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This is to certify that the

thesis entitled

DETERMINANTS OF MICROENTERPRISE INCOME:
FOCUS ON A LOW INCOME COMMUNITY IN A
HIGH INCOME COUNTRY

presented by

Sharon J. Lerner

has been accepted towards fulfillment
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Master's degree in Agricultural Economics

 

 

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Date December 16, 1996

 

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DETERMINANTS OF MICROENTERPRISE INCOME:
FOCUS ON A LOW INCOME COMMUNITY IN A HIGH INCOME COUNTRY

By

Sharon J. Lerner

A THESIS
Submitted to
Michigan State University
in partial fulﬁllment of the requirements
for the degree of

MASTER OF SCIENCE

Department of Agricultural Economics

1996

ABSTRACT

DETERMINANTS OF MICROENTERPRISE INCOME:
FOCUS ON A LOW INCOME COMMUNITY IN A HIGH INCOME COUNTRY

By

Sharon J. Lerner

Income to microenterprises operated in low income communities can be important
to households which struggle to provide for basic needs. The frequency and type of ﬁrms
which exist must be identiﬁed to examine the income earned through microenterprises.
The competitive environment of local markets, proprietors’ background, and ﬁrm
operation play important roles in proﬁt levels. These three types of income determinants
form a complex environment which creates possibilities for a diversity of microenterprises.

A household survey in Detroit reveals preliminary information about
microenterprises in a low income urban community. Microenterprises vary in terms of
sectors and income levels, however almost all ﬁrms involve specialized skills of the
proprietor.

Debate surrounds appropriate assistance to the poor. Research on the importance
of microenterprise income and the determinants of income will guide investment in
initiatives which address structural barriers of markets, constraints of social institutions

and the capabilities of individuals.

To all those who lent support, advice and laughter during my time in East Lansing.

ACKNOWLEDGEMENTS

Thank you to all of my teachers in Agricultural Economics at Michigan State
University, but especially to Don Mead for always encouraging me to move forward and
for always welcoming me to discuss ideas and perceptions. Thank you to Allan Schmid,
Tom Reardon and Joel Lichty for your interest in this topic and for providing guidance as
members of my committee. The research in Detroit would not have taken place without
the support of Rex La More, the MSU Center for Urban Affairs and the Community
Income and Expenditures Model team and our community partner, the Southwest Detroit
Business Association. The support of family and friends, especially Chuck Lemer, Judy
Lerner, Arthur Lerner and Michael Grinker, was essential to the completion of this paper.

Thank you to all who contributed to my experience at Michigan State University.

iv

TABLE OF CONTENTS

LIST OF TABLES ...................................................... vii
INTRODUCTION ....................................................... l
I. Microenterprise in the United States ................................... 2
A. Objectives of the research ..................................... 2
B. Background ................................................ 4
C. Income generation of microenterprises ........................... 5
D. Deﬁnition of microcnterprise ................................... 6
I]. Literature Review .................................................. 9
1]]. Conceptual Determinants of Microenterprise Income ..................... 16
A. Market structure ............................................ 18
1. Effective demand in a low income community .............. 19
2. Supply in a low income community ....................... 20
3. Transactions costs .................................... 21
B. Firm characteristics ......................................... 25
C. Personal characteristics ...................................... 28

IV. Selected Aspects of Comparison with Microenterprises in Low Income

Countries ....................................................... 31

A. Comparison of the number of ﬁrms between countries of different
income levels .............................................. 31

B. Determinants of income to microenterprises in a low income country . . 34

V. Empirical Research on Microenterprises in Southwest Detroit, Michigan ..... 36

A. Methods .................................................. 36
B. Results of the survey ........................................ 38
1. Incidence ........................................... 38
1.1 Random Sample Bias ............................ 4O
2. Firm characteristics ................................... 42
2.1 Sample ....................................... 42
2.2 Sector ........................................ 42
2.3 Income ....................................... 45
2.4 Growth, age and employment of ﬁrms .............. 50
2.5 Personal characteristics of ﬁrm proprietors ........... 51
2.6 Summary of microenterprise evidence from Southwest
Detroit ....................................... 54
VI. Next Steps ...................................................... 56
A. Future research ............................................. 56
B. Methodological improvements ................................ 58
VII. Conclusion ...................................................... 61
BIBLIOGRAPHY ....................................................... 65

vi

LIST OF TABLES

Table l - Sectors of microenterprises in 48209 with SIC codes ....................................... 44
Table 2 - Microenterprise contribution to household income ........................................... 49
Table 3 - Female ownership comaprison across data sources .......................................... S3

INTRODUCTION

In the United States approximately 67% of employment is found in ﬁrms with 100
or more workers (Small Business Administration 1994). Those who choose, or are
compelled, to earn income apart from a large-scale employer attract special attention
because they marshal resources in an alternative manner. Independent earners in low
income households who start businesses with highly limited resources are even more
interesting. Microenterprisesl in economically distressed areas generate income to
individuals and important economic activity in poor communities of contemporary United
States cities. The combination of household economic decision-making and the
complexities of modern business environments creates an intricate web within which
individuals may choose to operate a microenterprise.

An individual’s decision to create a microenterprise must be considered in
contrast to other income earning options. .1 ob options are compared based on wages paid
and on the ability of an individual to secure employment. Educational background, and
work and life experiences influence a person’s ability to secure employment, earn high
wages or identify a business opportunity.

Skills are necessary to earn income through enterprise operation or through wage
and salary work. Individuals with low levels of education or work experience will have
more difﬁculty in earning income than others. The character of real economic

opportunities which are open to individuals with less formal education or work

 

1The deﬁnition of microenterprises is this paper will be a ﬁrm with ﬁve employees
or fewer. This will be discussed further in a subsequent section.

1

2

experience is questionable. Many low wage jobs do not provide health insurance and
minimum wage full-time jobs often do not pay enough to sustain a family.
Microenterprise is an alternative earning option, however the potential returns of this
method of income generation have many different facets.

The popular press in the United States increasingly mentions microenterprise
assistance programs in either a positive or negative light. Debate about the beneﬁt of
microenterprise development is political because it involves funding to programs which
assist the poor. There has been, however, little investigation of the role of
microenterprises in the lives of people living on low incomes in the United States.

Section I of this paper provides background information to the study of
microenterprises in low income communities of the United States and Section II is a
review of the current literature. Section III discusses a conceptual model of income
determinants to microenterprises. Section IV presents selected points of comparison of
microenterprises in countries with different levels of income. Section V presents the
results of a survey of households in a low income community to identify microenterprises
and Section VI proposes next steps in research on this topic, including suggestions for

improved methodology. Section VII presents some concluding remarks.

I. Microenterprise in the United States
A. Objectives of the research
This paper explores key factors which affect the ability of microenterprises to earn

income in a poor community. Three components are addressed. A primary focus is the

3

conceptualization of determinants of income received by microenterprises across sectors
which are operated by households in low income communities. Clarity about the factors
that determine microenterprise income will help identify forces, both internal and external
to the ﬁrm, which inﬂuence microenterprise proﬁtability. Three types of determinants are
distinguished here: market structure, ﬁrm characteristics, and personal characteristics.
The interaction of these three types of determinants is also important to ﬁrm operation.

Secondly, a small sample of microenterpries in Detroit, Michigan provides
empirical information about the sectors, income levels received, and characteristics of
these ﬁrms. This research is one step in determination of appropriate assistance measures
to microenterprises in low income communities. It can be diﬁcult to identify and collect
information from very small ﬁrms. The methodology remains to be reﬁned for ﬁrrther
research in this ﬁeld and recommendations for improved methodology are suggested.

Thirdly, comparisons are made to microenterprise activities in developing
countries. The high percentage of employment in microenterprises in developing countries
is compared to the relatively low level of involvement in these activities in the United
States. Conceptual explanations of these differences, based on national levels of
development, are proposed. Similarities between the experience of very small enterprise
owners in nations of various levels of development are explored as well. These
comparisons are important because microenterprise research in developing countries has a
longer history and some of its lessons may be relevant for microenterprise development in

the United States.

B. Background

Data from the United States Small Business Administration reports that ﬁrms with
one to four employees comprised 50% of the total number of establishments in 1991 and
are the most numerous in almost every sector. However, ﬁrms with 1-4 employees
provide only 5% of total employment and income earned is often low. Tax returns reveal
that two-thirds of nonfarm sole proprietorships received less than $25,000 in 1992 (Small
Business Administration 1994). Many people operate small ﬁrms but they often generate
low returns and provide employment for themselves and one or two others.

As mentioned above, a minority of the population operates or is employed by small
businesses. The percentage of the population with nonagricultural self-employment’
income declined nationally for approximately 100 years, and then began to rise after 1970.
The number of nonagricultural self-employed workers decreased ﬁom 6.1 million in 1948
to 5.2 million in 1970 and rose to 7.6 million by 1983. This represented 6.9% of total
workers in 1970 and 7.8% of total workers in 1983 (Becker 1984).

Although the percentage of the population has risen, operation of one’s own
enterprise is still an uncommon earnings option. This is further illustrated by the fact that
nonfarm self-employment income is only 4% of wage and salary income, which totals
$194 million, within the zip code area in which the research for this paper was focused.
However, the aggregate income ﬁom nonfarm self-employment in 1989 represented a

substantial amount, 88 million dollars within the zip code (Michigan Census of Population

 

2The comparability of the terms microenterprise and self-employment is discussed
in the section on deﬁnition of microenterprise.

and Housing 1990).

Estimates of the informal economy vary but it is reasonable to surmise that the size
of the microenterprise, or self-employment and very small business economy, would be
larger if data on unreported ﬁrms were available. All microenterprises do not belong to
, the informal economy (Those ﬁrms not reported to the government), however many may
operate informally. This points to the potentially diﬁcult nature of data collection on
microenterprises. In addition, when enterprises are a part of the formal economy, they are
small and not readily visible. Firms ﬁrst must be identiﬁed, and secondly the proprietor
must be willing to provide information about the ﬁrm. Microenterprises are found in both

the formal and informal sectors.

