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CHAPTER 2
Literature Review
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CHAPTER 2
LITERATURE REVIEW
2.0 Introduction
The idea that entrepreneurship and economic growth are very closely and positively linked
together has undoubtedly made its way since Schumpeterian early work of 1911 (Dejardin,
2000). Transforming ideas into economic opportunities is the crux of entrepreneurship.
History shows that economic progress has been significantly advanced by pragmatic people
who are entrepreneurial and innovative, able to exploit opportunities and willing to take
risks. They are risk-takers who pursue opportunities that others may fail to recognize or may
even view as problems or threats. Entrepreneurship is closely associated with change,
creativity, knowledge, innovation, generation of monetary gain and flexibility-factors that
are increasingly important sources of competitiveness in an increasingly globalize world
economy. Thus, fostering entrepreneurship means promoting the competitiveness of
businesses (Retrieved from http://www.unctad.org/en/docs/webiteteb20043_en.pdf, as on March, 2011).
For many developing countries, private sector development has been a powerful engine of
economic growth and wealth creation, and crucial for improving the quality, number and
variety of employment opportunities for the poor. Economically, entrepreneurship
invigorates markets. The formation of new business leads to job creation and has a
multiplying effect on the economy. Socially, entrepreneurship empowers citizens, generates
innovation and changes mindsets. These changes have the potential to integrate developing
countries into the global economy (Retrieved from http://www.unctad.org/ en/docs/webiteteb 20043_en.
pdf, as on March, 2011). A positive interaction between growth and entrepreneurship is
grounded on the innovation activity that entrepreneurs convey. Thus, a significant
entrepreneurial supply in the economy stirs up scholarly interest (Dejardin, 2000).
Entrepreneurship cerates a positive change in the external environment. Enterprises are
tripod for individual, society and nation.
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The figure 2.1 indicates that enterprises are job spinners for masses as well as classes.
Enterprises generate greater earning opportunities for employees. Enterprises generate
income and share it in the form of tax with government thereby supporting the welfare state.
Enterprises create varied products and services for consumers, thus boost their standard of
living. Agrarian economy gets an opportunity to diversify to secondary and tertiary sector
with the support of enterprises. Shareholders are investors in enterprises who are rewarded
with capital appreciation and dividends when enterprises generates healthy bottom line.
The process of entrepreneurship results in enterprise creation. Setting up of enterprises
requires risk finance and VC. Friends, relatives, banks, FIs, angel investors, MFIs and VCs
provide a significant amount of leverage to MSMEs (Mayer, 2002). The role of bankers,
financial institutions, angel investors and informal sources are restricted to only providing of
funds to enterprises which have already proved to be successful. Diversity exists in the role
of VCs who not only provides funds at various stages but also provides mentoring,
managing and hand holding support to entrepreneurs (Davila et al., 2001). The study of VCs
is a sophisticated study guided by financial proposal, business plans and financial viability
of the project. The set of borrowers are also sophisticated who are qualified, skilled and are
attentive to the role of business plan. VCs have the onus of funding new ideas at urban level.
Entrepreneurship Creates Positive Change
Entrepreneurial Efforts
Employees Great Opportunities Greater Income
Government Additional Tax revenue Reduction in social benefit need
Consumers New Products, new services
General Economy Secondary and tertiary creation of opportunities
Shareholders
Increased Wealth
Figure.2.1 Entrepreneurship Creator of Positive Change
(Source: Retrived from http://www.aavishkaar.org/322,1,The
Situation, as on March, 2011)
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Lot of research work is traced in the field of sophisticated VC. In this chapter, an attempt
has been made to trace the development of MVC (providers of finance to grassroots
innovators) literature an upcoming concept in today’s society.
2.1 Entrepreneurship
Entrepreneruship is a broader term. Researchers have studied entrepreneurship from various
perspectives, which is described as sub points in the forthcoming discussion.
(a) Definition and History of Entrepreneurship
Map of Literature Review
2.1 Entrepreneurship
2.1.1 Rural, Grassroots, Technopreneurs
2.1.2 Social Entrepreneurship
2.1.3 Invention, Innovation and
Incubation
2.1.4 Funding to Entrepreneurs
2.2 Role, Funding and Drawbacks of
Micro finance
2.3 Role, Funding and Drawbacks of
Venture Capital
2.4 Global Studies on Micro Venture
Capital Finance (MVCF)
2.5 Need, Emergence, and Importance
of Micro Venture Capital Finance
(MVCF) (Indian Perspective)
2.6 Regional Studies on Micro Venture
Capital Finance (MVCF)
Figure 2.2 Map of Literature Review (Source: Author’s Own Creation)
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The word entrepreneur is derived from French word “Entreprendre” meaning to undertake.
J.S. Mill was the one who popularized the term in England (Paidi, 2006). Although the
concept of entrepreneurship was first defined more than 250 years ago, many have held it as
one of the mysterious forces of human nature. Even after 200 years, a commonly accepted
definition of entrepreneurship has failed to emerge. Earliest definition of entrepreneurship
arose in 1734 when it was said to be self employment with uncertain return (Sharma and
Chrisman, 1999) and about two hundred years later, the importance of innovation was
highlighted in entrepreneurship (Schumpeter, 1934).
A prominent definition in the contemporary literature considers it as ‘judgmental decision
making’ about the coordination of scarce resources under conditions of uncertainty (Casson,
1991, p.23; Casson and Godley, 2000). For some authors, innovating activities are more
important than market-equilibrating or management activities while for others the reverse is
the case. Some writers study entrepreneurial activity as an outcome of either individual
effort or organizational effort. It has also been assumed that entrepreneurial function may
take the shape of productive, unproductive or destructive activities, depending on whether
they add to, redistribute or subtract from net output (Cassis and Pepelasi, 2005).
The practice of entrepreneurship is, of course, as old as trading between tribes and villages.
The history of entrepreneurship can be segregated as follows:
Table 2.0 History of Entrepreneurship
Time
Line
Entrepreneurs
Referred as
Role of entrepreneur Result
Earliest Period (618-906 AD)
‘Trader’. Is viewed like an intermediary between manufacturer and consumers.
‘Stock and Sell’. Borrowed money from shroffs to stock goods and sell the same at profit to consumers.
Moneylenders (Shroffs) demanded share in profit. Trader did not profit but was profiteered.
Middle Ages
‘Constructor’- of palaces, forts etc.
‘Arrange and execute’. Arranged for labours and managed logistics needs.
Rewards were uncertain and unknown, it was at the discretion of kings.
14th Century
‘Agent’ Collected tax on behalf of state.
Reward, if taxes were in excess of auction fees.
(Contd.)
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Time
Line
Entrepreneurs
Referred as
Role of entrepreneur Result
17th Century
‘trader cum contracted supplier’
Individual contracted to supply the material to the state authorities at fixed price.
Reward if supplies were managed at a price lower than contract price.
18th Century
‘Manufacturer’ Inventions were commercialized.
Specialization seeped in and local modes of production grew sophisticated.
19th and 20th Century
‘Innovator’ A transformer of resources into unforeseen products.
Introduced new product, new technology or new market.
21st Century
‘Social entrepreneur’
Addressed the social issue along with functions of business entrepreneur.
Viewed as strong and significant force for social transformation.
(Source: Adapted from: Kedia, 2008)
From the table 2.0 it can be concluded that entrepreneurs played different role during
different time slots. It is also noted that with the change in time the role of entrepreneur
graduated from trader to innovator to social entrepreneur.
(b) Studies on Making of Entrepreneurs
‘Entrepreneurship’ has been studied from the diverse perspectives of economic theory,
sociology, psychology, anthropology, political science, business administration and history
(Cassis and Pepelasi, 2005). Much of the attention and effort in the entrepreneurship
literature has centered upon the development model of entrepreneurship. There are two main
schools of thought which divides the comprehension of the term as either a functional
approach or the trait approach. The functional approach focuses on the role of
entrepreneurship within the economy and the trait approach defines an entrepreneur with a
specific ‘set of personality traits and characteristics’ (Gartner, 1988). Within this subject
many studies have been conducted on the different aspects of entrepreneurship for example
creativity and innovation, entrepreneurial motivation, entrepreneurial networking and
entrepreneurial stress and coping mechanisms just to name a few (Retrieved from
http://www.oppapers.com/essays/Entrepreneurship/164832, as on, December, 2010).
Available literature on entrepreneurship theory can be grossly divided into two extensive
camps focusing on individuals and structure respectively (Martinelli, 1994; Thornton, 1999).
The individual approach explains that innate psychological traits and special characteristics
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in social groups contribute in making of an entrepreneur. The structural approach shows
how social and cultural factors motivate entrepreneurs by providing opportunities for
entrepreneurship. Much of the literature seeks to explain entrepreneurial activity at micro
level, which is often contained with certain place or time (Reynolds, 1991). An early and
important contribution to the study of entrepreneurial individuals was first undertaken and
documented by psychologist David McClelland in the book ‘The Achieving Story’
(McClelland, 1961). Other researchers too supported McClelland views of cultural attitudes,
primary socialization and painful upbringing makes up an entrepreneur (Kets de Vries,
1977; Delmar, 2000).
Some authors argue that deviance and marginality encourage entrepreneurship whereas,
other authors emphasize that cultural and institutional support, and good access to resources
induces entrepreneurship (Martinelli, 1994). Busenitz, Gomez and Spencer (2000)
methodically breaks the factors in three sets viz., regulatory factors (e.g. institutions and
policies), cognitive factors (e.g. knowledge of how to start ventures and obtain financial
support), and normative factors (e.g. the perception of entrepreneurship as a career), which
contributes to explain both types and levels of entrepreneurship across countries (Berglund,
2005). The three broad approaches in entrepreneurship are represented in a nutshell in the
table below.
Table 2.1 Approaches in Entrepreneurship
Approach Behavioral Cognitive Discursive
Paradigm
of Inquiry Empiricism Rationalism Interpretivism
Goal of
Inquiry
Construct covering laws that reflect behavioral patterns and stable cause-effect relationships
Uncover formal rules in the form of cognitive scripts or processes
Produce a plausible and interesting account that makes sense of an action of process
Typical
Method
Mainly quantitative and inductive, collecting and statistically analyzing data from surveys and panel studies
Mainly quantitative and deductive, testing hypotheses about cognitions using questionnaires and attitude scales
Mainly qualitative and abdicative, generating plausible narratives that include individual action as part of a greater situation
(Contd.)
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Approach Behavioral Cognitive Discursive
Main contribution
to understanding
of entrepreneurial
action
Emphasizes the heterogeneous and open-ended nature of entrepreneurial processes
Emphasizes cognitions and thoughts as important drivers of entrepreneurial action
Emphasizes that entrepreneurial action must be understood in relation to its greater context
Main drawback
for understanding
entrepreneurial
action
Little attention is given to the subjective meanings of actions
Little attention is given to the entrepreneur as a situated and reflexive subject. Actions take place ‘behind the backs’ of entrepreneurs
Tends to downplay individual agency and initiative in favor of contextual influences and process descriptions
(Source: Retrieved from http://www.henrikberglund.com/thesis/index.htm as on December, 2010).
