
–
Vertical Informality
Distance measures
2. Study 2: Adaptation of the microfinance model
–
Uganda, Ethiopia, USA
3. Informality framework
4. Non-profit vs. for-profit models
–
Answer not yes/no, but when and how
5. Reverse transfer of models from developing to
developed countries
30
General Implications for Sustainability
Research
• IB literatures are clear that transferring “best
practices” across national boundaries is highly
complex
– E.g., Bringing European best practices on environmentalism
to the U.S. will likely have similar issues
– Cross-cultural differences in conceptualizing sustainability
– These cross-national differences have implications for the
scalability, growth, and profitability of sustainable initiatives
31
Conclusion
• Ultimate goal is to eradicate poverty, protect the
environment, achieve peace, eliminate disease, etc.
– Need to break broad goals into component parts
– Social case, business case, and sub-issues
• My research focus is on middle range theory about
what works, when, and under what conditions
– Poverty eradication
– Business case for poverty eradication
– Transferability of business models across societies
32