C. Income generation of microenterprises

A combination of economic, psychological and sociological concepts arise in
evaluation of self-employment in low-income populations (Balkin 1989). Decisions
regarding employment options are based on individual perception of earnings
opportunities, the eﬁ‘ects of social institutions, and the workings of one’s psyche. Income
earned is determined by a combination of all of these factors. Each of these aspects aﬁ‘ects
proprietors’ decisions about how to operate a microenterprise within existing markets.

Firm operators must identify a market opportunity and meet the demand over time
to earn proﬁts. Real market opportunities faced by very small ﬁrms can be diﬁcult to
identify. Serious questions concern the ability of individuals to create competitive

advantage, and consequently earn income through microenterprises in a complex market

environment.
Determinants of microenterprise income generation operate on individual, ﬁrm and
market structure levels. Microenterprises which exist in a low income community also

provide clues about the role of this method of income generation to households.

D. Deﬁnition of microenterprise

The concept of microenterprise does not have a standard deﬁnition in the United
States. The term has assumed a concrete deﬁnition in international development work
through formal use of the term over time by large agencies’. Funders and researchers
working with US. microenterprise development have adopted a revised deﬁnition from
the international term to adjust for the larger scale of the industrialized market economy.
A microenterprise is considered to be a ﬁrm with ﬁve workers or less for the purposes of
this study‘.

Very small ﬁrms in the United States are often sophisticated and make high proﬁts
which could justify the downward adjustment of the international deﬁnition of
microenterprise. There may be greater opportunities to earn proﬁts with fewer workers

through increased access to technology, education and capital in a developed economy.

 

3The USAID deﬁnition of a microenterprise is a ﬁrm with “no more than
approximately 10 employees....An attempt to deﬁne or limit the size of a microenterprise
too severely would exclude from the program some enterprises that Congress desired to
receive the beneﬁt of this program, i.e., made up of poor people” (U SAID 1988).

‘This is the deﬁnition used by two major participants in microenterprise assistance
programming in the United States, Shorebank Advisory Services and the Mott
Foundation.

7

Access to these resources makes labor more productive and increases the returns to a
small scale ﬁrm.

Although the deﬁnition can be stated simply, controversy exists over optimal
breakdown in the classiﬁcation of very small ﬁrms’. The distinction between
microenterprises and other methods of categorizing small businesses is not strict.

Microenterprises can be viewed as small businesses or self-employment. Previous
research has found many microenterprises to be one person ﬁrms (Liedholrn and Mead
1992; Clark et al. 1994; Raheirn et al. 1995). This includes self-employment and
businesses with ﬁve workers or less. The terms are not completely comparable, however
data on both types of ﬁrm populations are used here to discuss microenterprises. This
reﬂects two different sides of the discussion about microenterprises, small business
operation and household income sources.

Data which describe microenterprises are collected by the federal government in
the general categories of both small business and self-employment. Self-employment ﬁrms
qualify as microenterprises as long as there are ﬁve workers or less‘. The smallest
category of ﬁrms in Small Business Administration data is those ﬁrms with one to four
employees. The average size of nonfarrn sole proprietorships in this category in 1991 was

1.7 employees (Small Business Administration 1994).

 

’For a review of several classiﬁcations based on growth prospects of very small
ﬁrms in a developing country context see Davies, Mead and Scale, 1992.

‘In the Current Population Survey of the Bureau of Labor Statistics, if the ﬁrm is a
corporation, the owner is considered to be an employee of the corporation and is not
considered to be self-employed (Bregger 1996).

8

Another term often used to describe businesses which could be termed
microenterprises is home-based business. Microenterprises can be self-employment and/or
home based businesses but they are not necessarily either one. These two terms describe
potential characteristics of a ﬁrm of any size. Confusion arises in the collection of data ‘
concerning diﬁ‘erent types of ﬁrms and the complementarity of data sets because ﬁrms may
belong to one group and not the other.

The major distinguishing characteristic of microenterprises in the United States
may be that they intentionally refer to entrepreneurial efforts of persons with few assets
and little economic security. This characteristic is a main motivating factor for the current
interest in microenterprises in contributing to poverty alleviation.

“. . .Microenterprise development targets women, low-income individuals, displaced
wage earners, and the under- or unemployed. This approach focuses on creating

local entrepreneurial capacity that will catalyze indigenous economic growth

within communities” (Shorebank Advisory Services 1992).

This concentration on economically disadvantaged populations is a distinguishing
characteristic from the broad focus on self-employed workers and is a compelling reason

for study of microenterprise activities.

11. Literature Review

Research on microenterprises in the United States has grown out of efforts to
evaluate newly established microenterprise assistance programs. The research has drawn
samples ﬁ'om assistance program client lists, including individuals receiving federal income
assistance. Two major eﬁ‘orts have collected primary data on microenterprise activities of
low income individuals who have received agency assistance.

A three-year study (1992-95), referred to as the Self-Employment Learning
Project (SELP), uses a sample consisting of 302 randomly drawn microenterprises from
ﬁve diﬂ‘erent program client lists. Interim reports present proﬁles of microentrepreneurs
and their businesses, discussions of their levels of proﬁtability, and methodology of
assistance agencies (Clark et al. 1994).

The ﬁrst focus of this study is to describe general characteristics of this target
population. Microentrepreneurs having received assistance are predominantly female" and
have graduated from high school. Ethnic composition was reported to reﬂect the
demographics of the low-income communities in which the programs are located and
which they were designed to serve. Almost half of microentreprenuers in this study have
two or more sources of income, including their business and most respondents reported
the business to be their primary source of income. Almost two-thirds of the businesses are

based in the home. Firms are typically less than ﬁve years old' and two-thirds provide

 

7Some assistance programs were originally established to serve only women
(ISED). Many have recently begun serving men and male clients have increased.

'Some assistance programs offer assistance in starting businesses so there may be
more very young ﬁrms.

10

employment for only one paid worker, the owner. Microenterprises were involved in the
following three industries most ﬁ'equently(N=302): apparel and textile businesses (n=81),
varied wholesale and retail products businesses (n=78), and professional services (n=66)
(Clark et al. 1994).

Due to the method of drawing the sample ﬁom program client lists, the study
includes only microenterprises which sought and received assistance. This is useﬁrl for the
second focus of the study which is to evaluate eﬁ‘ectiveness of assistance programs,
however some bias exists in the sample because all ﬁrms or proprietors had some
characteristics which resulted in seeking assistance for the ﬁrm. Firm owners who had not
reached the point at which they were motivated to seek assistance are not represented in
this research.

A second research effort was designed to be a “test of the feasibility of self-
employment as a route to economic self-suﬁiciency for families dependent on AFDC”
(Raheim et al. 1995). The Self-Employment Investment Demonstration (SEID) offered
business training, loan assistance and asset accumulation waivers to AFDC recipients as a
pilot project in eight locations across the United States ﬁ'om 1988-1992. A random
sample of those who elected to participate in the program was analyzed two years after it
began. Results of this study include a proﬁle of the typical AFDC recipients who chose
self-employment and several lessons about the potential of microenterprise development to
contribute to poverty alleviation (Raheim et al. 1995)

There are some parallels and some distinctions among microentrepreneurs in this

sample compared to the one above. All participants are women due to the focus on

11

AFDC recipients. More than half have some vocational training or some college
education, more than two-thirds are single heads of households, and 14% have more than
three children. The ethnic composition reﬂects the larger AFDC recipient population. A
majority of enterprises assisted by this program are in the service sector (73%), followed
far behind in frequency by the retail sector (20%). Two years after the program began,
79% of the businesses were still in operation and the median income provided was $8,000.
The businesses had created .53 jobs for every one business excluding the owners and
seasonal labor.

A large deterrent to foregoing federal income assistance was found to be the loss
of medical beneﬁts. In addition, a signiﬁcant barrier to self-employment by welfare
recipients was found to be federal regulation which disallows receipt of AFDC beneﬁts in
the presence of minimum levels of income and asset accumulation (Raheim et al. 1994).
These levels are quite low. A person could reach these limits and still face a great deal of
economic insecurity.

Both studies found beneﬁts from microenterprise operation other than monetary
income. Many reported increased conﬁdence levels of proprietors in their personal and
professional lives, better relationships with children and other family members, and
increased self-esteem.

Another study, based on the SELP sample and on Census Bureau Survey of
Income and Program Participation (SIPP) data, compares business and personal
characteristics of different types of female microentrepreneurs to evaluate the “success” of

microenterprises in raising incomes and helping women work their way oﬁ‘ welfare. The

12

authors ﬁnd that microenterprise income is a small part of family income and clearly point
out that the population of potentially self-employed “successes” among AFDC recipients
exists, but is small. Several concluding suggestions include support for increased
education, health insurance, microlending institutions, income supports to packagers, asset
accumulation levels for AFDC recipients and recruitment of women of color (Spalter-Roth
et al. 1994). The discussion of suggested policies does not specify methods by which
candidates could be targeted although they point out that this method of income
generation is not suitable for all.

Some authors have discussed the potential for microenterprise development to
contribute to poverty alleviation and local economic development by examining
international models. This is appropriate because the history of researching and providing
assistance to microenterprises is longer in developing countries than in the United States.
Obstacles to the suitability of microenterprise assistance initiatives in the United States are
raised.

Several barriers to transferring “minimalist”9 microenterprise assistance programs
to the United States are mentioned: 1) The informal sector is not as concentrated or as
large as that of developing countries; 2) It is not clear that a lack of access to credit is the
main constraint in the United States, implying that there are other important obstacles to
microenterprises (This is also a point of debate in international microenterprise

development and research); 3) Welfare options inhibit self-employment; 4) Doubts exist

 

’This is a common term for microenterprise assistance models in that they limit the
range of assistance oﬁ‘ered in order to address issues of emciency and scale in program
delivery. Minimalist models typically involve credit.

13
about the proﬁtability of ﬁrms in the long run (Novogratz 1992; Solomon 1992).