Sociologists like Cochran propagated cultural values, role expectations and social sanctions
are the suppliers of entrepreneurship (Singh, 1986). Max Weber emphasized that the driving
entrepreneurial energies were generated by the adoption of exogenously supplied religious
beliefs (Dhillion, 1996). Hoselitz (1952) provides importance of culturally marginal groups
in promoting economic development. Psychologists like McClelland associated achievement
motivation theory towards the inception of entrepreneurship as a career (Misra, 1987). A
clear absence of contribution was seen in definition of entrepreneurs and entrepreneurship
from Indian economist. Freeman (1986) explained that management researchers often
emphasized special influence of organization and prior job experience as a vital asset for
entrepreneurs. Audia and Rider (2005) extended the view of Freeman and explained the role
of organization in instilling confidence, exposure to general industry knowledge, guidance to
entrepreneurial opportunity and assist in developing social networks and access to critical
resources.
The individual and structural approach has been criticized hard by Gartner, 1988; Shaver
and Scott, 1991; Thornton, 1999 on account of reasons like single cause logic, insensitivity
to temporal dynamics, failure to account for contextual factors and failure to account for
human agency respectively. On the other hand authors like Gartner, Bird and Starr, 1992;
and Venkataraman, 1997 explains that the current trend underlines heterogeneity in terms of
knowledge, preferences, abilities, behaviours etc., as a requisite assumption for theory
building.
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(c) Economists View on Entrepreneur and Entrepreneurship
Individual traits have been linked to both neoclassical (Shane, 2000) and invariably
unarguable Schumpeterian elite entrepreneur (Gick, 2002). Schumpeter’s comprehensive
work on entrepreneurship, acted as a source for inspirational empirical research on
entrepreneurial behaviour (Ripsas, 1998; Aldrich, 2005). Schumpeter’s creative entrepreneur
provides charismatic leadership which inspires others both within firms (Witt, 1998) and on
markets (Langlois, 1998).
In economic theory ‘entrepreneurship’ has been defined in myriad ways (Herbert and Link,
1989; Blaug, 2000; Swedberg, 2000). Economist characterized entrepreneur as organizer
(Marshal), risk bearer (Cantillon, 1755), coordinator (Say, 1821), arbitrator (Kirzner, 1973),
innovator (Schumpeter, 1942), creative rebel (Schumpeter, 1942) and business managers..
A ‘creative rebel’, the Schumpeterian entrepreneur creates disequilibrium and plays a key
role in economic development, by breaking away from the path of routine and implementing
innovations (Cassis and Pepelasi, 2005). Economist also made a distinction between risk
(insurable) and uncertainty (uninsurable). British, Irish, French, Austrian and American
economists contributed to the traits of entrepreneur. Classical, Neo Classical and Modern
economists contributed to macro and micro theory building of entrepreneurship. However,
contribution from Indian economist in building of theory on entrepreneurship was not found.
Neoclassical economists (Baumol, 1968; Bianchi and Henrekson, 2005) explain that in the
event of disequilibrium the role of entrepreneurs emerge as a result of exogenous factors like
Public, R&D etc., (Schultz, 1980), for optimizing given problem framework (Demsetz,
1983; Caplan,1999) which is backed by ability to assume high risk propensity (Kihlstrom
and Laffont, 1979). These economists further puts that value of entrepreneurship is
proportional to development of ‘human capital’ (time allocated to build up entrepreneurship)
(Schultz, 1980; Becker, 1965) which motivates one to pursue existing opportunities (Schultz,
1980) or explore unknown opportunities (Fiet, 1996; Gifford, 2003; Langlois, 1998b).
(d) Analysis of Studies on Entrepreneurship
In the first stream of research, economists explored the impacts and results of
entrepreneurship. For example, Schumpeter (1934), in his seminal article, examined
entrepreneurship as a key process (Westhead and Wright, 1998) through which the economy
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as a whole was advanced. The second stream of research has focused on the entrepreneurs
themselves i.e. the role of entrepreneurs (Bhidd, 2000); importance of entrepreneur
(Hirschman,1958; Libenstein, 1968; Leff, 1979; Sandberg, 1986); reasons for becoming
entrepreneur; results of entrepreneurship and task of entrepreneurs (Bygrave, 1989; Danhof,
1949) and causes of entrepreneurship (Evans and Jovanovic, 1989; Freeman, 1986).
Research in this stream examines entrepreneurship from a psychological and sociological
perspective (Collin and Moore, 1964; McClelland, 1961). Finally, the third stream has
focused on the entrepreneurial management process. This diverse literature includes research
on how to foster innovation within established corporations (Burgelman, 1983, 1984), start
ups and VC (Timmons and Bygrave, 1986), organizational life cycles (Quinn and Cameron,
1983), and predictors of entrepreneurial success (Cooper and Bruno, 1975; Dollinger, 1984)
(Austin, Stevenson and Wei-Skillern, 2006). Many different and useful approaches have
been used to analyze entrepreneurship. They have tended to fall within three main streams of
research, which include a focus on the causes of entrepreneurship, the results of
entrepreneurship and entrepreneurial management (Stevenson and Jarillo, 1991). Other
studies also include motivational study of entrepreneur (Martinelli, 1994) and contributions
by entrepreneur (Gartner,1988; Carland et al., 1984; Hoselitz, 1952).
Recent theories of economic growth viewed externalities, as opposed to scale economies, as
the primary engine of growth (Romer, 1986; Lucas, 1988). When economists began looking
for knowledge spillovers (Romer, 1986; Lucas, 1988), cities presented the clearest examples
of economic regions subject to local spillover benefits (Acs, 2002). Entrepreneurship leads
to economic growth because it is the mechanism by which knowledge spillovers develop
(Audretsch and Thurik, 2004; Carree and Thurik, 2005). New organizations played an
important role in taking advantage of knowledge externalities within a region, and that
entrepreneurship acted as the vehicle by which the knowledge spillovers contributed to
economic growth (Freeman and Hannan, 1989). Higher rates of entrepreneurial activity were
very strongly associated with faster growth of local economies (Retrieved from
http://www.babson.edu/entrep/fer/BABSON2002/XI/XI_P1/XI_P1.htm, as on July, 2009). Romer (1986)
posits that knowledge accumulated and innovations produced by one firm tend to help other
similar firms’ technologies, or improvement of products, processes, or marketing, without
appropriate compensation. The Jacobs model of externalities (1969) stresses knowledge
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spillovers across industries. Author posits that the crucial externality in local economic areas
was due to cross-fertilization of ideas across different lines of business.
Finally, several theories, including those of Porter (1990) and Jacobs (1969), suggested that
local competition rather than monopoly promoted economic growth, which is further
empirically supported by Glaeser et al., (1992) and Feldman and Audretsch (1999). Smaller
entrepreneurial firms were crucial for the long run competitiveness of a country. Empirically,
the importance of entrepreneurial activity at the macroeconomic level had been established
by several studies. The entrepreneurial sector, for example, had been shown to contribute
significantly to the creation of employment. Also, results from several cross-country studies
of entrepreneurial activity suggested that, across nations, firm start-up rates accounted for a
significant portion of the variation in economic growth (Retrieved from http://www.babson.edu/
entrep/fer/BABSON2002/XI/XI_S3/XI_S3.htm, as on July, 2009). It can be concluded that
entrepreneurship stimulates economic growth firstly through creation and transformation of
knowledge, secondly through increased competition brought on by the creation of new
enterprises and thirdly by spawning diversity among firms in a specific location.
(e) Analysis of Indian Research on Entrepreneurship
Almost without exception, academic studies on entrepreneurship are motivated by the
economic benefits of entrepreneurship. Most academic study showed that entrepreneurship
indeed leads to substantial benefits in terms of, for instance, employment generation or
innovations (Praag and Versloot, 2007). The researcher (Praag and Versloot, 2007)
conducted the study of entrepreneurial firms (which employed fewer than 100 employees,
new entrants and younger than 7 years old) and its counter parts. The research emphasized
that young and small firms created more employment with higher dissolution rate, which
negatively affected stability of labour market. The job quality and wages were lower but it
provided higher intangible benefits. Young firms commercialized the innovations but were
non-adoptive to innovations. It was also found that entrepreneur’s income was higher than
wage employees but it was highly variable (Praag and Versloot, 2007).
The Indian research on entrepreneurs studied mainly the requisites for successful
entrepreneurship, influence of socio-economic background, entrepreneurial characteristics
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etc., which is discussed below. In a well documented report of Entrepreneurship
Development Institute of India (EDII) the work of various Indian researchers, in the field of
entrepreneurship was explored. Indian researchers conducted the regional specific study to
verify the theory advocated by other researchers. Gaikwad and Tripathi (1970), Nafziger
(1978), Bhatia (1974), Sharma (1976) and Deivasenapathy (1986) studied the prerequisites
for successful entrepreneurship. Factors like background of the entrepreneur, his economic
and family status, attitude towards industry, inter state climate, socio economic background
and problem faced by entrepreneur were significantly studied. Nandy (1973) and
Venkatapahty and Subramanian (1984) drew a comparison of culture and alienated feeling
between enterprising and non enterprising people.
Bhattacharya and Akhouri (1975) developed a profile of small industry entrepreneur.
Demographic characteristics contributing to entrepreneurship were studied by Deshpande
(1982) and Venkatapathy (1980). Researchers like Ventaktapaty (1989) compared the view
of first versus second generation entrepreneur. Kanitkar (1994), Pareek and Rao (1995) and
Awasthi and Sebastian (1996) contributed to development of entrepreneurs through
extension approach, counseling and contribution through Entrepreneurship development
programmes (EDPs).
The outcome of the Indian research revealed that entrepreneurs are initiator and hard worker.
Longer gestation period of business kept entrepreneurs away from industrial
entrepreneurship (Gaikwad and Tripathi, 1970). Need for achievement, need for power,
independence, risk taking and sense of efficacy are the factors which are statistically
supported (Nandy,1973) and other set of factors like autonomy, aggression, conformity,
recognition which are statistically unsupported (Bhattacharya and Akhouri, 1975), family
tradition, family support, previous job experience and dissonance on account of exploitation
by employers boosted entrepreneurship (Deivasenapathy, 1986).
Lack of information forced entrepreneurs to diversify (Bhatia, 1974). Status and caste
played important role in promotion of entrepreneurship (Nafziger, 1975). Every state’s
industrial climate played variations in the entrepreneur and economic performance; it either
supported or uprooted entrepreneurship. Age and risk taking behaviour were not found to
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have any association (Sharma, 1976). Failure to get appropriate job or time spent on degree
education was the main reason for late entry into the career of entrepreneurship (Deshpande,
1982). First generation entrepreneurs were influenced by father, they were less conventional,
adapted innovation and ventures into entrepreneurship for self-employment. Second
generation entrepreneurs were self doers, believed in managing existing firms, not
influenced by anybody and undertook venture to avoid unemployment (Ventaktapaty, 1989).
Entrepreneurs who chose entrepreneurship career by choice were self satisfied and less
alienated compared to non-entrepreneurs (Venkatapahty and Subramanian, 1984). Lack of
‘extension approach’ was a major cause of failure of trainees (Kanitkar, 1994). Professional
counseling acted as stress reliever for entrepreneurs. EDPs stood the test of cost benefit
criteria (Awasthi and Sebastian, 1996).
