STUDY | Entrepreneurship not always the solution to poverty

Entrepreneurship is often touted as a route out of poverty. But a new study shows that the reality may be more complex. For many people from poor backgrounds, entrepreneurship does not lead to increased well-being – but to getting stuck in what researchers call a commodity trap.

The term implies that the business is weakly differentiated and offers similar products or services to many others. Businesses are often labor-intensive, have limited capacity, little bargaining power and tight margins. This makes it difficult to grow, develop and generate stable income.

Analyzing data from small business owners in Ecuador, the researchers behind the study looked specifically at two key aspects of poverty: perceived resource scarcity and a limited horizon of opportunity – that is, a narrow view by small business owners of what options are possible. The results show that these factors affect both business development and individual well-being. When the disadvantages of poverty are transferred to entrepreneurship and cannot be overcome, it means a lower quality of life.

The trap that holds back entrepreneurship

The commodity trap acts as a link between the conditions of poverty and the subjective well-being of the entrepreneur. The deeper the company gets stuck in the trap, the harder it is to perceive that life is improving. But the researchers also show that those who develop a more strategic mindset and become better at spotting opportunities are more likely to avoid or escape the trap.

The study broadens the view of what entrepreneurship can contribute. In addition to economic outcomes, entrepreneurship can also provide independence, self-confidence, identity and a sense of belonging. But these benefits require that the entrepreneur is given the chance to build his or her skills – something that is often made impossible by poverty structures.

Support that makes a difference

For policy makers and support organizations, the conclusion is clear: simply encouraging people in poverty to start businesses is not enough. For entrepreneurship to truly contribute to a better life, support is needed to avoid the commodity trap. This includes investing in training, mentoring and incubators. But it also means helping entrepreneurs from poor backgrounds to differentiate their offerings, collaborate on sourcing and marketing, use simple technologies and develop value-based pricing.

Another important step is to broaden entrepreneurs’ horizons of opportunity. Through networks, role models, mentoring programs and exchanges of experience, they can see more options than those available in their immediate surroundings. However, providing capital alone risks being a short-term solution – unless it is combined with efforts that strengthen individuals’ ability to see and seize new opportunities.

More about the article and the researchers
The article From poverty trap to commodity trap: entrepreneurship and well-being among the poor is published in the scientific journal Small Business Economics. The authors are Michael H. Morris, University of Notre Dame, Sohrab Soleimanof, Louisiana State University, Marcello Calle, Universidad del Azuay and Reginald Tucker, University of Oklahoma, all in the USA.