There is a great deal of literature on various aspects of self-employment. Two
studies viewed the reversal of a hundred year declining trend of self-employment to be
worthy of examination. One found potential earnings to be the main determinant of the
choice to be self-employed for a sample of Canadian, white men. Another found changing
technology and industrial structure to be the major determinants in the increase in self-
employment in the general population (Blau 1897; Bernhardt 1994). Neither of these
studies focused primarily on low income populations.

One body of literature on self-employment focuses on entrepreneurism in
immigrant communities in the United States. Case study examination of microenterprise
activity in ethnic enclave communities shows evidence of varying levels of microenterprise
success in diﬁ‘erent types of communities (Novogratz 1992). Ethnicity and culture are
distinguishing characteristics and play a role in the level of entrepreneurship or self
employment in a community. Microenterprise assistance can have various aﬁ‘ects across
communities with populations of different cultures.

Various researchers have produced contradictory results regarding the relative
returns to labor of self-employment versus wage and salaried work in ﬁrst and second
generation immigrant communities. They determine that the form of the equation used to
estimate earnings inﬂuences which type of earnings is greater. Their sample is composed
of men and uses nationality or cultural backgrounds as the distinction between groups
(Portes and Zhou 1996). Writings on immigration and self-employment provide a basis

for consideration of culture and ethnicity as a signiﬁcant variable in research on self-

l4

employment. Although immigrants oﬁen have little ﬁnancial wealth, the focus is not

limited to low income populations.

A central reason for developing country interest in microenterprises is the high
percentage of the labor force which is employed in this part of the economy. Several
frameworks have been used to evaluate constraints to the ability of microenterprises to
contribute to poverty alleviation and economic growth on a national scale.

One research project on microenterprises, the GEMINI project, conducted several
country-wide cross-industry studies in south and east Africa which have been able to paint
a rich picture of the scope and breadth of microenterprise activities. The research has
described the role microenterprises play in creating income and employment and factors
which may aﬁ‘ect enterprises operating on this scale.

Some key ﬁndings come out of the GEMINI research:

1) Microenterprises are dynamic and diverse. Data ﬁom several country-wide studies
has shown the world of micro-ﬁrms to be extremely varied by both activity and
income earned.

2) There are high rates of birth and death of ﬁrms. Births have been found to be
higher during macroeconomic downturns, whereas growth of existing ﬁrms was
found to be higher during times of national economic prosperity.

3) Most ﬁrm deaths occur within the ﬁrst three years of the start of the enterprise and
this is often for other than ﬁnancial reasons.

4) Most ﬁrms (two-thirds) employ one person, the owner, and do not grow.

15

As the ﬁrst key ﬁnding reveals, the world of microenterprises is dynamic and
diverse. Categories within this diversity have been identiﬁed in which each group of ﬁrms
has diﬁ‘erent growth rates, proprietor characteristics and potential assistance demands
(Liedholrn and Mead 1995). Each group appears to have a diﬁ‘erent set of assistance
needs. The four categories are described as: 1) new ﬁrms, 2) established ﬁrms that do not
grow, 3) ﬁrms that are growing slowly, 4)ﬁrrns that have grown larger but are still small.
An implication of the GEMINI research project is that “diﬁ'erent types of micro and small
enterprises have very different contributions to make to the dual objectives of poverty

alleviation and growth” (Leidholm and Mead 1995).

III. Conceptual Determinants of Microenterprise Income

Income to ﬁrms is determined by their ability to produce and sell goods and
services at low cost and earn a proﬁt as well as or better than others. Firms use available
resources to enter into exchanges in the existing business, social and political climate. The
idea that a ﬁrm must produce a good or service that is demanded to make proﬁts may be
the most elemental concept in capitalist economics or business school courses. To identify
income determinants of microenterprises, this principle must be applied to small ﬁrms
operated by poor people. This discussion will focus on the forces, internal and external to
the ﬁrm, which are of particular relevance to microenterprises in low income communities.

The model in this discussion attempts to identify the factors which aﬁ‘ect income
received by microenterprises. Three proposed categories of income determinants are
market structure, ﬁrm characteristics and personal characteristics of the proprietor.

These categories can interact with one another and they all are inﬂuenced by the political
and social institutions under which all ﬁrms operate.

The discussion of factors of microenterprise income generation focuses on local
markets. It assumes that very small ﬁrms run by households in low income communities
have more experience with, and are more centered, around local markets. An international
exporter of high quality china, for example, could be a microenterprise based in a low
income community, but research has not revealed such sophisticated ﬁrms. This assumed

focus on the local economy makes sense in that poverty in the United States is in speciﬁc

16

17

localities which are not distant ﬁ'om wealthy communities”. Economic distress is a
localized phenomenon and thus attention is focussed on these geographic communities for
the purposes of this discussion

Each category of income determinants has several components. This discussion
will highlight critical aspects within each category of determinants. Markets consist of the
levels of supply and demand within a particular geographic area and are external to
individual microenterprise ﬁrms. Market structure includes transaction costs of an
industry, particularly information costs, which can usually be considered a component of
supply costs.

A second category of income determinants are ﬁrm characteristics. Characteristics
of the ﬁrm determine the price, quality and availability of the good or service. These
characteristics will depend on the technical and managrnent skill levels of the ﬁrrn’s owner.
Price, quality and availability of substitutes will also inﬂuence the ﬁrm’s product offerings.
Methods of reaching customers, ie. advertising, also play a role in the income received by
microenterprises.

The third category of income determinants is characteristics of the proprietor.
Personal characteristics of the owner play a large role in determination of ﬁrm
characteristics, as well as in the direct operation and income earned by the ﬁrm. Gender,

education, ethnicity and experience are discussed in this paper. Experience is deﬁned to

 

u’I'he presence of large amounts of spending power is benﬁcial to microenterprises
if they are sophisticated enough to operate in these markets. This is an advantage for
these ﬁrms in developed countries as opposed to developing countries where the

proportion of the population with high disposable income is much lower than the United
States.

18

be both work and life experiences. Various types of experience inﬂuence the expertise
used in ﬁrm operation, an individual’s outlook and attitude towards income generation,
and the ability to access resources and solve problems. Additional personal characteristics
of proprietors which are not discussed in detail here can include family stability and level
of economic security.

The three types of income determinants are deeply related. They are all formed by
the political and social insitutions within which they operate. Aspects of a person
inevitably aﬁ‘ect the operation and characteristics of a one or two person business. The
neighborhood in which a child is raised and the school attended by that child have a deep
affect on the grown person’s problem-solving abilities and perceived opportunities later in
life. In the aggregate, these social and political experiences form the context within which
all businesses and jobseekers operate. These are the markets for goods and services

within which microenterprises compete.

A Market structure

Structural aspects of markets aﬁ‘ect decisions nude in operation of
microenterprises. In the same manner that individuals use Sirnon’s procedural rationality
to select among various income earning options, microenterprise proprietors use this
bounded rationality (Simon 1986) to select methods of operating their ﬁrms within a
complex environment.

The following concepts are part of the context within which proprietors make

decisions about how to operate ﬁrms. The methods by which microenterprises enter

19

output markets to sell their products are inﬂuenced by effective levels of demand and
supply in local markets and transaction costs. These structural aspects of the local

economy surround individual decisions about what to sell and to whom.

1. Effective demand in a low income community

Ifﬁrms are to earn income, they must supply products which meet a demand. If
ﬁrms most often supply local markets, the level of eﬁ‘ective demand (demand backed by
purchasing power) for particular goods and services in low-income communities is
important. The dearth of large low cost ﬁrms may be understood as an indicator of low
eﬁ'ective demand and little potential proﬁts in a low income community. Demand may
exist, but if there are not enough paying customers to cover a ﬁrrn’s costs, there is not
suﬁcient eﬁ‘ective demand for the ﬁrm to survive.

Alternatively, larger ﬁrms with proﬁtable operations elsewhere may not enter a
speciﬁc community if the projected proﬁts do not teach a designated proﬁt level. The
minimum acceptable proﬁt level for a multimillion dollar ﬁrm could be higher than the
minimally acceptable proﬁt level for a ﬁrm run by individuals with more limited eaming
and investment options. The larger ﬁrm may choose not to enter a market if eﬁ‘ective
demand is perceived to be too low to meet target proﬁt levels. Although ﬁrms make
careful decisions about where to operate, imperfect information about the eﬁ‘ective

purchasing power of a community can be hypothesized.

20

2. Supply in a low income community

Two basic sources of competitive advantage for ﬁrms are to be a low cost provider
or to provide drﬁ’erenriared products. Strategic management literature suggests that if a
ﬁrm can not achieve a competitive cost structure, the ﬁrm should pursue an alternate
strategy which often involves differentiation of its goods or services in some way to gain
customers (Thompson and Strickland 1995).

Large scale national ﬁrms are often low cost providers, due in part to their gigantic
scale of operations. If one of these ﬁrms chooses to supply an area, it is diﬁcult for
smaller ﬁrms to compete on price in the same product markets. Ifa low cost provider
ﬁrm does not enter a speciﬁc geographic market, there may be room for smaller ﬁrms.
Customers would be willing to pay a slightly higher price to smaller local ﬁrms due to
savings in transportation costs and convenience. The geographic niche could exist as long
as products are competitive in terms of price and quality.

An example of this in Southwest Detroit is a butcher shop which was reported to
be a favorite shopping location by a large number of respondents to a recent household
survey“. Many people reported shopping at this butcher even though most food shopping
is done in neighboring communities at hyperrnarkets such as Meijer’s or Farmer Jack’s.
This butcher shop competes with low cost providers by differentiating its meat products.
Although there are greater opportunities to attract customers through product

diﬁ‘erentiation, challenges to microenterprises still exist 1) in the identiﬁcation of the

 

"The survey which included questions about “self-employment business activities”
to provide data on microenterprises in the 48209 zip code of Southwest Detroit asked
about income and expenditures of households.

21
demand for specialized products, and 2) in reaching consumers with purchasing power.

Production of some goods and services are potential markets for microenterprises
and some are not. One case within this sample is a mechanic (automotive repair) with a
low net income. Some respondents reported car repair as a type of businesses they would
like to see in the area. There is a mechanic making low proﬁts in the sample of
microenterprises and there are consumers who demand the services of this ﬁrm. Local
supply and demand for car repair do not meet.