(f) Importance of Entrepreneurship
Recent interest in entrepreneurship is the growing realization of the significance of new
businesses in a society increasingly concerned with the problem of unemployment
(Swedberg, 2000, pp.7-8; Amatori, Colli and Toninelli, 2002). Recent studies emphasized
entrepreneurship as a driver of economic development and some authors included
entrepreneurship as a fourth production factor in the macroeconomic production function
(Audretsch and Keilbach, 2004). Entrepreneurship was the factor that created wealth by
combining existing production factors in new ways. Entrepreneurs experimented with new
combinations of which the outcomes were uncertain, but in order to make progress, many
new variations were tried in order to find out which ones will improve (economic) life
(Rosenberg and Birdzell, 1986).
Other authors have argued that entrepreneurship would only unlock economic development
if a proper institutional setting was in place (Baumol, 1990; Powell, 2008; Boettke and
Coyne, 2003). The institutional setting comprised of informal as well as formal institutions
(North, 1990). An essential formal institution, for welfare enhancing, entrepreneurship was
property rights. Insecure property rights had been an important constraint on the investments
by entrepreneurs in transition countries, even more so than capital market constraints
(Johnson et al., 2000). It might be said that the production factors, capital, labour,
technology, and entrepreneurship are the proximate causes of economic development, while
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institutions were a fundamental cause of economic development (Acemoglu, Johnson and
Robinson, 2004) (Stam and Stel, 2009).
Referring more particularly to economies that are developing or in transition, Dutz, Ordover
and Willig (2000) stressed the primordial role that could be played by governments by
creating (or reinforcing) the institutions that foster entrepreneurship. Douglass North (1990)
had described the individual entrepreneur as an ‘agent of change’, while Jones (1991, 1993)
had discussed the importance of encouraging entrepreneurship for economic growth. In
modern era entrepreneurship had been neglected at theoretical level but it was crucial for the
‘vitality’ of capitalist society and the market economy (Baumol, 1968, p.64; Casson, 1991).
As per the neoclassical approach ‘theoretical’ firm is entrepreneurless and within
macroeconomics there is a tendency to assume that economic progress is automatic
(Swedberg, 2000, p.21). Thus, entrepreneurs are risk bearers, coordinators and organizers,
gap fillers, leaders and innovators or creative imitators (Cassis and Pepelasi, 2005).
The development of entrepreneurial activity is essential not only to solve the problems of
unemployment, unbalanced areas of development, concentration of economic power and
diversion of profits from traditional avenues of investment. Entrepreneurship has been a
major factor in the economic growth of the West, of the Union of Soviet Socialist Republics
(USSR) and of Japan in Asia and it seems to be of rapidly growing importance in country
like India.
Traditionally, there are at least two basic understandings of entrepreneurship shared by
scholars across different disciplines, namely; First the recognition of the individual as an
important or even vital element in the creation of new value in an entrepreneurial event
(Carland et al., 1984; Busenitz and Barney, 1997; Baron, 2000; Francis and Sandberg, 2000;
Littunen, 2000; Kreiser, Marino and Weaver, 2002; Shook, Preim and McGee, 2003) and
second the belief that the resources in the environment play an important role in increasing
entrepreneurial activities in a society (Stevenson and Jarillo, 1990; Douglas and Shepherd,
1999; Robinson, 1999; Busenitz, Gomez and Spencer, 2000; Chirsman, Chua and Steier,
2002; Davidsson and Honig, 2003; Brockner, Higgins and Low, 2004).
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From the examination of above mentioned literature review it is concluded that major
literary work were centered at behavioural aspect of entrepreneurs. Various prominent
economist and researchers defined and upgraded the conceptual definition of entrepreneurs.
Various attempts were made by researchers to link the importance of entrepreneurs with
economic development. The notable contributions came from Schumpeter. Renowned
economist like J.R. Horris, G.F. Papanck and I.M. Kirzner are the main advocates of school
of thought which argues that entrepreneurial supply will be associated more or less with the
provision of economic incentives and support system of the society.
(g) New Focus in Entrepreneurship Research
The new stream of research has started to shift the focus towards the interactions between
individual entrepreneurs, their entrepreneurial processes and the environment in which they
operate. Other stream of research which has emerged includes international entrepreneurship
(McDougall, 1989; Hordes, Clancy and Baddaley, 1995; Oviatt and McDougall, 1995;
McDougall and Oviatt, 2000; Zahra, Ireland and Hitt, 2000; Yeung, 2002), strategic
entrepreneurship (Shan, 1990; Stevenson and Jarillo, 1990; Hitt et al., 2001) and
technological (high tech) entrepreneurship (Roberts, 1991; Christensen and Rosenbloom,
1995; Berry, 1996; Phan, 2004). This indicates that social scientist have started to include
entrepreneurial activities in their research agenda and entrepreneurship scholars have started
to consider different aspects in their traditional studies (McDougall, Scott, and Oviatt, 1994;
McDougall and Oviatt, 2003; Zhang and Dodgson, 1968).
Interest in social, political and cultural entrepreneurship is highly flourishing these days.
Ancient economic theory (especially Austrian economist theory; Venkataraman, 1997;
Shane, 2003) of earlier researchers is still used as a base for defining the phenomenon,
guidance to empirical research and legitimacy in new theory development (Ogbor, 2000;
Steyaert and Katz, 2004).
Above literature talked about entrepreneurship in a broader sense. It can be learnt that
enterprises are must for growth of nation. The literature explained the concept of
development from urban perspective. For sustainable development growth of entrepreneurial
initiatives amongst the poorest socio-economic groups at the bottom of the pyramid was
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essential (Retrieved from http://www.aavishkaar.in/ as on June, 2011). To find the importance of
collective economic development importance of welfare economics was comprehended.
The concept of welfare economics was untouched for many years when noble prize winner
economist of India Prof. Sen explained it in the year 1970. He explained that economic
development should be viewed in the context of human development. Development is a
broad concept entailing the raising of human capabilities (Sen, 1999). One of the central
challenges in improving economic development is to increase the standards of living for
individuals and growth of the economy as a whole. Even though economic growth in itself is
a rather narrow target, it is probably one of the most important targets for development
policies. It is also one of the measures that are most easy to access for analysts, and probably
the best measure to make cross-national (Barro, 1991; Sala-i-Martin, 1997) and historical
(Maddison, 2001) analysis of the development of economies (Stam and Stel, 2009).
The roots of SE and answer to ‘other than income’ can be dug out from the faculty of
welfare economics which is discussed as a forthcoming point under the emerging concept of
SE. However, the existing literature remains silent on importance of social entrepreneurs
who are basically gap fillers between the role of welfare state and commercial entrepreneur.
2.1.1 Rural, Grassroots and Technopreneurship
2.1.1.1 Rural Entrepreneurship
From the conventional literature on entrepreneurship it can be learnt that entrepreneurial
activity and new firm formation are unquestionably considered engines of economic growth
and innovation (Baumol, 1990; Murphy, Shleifer and Vishny, 1990). A developing country
or a region is tied by a chain whose main links are in general poverty, backward people,
underemployment, ignorance, low productivity, traditional culture and various static and
stagnating sets of conditions (Soundarapandian, 2001).
Rural development as defined by Sauer (1986) includes issues like encouragement of farm
related enterprises, technical and management assistance and infrastructural and ancillary
support to rural entrepreneurs. Wortman (1990, 1990a) defines rural entrepreneurship as the
creation of new organization that introduces a new product, serves or creates a new market,
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or utilizes a new technology in a rural environment. Entrepreneurial orientation in rural
areas is based on stimulating local entrepreneurial talent and subsequent growth of
indigenous first generation entrepreneurs (Petrin, 1992) or companies, which could create
jobs and add economic value to region and country (Rena, 2007).
Researchers have found entrepreneurship to be highly correlated with economic growth both
at national and regional level. Yet, research analyzing the impact of entrepreneurship on
rural economic growth in United States (US) is sparse (Henderson, 2006). Research by
Boden (2000) found the survival duration of new establishment differed across metropolitan
status. Audretsch and Kielbach (2005) analyzed the entrepreneurship impact of growth in
rural West Germany. Both found that the impact of entrepreneurial activity was weaker in
rural regions. Acs and Armington (2004) and Camp (2005) suggest that the impacts of
entrepreneurship on economic growth could differ in rural locations (Henderson, 2006, p. 6).
Soo and Phan (2008) studied the work of various researchers like if counseling activities
produced different results when provided to rural and urban entrepreneurs; differential
policies, actions and means to support rural entrepreneurship, ideas stimulating rural
entrepreneurship and requirement of conceptual framework (Wortman, 1990) triggering the
growth of micro and rural enterprises. Rural entrepreneurship has been advocated to reduce
pressure on agriculture, curb migrations of rural people, disperse large scale industrialization,
reduce investment cost and generate employment on mass scale for skilled and unskilled
persons of the community and reduce regional disparity (Bhat, 2005).
Referring to the genesis of rural entrepreneurship in India, the country is a rich in locally
available resources. The development of local (rural) entrepreneurship is a must to harness
the rich potentialities of available local resources to support sound economic development
through industrialization (Verma, 2005). Mahatma Gandhi had expressed that India being
land of villages inhibits its true spirit in rural India. He opposed heavy industrialization and
machines as it can increase production but it cannot provide employment to crores of poor
rural Indians. He promoted ‘charkha’ as a symbol of self employment for rural households
and advocated rural entrepreneurship (Siddiqui, 2003). Self employment has emerged as a
major source of employment creation in rural India.
30
The significant rise in rural entrepreneurship is due to rural literacy rates, increase in
government grant for rural development and village and small industries. Siddiqui
articulated that rural poverty can be removed by promoting entrepreneurship at rural level.
Downward trend in agriculture can be restrained by boosting ‘Agripreneurship’ (Siddiqui,
2003; Sinh and Krishna, 1994; Verma and Thakur, 2005; Harper and Vyakarnam, 1988;
Heredero, 1979).
Indian researchers studied various parameters in the context of rural entrepreneurship like
risk taking (Matthai, 1979), effect of cultural issues (Vyakarnam and Fiafor, 1991),
necessity of group entrepreneurship (Bogaert and Das, 1989; Awasthi, 1993), preference for
borrowings (Moulik et al., 1978), push and pull factors for rural entrepreneurs (Tovo, 1991;
Pai Parandiker and Sud, 1986), transition of worker to rural entrepreneur (Subramaniam,
1989), support of cooperatives to rural entrepreneurs (Harper and Vyakarnam, 1988),
evaluation studies of rural entrepreneurship (Tripathi et al., 1985) and support system for
rural entrepreneurs (Taori and Singh, 1991; Kashyap, 1990; La Towsky and Grierson, 1992;
Kanitkar, 1995).
In a brief note to the Rural Entrepreneurship Development Experiment (REDE) undertaken
by EDII, it was found that various government, semi-government and non government
organizations are engaged in task of rural development. Rural programmes were input
oriented (in terms of money) rather than output oriented. Removal of poverty syndrome and
income generation activity was often bypassed in the programme (Awasthi, 1993).
In the literary work Bhat (2005) expressed that failure of anti poverty, self employment
programmes sponsored by government like Prime Minister’s Rozgar Yojana (PMRY),
Training of Rural Youth for Self Employment (TRYSEM), Jawahar Rozgar Yojana (JRY),
Jawahar Gram Samridhi Yojna (JGSY), Integrated Rural Development Programme (IRDP),
Development of Women and Children in Rural Areas (DWCRA) etc., was due to minimum
imparting of entrepreneurial qualities and training in entrepreneurial activity by
governmental agencies to the beneficiaries. To grab the opportunity to entrepreneurise the
lesser known target groups Non Government Organizations (NGOs) played a role distinct
from its traditional role. NGOs like National Alliance of Young Entrepreneurs (NAYE),
31
World Assembly of Small and Medium Entrepreneurs (WASME), Xavier Institute for
Social Studies (XISS), SEWA, Self Employment of Kolkata (Y), Association of Women
Entrepreneurs of Karnataka (AWAKE) and Rural Development and Self Employment
Training Institute (RUDSETI) supported government in entrepreneurship programmes by
developing true entrepreneurial qualities among the beneficiaries of the schemes.
Excessive reliance on poverty alleviation, employment generation and negligence in raising
the productivity of non farm activities were responsible factors for failure of rural
industrialization (Soundarapandian, 2001). The schemes for employment generation or self
employment have not yielded expected results of adequate employment and reduction in
social and economic disparities due to lackadaisical approach in their implementation. As a
part of self employment stimulators in rural areas, of late, the conventional EDPs were
modified to train youth, poor, women and other disadvantaged sections of the society (Bhat,
2005).
Verma and Gupta (2005) on examining the study of researchers on rural entrepreneurship
highlighted that there was a need of cluster approach in which the facilities or ownership is
shared for development of rural entrepreneurship to solve the problems of value additions,
technological innovations, logistic problems etc. Verma and Gupta (2005) appreciates the
role played by Cooperatives in boosting rural entrepreneurship through Primary Agriculture
Credit Societies (PACs), Dairy Cooperatives (based on Anand Milk Union Limited (AMUL)
Model) Sugar Cooperatives, Fertilizer Cooperatives (Indian Fertilizer of Farmer Co-
Operation (IFFCO) and Krishak Bharati Cooperative Limited (KRIBCHO) etc.
Rural entrepreneur plays a twin role of producer and seller in which he takes certain decision
differentiated from exclusive producers and sellers. He emphasized rural based women
entrepreneurship for increasing production, proper wealth distribution and optimum
utilization of resources (Paidi, 2006). Innovating entrepreneurs are rarely found in under-
developed countries, which in fact are a necessity for promoting entrepreneurship (Verma,
2005).
32
Siddiqui (2003) highlighted that Swarna Jayanti Gram Swarozgar Yojana (SGSY) scheme
aims at establishing a large number of micro enterprises in rural areas. It is a credit cum
subsidy scheme in which the beneficiary can be individuals or self help groups (SHGs). The
programme has positively affected entrepreneurship among youth and women in rural areas.
From the literary work of other researchers Siddiqui concluded that poverty, dissatisfaction
from job, education and government assistance acts as compelling as well as motivational
factors for promotion of self employment or entrepreneurship. These set of similar factors
were earlier established by researchers in their study of entrepreneurship at urban level.
In the same study Siddiqui (2003) recommended that developmental plans should be based
on vocational pattern, emphasis on rural industrialization, minimal political interference,
coordination of programmes for funds management, encouragement of private investment
avoidance of restructuring plans and encouragement of rural entrepreneurship was
advocated. Bhat (2005) also explored that primary level NGOs, Intermediate NGOs and
Grassroots level NGOs contribute in developmental activities, imparting training and field
actions for promoting self employment in rural areas. The role of NGOs has assumed critical
significance primarily at the grassroots level. A few NGOs in India have succeeded largely
in imparting skills of income generation and micro entrepreneurship development among the
weaker sections of the society like women, tribal’s and others (Bhat, 2005).
Verma and Thakur (2005) explored in their literary work that rural entrepreneurs face
technical, economic, social and environmental risks. The policies and programmes initiated
by the Government are mostly politically motivated which fails to generate entrepreneurship
in the specific pockets and therefore entrepreneurial growth tends to be lopsided and
inequitable. They suggested that the focus of rural entrepreneurship programmes should not
be on achieving time bound quantitative targets but on developing the villagers risk taking
and innovative capabilities.
Verma and Jiloka (2005) pointed out that in the context of India, entrepreneurial activity in
small towns and rural areas to a large extent is based on a small scale, less sophisticated
technology and most importantly depends on local material and human resources.
Developing entrepreneurship involves a triangular approach of development of individual,
33
social and group. It was further discovered that government, non government, and
supporting services like financial, commercial and consultancy etc., plays a predominant
role in development of entrepreneurship.
The biggest limitation to rural entrepreneurship research is the lack of data on entrepreneurs
at country level. The empirical results indicate that to increase the understanding of rural
economic growth, researchers could extend their analysis of rural entrepreneurship by
analyzing the factors supporting entrepreneurship development in rural places (Henderson,
2006). As rural communities search for new engines of growth, entrepreneurs can act as
mechanism that transforms opportunity into prosperity (Henderson, 2006, p.26). US
researchers explained that traditional attempts to stimulate economic growth by luring big
businesses to rural communities have largely failed. Other programmes aimed at creating
local small businesses have similarly failed. A unified public-private organizations must
work together to stimulate entrepreneurship in rural regions. Researchers also pointed out
those developmental strategies targeted to turnaround US rural economies had not been
successful and rural poverty continues to be a nagging problem even in US (Retrieved from
http://usasbe.org/knowledge/proceedings/proceedingsDocs/USASBE2005proceedings-Heriot%2030.pdf, as on
June, 2011).
Lyson (1995) emphasized the creation of rural enterprise as those businesses will provide
products for local consumption that are not readily available in the mass market. Technically,
sophisticated micro enterprises would be able to fill the niche markets in the national
economy that are too small for mass producers. Rural entrepreneurship is more likely to
flourish in those rural areas where the ‘bottom up’ and the ‘top down’ approach complement
each other (Rena, 2007). Based on the summary of REDE undertaken by EDII, last year, it
suggested that promoting rural poor as well-rounded and successful entrepreneurs, (who
perceive economically viable opportunities, convert them into a sound business plan, exploit
the local resources and tap vast rural market) might provide an alternative strategy for rural
development.
Zhang Liyan, professor at Tianjin University of Finance and Economics, China explained
that villages in countries like India and China are centers of traditional wisdom, where
34
innovations have been on since ages. The need of the hour is to tap into traditional talent and
convert it into rural entrepreneurship. Government should provide institutional framework,
infrastructure facility and funds to develop rural entrepreneurship, so that the talent of Indian
villagers is not restrained (Retrieved from http://www.tjwbi.com/system/2007/07/16/000195715.shtml., as
on August, 2011).
The research in rural entrepreneurship comprises of emergence of rural entrepreneurship,
factors boosting rural entrepreneurship, necessity of rural development and scrutinizing
reasons for failure of government sponsored programmes. All researchers have broadly
suggested the need for recognizing traditional talent of rural poor and transform rural
knowledge and talent into rural entrepreneurship. In other words they have advocated the
idea of establishing rural enterprise based on the innovative ideas and talent of rural poor.
Till date no research supporting this view has been found in the literature. The importance of
rural entrepreneurship at the bottom of the pyramid (BOP) refers to creating rural
employment, stimulating rural growth, improving local economic activity, enhancing
productivity and efficiency at local level, evolving regional role models for others to
emulate and spawning multilayered economic development (Retrieved from
http://www.aavishkaar.org/ 322,1, ICC-UNDP-IBLF World Business Awards 2006, 9 May 2006, New York,
as on March, 2011).
2.1.1.2 Grassroots Entrepreneurship
Ample research is found in the area of entrepreneurship and types of entrepreneurship. The
literary work on grassroots entrepreneurship is not available. Grassroots social entrepreneurs
are defined as citizens with an innovative idea to solve a social problem, but without an
existing organization backing them. Despite these difficulties, research shows (Meroni,
2007) that there are numerous examples of citizens developing such grassroots social
ventures and collaboration networks successfully. These grassroots initiatives focusing on
sustainable solutions to social problems “are an opportunity to learn from their common
success factors and to be alerted to cross-cutting obstacles they encountered. It will help us
to develop, initiate and test new policies, aimed at enabling and empowering individuals or
“creative communities” to do better and to do more” (Meroni, 2007).
35
There are a number of studies available examining the emergence of rural entrepreneurs and
owners of village based micro enterprises (Kanitkar, 1995). A village entrepreneur is a
person from local, indigenous, or native population who decides to become self-employed in
the village or its surroundings, by starting on his own a shop, trade etc. He is an innovator as
he is the first in his community to imitate a profession that people in town practice. He
invests his own funds or obtains it from banks, relatives, money lender, or government and
assumes risk of the venture. Rural industrialization can make a significant contribution to
rural development by way of increasing rural production and productivity and also by
improving the human resource base of rural areas. Rural industries which require less capital
and simpler technology are best suited to the managerial and organizational ability available
in rural areas. The success of rural industrialization depends not only on the drive and
initiative of the rural folk but also on the provision for adequate financial assistance, supply
of raw materials, machinery and equipment and the stupendous task of providing the
marketing assistance.
The study conducted by Rao and Mohan (1988) revealed that the main problem of small
entrepreneurs were capital shortage, scarcity of raw materials and marketing. The same
study also indicated that a well planned effort by the concerned agencies and organizations
is a must if efforts to promote grassroots entrepreneurship are to succeed. Development of
micro entrepreneurship at the grassroots level is perceived as a powerful medium to
ameliorate several socio-economic problems such as poverty reduction, balanced regional
development, provision of goods and services appropriate to the local needs, redistribution
of income and opportunities in the community (Bhat, 2005). At the grassroots level, there
are two types of rural innovation support models that support innovation and existing
knowledge, practices and resources, which are discussed later in the incubator head (Sonne,
2010).
Recently in the inauguration of international conference of three days held on 15th
Decemeber, 2010, on ‘Challenges to Inclusive growth in the emerging economies’ at Indian
Institute of Management-Ahmedbad (IIM-A) Ratan Tata, the renowed business tycoon
explained that around 50 to 60 crores of people are living at the bottom of the pyramid and
there is a, potential market, for companies if they innovate or rebuild their existing product
through technology and cater to the unmet needs of grassroots people.
36
2.1.1.3 Technopreneurship
According to Schumpeter (1976), the function of entrepreneurs is to reform or revolutionize
the pattern of production by exploiting an invention or, more generally, an untried
technological possibility for producing a new commodity or producing an old one in a new
way, by opening up a new source of supply of materials or a new outlet for products, by
reorganizing an industry and so on.
Since the end of the 1980s, the development of the knowledge-based economy, globalization
and international competitive pressure has increased the importance of innovation in local
economies (Camagni, 1995; Feldman, 1994; Malmberg, 1997; Porter, 1990; Ritsila, 1999;
Storper, 1995) and also the importance of entrepreneurship, especially technological
entrepreneurship, as one of the most important factor in the creation of both individual and
regional wealth has recently generated considerable interest (Venkataraman, 2004).