Improbable industries for microenterprises include the most frequently demanded
shopping option for a large scale low cost retailer, such as Target. It is diﬁcult to imagine
how a microenterprise could match the prices and quality of Target, albeit on a much
smaller scale. Demand for diﬁ‘erent types of goods or services provides varying levels of

opportunity for microenterprises.

3. Transactions costs

Transactions costs are associated with governance and information used by the
ﬁrm. These costs arise due to bounded rationality and the “hazards of opportunism” both
within and without the ﬁrm (\Vllliamson 1985).

Political, economic and social institutions are a source of transactions costs (You,
1996). An example in the case of social institutions is ethnic or class diﬁ‘erences which
could raise costs of serving a particular geographic market due to uncertainty or

information costs. Higher costs require higher demand levels or prices to make proﬁts.

22

Ifethnicity inﬂuences preferences, peOple from Chaldean, Latino and Aﬁ'ican-
American cultures might have demands diﬁ‘erent from the mm'ority. If minority demand is
not great enough to cover costs, it may not be supplied by large scale producers. The
preferences of consumers are interdependent because producers will supply those goods
and services for which they can realize proﬁtable economies of scale (Schmid 1987).
Southwest Detroit has a heterogenous population which decreased overall by 4% between
1990-1994. This could suggest a decreasing supply of specialized goods or services in
this community.

Lack of specialized knowledge of preferences could increase information costs to a
ﬁrm which is unfamiliar with this market. Access to this knowledge could be one source
of comparative advantage to small local ﬁrms. This can be termed a cultural harder and
ethnic foods or products provide an example. 1

Two tortilla factories exist in Southwest Detroit. A retailer who wants to sell
tortillas in another part of Michigan could use contracts to arrange a steady supply ﬁom
one of the two ﬁrms which specialize in tortillas. These tortillas are sold in supermarkets
in Lansing, Michigan. The supermarkets have bakery departments and could produce
tortillas themselves. Southwest Detroit’s Mexican-American culture supports a
comparative advantage in Mexican food products.

A cultural institution (Mexican-American culture) has supported the development
of a network of Mexican restaurants in this area, which may some of the customers of the
tortilla factories. The area has come to be known as Mexicantown and has developed as a

location node for Mexican foods and products. The fact that people think of going to

23

Mexicantown for Mexican-American goods or services is an advantage to a Mexican
restaurant which is located there, as opposed to a Mexican restaurant or a tortilla seller on
the North side of Detroit.

Another source of advantage for small local ﬁrms, besides a knowledge of
specialized preferences, may lie in the method in which large ﬁrms make location
decisions. Rules of thumb used by large ﬁrms about location based on mean household
income level in the community or proximity to other shopping and highways could provide
opportunities for small ﬁrms to earn income. Eﬁ‘ective demand may exist in a community,
but the knowledge of whether it is enough to earn target proﬁt levels is imperfect.
Transactions costs of determining the actual level of demand may be prohibitive, so
location decisions are based on the information which is available.

Transactions costs of operating in an unfamiliar setting may also be a deterrent to
low cost producers. Costs of operating in a high crime area or a community with high
levels of enviromnental contamination may pose high costs. Asset speciﬁcity of buildings
and land may prevent a ﬁrm from making location decisions which seem more risky due to
uncertainty. There is a question of whether someone ﬁom the community would be better
able to handle costs of this type. In the case of crime, a local person may have lower costs
by securing the help of neighbors in patroling and keeping watch over property. In the
second scenario, a large ﬁrm is probably better able to bear environmental cleanup costs
than a microenteprise although these costs can be prohibitive to large ﬁrms as well.

Information costs to large ﬁrms may raise the costs of supply and create greater

opportunities for microenterprises, which generally face higher average cost structures.

24

Large ﬁrms could reduce this type of transactions costs by avoiding particular locations
where costs are higher or by working with local or specialized ﬁrms. There may be
advantages to both small and large ﬁrms to minimize costs by jointly supplying markets
through the use of contracts. Contracting involves the coordination of activities through
markets as opposed to within theﬁrm and allows greater specialization of individual ﬁrms.

Contracts have been identiﬁed as mechanisms for microenterprises to become
integrated in vertical production systems through interaction with more established ﬁrms
(Mead 1984). Contracts can be utilized among small and large ﬁrms in the United States
to mitigate information costs. Large ﬁrms with scale economies and low overall cost
stmctures may want to serve a speciﬁc market niche which could be more cost effectively
addressed by subcontracting. Subcontracting could be attractive if microenterprises can
offer lower prices for competitive products based on knowledge or access to underutilized
resources in low income communities (labor or land). Local knowledge may reduce
operating costs due to uncertainty for microenterprises in local markets. This would apply
if the large ﬁrm did not have the same type of access to the resources

Contracting with small ﬁrms could provide specialized knowledge of local
preferences or product niches. Sharing of capital costs could beneﬁt the microenterprise
and speciﬁc knowledge of local markets could beneﬁt the large ﬁrm. Contracts could
provide a more secure source of output markets for microenterprises. This would reduce
the activities required of the microenterprise, such as large scale advertising, in which the

smaller ﬁrm does not have comparative advantage.

25

Costs of negotiation and enforcement increase the transactions costs of
subcontracting as the number of ﬁrms rises due to problems of large groups (Olson 1965).
This will limit the number of ﬁrms which can participate in particular contracting
arrangements. The distribution of the negotiation and enforcement costs of contracts is
important to microenterprises which are not able to bear the costs. Large ﬁrms may be
unwilling to bear costs over a certain amount and microenterprises may not be willing or
able to bear much of these costs at all.

Transactions costs, often due to costs of information, aﬁ‘ect the supply of ﬁrms to
particular markets. Sources of competitive advantage which have been identiﬁed in low
income central city communities (Porter 1995) have transactions costs due to imperfect
information. Market opportunities for microenterprises in a low-income community could
be increased or decreased as a result of transaction costs. Contracts among large and
small ﬁrms could be useful to reduce these transaction costs and increase opportunities for

ﬁrms of various sizes.

B. Film characteristics

The interaction of competitive environment, the ﬁrm and the individual create the
microenterprise capacity for income generation. The ability of a ﬁrm proprietor to assess
demand and to successﬁllly enter into that market is inﬂuenced by personal and ﬁrm
characteristics. Personal and ﬁrms characteristics are deeply interwoven. Their separation
within this paper signiﬁes diﬁ‘erent stages of economic decision making and diﬂ‘erent

points of inﬂuence of external factors on the individual involved in enterprise activities.

26

As addressed previously, the level of effective demand for goods or services is a
critical determinant of income earned by the ﬁrm. Within the ﬁrm, the choice of what to
produce plays a large part in the potential proﬁts earned by the ﬁrm. Decisions about
what and how to produce, the quality of the product and the prices charged rely on
qualities of the person making those decisions. The experience, knowledge and decisions
of the individual determine the subsector in which the ﬁrm is involved and the level of
sophistication at which the ﬁrm operates.

Methods of entry into markets are related to the types of markets a ﬁrm owner
chooses to enter. All income tax preparer who is competing with H&R Block must be
able to convey reliability and accuracy to people who have the disposable income to pay
someone for this service. In one specialized case, a horse show judge may not have to
advertise at all if there is little competition.

Access to output markets are important to reach customers. Economies of scale in
advertising and brand name recognition can be identiﬁed as a source of advantage to large
ﬁrms in reaching customers (Scherer 1986). A microenterprise may be able to charge a
lower price than a more established, larger ﬁrm due to low overhead or avoidance of some
government regulations. If the microenterprise can not or does not advertise this lower
price eﬁ‘ectively, a more visible larger ﬁrm will probably have more customers.

Related to the method of advertising goods and services and their prices are
methods of conveying product quality. Ifa market is identiﬁed and product designed to ﬁt
that market, customers must be informed that the good or service will meet their needs.

Microenterprises do not have the beneﬁts of franchises which can rely on national quality

27

standards and recognition of their products.

Small, independent proprietors rely more heavily on the revealed quality of their
products through past customers than franchises or larger ﬁrms. In face of a multitude of
choices, consumers and other ﬁrms must have some basis for making decisions. Heiner’s
standard operating procedures (SOP’s) provide a rationale for selections based on
familiarity which advantage large ﬁrms over smaller ﬁrms (I-Ieiner 1983). Alternatively,
large ﬁrms may actually provide higher quality products with better service due to lower
cost structures and economies of scale throughout the production chain. Whether large or
small ﬁrms have better quality or prices, customers often face a multitude of choices and
nwd a clear and readily available basis for making decisions.

Methods by which microenterprises reach customers through advertising of price
and quality is important to their ability to generate income. Anecdotal evidence suggests
that word-of-mouth is utilized often in reaching customers. This suggests the importance
of social networks to the proﬁtability of microenterprises.

Reich’s breakdown of skills necessary for success in the modern economy has one
category at the top of the earnings pyramid, problem identiﬁers and solvers (Reich 1991).
Ifmicroenterprise owners were highly skilled problem solvers, this would be reﬂected in
higher incomes as the retum (or marginal value product) to their labor. However, the
ability to identify and solve problems is essential to successfully discover a market demand
and sell the good or service on a scale large enough to cover costs. Some level of
expertise is required to earn income from a microenterprise. Consideration of the problem

solving ability of microenterprise proprietors leads to a discussion of characteristics of ﬁrm

28

owners as they affect one’s ability to operate the ﬁrm proﬁtably.

C. Personal characteristics

Many personal characteristics such as education, family life, and experiences with
social, economic and political institutions affect an individual’s cognitive outlook on life
and the ability to successfully earn income. The dependence of the future on one’s ability
to imagine and create suggests the role of hope and vision in improving one’s economic
situation (Littlechild 1989).

Experiences of the individual in labor markets will inﬂuence the psychology of the
person and the ability to earn income. Periods of unemployment cause depression which
can reduce a worker’s future productivity and earning potential (Goldsmith and Darity
1996). Concepts of behavioral reinforcement and path dependency may also be important
in consideration of earning abilities of the very poor, such as the chronically unemployed.