The reason why some regions are more advanced than others lies in successful fostering of
technological entrepreneurship, which acts as catalyst (Rothwell and Zegveld, 1982) in the
process of growth of advanced regions. Schumpeter was the first (Schumpeter, 1976;
Venkataraman, 2004) to clearly posit the centrality of the entrepreneur to economic progress.
Techno-entrepreneurship is a recent field which has its roots in the well established field of
entrepreneurship. It leads to rapid development of new products, which leads to key success
for an industry creation and development (Schoonhoven et al., 1990).
New breed of entrepreneur with background of science and technology and having zeal of
entrepreneurship are commonly referred as ‘Technopreneur’. However, looking at available
literature, it was found that research in the field of technology-based entrepreneurship is still
in infancy, and there are only a handful of studies that directly targets high-tech new venture
and its founder (Slatter, 1992; Roberts, 1991; Roure and Maidique, 1986; Cooper and Bruno,
1977). Dorf and Byers (2005) defined technological entrepreneurship as a style of business
leadership that involves identifying high-potential, technology-intensive commercial
opportunities, gathering resources such as talent and capital, and managing rapid growth and
significant risk using principled decision making skills. Shane and Venkataraman (2000)
highlighted the function of technopreneur to assemble organizational resources, technical
37
systems and strategies to pursue opportunities. The Canadian Academy of Engineering
(1998) defined technological entrepreneurship as the innovative application of scientific and
technical knowledge by one or more person who operates the business and assumes the
financial risk. In fact, techno-preneurs faces ‘squared risk’ i.e. one associated with
entrepreneurship and other technology risk.
Technopreneurs are aimed at creating; capturing economic value through the exploration
and exploitation of new technology based solutions and hence treated as important sources
of economic value creation and development in Europe. As technology is involved in such
ventures it brings important changes into the market as compared to traditional
entrepreneurship. The process of technopreneurship like traditional entrepreneurship starts
with sensing of a need for change and ends with innovative solution which is clear enough
and externally recognized (Blanco, 1998).
Many researches have made motivational study of technopreneurs (Blanchflower and
Oswald, 1998; Roberts, 1988; Reid and Smith, 2000; Isaiah and Cristopher, 1974; Litvak
and Maule, 1971; Henry and Kahtleen, 1989; Cooper, 1973; Akbar, 2005; Arulraj, 2004;
Smith and Miner, 1984) and found that need for achievement, alternative to unemployment,
accepting challenges, becoming one’s own boss, competency to start own enterprise, certain
push and pull factors were responsible for starting a techno enterprise. Oza, Trivedi and
Savalia (2009) made a comparison of internally motivated and externally influenced
technopreneurs. Manimala (1999) compared motives of British NTBFs versus Indian
NTBFs to become technopreneurs. Colombo and Delmastro (2001) identified that internet
based entrepreneur’s foremost motivation to start the venture was higher income.
Phan and Foo (2004) briefed that high tech entrepreneurship research is a complicated
subject because it occurs at many levels like individual level, organizational level and at
societal level. Thus, research in this field is highly interdisciplinary. Dodgson and Rothwell
(1989) found that technopreneurs lack in formal aspects of management tasks like financial
control, reporting systems etc.
To encourage entrepreneurial spirit among the Science and Technology (S&T) persons, the
Government of India established the National Science and Technology Entrepreneurship
Development Board (NSTEDB) in 1982 under the Department of Science and Technology
38
(DST). NSTEDB initiated instruments such as Science and Technology Entrepreneur’s
Parks (STEPs) in collaboration with all India FIs and Entrepreneurship Development Cells
(EDCs) in and around academic institutions to encourage promotion and growth of
technology based enterprises through S&T persons. It also provided various services to the
existing SMEs (Singh, 2000).
Science Parks, Innovation Centers, Technology Business Incubators and similar initiatives
are recent developments in the evolutionary line to create an environment for innovation and
techno enterprise. As a result of number of institute such as Small Industries Service
Institutes (SISIs), Industrial and Technical Consultancy Organizations (ITCOs), National
Institute of Small Industry Extension and Training (NISIET), EDII, National Institute of
Entrepreneurship and Small Business Development (NIESBUD) and state level Centers for
Entrepreneurship Development (CEDs) started to actively work in the field of
entrepreneurship education, training and research (Singh, 2000).
The conception was that by virtue of their (S&T person) academic qualification, the
technical entrepreneurs possessed varying degree of traits associated with creativity and thus
were well suited for promoting new ventures. S&T persons having adequate degree of
entrepreneurial traits, if identified and trained properly, could prove to be better
entrepreneurs (Singh, 2000). Thus, training is imparted to the students of universities who
are pursuing a technical course. It can be concluded that NSTEDB has almost left out
grassroots technical people (who are not professional degree holders) in imparting
entrepreneurship training.
In a book by Singh (2000), the author has published 25 selected cases of first generation
S&T techno entrepreneurs; it was found that all technopreneurs were educationally well
qualified. Not a single case study was found on grassroots, illiterate, first generation
technopreneur. Technological entrepreneurship is a relatively unexplored topic (Shane and
Venkataraman, 2000) and is one of the most important factors of regional development; key
elements of technological entrepreneurship should be determined to know how to foster
technopreneurship. In India, Technology Business Incubators (TBIs) are now being
promoted based on success in China, Malaysia, USA etc. Mechanisms such as Innovation
Centre are also being tried (Singh, 2000). Lack of institutional support, patenting need and
non innovative funding support from traditional bankers are the major roadblocks faced by
39
S&T entrepreneurs (Singh, 2000). None of the literary work is found in the field of
grassroots technopreneurs, which are equally competent to support economic development.
2.1.2 Social Entrepreneurship (SE)
The term of “social entrepreneurship” was first coined in 1980 by Bill Drayton of Ashoka
which is the global association of the world’s leading social entrepreneurs. David Gergen,
Harvard Professor, described social entrepreneurs as the “new engines of reforms”. In an
environment where traditional providers such as the charitable and voluntary sectors have
been criticized as bureaucratic and resistant to change and the public sector has become
overstretched and hampered by resource constraints, SE has been identified as an innovative
way of tackling unmet socio-economic needs (Leadbeater, 1997; Mulgan and Landry, 1995).
The term SE has emerged as a new label for describing the work of community, voluntary
and public organizations, as well as private firms working for social rather than for-profit
objectives (Shaw and Carter, 2004). They gather together the necessary resources and use
these to “make a difference” (Thompson, 2000). The job of a social entrepreneur is to
recognize when a part of society is stuck and to provide new ways to get it unstuck. He or
she finds what is not working and solves the problem by changing the system. The concept
of SE has become the buzzword only in the recent past, backed by the economic boom in
late 1990s and the government’s inability to solve social problems. By the end of 20th
century, social entrepreneurs became a part of the development lexicon and played a
significant role in the social, political and economic contexts for poor and marginalized
groups (Prahalad, 2006).
The Social Entrepreneurship Initiative (SEI) based at Stanford University has developed a
comprehensive description of social enterprise that reflects the diversity. They argue that
social enterprises can be classified in one of the three ways:
� as for-profit organizations which use their resources to creatively address social
issues;
� as not- for- profit organizations which help individuals establish their own small,
for- profit businesses, or
� as not-for-profit ventures which create economic value to fund their own
programmes or to create employment and training opportunities for their client
population (Eleanor and Carter, 2004).
40
As found in Hindustan Times (4th November, 2008), in the words of Klaus Schwab, “SE is
about applying practical, innovative and market-oriented approaches to benefit the
marginalized and the poor.” Social entrepreneurs can structure their organizations as non-
profit or for-profit entities. In case of the latter, profits are re-invested in strengthening and
growing the social mission (Schwab, 2008).
Most of the literature pertaining to SE draws on the business entrepreneurship literature.
Large number of scholars are making efforts to bridge the literature of SE with other streams
of research like social movement theory (Alvord, Brown and Letts, 2004), sustainable
development (Seelos and Mair, 2005) or institutional entrepreneurship (Dorado, 2005). One
of the problems in researching this field is that there is no consensus on nonprofit and/ or SE
(Shockley, Frank and Stough, 2008). A great deal of attention is paid to defining what
exactly these entrepreneurs do. As a result, this entrepreneurial behaviour that is outside of
purely market driven purposes is called as social enterprise, SE, social innovation or
nonprofit entrepreneurship. As cited by Stevenson and Jarilo (1991) Durcker in his famous
book “Innovation and Entrepreneurship,”notes that the social entrepreneur changes the
performance capacity of society. Social entrepreneurs are perceived as change agents who
create and sustain social values without being limited by the resources currently at hand.
Robinson, Kirzner and fellow Austrian economists believe that social entrepreneurial
opportunities exist, but they cannot be seen by everyone (Johanna, Robinson and Hockerts,
2006). Their activity is valued by their ability to maximize social rather than economic
returns (Sullivan, Weerawardena and Carnegie, 2003). In addition, the norms effective in
social markets do not go parallel to those governing economic markets (Emerson and
Twersky, 1996). One negative aspect was social ventures that open up new areas of activity
must often contend with an environment that does not recognize or appreciate their worth or
inherent contribution. Growth aptitude in SE is mainly determined by the extent to which the
innovation is scalable, and that scalability is one criterion for assessing the potential success
of a socially oriented project (Perrini, 2006).
SE is seen as a response to diminishing government involvement in the economy and society
(Nicholls, 2006) and it is extended rapidly to the private and public sector (Johnson, 2000).
Corporate Social Responsibility (CSR) emerged in a corporate context, whereas SE
41
originated from the non-profit sector (Dees, 1998, 1998a; Johnson, 2000; Sullivan,
Weerawardena and Carnegie, 2003; Emerson, 2003). The CSR literature and the SE
literature share a primary interest in the creation of social values, but its fundamental
assumptions are distinct. Socially responsible companies are those, whose primary goal is
profit, whereas, social entrepreneurs emphasize social value and economic value creation as
a necessary condition to ensure (financial) viability (Dorado, 2005). To date, there are
different approaches to SE (Mair and Marti, 2006; Dorado, 2005) and there has not been a
universally accepted definition of what constitutes a social entrepreneur (Shaw and Carter,
2004; Dorado, 2005). Therefore, the literature on SE still hearts around two main themes;
the level of analysis and the locus of SE. Regarding the level of analysis, the field
potentially embrace individual, organizational and inter-organizational levels of analyses. At
the individual level, definitions of social entrepreneurs focus on the founder of the initiative
(Mair and Marti, 2006), who is generally referred to as a ‘change maker’ (Barendsen and
Gardner, 2004; Shaw and Carter, 2004; Van Slyke and Newman, 2006), acting upon an
opportunity and gathering resources to exploit it.
At the(inter) organizational level, definitions of SE typically refer to the process of value
creation, including opportunity recognition, adopting a mission to create social value,
engaging in a process of continuous innovation, adaptation, and learning (Dees, 1998;
Roberts and Woods, 2005). The second debate addresses the issue of where or in which
contexts SE occurs (Mair and Marti, 2006) and contests the views that SE is limited to the
non-profit sector on one hand or to socially responsible actions of mainstream business
practice on the other. They conclude that SE refers as means to tackle social problems and
catalyze social transformation, irrespective of the for-profit or not-for-profit status of the
organization (Mair and Marti, 2006; Roberts and Woods, 2005; Austin, Stevenson and Wei-
Skillern, 2006; Nicholls, 2006; Korosec and Berman, 2006).
Cho (referred by Mair, Robinson and Hockerts, 2006) has narrated the concept of SE by
augmenting the social objectives with the pursuit of financial objectives. The same study has
quoted a most all-inclusive explanation on social entrepreneur that was given by Perrini
(referred by Mair, Robinson and Hockerts, 2006) and also by Vurro (referred by Mair,
Robinson and Hockerts, 2006) which says that social entrepreneur is change promoters,
42
pioneer innovator, inspects quality of idea and measures its social impacts. Robinson
(referred by Mair, Robinson and Hockerts, 2006) has specifically correlated the process of
social problem solution with its impact in terms of evaluation either as venture created for
profit or nonprofit or double bottom line. Haugh (referred by Mair, Robinson and Hockerts,
2006) explained social enterprise as an organization which is the outcome of business led
solutions to achieve social aims. Singh (2007) concludes that there is an urgent need to draw
boundaries so as to delimit scope and clarify whether SE is really an independent field of
research, and the need to identify the different levels of analysis, disciplines and literatures.
It has enormous scope as it poses a challenge to rethink central concepts and assumptions.
SE refers to innovative activity with a social objective in either the for-profit sector, such as
in social purpose commercial ventures (Dees and Anderson, 2003; Emerson and Twersky,
1996) or in corporate SE (Austin et al., 2004); or in the non-profit sector, or across sectors
such as hybrid structural forms which mix for-profit and nonprofit approaches (Dees, 1998).
It refers to the phenomenon of applying business expertise and market-based skills in the
nonprofit sector such as when nonprofit organizations develop innovative approaches to earn
income (Reis, 1999; Thompson, 2002). One theory behind the existence of social-purpose
organization is that they emerge where there is social market failure i.e. commercial market
forces do not meet a social need, such as in public goods (Weisbrod, 1975) or in contract
failure (Nelson and Krashinsky, 1973). Thus, a problem for the commercial entrepreneur is
an opportunity for the social entrepreneur.
In addition to innovative not-for-profit ventures, SE can include social purpose business
ventures, such as for-profit community development banks, and hybrid organizations mixing
not-for-profit and for-profit elements, such as homeless shelters that start businesses to train
and employ their residents. Though the concept of SE is gaining popularity, it means
different things to different people, at times confusing. Some people use it to describe
anyone who starts a not-for-profit organization. Still others use it to refer to business owners
who integrate social responsibility into their operations (Khoja and Kangad, 2009). A social
entrepreneur must identify business ideas, should not depend on grants permanently and
make profit to give back to the society. The NGOs pay well today and even corporate set
aside a huge amount under CSR. Social entrepreneurs, operating outside of the constraints of
43
government, significantly enhance the ability to find and implement effective solutions to
social problems.
The existing academic research in this field, greatly agree to recognize two main macro-
dynamics as decisive in the emergence of social entrepreneurial ventures. They are the crisis
of traditional welfare state (Johnson, 2000; Cook, Doods and Mitchell, 2001; Borzaga and
Defourny, 2004) and the increase in competitive pressure within the nonprofit sector (Dees,
1998; Reis, 1999). The desire to change society and discomfort with the status quo are the
main stimuli for social entrepreneurs to innovate (Prabhu, 1999). This makes them more
sensitive to entrepreneurial opportunities that deal with social problems and unsatisfied
social needs (Mair and Noboa, 2003a) and they create value by building portfolios or
resources to address unmet social needs. The current literature on SE focuses at a
preliminary ‘definitional level’. Roberts and Woods blend the academic and practitioner
perspectives on SE to define it as “the construction, evaluation, and pursuit of opportunities
for transformative social change carried out by visionary, passionately dedicated
individuals” (Chand, 2009).
But what underlines all these definitions is that there are individuals who take the initiative
to spot and address important social problems. They are bent upon creating social value and
exhibit the vision, innovativeness and drive to implement their ideas for change. Dart (2004),
describes a social enterprise as a radical innovation in the non-profit sector. Alvord, Brown
and Letts (2004) identified three forms that a social enterprise can take: augmenting local
capacities, disseminating packages to solve local problems and social movements. But the
form that the enterprise can take depends, as Townsend and Hart (2008) note, on the relative
strength of the two aspects of the double bottom line that is creation of economic value and
creation of social value (Chand, 2009).
A continuum of business mentioned below explains that a business may have market or
social driven orientation and may or may not operate for profit.
44
Figure 2.3: The SE Matrix
(Source: Massetti, 2008)
From the above figure the quadrant which has market-driven orientation and profit
orientation, applies to traditional entrepreneurship. But individuals here, when the
marketplace attaches values to a social cause, become social entrepreneurs so as to be
considered socially responsible. In the second quadrant traditional non profits are driven by
a social mission but do not need to make a profit. If social entrepreneurs arise in this
category, they use surpluses for efficiency and growth. The third quadrant, responding to
market needs but not driven by profits, depend on grants and must continually adapt to
market forces and such organization are not driven by need to create new but they create
solution path for a complex social problem. The final quadrant, which Massetti (2008) terms
as the Tipping Point Quadrant, is represented by organizations that are driven by social
missions, and must make profits to survive. These organizations have goals that benefit
society and see to it that profits are not wasted. While there is financial independence, the
entrepreneurs are free to accept funding from traditional social support systems as well.
Thus, impact is more important than sustainability of organizational form. This form is most
suitable for social entrepreneurs.
SE has its origins in the 21st century when philanthropic business owners and industrialists
demonstrated a concern for the welfare of employees by improving their working, education
and cultural lives. Since, then SE has been associated with community enterprise and
development, education, churches, charities, the not-for-profit sector and voluntary
organizations (Eleanor and Carter, 2004). Thus, emergence of social economy or “third
sector” has expanded on account of failure of efforts of traditional public, voluntary or
community mechanisms. Historically, social enterprise organization has been defined in the
negative as nonprofit or nongovernmental organization. Today, they are understood as the
“independent sector”, “nonprofit sector”, “third sector” or “citizen sector” (Bornstein, 2005).
SE has emerged from practice rather than academic debate. The basic thesis is that many
Traditional Tipping Point Social Entrepreneurship Entrepreneurship
Organization Traditional Running on growth non-profits
organization
Profit
Yes
No
Market Driven Social Driven
45
social problems, if viewed through an entrepreneurial lens, create the opportunity to launch a
venture that generates profits by alleviating a specific social problem. This sets in motion a
virtuous cycle; the entrepreneur is propelled to generate more profits and in so doing, the
more profits made, more the problem is alleviated (MacMillan and McGrath, 2000; Prahalad,
2004; Prahalad and Hammod, 2005; Perrini 2006).
The studies of social entrepreneurs have received little attention. Historically, they have
been cast as humanitarians or saints, and stories of their work have been passed down more
in the form of children’s tales than case studies. While the stories may inspire, they fail to
make social entrepreneurs’ methods comprehensible. The question arises that one can
analyze the entrepreneur but how can one analyze a saint?
SE is conceptualized from organizational level. A first perspective could be described as
commercializing a nonprofit organization. It means it brings a ‘for profit’ philosophy to the
many not for profits that experienced a financial crunch and found it difficult to sustain
without donations and grants. Second perspective is of efficient nonprofit management by
way of brining expertise and market-based skills to the nonprofit sector (Johnson, 2000). A
base for third perspective suggests that there also exists a tradition to link a specific
ownership structure to social enterprises. For example, the cooperatives and other mutually
owned organizations are often referred to as social enterprises. A fourth view suggests social
entrepreneurs as social purpose business ventures (Campbell, 1998; Larson, 2000; Foryt,
2002; Schaltegger, 2002; Volery, 2002; Hockerts, 2003; Mair and Noboa, 2003a). In this
case an emerging social innovation is seen as a business opportunity and turned into a
commercial for-profit business creating, in the process, new market space is created while
attaining a social objective. At the societal level SE is often understood as networks for
social entrepreneurs and venture philanthropy. And in this case, information and practical
support, as well as charitable donations or equity capital, are made available to
entrepreneurial individuals and organizations that have a clear social mission and require a
targeted amount of funds to realize it (Christopher, 2000; EMKF, 2002; Joshua Venture,
2002; Orloff, 2002). Ashoka and Schwab Foundations are examples of this type.
The concept of SE is still poorly defined and its boundaries are still open for future
researchers to study. One group of researchers understands it as the socially responsible
46
practice of commercial business engaged in cross- sector partnerships. Other group views
SE as means to alleviate social problems and catalyze social transformation (Alvord et al.,
2004). Singh (2007) expresses that SE is a process of creating social value by combining
resources which they themselves do not possess in a new way to explore and exploit
opportunities for the purpose of social change or meeting social needs, which results in
offering of services and products. The literature on SE describes a set of behaviours that are
exceptional. These behaviours should be encouraged and rewarded in those that have the
capabilities and temperament for this kind of work. Hence, according to Dees (1998)
everyone should not aspire to be a social entrepreneur. Various motivations for SE are
identified in the literature. Cannon (2000) recognizes three general types of people who
become social entrepreneurs. The first are individuals who have made a lot of money and
are interested in giving some of it back to further social goals. The second are ‘recovering
social workers’ who are disenchanted with the existing social support system and looking
for a more effective approach. The third type is a new breed who has gone to business
schools (or along a similar path) with social enterprise in mind. Catford (1998) summarizes
social entrepreneurs as those who combine street pragmatism with professional skills,
visionary insights with pragmatism, an ethical fiber with tactical thrust. Bornstein (1998)
characterizes a social entrepreneur as a path breaker with a powerful idea, who combines
visionary and real world problem-solving creativity who has a strong ethical fiber and who
is totally possessed by his or her vision for change.
SE can be further divided into two parts namely techno-based SE and non-techno-based
entrepreneurship. Aim of techno-based SE is to incubate and boost entrepreneurship based
on rural innovations, so that such innovation can be commercialized and patented and
targeted to Tier-IV market; for example: GIAN, NIF, Aavishkaar. Aim of non-techno based
SE is to promote self-employment at rural level as seen the cases like SEWA, AMUL, etc.
Social entrepreneurs are emerging breed of entrepreneurs, whose primary interest is the
social development, at the same time ensuring sustainability of the organization and
replication of the ideas. They are transformative forces. They are restless people who search
for solving a problem in unique way, which is untried. They are change makers in the
society, as they set new path to solve traditional problems. They play the role of developer
47
of economy which is basically played by government and business entrepreneurs. Social
entrepreneurs play analogous roles in the field of education, health care, environmental
protection, disability, MF, micro venture capital finance and many more fields. They try to
devise cost-effective ways to deliver basic services. They undertake both public and private
sector functions alongside and work with people whom the governments have been unable
to reach effectively, with basic goods and services. They address market failures effectively
by providing access to private goods and services to markets where business does not
operate because the risks are too high and rewards are very low. Social entrepreneurs
identify resources where people only see problems. They view the villagers as the solution,
not the passive beneficiary. They begin with the assumption of competence and unleash
resources in the communities they are serving. The role of social entrepreneur is of a
‘Reliever’. They provide new ways to unstick the society. They find what is not working and
solve the problem by changing the system, spreading the solution and persuading society to
take new leaps. Social entrepreneurs produce measurable impact for the marginalized and
disadvantaged sector of the society (Retrieved from http://www.pbs.org/opb/ thenewheroes/whatis/, as
on December, 2009).