A central question is whether individuals face limited opportunities to access
resources for economic success based on who they are. The variables here include gender,
age, ethnicity/culture and geographic community (side of the tracks). Exceptional
individuals will succeed regardless of where they are ﬁ'om Do people from poor
communities have to be more exceptional than people ﬁom wealthy communities to get a
loan ﬁom a bank? The role of social contacts or the ability to relate socially to those in
control of resources is important.

The ability of an individual to successfully earn income depends upon the person’s

interaction with social, economic and political institutions. Political institutions

29

theoretically treat all legal residents as equal. The concept of an inextricably wound
political and economic system has been described as the legal-economic nexus (Samuels
1989). Social institutions have variable affects on individuals depending on personal
characteristics. The environment in which an individual makes economic decisions about
his or her life could be termed the social-economic nexus. Society and all of its
institutions inﬂuence people from early childhood. Educational and work experiences are
sought out and absorbed within this social-economic nexus.

Workers with greater skill levels command higher incomes due to their increased
productivity. Less skilled workers face dimculty to earn suﬁcient income to meet basic
needs. Job opportunities have changed through the decline of production and
nonsupervisory jobs in manufacturing and the increase of jobs in the retail and service
industries which offer below average weekly pay".

An increase in low wage jobs to low income households has been hypothesized to
contribute to increased income inequality among households over the past 16 years
(Ryscavage 1995). In addition, low earnings have been found to be an important
contributing factor to poverty in the presence of other labor market problems (BLS 1989).
These labor market trends suggest that marketable skills and experience are important to
an individual’s ability to earn income. Expertise is important whether one works for

oneself or for someone else.

 

12Average weekly pay for all production and nonsupervisory jobs was $254 in
March 1996. Average weekly pay in manufacturing, retail and services industries was
$327, $143, and $240 respectively (Bureau of Labor Statistics 1996).

30

Determination of the importance of some ﬁrm and personal characteristics is
produced for Kenyan microenterprises in a subsequent section. This is an example of
techniques that. might be used to determine the importance of personal characteristics on

determinants of microenterprise earnings in low income communities in the United States.

IV. Selected Aspects of Comparison with Microenterprises in Low Income Countries

A. Comparison of the number of ﬁrms between countries of diﬁ‘erent income levels

The history of microenterprise research is short in the United States compared to
the amount of attention which has been focused on this topic in developing countries over
the past several decades. Aﬁican nations are mentioned as examples of low income
countries in a discussion of microenterprises because a substantial amount of research has
focused on this topic in several Aﬁican countries. The interest in microenterprises in south
and east Aﬁica is motivated by the large numbers of people working in these types of
ﬁrms. A critique of microenterprise development eﬂ‘orts in the United States is that this
avenue of assistance to the poor or to support economic development is not signiﬁcant
because number of people involved is much smaller. There are several reasons why there
might be many more microenterprises in Aﬁican countries than in the United States. The
implications of current economic and political trends are also important to consider in the
following discussion of suggested reasons for the existence of fewer microenterprises in
the United States.

First, the larger size of the developed economy in the United States oﬁ‘ers greater
numbers of job opportunities to nonfarm workers besides microenterprise activities.
However, the quality of these jobs as measured by the wages paid is questionable as trends
show that greater numbers of households need two wage earners to maintain the quality of

life which was supported by one wage earner several decades ago (I'hurow 1996).

31

32

Secondly, as has been pointed out in the literature, federal income assistance
programs create disincentives to operate microenterprises (Novogratz 1992). Welfare
programs are a safety net in which those without a source of earnings receive an income if
they qualify. Political action in the United States is creating great changes in the safety net
system as General Assistance programs (an income assistance program for single adults)
have been eliminated in some states and major changes such as time limits and work
requirements to AFDC13 are currently being considered in the United States Congress.

Welfare programs have also been portrayed as a disincentive to microenterprise
operation due to their asset accumulation limits (Sherraden 1989; Friedman et al. 1994).
The hypothesis is that rules against beneﬁts receipt and the accumulation of minimum
savings or asset levels“ decreases the likelihood that this segment of the low income
population will attempt to generate income through microenterprise activities. Research
on the ability of welfare recipients to relinquish beneﬁts in favor of self-employment found
the option was suitable for a small portion of this population provided that asset
accumulation waivers were procured.

A third explanation of the lower level of microenterprise activity in the United

States is the enforcement power of government. As compared to the periodic clearing of

 

13Aid to Families with Dependent Children, a federal income assistance program
for single women with children.

1‘Restrictions on asset levels include: one motor vehicle with equity value of
$1,500 and real and personal property with equity value of $1,000 (Taken ﬁ'om Overview
of the Findings ﬁom the Self Employment Investment Demonstration (SEID).

 

33

the informal market vendors in Lima, Peru", street vending is more strictly monitored in
the United States with ﬁnes charged for noncompliance with licensing requirements.
Although the government may have more power to enforce regulations and tax laws in the
United States, the level of formality can be hypothesized as a continuum with most
microenterprises somewhere in the middle in both developing and developed countries.

A fourth, and perhaps most critical, deterrent to microenterprise activity in the
United States is the multitude of sources of low cost goods and services. Low cost
producers make or import all products demanded by consumers or intermediate product
ﬁrms. This points to a central topic of this paper, real opportunities to make proﬁts and
the ability of microenterprises to supply quality goods or services which meet a demand.

Iflarge ﬁrms with economies of scale proﬁtably supply all markets, there may not
be many opportunities for microenterprises to supply existing markets (although
opportunity for innovation always exists). This condition applies to developing and
developed countries, however capital restrictions could prevent developing nations ﬁ'om
producing or importing the proﬁrsion of products oﬁ‘ered in a high income country. Even
in a high income county, there may be some products which are not optimally mass
produced. This may provide microenterprise opportunities in the face of high degrees of
competition from low cost producers.

There may a difference in the nature of goods and services consumed in low
income countries versus those consumed most ﬁequently in higher income countries. In

economic development theory, demand for more diﬂ‘erentiated products grows as national

 

"As described by Hernando de Soto in mm.

 

34

income increases. Markets which are dominated by more sophisticated products, and
ﬁrms which supply those products, may pose diﬁ’erent types of opportunities for
microenterprises than a national economy which mainly produces and consumes
commodity products.

Different types of barriers to entry could exist in terms of the sophistication and
information needed to operate proﬁtably in markets or the technologies used to learn
about specialized demands and produce highly differentiated products. Higher consumer
income levels in a more industrialized country support proﬁt making opportunities for
many diﬁ‘erent ﬁrms. However, consumption patterns in lower income countries might
support greater opportunities for microenterprises, although their proﬁts are often very
low.

Proposed explanations for larger numbers of microenterprises in African nations as
opposed to the United States are based on diﬁ‘erences in market structures and political
institutions. The ﬁamework within which microenterprises operate appears to be
important to internal development of micro-ﬁrms, even at the level of ﬁrm start-up which
is indicated by the diﬁ‘erences in the number of microenterprises found in low and high

income countries.

B. Determinants of income to microenterprises in a low income country
Recent inquiries of microenterprises in Nairobi, Kenya have produced a data set on
income levels in these ﬁrms (Daniels, Mead and Musings 1995). Regression analysis using

this data has provided a quantitative picture of the determinants of income to

35

microenterprises. Interestingly, the national average of returns per worker per month
were higher than the Kenyan minimum wage. However, the variance of these returns is
very high.

Gender, age of the ﬁrm, utilization of paid employees, and higher levels of
education were found to be signiﬁcant determinants of income to microenterprises.
Business sector, macro-location (rural versus urban), micro-location (home, marketplace,
roadside etc.) and capital asset investment were found to be insigniﬁcant variables for
proﬁt levels. (Daniels and Mead 1996).

These results present an interesting indication of what matters in terms of income
generation to microenterprises. It seems that variables which can be chosen, such as
location and product, were not signiﬁcant. Variables which are more difﬁcult or
impossible to choose, such as one’s gender or the age of the ﬁrm, are important.
Education levels and decisions to invest in equipment or hire employees are choices which
are made in operation of the ﬁrm. This knowledge can be helpful to identify clearly the
varying assistance needs of different types of microenterprises.

This ﬁamework provides a basis for identiﬁcation of key determinants of income
levels based on characteristics of ﬁrms and proprietors. These factors are signiﬁcant
aspects of ﬁrms which suggest higher income generation levels. Based on commonalities
of some microenterprise characteristics in developing and developed countries, this
framework can suggest aspects of domestic microenterprises to test for signiﬁcance in the

determination of income levels.

V. Empirical Research on Microenterprises in Southwest Detroit, Michigan
Investigation into the contribution of microenterprises to income and employment
to low-income households begins with questions about the types of enterprises which
exist. A description of microenterprises in a low-income community answers preliminary
questions about the number and activities of these ﬁrms and provides a base for ﬁlture

inquiries into the potential of microenterprises.

A. Methods

A survey of households from the 48209 zip code in Southwest Detroit was
conducted in June, 1996 to determine general income and expenditures of residents“.
Questions concerning self-employment were included in the survey instrument to provide
data describing the incidence and nature of microenterprises in a low income community.
The questionnaire was self-administered and mailed to 57 5 randomly selected households.

Sixty blocks, weighted for population, were selected randomly from Census tract
block maps. Due to the absence of a complete address list for households in the zip code
area, block level street maps were used to construct a list of all buildings on the block.
Ten houses from each block were selected randomly and questionnaires sent to each
house. Apartment buildings with more than ﬁve units were visited to ensure that they are

inhabited.

 

u’I‘llis project was conducted in conjunction with an applied research project of the
Michigan State University, Center for Urban Affairs, Community and Economic
Development Program.