As per the definition from Stanford University, a social entrepreneur is non profit
organizations which help individuals establish their own small, for- profit businesses. As per
this definition a social venture capital fund (which works for non-profit) which helps the
individuals to establish their own small for-profit businesses is necessary to stimulate
grassroots rural techno entrepreneurship. The grassroots innovators can also be treated as
social entrepreneur, as they find a new solution to unstuck the society, for which the
commercial enterprises were hesitant to initiate and solve the problem and the government
did not think to venture for solution of such problems.
2.1.3 Invention, Innovation and Incubation
2.1.3.1 Invention and Innovation
Idea is the genesis of entrepreneurship. Ideas may be rational or wild. In either case, they
need to be filtered and those which have probability to generate a business needs to be
nurtured (Sahay, 2011). Innovation despite being as old as mankind itself, in spite of its
obvious importance, it has not received adequate scholarly interest (Fagerberg, 2003).
48
Economists see a direct relationship between technology change and economic growth.
Economist dealt with the allocation of resources to innovation and its economic effects,
while the innovation process itself has been more or less neglected (Fagerberg, 2003).
Management gurus base their theories of competitive advantage on innovation. The World
Bank spreads the gospel of social development driven by knowledge adoption. Altogether,
the role of innovation in a national economy is getting increasing attention (Rao, 2007).
Research on the role of innovation, economic and social change has proliferated in recent
years, particularly within social sciences and cross disciplinarily (Fagerberg, 2003).
Different authors have defined innovation and invention in various ways.
According to Durcker, innovation is the means by which the entrepreneur either creates new
wealth-producing resources or provides existing resources with enhanced potential for
creating wealth. Firms in developed countries of West are in the forefront of innovation and
change, whereas developing world finds it hard to compete on the technology plank
(Selvanayakam, 2007). Innovation is the use of new knowledge to offer a new product or
service that customers want. It is invention plus commercialization. It is a new way of doing
things. It is new knowledge which can be either technological or market related. Often the
new product or service itself is called as an innovation, if its cost is lower, its attributes are
improved or now it has new attributes it never had before, which reflects the creation of new
technological or market knowledge. To be an innovation, an idea must be converted into a
product or service (Selvanayakam, 2007, p.15). Innovation is the developmental process. It
is the translation of an idea into application (Ghosh, 2000).
Schumpeter (1939) differentiated between the three types of creative activities- Invention,
Innovation and Imitation. Accordingly, Invention is the act of creating or developing a new
product or process or new idea. Innovation is the process of creating a product or service
from an invention. It is the commercial exploitation of the invention. Imitation is the
adoption of an innovation by similar firm (Manimala, 1992a; Selvanayakam, 2007). Thus,
an invention may be a scientific discovery; innovation is its economic application.
49
Schumpeter has identified five major forms of innovation i.e. introduction of a new product
or service (or improvement in quality of an existing good); introduction of a new method of
production; development of new market; exploitation of a new source of supply or raw
materials or semi-manufactured goods; reorganization of the operation of an industry.
Schumpeter’s concept of innovation is much wider as it covers the doing of any new thing,
or old thing in a new way (Glaister, 1989). The modern concept of innovation is that it is a
process, one of the early stages of which is invention (Glaister, 1989).
Expanding the work of Schumpeter author Manimala (1992a) identified ten types of
innovation viz., market innovation, product innovation, process innovation, R&D
management innovation, supply innovation, personnel innovation, financial innovation,
cultural innovation, structural innovation and government relations innovation. The most
important is product innovation which relates mainly to modifications of existing products
and or introduction of locally new products. Process innovation refers to the change or
modification in the method of the product’s production. Author created the sub types within
high innovation group as inventor/tinkerer, adventurer, problem solver, gap filler, social
visionary, opportunity grabber and specialist pioneer. In the category of low innovation
group, a sub category of innovators were found and those were like; chance entrant, agent
turned producer, concession grabber, obsessed producer, imitator and niche holder
(Manimala, 1992a, 2005).
Schumpeter (1939) defined innovations as the commercial use of scientific discovery or
invention. A major difficulty with this definition is that it fails to distinguish between
commercial and non-commercial innovation. The definition provided by Rogers (1962)
overcame the difficulty of definition. It also introduced the idea of perception of an
Invention Creation of something new
Results in new knowledge
Innovation Transformation of an idea into
useful applications
Results in new products, services
or processes
Figure 2.4: Conceptualization of Invention and Innovation
(Source: Own Creation)
50
innovation as “an idea, a practice or objective perceived as new by an individual or other
unit of adoption”. This definition emphasized “newness” dimension and not the
“productivity” dimension as highlighted by Schumpeter. Combining the views of
Schumpeter and Rogers, Pastakia (1998) describes the features of innovation as follows:
(a) Innovation involves a new and significantly better way of doing things.
(b) It is inevitably associated with improved productivity or savings in costs, effort or time.
(c) An idea, a practice or a product may be perceived as an innovation by the innovator or
by an external observer.
(d) Perception of innovation is influenced by the context and world views of the people
involved.
‘India Innovation Survey’ jointly conducted by Confederation of Indian Industry (CII) and
Boston Consulting Group (BCG) found that innovation is a top strategic focus for most
Indian Companies. As high as 89% respondents, explained the importance of innovation
over last ten years. A 39% of the respondents felt that innovation today has become critical
to their organization and as high as 91% said innovation was amongst the top three strategic
priorities. Gupta explained that creativity in India particularly in science and technology is
grossly underestimated. On accessing the Information and Library Network’s (INFLIBNET)
National Online Union Catalogue (which houses database of Indian doctorate research
studies) no significant work is found on innovation and its requirement in generating
entrepreneurship and initiatives and challenges of education system to generate innovative
entrepreneurship. Foreign researchers focused more on innovative practices and its impact
on performance of the company. Broader research work includes interdisciplinary theory of
entrepreneurship, incubators, innovative internationalization etc., (Rathod, 2010).
Rathod explored other researchers empirical research work and found that strategic human
resources management (SHRM) is seen as crucial for innovation and entrepreneurship in
China leading to the synergy between entrepreneurship and innovation. The study found that
entrepreneurship and innovation are complementary for organizational success, they are not
confined to the initial stages of a new venture, rather they are dynamic and holistic processes
in entrepreneurial and innovative organizations. Very fewer studies are found on
innovativeness of Indian Entrepreneurs particularly in India.
51
In the same study by Rathod (2010) found that entrepreneur’s ordinal ratings were
technological, marketing, process, business, strategic and organizational innovation.
Entrepreneurs of large scale industries were more innovative compared to small and medium
scale industries and thus their innovation positively correlated with their performance.
Researcher concluded that small scale organizations are found on a higher scale in terms of
marketing innovation.
Gupta et al., (2001) has made a remarkable contribution in explaining the concept and
importance of grassroots innovations. According to Gupta et al., (2001) invention and
innovation are differentiated terms. Invention means a new, first hand discovery, whereas
innovation refers to incremental changes or improvement in the existing product, which may
result in higher production, or lowers cost or increases efficiency or results in different
application of same technology. In other words innovation is a solution which is aimed
either to increase work efficiency or improves the product efficiency or helps in reducing
drudgery, or lowers the cost or leads to generation of additional income or reduction or
prevention of possible losses (Gupta, 1996).
While searching for literature on creativity of common people and their ability to solve
problem, a huge gap was found (Gupta, 2007). With respect to grassroots innovator only one
study was found in the form of student project at IIM-Ahmedabad, which explained the
difference between the types of grassroots innovators. Karan and Saha (2003) distinguished
the grassroots innovator in two forms viz. the problem solver and designer innovator. The
features of both the form of innovators are given below.
Table 2.2 Distinction between Problem Solver Versus Designer Innovator
Problem Solver Designer Innovator
For a Problem solver the need for innovation arises from a first hand experience with the problem that an innovator has faced in his career or in his environment.
Designer innovator is excited by new ideas and develops new products to satisfy their creative urge.
Problem solver focus on a single product and on building a business around that product.
Multiple products can be expected from designer innovator.
Problem Solver can be expected to have sufficient drive to improve upon and market their product.
Designer Innovator may be keener on giving shape to his creative ideas than on converting one such idea into a successful business enterprise.
(Contd.)
52
Problem Solver Designer Innovator
Problem Solver if given their business orientation and focus, it is expected that he may be unwilling to sell his technology.
Designer Innovator needs not only a financial backing at the time of development of a product but also a proper management and strategic guidance in commercializing their product.
In the case of problem solver it is expected that innovator would have developed a prototype and tested it. The support they need would be more for commercialization and improvement in their product.
In the case of designer innovator since they do not focus on commercializing, they may not be in a comfortable financial position and may be willing to sell their technology on reasonable terms.
Problem Solver are “Type1” Innovators Designer Innovator are “Type2” Innovators.
Note: There could be a third category, “Business Driven Innovators” whose business needs drive innovations. They are included under “Problem Solver”.
(Source: Karan and Saha, 2003)
Baumol (2002) believes that the largest contribution to economic welfare is due not to major
breakthroughs but, rather, to routine improvements in the existing products and processes.
He emphasized the importance of systematized R&D activities and fails to recognize the
contribution of independent inventors/ innovators (often entrepreneurs) to a technological
development process. People believed that the fire of creativity had extinguished in Indian
society, because it relied more on borrowed concepts and instruments, which lead to losing
of ability to scout and spawn innovations at grassroots (Gupta, 1998).
The fundamental assumption behind most developmental approaches aimed at poverty
alleviation is that poor people are too poor to be able to think and plan on their own. The
result is that most interventions are designed by externally learned and qualified people
(Gupta, 1998). In fact many odd balls in villages have tried to experiment and do things
differently in a very creative and innovative manner. Often such innovations remain
localized sometimes unknown to farmers in the same village. Lack of diffusion causes
validity of these innovations. SRISTI, GIAN and NIF have scouted many technological,
socio-cultural, institutional and educational innovations from rural India (Gupta, 1998).
Large mass of poor people had no choice but to be inventive in order to just survive. Present
time demands that given the increasing pressure of global competitiveness, Indian
entrepreneurs have to develop new products, services which have an edge in the field of
environment as well as efficiency. Technological and institutional innovations by grassroots
people and farmers in disadvantaged regions can spur huge revolution (Gupta, 1998).
53
Grassroots creativity can harness global capital and entrepreneurial support for decentralized
development (Gupta et al., 2001). Knowledge, innovation and practices are produced by
people in the course of exploring new habitats, new materials, new needs and new
institutional conditions (Gupta, 2007). Poor people are potentially rich in knowledge,
creativity and invention as they learn majority of their lessons in laboratories of life. Poor
are at the bottom of the economic pyramid but they are at the top of ethical, innovations and
knowledge pyramids (Retrieved from http://www.sristi.org/anilg/papers/Augmenting innovations.doc, as
on June, 2007). The institutes which work for grassroots innovators who are engaged in
conserving biodiversity and developing eco-friendly solutions to local problems are
Honeybee Network, SRISTI, GIAN and NIF, which is discussed at length in the
forthcoming chapter. The innovation in entrepreneurship has always helped countries by
changing with the times and producing new products and services from ones that already
exist, being innovative has helped one to become successful in all endeavors (Shukla, 2011).