36

37

Pre-survey letters were mailed to the selected addresses. Due to vandalism and
abandonment, many addresses listed on 1992 block level maps were no longer valid.
Undeliverable pro-survey letters were returned to MSU and a decision rule guided the
selection of replacement houses. For invalid addresses, the decision rule was to select the
next house in the block. This process was repeated so that three attempts were made to
identify a valid address before the case number was eliminated from the sample.
Unreturned pro-survey letters were followed by a survey one week later. A reminder
postcard was sent one week after the questionnaires were mailed and a second mailing
took place one week after the postcard. Primary data collection from households was
completed at the end of June, 1996. The ﬁnal response rate for the survey was 24%. One
hundred forty out of 575 questionnaires were completed and returned. Ten of these
questionnaires provided information on “self-employed business activities” in the
household.

A second distribution method of the survey was conducted at the request of the
community sponsor of this project, the Southwest Detroit Business Association (SDBA).
An employee of the SDBA, a local nonproﬁt, took questionnaires to other local nonproﬁt
and community organizations. Members or employees of the organizations were asked to
complete the survey. This distribution method yielded 89 nonrandom, completed
questionnaires. Nine of these questionnaires provided information on “self-employed

business activities” in the household.

38

B. Results of the survey

The survey of households identiﬁed microenterprises in the 48209 zip code area of
Southwest Detroit. Low returns resulted in a small sample of ﬁrms, however the results
illuminate some empirical aspects of microenterprises in a low income urban area of the

United States.

1. Incidence

Vlflthin the random sample of households in the 48209 zip code of Southwest
Detroit, microenterprise ﬁrms were reported to exist in 10 out of 140 respondents to a
self-administered mailed questionnaire. This suggests a 7% incidence rate of
microenterprises in the larger population. Non-response bias and the inability to
statistically compare characteristics of households with microenterprises to households
without microenterprises reduce the power of the data. However, this initial step in
identifying and characterizing microenterprises provides a starting point for ﬁrture
investigation and a suggestion of how many households are involved in these activities.
Microenterprises are a source of income for some small percentage of households in a
low-income community.

There are measurement problems in this research because source of income is a
sensitive subject and individuals may not wish to disclose information. One attempt to
measure hidden labor in the economy cites previous estimates of 10-3 3% of omcial GNP
and presents several diﬁ‘erent aspects of activities which can be considered a part of the

underground economy (Koopmans, 1994). Economic activities could be under-reported

39

for several diﬁ’erent reasons according to Koopmans: 1) economic activities not included
in ofﬁcial statistics, 2) economic activities on which no taxes are paid, 3) illegal activities.
Under-reporting of microenterprises can be expected if the individual does not consider
the ﬁrm to be a business, or due to fear of any consequences as a result of belonging to the
second two categories listed above. Measurement problems can arise because: 1)
Individuals may not reveal the existence of the ﬁrm, or 2) Individuals may not feel
comfortable revealing the amount of income generated by the ﬁrm. The sample design can
also be expected to affect the willingness of individuals to disclose sensitive information.

Several respondents to the questionnaire did not provide information on a ﬁrm in
the self-employed business activities section, but did report self-employment income in
their list of income sources (7 cases). Some of these may be due to respondent conﬁlsion
and others due to unwillingness to provide ﬁrm level data as indicated in the discussion of
underground economy. Combination of these households with those who did report on
their enterprises results in a 13% incidence rate of self-employment income among
households in zip code 48209. This is higher than average national rates of self-
employment and much higher than oﬁcial statistics on self-employment income within the
zip code". Households in this low-income community are involved in microenterprise

activities more often than is reﬂected by national statistics.

 

"The national incidence rate of self-employment in the general population is 7.5%
as measured in the Burearu of Labor Statistics’ Current Population Survey (Bregger
1996). The rate of nonfarm self-employment in this zip code of Detroit is 4% Mchigan
Census of Population and Housing 1990).

40

This incidence rate of microenterprises in a low income urban community of the
United States can be compared to the rate of microenterprises found in urban areas of a
low income country, Kenya. In Kenya, microenterprises were identiﬁed in 35% of
households interviewed. However, the rate in low income urban areas of Kenya is
reported to be relatively lower than the incidence rate in rural areas of Kenya and in other
Aﬁican nations. Hostile government attitude to informal sector activities, easy access to
wage employment and access to products made outside the immediate area are oﬁ‘ered as
explanations for the lower incidence rates in this urban area (Liedholrn and Mead, 1993).
Similar hypotheses are oﬁ‘ered earlier in this paper to explain the lower number of

microenterprises found in the United States compared to less industrialized countries.

1.1 Random Sample Bias
Respondents to this questionnaire encountered the following introductory
paragraph on which they were asked to determine if their household operates a
microenterprise:
SEC HON V. SELF-WWW We are interested in encouraging small
business in our community. Please complete this section if you or anyone in
your household owns or operates a business, or earns income ﬁom
independently contracted work, even if you do not consider it an oﬂicial

business. Exanples include hair styling, car repair, lawn care, or child care in
your home.

This paragraph was designed to be inclusive of all types of ﬁrms, no matter how well
established. It was speciﬁcally aimed at the least established ﬁrms to encourage owners to

report their ﬁrms. Longer standing ﬁrm owners were hypothesized to have more

41
conﬁdence and be more accustomed and willing to report their ﬁrms. Very few ﬁrms of

the types which were proposed as examples were reported. These examples were chosen
based on observation and conversation. Explanation for this may be that the examples
were inaccurate propositions, or perhaps operators of these types of ﬁrms were less likely
to report them. This is the problem of non-response bias.

The response rate to this mailed survey was 24% (140 out of 575). There are
many households which were randomly selected to complete the questionnaire which did
not respond. Households with certain types of ﬁrms may have been more likely to report
microenterprises than others. Certain types of people may have been more likely to report
their microenterprises than others.

The characteristics of households and ﬁrms which did not respond to the survey is
unknown and it is impossible to know if those who did not respond are similar to those
who did respond. It can be hypothesized that those least likely to complete the survey and
report microenterprise activities are the less educated and more disenﬁanchised portions
of the population, such as a homeless person who collects cans for recycling. It is possible
that a greater portion of people who did not respond to the survey operate
microenterprises. It is also possible that fewer of those who did not respond to the survey
operate microenterprises.

Identiﬁcation of microenterprises which did not respond to the survey is important
to understand well the income contribution of microenterprises to households in low
income communities. Methods used to identify ﬁrms are important because they inﬂuence

which individuals are contacted and the willingness of people to disclose information

42

about income earning activities. Methods used in this survey need reﬁnement to better
document microenterprise activity in a low income community. Suggestions for improved

methodology are oﬁ‘ered in a subsequent section.

2. Firm characteristics
2.1 Sample

The following discussion presents the characteristics of microenterprises and their
owners which were discovered through this questionnaire. Two distinct methods of
survey distribution contributed to this sample. The ﬁrst method was a random mail survey
on which the above incidence rates were based (number of ﬁrms identiﬁed=10).

The second method was a community-based method in which surveys were
distributed through local nonproﬁt organizations (number of ﬁrms identiﬁed=9).
Microenterprises identiﬁed from both of these distribution eﬁ‘orts compose the sample
(N=19) used to analyze ﬁrm and proprietor characteristics in the following sections.
Characteristics of ﬁrms such as their activities, location, customers, reported net incomes,

problems and personal characteristics of owners are reported below.

2.2 Sector

The activities in which ﬁrms are engaged are presented in Table 1. They are a
diverse group with the predominance of ﬁrms in service sectors. As hypothesized above
in the reasons for fewer microenterprises in a highly industrialized economy, access to

imported (meant here in the sense of brought into the community, not the country)

43
manufactured products may leave more opportunities for microenterprises in services
which are more diﬁcult to ship long distances.
Within the services category, there are many diﬁ‘erent types of ﬁrms. The most
numerous two-digit SIC code category is “Business services” (SIC=73, n=5), and within

the “Business services” category, activities and characteristics are varied.

44

Table l: Sectors of microenterprises in 48209 with SIC codes

 

 

 

 

 

 

Activity SIC Frequency
Building contractor 15 1
Manufacturing (apparel)2 23 1
Woodcraﬁ, Cabinet production 24 2
Transportation services 47 1
(Detroit Free Press delivery)

Retail trade- apparel, books 56 2
Business services 73 5

(communications, ﬁrndraising, income tax
preparation, miscellaneous)

 

 

 

 

 

 

 

 

 

 

 

Automotive repair 75 1
(mechanic)

Miscellaneous repair 76 1
(general labors)l

Amusement services 79 1
(mime)

Health services 80 1
(care giver)

Educational services 82 2
(art programs, lectures/teaching)

Social services2 83 1

(shelter for distressed families)

Art services, production 84 1

Miscellaneous services 89 1
(horse show judge)

Activity not reported 99 1
Total 22

Total in sample - l9

 

1. Closed enterprise due to medical problems, was in operation 1989-94 not included In sample.

2. Bothoftheeebusinesswerereportedinthesamehousehold. 'l'herespondentreportedthirtyemployeesbm
no income, dueto“building closed for repair”, not included In sample.

45

2.3 Income

Microenterprises in this sample typically generated low net incomes in 1995
(median=$5,000 mean=$16,511 SD=6,061). Households with microenterprises had total
household income with a median of $1 5,000 in 1995. This can be compared to the median
income of households without microenterprises in the random sample of $6,250 in 1995.
These measures of central tendency can be compared to the annual minimum wage in this
country of $8,840 before taxes for ﬁlll-time work". Median per capita income in the
subsample of households with microenterprises was $12,500 in 1995.

The following breakdown of microenterprise income levels provides a rough
picture of the importance of microenterprise income to individual households in a low
income community. Presentation of a breakdown of ﬁrms based on contribution to
household income illustrates that ﬁrms can play large, intermediate and small roles in
generation of household income. Firms in all three categories seem to require some skills
and there are similar levels of total household income across groups. The types of ﬁrms
which generate diﬁ‘erent levels of returns to households are varied. There is no clear
money making or losing sector based on this data. The breakdown shown in Table 2
illustrates three different levels of importance of the microenterprise contribution to total
household income. The sample is small, but it is fairly evenly divided among these three
categories.

In some cases ﬁrms contributed a large portion of total household income to

 

“This is calculated at the present minimum wage of $4.25/hour. The Congress
voted this Spring to raise the minimum wage by $.90 which brings the hourly wage to
$5.15/hour and the annual full-time wage to $10,712 before taxes.

46

relatively high income households. Household incomes for which microenterprises
generated more than halfof total household income ranges ﬁ'om approximately $25,000 to
greater than $50,000. Microenterprises can be considered a valuable source of income to
these households.

In a second category, microenterprises contribute an intermediate amount to
total household incomes. Net income levels for these microenterprises may be low, but
total household incomes are also low in some cases which makes the marginal income
contribution of the activity a more important source of income than it would be in a higher
income household. The lower the level of total household income, the more important is
the intermediate contribution of the microenterprise to the households. At lower levels of
income, money is more critical to ﬁll basic needs.

The third category of microenterprise income levels which can be distinguished are
those which contribute a small amount to total household income. This may represent
a more sideline type of ﬁrm. The reasons that the ﬁrm has not become a more important
source of income to the household are not known.

Income earned by ﬁrms provides information about the importance of ﬁrms to total
household income. High levels of income suggest that microenterprises generate
signiﬁcant income to households in low income communities. Low income levels can also
be important sources of income if they provide a signiﬁcant portion of total household
income. Different income levels could reﬂect diﬁ‘erent levels of demand for various goods

and services or diﬁ‘erent levels of ability or motivation of the ﬁrm owner.

47

Average income levels across categories are similar, regardless of the diﬁ‘erence in
the microenterprise contribution to total household income. Enterprises which generate
low levels of income do not generally occur in households with low total income.
Households with greater income resources do not necessarily generate higher income
levels than microenterprises in households with lower total incomes.

Proﬁts earned by microenterprises illustrate the retums to resources (labor and
capital) of these activities. Net income of these ﬁrms can be compared to the amount of
income earned by an individual with the same skill level through working for someone
else. This is the opportunity cost of labor involved in microenterprise activities. In this
sample, for example, there is a building contractor who earns most of total household
income through a one-person microenterprise which he has operated for 10 years.
Comparison of this ﬁrrn’s net income to the salary of a contractor with similar experience
would illustrate the marginal beneﬁt of income generation through microenterprises
compared to income earned through working for someone else.

Income levels earned ﬁom microenterprises can be compared to that earned ﬁom
employment for others to determine the attractiveness of self-employment compared to
wage and salary work. It is important to note that there may be beneﬁts to self-
employment aside ﬁom monetary income such as the ability to care for children or older
family members. In addition, there is no guarantee of employment which requires the
skills possessed by an individual. A person may be a skilled mechanic, but there may not
be many employment opportunities for mechanics, which could reﬂect low effective

demand for automotive repair services. Alternatively, there could be several job openings

48

for mechanics, but an employer may be reluctant to hire a person if the applicant checks
“yes” on the application question which reveals that he or she was a convicted felon. It is
critical to remember that employment opportunities may be scarce or other barriers may
prevent gainﬁll employment, such as imperfect information or discrimination on behalf of
both job seekers and employers.

Microenterprises contribute varying amounts to total household income. The
choice of this method of income generation could be motivated by many different forces
or circumstances. The beneﬁt of microenterprises must be analyzed in comparison with
available income generation possibilities. Firms with various levels of sophistication will
have diﬁ‘erent types of assistance needs. Income levels earned by ﬁrms and the importance
to household income are important pieces of information in the consideration of assistance

initiatives to microenterprises in low income communities.

49

Table 2: Microenterprise contribution to household income

 

 

 

 

 

 

 

 

 

 

 

Microenterprise Net Income, 1995 Approximate Total Business Activity
(% of household income) Household Income, as reported by respondent with
1995 SIC
Firm contributes large portion of total household
income (n=5)
100% $35,000 Ladies apparel store (56)
78 $45,000 Building products, independent
contracting (15)
70 $50,000 or higher Art production (84)
60 $25,000 Adjudicate equine events (89)
(Horse show judge)
Cabinet production (24)
F irm contributes an intermediate amount of
household income (n =5)
33% $15,000 Income tax preparation (73)
33 $45,000 Consultant to individuals (7 3) [legal
secretary]
30 $50,000 or higher Art services to schools (82)
25 $10,000 Detroit Free Press delivery (47)
14 $3 5,000 Mechanic (75)

 

Firm contributes a small portion of total household
income (n= 7)

 

10% $25,000

7 $5,000
6 $45,000
5 $50,0000rhigher

Communications, fund-raising,
organizing (7 3)

Writer (7 3)

Woodcraﬁ (24)

Mime (79)

Sell books (59)
Care giver (80)

Consultant to community
organizations (7 3)

Thistableincludesl7ﬁrmsbecausemeﬁmdidnotrepmtmacﬁtdtymdmhadidnotrepatmcomelevel

afﬁrm

 

50

2.4 Growth, age and employment of ﬁrms

Analysis of the demand for goods and services of microenterprises involves a
broad view of consumer demand and the competitive structure within speciﬁc sectors. It
is diﬁicult to analyze the competitive opportunities for microenterprises based on this
sample due to the small sample size. One hint concerning the market opportunity for these
ﬁrms is that although the growth rate in this data set is eﬁ‘ectively zero" (.4) in terms of
the growth of workers per ﬁrm over time, the average age of ﬁrms is 9 years (SD=7
years). Most ﬁrms begin and remain one-person ﬁrms. At the time of this survey, the
number of jobs provided by microenterprises reported here was 1.4, including proprietors.

High failure rates for small businesses in the United States are infamous.
Additionally, the ﬁrst three years are critical to microenterprise survival, as has been
identiﬁed by previous research (Liedholrn and Mead, 1993). The higher average age of
ﬁrms in this sample may reﬂect some ability to meet a market demand, based on the
assumption that households in a low-income community could not afford income losses
over a sustained period of time. The high average age could also reﬂect a sideline nature
to the ﬁrms which enables individuals to engage in the microenterprise activities while

earning most income elsewhere.

 

1"This growth rate is calculated based on questions about the year the ﬁrm began,
the number of workers in the ﬁrru at that time and the number of workers in the ﬁrm at the
time of the survey.

51

2.5 Personal characteristics of ﬁrm proprietors

Microenterprises are often one person ﬁrms (11 out of 16 cases) which implies that
personal characteristics of the owner have substantial inﬂuence on the nature of the ﬁrm.
Personal characteristics of microentrepreneurs contribute to the perceived options
(bounded rationality) encountered in both labor and goods markets and will inﬂuence the
manner in which the individual does business. The education, gender, ethnicity and
experience of the owners provides a proﬁle of microenterprise owners compared to other
respondents to this survey and to US. Census data.

The average education level of survey respondents from households with
microenterprise income is higher than survey respondents from households without
microenterprises. The median levels of education for households with microenterprises,
households without microenterprises and Census data for the entire zip code are some
college or technical school, high school graduate and between ninth and twelfth grade
without a diploma, respectively. This comparison indicates that the survey reached a more
educated segment of the population. Those households with microenterprises seem to be
somewhat more educated than survey respondents ﬁ'om households without
microenterprises.

Approximately 50% of ﬁrm owners are female (9 out of 19 cases). This rate is
higher than rates of self-employed women revealed in the Bureau of Labor Statistics
Current Population Survey in 1983 (29%) and the percentage of women-owned nonfarm
sole proprietorships in 1991 (33%). This could be due to a less oﬁcial nature of women

owned ﬁrms and a lower tendency to report these ﬁrms in government counts. The

52
relatively higher rate of female participation in microenterprise activities discovered here
can be compared to high rates of female microenterprise ownership in developing
countries. Among urban ﬁrms in Kenya, 43% are women-owned and a 7 country average
of women-owned microenterprises from South and East Africa” is 64%. Higher rates of
female participation in microenterprises points to the signiﬁcance of this method of income
generation to women on an international scale which includes highly industrialized nations.
The varying statistics may also reﬂect different methods of data collection and the

effectiveness of reaching particular populations with different methods.

 

”This is based on country-wide surveys conducted in Botswana, Kenya, Lesotho,
Malawi, South Africa, Swaziland and Zimbabwe.

53

Table 3: Female ownership comparison across data sources

 

 

 

Source of Data, Rate of Female
Activity Surveyed and Date of Collection Ownership

%

Southwest Detroit household survey 47

Self employed business activities

1996

Current Population Survey 29

Self employment

1983

Small Business Administration 33

Nonfarm sole proprietorships

1991

 

Country-wide Micro & Small Enterprise surveys
Firms with 50 workers or less

1990- 1993
Kenya 43
7 Country averagi' 64

 

*Includes Botswana, Kenya, Lesotho, Malawi, Swaziland, South Aﬁica, and Zimbabwe.

The ethnic composition of the household sample matches Census data for peoples
of European and Latino descent, but not for those of Aﬁican descent. Census data show
that 10% of the population of the zip code is of Aﬁican descent but only 6% of survey
respondents are Aﬁican Americans. Perhaps as a result of this under-representation, there
are no African American proprietors of microenterprises included in the sample of
households with microenterprises. There were two ﬁrms reported by African American

respondents, however one was a closed microenterprise and the other reported 30

54
employees (but no income)”.

Ethnic representation and education level may be indications that the survey did
not reach a representative sample of the population. Higher numbers of women-owned
ﬁrms than are reﬂected in oﬁicial counts may signify that this survey reached some
segments of the population which are not typically well counted, however it did not
successfully reach some segments of the population such as Aﬁican Americans and those
with less than a high school education. The small number of cases with ﬁrms prevented
statistical testing for diﬂ‘erences between respondents with and without microenterprises.

Skill level of proprietors was not directly addressed in this survey, but some level
of skill can be inferred from the activity of the microenterprise. Most ﬁrms, regardless of
the level of income contribution to the household, seemed to require technical expertise.
There is only one ﬁrm which involves less specialized skills, Detroit Free Press delivery.
This is also the household with the lowest level of total household income ($10,000 in

1995) out of 19 households with microenterprises.

2.6 Summary of microenterprise evidence from Southwest Detroit
The ﬁrms discussed above reveal speciﬁc enterprises undertaken by residents of a
low-income community in Southwest Detroit, Michigan. Their general characteristics of

income level, location, credit and major customers reﬂect trends which have been

 

2‘These two ﬁrms were excluded from the sample because they did not meet the
deﬁnition of a ﬁrm with 5 workers or less.

55

identiﬁed in previous work on microenterprises in developing countries. They reveal a
one-person ﬁrm based in the home using personal savings and selling to individuals. Two-
thirds of ﬁrms oﬁen have one of these four common characteristics, however, the other
third oﬁen reﬂect “something different” ﬁ'om this scenario. Some ﬁrms earn substantial
income from their eﬁ‘orts which reﬂects a market value in that “something diﬁ'erent”.

Some microenterprises demonstrate ability to meet a customer demand by earning
income levels high enough to contribute signiﬁcantly to household income. Others earn
very little which could reﬂect a large range of factors. The option to engage in
microenterprise activities is available, but not successﬁrl, for all individuals.

The extensive list of factors which contributes to the level of income generated by
microenterprises was not thoroughly addressed by this survey. The initial step to identify
the activities, income levels and basic characteristics of ﬁrms and their owners provides a
jumping oﬁ‘ point for more extensive identiﬁcation and analysis of supply factors and the

target population for future investigation.

VI. Next Steps

A. Future research

The discussion suggests several avenues for future research to more clearly
delineate the beneﬁts and key determinants of income to microenterprises. Further
knowledge about the returns to diﬁ‘erent types of ﬁrms and the determinants of these
income levels will provide a solid basis for design of policies and programs to assist low
income populations involved in microenterprises.

Two pieces of information which will facilitate evaluation of microenterprise
income are methods used to enter markets and the returns to resources in the ﬁrm. The
method in which microenterprises enter markets can be examined in two ways. One
approach involves the owners’ motivations for operating a microenterprise. This could
also provide clues about why owners’ choose to go into business for themselves, and to
provide particular goods or services. This would lend insight into whether proprietors
identify a demand and then proceed to take advantage of that opportunity. It would also
reveal the extent to which ﬁrm owners are meeting their goals in microenterprise
operation and whether there are other beneﬁts to ﬁrm creation besides monetary income,
as suggested in previous research.

Secondly, methods used to reach customers illustrate the degree of sophistication
used by ﬁrm operators to sell their goods and services. The correlation between method
used and income level could reveal an opportunity for intervention through education on

reaching consumers or institutional initiatives to increase output markets for very small

56

57

ﬁrms like small ﬁrm yellow pages or local marketplaces.

Another avenue which must be explored further are the returns to resources

within the ﬁrm. Investment levels in terms of both time and money will reveal the return

to resources used in operation of the ﬁrm. Returns to labor can be compared to wages in

alternative job opportunities or the minimum wage to determine the relative value of

microenterprises in generating income to low income households. A series of questions

could be asked of the universe of microenterprises, such as the following: What are

alternatives to earn income?; What are the returns from each alternative?; and What is the

potential for the more lucrative alternatives?

The following hypotheses are proposed for ﬁxture research on the determinants of

income earned by microenterprises in low income communities. These hypotheses can be

tested if a larger data set is successfully collected.

Ho:

Ho:

Ho:

Ho:

Ho:

Microenterprises generate returns to labor higher than the minimum wage

Microenterprises sell in local markets more often than outside the
community

Microenterprises reach customers through word-of-mouth (social capital)
more often than through formal advertising channels

Microenterprises sell differentiated products more often than standardized
goods or services

Microenterprises that sell differentiated products make higher returns than
microenterprises selling standardized goods or services

58
Additional hypotheses can also be drawn based on the Kenyan research on the

determinants of income to microenterprises. Variables for ethnicity might be added to this
equation given the diversity of ethnic backgrounds in United States cities. A variable for
family structure could also be added in light of the high levels of mobility and the
recognized rise of poverty in female, single-headed households.

Another important step will be to focus on a sector in which microenterprises
operate to determine modes of interaction within vertical chains of production. A sector
which was reported in this research can be selected as a basis for further inquiry, such as
“Business services” which was the largest group of ﬁrms. Rapid appraisal techniques can

be used to conﬁrm the importance of these sectors and to investigate local markets.

B. Methodological improvements

Empirical research in this study was the result of an effort to apply methods which
have been utilized successfully in developing countries. Similarities to a developing
country context were found in the absence of a sample ﬁ'ame for both microenterprises
and for households in the zip code area.

Reﬁnement of the methodology can produce a larger pool of microenterprise
ﬁrms. A larger sample could provide greater diversity of activities and a basis on which to
make statements about the connections between types of activities and ﬁrm characteristics
which this sample was too small to provide. A larger sample would also allow comparison

of personal characteristics of microenterprise proprietors with the general population.

59

Many factors may have contributed to the small sample size in this survey which
provides opportunity for improvement. Questions about self-employment were included
in a longer survey instrument which limited space for questions in this section and
required respondents to complete several sections before identifying a microenterprise in
the household.

A simpler method to identify a microenterprise within a household, preferably
through in-person questioning, could successfully discover more ﬁrms as a ﬁrst stage in a
reﬁned methodology. It is important to collect information on whether a ﬁrm is present
from a group of households which is representative of the community in terms of
education, ethnicity and work experience. A second stage would involve the
administration of follow-up questionnaires to all sites which reported the presence of a
microenterprise in the household.

As an outsider entering a community there may be little response at all if there is
no introduction and explanation of the reasons for such inquiries. Questions about ﬁrm
formality or compliance with government rules and regulations were not asked for these
reasons. An opportunity to work with a local organization and ask a simple identiﬁcation
question to households may be an optimal method of locating larger numbers of
microenterprises.

Household visits to a targeted area would avoid the need for a household address
list which was diﬁcult to compile for this community. The clustered sampling technique
used in Microenterprise Baseline Surveys of the GEMINI project was speciﬁcally

developed to collect data ﬁ'om microenterprises in south and east Africa (McPherson and

60

Parker 1992). This method of on-site interviews at every establishment within a designated
cluster could be applied in an inner city community in the United States. A follow-up
interview with identiﬁed ﬁrms could ask more in-depth questions about start-up and
operation of ﬁrms and additional income generation in the households.

In addition to households, interviews could also be conducted with establishments
on commercial strips by asking an initial identiﬁer question about the number of
employees. Combination of the two methods would be an interesting community
development approach in that it integrates the residents and the local business community.
It would be necessary to ask the speciﬁc location of ﬁrms identiﬁed in households to
ensure against double counting.

Valuable insight into the supply and demand possibilities fer micro-ﬁrms in a low-
income community can be gained through: 1) a more comprehensive view of existing
microenterprises through a larger sample; 2) several targeted questions about
microenterprise resource use and ﬁrm operation; 3) a focused look at the demand for

microenterprise goods or services within a speciﬁc sector.

VII. Conclusion

Knowledge of microenterprises within low income communities is useful to those
interested in issues of poverty, employment, and local economic development. The choice
to open a microenterprise is made through comparison with other possibilities to earn
money to buy necessities. The decision to operate a ﬁrm may be either proactive in view
of a market opportunity or reactive in face of limited perceived options.

Determinants of income to microenterprises in low income communities which fall
into the following three categories have been proposed: local market structures, ﬁrm
characteristics and personal characteristics of the proprietor. These three types of
determinants of ﬁrm income form a complex environment. This environment creates a
wide range of possibilities which results in a diversity of microenterprises.

Research on microenterprises reveals a foundation of self-employed business
activities in a low income community of Southwest Detroit, Michigan. Microenterprises
are found to vary in terms of sectors and net income levels, however almost all ﬁrms
involve specialized technical experience or skills on behalf of the proprietor. There are
probably more diﬁ‘erent types of ﬁrms in the community than were, successﬁrlly identiﬁed
in this survey. Notably under represented are ﬁrms which require lower amounts of
expertise than those typically found in this sample. The diversity of ﬁrms creates a
variegated picture of the potential of microenterprises and their assistance needs.

Much debate surrounds appropriate levels and types of assistance to the poor. A

focus on microenterprises is one type of assistance to households and communities in

61

62

economic distress. Public policy which aﬁ‘ects microenterprises could be a valuable tool in
poverty alleviation or local economic development to economically distressed
communities. Measures which assist very small ﬁrms could encourage local growth and
economic diversity. Support to microenterprises could take many diﬁ‘erent forms,
including institutional measures or direct assistance to ﬁrms. Diﬁ‘erent types of assistance
to microenterprises help very small ﬁrms to cut costs, ﬁnd new markets or improve
management skills. More precise estimates of the signiﬁcance of microenterprises to total
household income and the determinants of ﬁrm income levels could provide valuable
insight into potential poverty alleviation measures and the target populations for such
measures.

Ifﬁrrns are important sources of earnings to low income households, as some
cases in this sample have demonstrated, there may be support for consideration of
specialized institutions or policies which encourage these activities. Support of these ﬁrms
could increase household income and assist ﬁrm growth which would create jobs and
increase local economic activity. There may also be other positive beneﬁts in the
community such as the provision of positive role models for children in a volatile social
climate.

Firms which generate lower returns are more complicated. There could be many
explanations for these low returns. Firms which generate low returns to poor households
can be considered particularly critical in temrs of poverty alleviation. Beneﬁts of assisting
proﬁtable ﬁrms mentioned above also applies to these ﬁrms. It is more diﬁcult to

determine the levels and timing of assistance to be given to less proﬁtable or unproﬁtable

63

ﬁrms. The best type of assistance to these ﬁrms in the long term may be to change
product markets or discontinue operation and work elsewhere, if possible.
Microenterprise operation is not a good income earning option for everyone. In many
cases the earnings can be very low.

Discussion of the determinants of income to microenterprises presents various
levels of opportunity to earn proﬁts through very small businesses in low income
communities. The competitive environment of local markets, the background of individual
proprietors, and speciﬁc decisions about ﬁrm operation play important roles in the proﬁt
level of microenterprises. Further research on the importance of microenterprise income
and the signiﬁcance of individual factors in determining income levels will guide
investment in assistance initiatives and policy measures which address structural barriers of

markets, constraints of social institutions and the capabilities of individuals.

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