Grassroots technological innovations can overcome the inertia and improve the efficiency at
grassroots level (Gupta et al., 2001).
2.1.3.2 Incubation
Small start up firms assists in job creation, employment growth and development of
innovative products and services. Technology based companies tend to emphasize R&D
investments and a firm with a new ‘high tech’ product wants to achieve proof of concept or
to build a prototype. Incubators assist such firms in the pre-seed and seed phase (Christian,
2007). The concept of incubators is applied more to project ideas which have a high degree
of uncertainty in new business creation or development. Incubator facilitates the survival of
companies and nurtures them for growth and success by providing the inputs, shares the risk
and provides credibility to an idea as it progresses from idea to some kind of product or
service. Un-inclined innovator may not like to develop a business enterprise; he would
instead like to concentrate on innovations. Here, incubator acts a link between the golden
triangle (as advocated by GIAN) of innovation, investment and enterprise. Incubator
encourages the idea to be converted into an enterprise, perhaps by a different person
(Selvanayakam, 2007). Lack of incubators in developing countries hinders the process of
converting innovation into product (Gupta, 1999).
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According to National Business Incubation Association, business incubation is “a business
support process that accelerates the successful development of start-up and fledging
companies by providing entrepreneurs with an array of targeted resources and services.
Critical to the definition of an incubator is the provision of management guidance, technical
assistance and consulting tailored to young growing companies. The definition highlights
the imperative role played by the incubator (Retrieved from http://www.nbia.org/ resource_library/
what_is/,as on June, 2011).
The incubation work can be divided into theoretical work which primarily explains the
concept of incubation and incubator (Bhabra-Remedios and Cornelius 2003; Aernoudt,
2004; Hackett and Dilts, 2004a). Practical work consists of summarizing the services of
incubator, success of incubator (Bergek and Norrman, 2008; Chan and Lau, 2005; Hansen et
al., 2000; Von Zedtwitz 2003; Haapasalo and Ekholm, 2004). Evaluation work of incubator,
in terms of incubatee survival and growth was also studied (Aerts, Matthyssens, and
Vandenbempt 2007; European Commission 2002; Hackett and Dilts 2008; Lalkaka, 1996).
Researching further, it was found that business incubators can be private or public. Private
incubators are for-profit firms that take equity or receive a fee for the business services
provided to clients; on the other hand public incubators are focused on high-tech industries
(Sahay, 2011). The most important work of Voisey et al., (2006) stressed that although
business incubators are sometimes structured as traditional companies, the majority of
incubators are non-profit entities.
The formal concept of business incubation began in the US in the 1960s. It later developed
in the UK and Europe through various related forms (e.g. innovation centers, pepinieriesd’
enterprises, technopoles/science parks) during the 1980s. As per United Kingdom Business
Incubation’s (UKBI) survey as on 2005 there are 270 incubation environments across the
country UK, as per European Commission in 2002 identified 900 incubation centers in
Western Europe and National Business Incubation Association (NBIA) estimated 1,500
incubators in US.
The first incubators supporting start-up companies were set up in USA. The oldest incubator
in the world is Student Agencies Inc from Ithaca, New York. There is a lack of academic
research on business incubation focusing on university based incubators. In particular, there
55
are almost no recommendations, best practices and guidelines coming out of the research for
practicing technology transfer from university by an incubator (Christian, 2007). In US,
VCFs, companies and even city governments have their own incubators (Singh and Singhal,
2002). An incubator provides infrastructural, technical and business mentorship to start ups,
handholding guide, access to investors and vibrant eco system (Retrieved from
http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm as on May, 2011).
The incubator assists the innovator like in business plan development, enterprise start up,
external finance, entrepreneurship education, market research, sales assistance, research and
development, accounting, tax and legal assistance, human resource consulting, providing
seed financing (Christian, 2007), industry cluster development, promoting innovation and
technology transfer (Sahay, 2011). Incubator operates at three level viz., fundamental level,
operational level and policy development (Retrieved from: http://www.dare.co.in/strategy/business-
essentials/how-do-business-incubators-help-you.htm as on May, 2011).
US based researcher explained that incubators are another means of economic assistance in
rural areas. Incubators nurture young firms, help them to survive and grow during the start
up period when they are most vulnerable. It provides hands-on management assistance,
access to financing and orchestrated exposure to critical business or technical support
services. Research on incubators has emerged as one of the topical debates among business
schools, business leaders and policy makers. However, very few studies have evaluated rural
incubators. 30 percent of all incubators in the US are located in rural areas (Retrieved from
http://usasbe.org/knowledge/proceedings/proceedingsDocs/USASBE2005proceedings-Heriot%2030.pdf, as on
June, 2011).
Business incubators is a relatively new concept in India and unlike in other Brazil, Russia,
India and China (BRIC) countries such as Brazil or China, even now concept is not so well
developed in India as a support system for engineering technology- based entrepreneurs. The
idea is very recent in India (Nagayya, 2005). Business incubation in India goes back to 1984,
when the DST set up the first scheme to help entrepreneurs bootstrap their business (Retrieved
from http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm, as on May,
2011). The history of business incubator could be traced to 1985 when Tiruchirappalli
Regional Engineering College at Tiruchi. India is a prime destination for incubation centers.
The Technology Development Board has sponsored around 60 plus incubators and another
56
30 to 40 incubators run privately (Retrieved from http://www.dare.co.in/strategy/business-
essentials/how-do-business-incubators-help-you.htm, as on May, 2011).
There are three types of incubators set up in India, viz., incubators set up under the aegis of
leading institutions of engineering, technology and management (e.g. IIMs and Indian
Institute of Technology, IITs), within STEPs (e.g. Technoparks in Trivandrum), by leading
private sector enterprises (e.g. Nirma labs, NCL, Pune). The first phase was from 1986
through late 1990s when incubators were set up under STEPs and the second phase from late
1990s which focused on incubation set up under private sector enterprises (Mani, 2009).
India has unmatched diversity of incubators ranging from agro-based technologies,
biotechnology, nanotechnology, energy and power electronics (Retrieved from
http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm, as on May,
2011). The Technology Development Board (TDB) of India provides financial assistance to
industrial concerns and research institutes for commercial application of indigenous
technology or adopting imported technology for wider domestic applications (Sahay, 2011).
It provides assistance in the form of equity, soft loans or grants. The assistance provided by
TDB is positioned to create techno-entrepreneurs and to act as a bridge between
development and commercialization of the technologies (Sahay, 2011). The business ideas
selected are typically those that are considered either too risky or too long term by regular
venture capitalists (Nagayya, 2005).
To spur entrepreneurship, NSTEDB took the unprecedented step of providing seed capital to
start ups. Until sometime back, all entrepreneurs were dependents on external finance for the
initial amount of `5 to 10 lakhs. To encourage entrepreneurs, a seed support system in 2004
was started in which a crore of rupees were placed with incubators as a grant from NSTEDB,
from which the incubators could disperse money as an investment by way of soft loans,
terms loans and equity participation etc., (Retrieved from http://www.dare.co.in/strategy/business-
essentials/how-do-business-incubators-help-you.htm, as on May, 2011).
Innovation in India is still largely led by multinationals and it has more than a fair share in
the ICT domain. Incubators are still a new concept in India as compared to the First World
countries. So, the process and time required to get funds is slower than the benchmark.
57
Incubators helps the incubates to complete the prototype stage and reach the level where
their business plan complements user feedback and market response during pilot testing
(Retrieved from http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm,
as on May, 2011). It can be a great place for entrepreneurs, especially for those who are in the
initial stages of their ventures, anywhere from conceptualization to early stage operations
(Retrieved from http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm,
as on May, 2011).
The idea behind the incubation initiative was to ensure that technopreneurs are not hindered
for the want of initial funds required for market research and for bridging the financing
needs between the time, the business venture floats and the time when venture financing is
attracted (Mani, 2009). Since the incubator idea itself is new and evolving, there are no
detailed studies on the effectiveness of these as an instrument for promoting
technopreneurship at urban areas (Mani, 2009).
In the recent article on ‘How do Business Incubators Help you’, featured in Cyber Media’s
publication, a monthly magazine Dare (Vol.4, Issue Nos.5, February, 2011), highlighted the
thrust areas of Indian incubators like life sciences, agro business, pharmacy, biotechnology,
renewable energy, telecom, education, healthcare, dairy technology, arterial science centric
products, herbal, Information Communication and Technologies (ICT), information
technology (IT) etc., which clearly depicted that none of the existing incubators worked on
ideas of innovative rural entrepreneurs. The same set of sectors being favoured by
incubators was highlighted in the study carried out by Sahay (2011) on incubation and
innovation. From this the grassroots level incubation gap is highlighted. Rural Innovations
Network (RIN, now known as Villgro) based at Chennai incubates grassroots innovations,
which can have a significant impact on rural lives and lie untapped, in spite of their potential
to transform lives. RIN has, from inception, focused on forging ties with VC firms that
operate with rigorous commercial discipline. RIN has signed a Memorandum of
Understanding (MoU) with AIMVCF. Aavishkaar, under the MoU, considers investment in
RIN-enabled, innovation-based micro enterprises.
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With respect to Gujarat only one grassroots level technology incubator is found, which
focuses on incubating and commercializing grassroots innovations. The delivery functions
like project appraisal, disbursement, monitoring and mentoring and recovery are being taken
care by the regional arms of NIF e.g. GIANs and collaborators. GIAN-West (Ahmedabad),
GIAN-North-East (Guwahati), GIAN-North (Jaipur) is operational to help NIF to disburse
MVIF. With respect to incubation in the rural areas only one study was found which was
undertaken by Sonne (2010). At the grassroots level, there are two types of rural innovation
support models that support innovation, existing knowledge, practices and resources.
Firstly, there are innovative organizations in rural areas who innovate for poor with new
technology, innovative ways of organizing production, innovative ways of reaching markets,
using natural resources, provide extensive non-financial support in implementing small scale
business models. This kind of model needs grants for preliminary studies, project settings
and building up local institutions. As the intervention matures it is managed by poor through
internal profits, or bank loans. The government’s department of Science and Technology is
involved in grassroots innovation support through its Science and Society Programme,
whilst NGOs those connected through All India People’s Science Network, and Delhi based
Center for Technology Development Sonne (2010).
In the second type of grassroots organizations which acts as incubators for rural entrepreneur
with exciting ideas with focus on creating a viable venture around the new product or
service. Limited financial support is provided to test an idea, to build a prototype, to
research markets and establish network contacts. Governmental and non-governmental
organizations are involved in rural incubation. DST has been involved in rural innovation
through its incubator GIAN together with IIM-Ahmedabad, Honeybee, and SRISTI. At
international level, the World Bank has recently started incubator programmes in India
through its InfoDev initiative though it focused specifically on pro-poor incubation in the
ICT related areas (Sonne, 2010).
Recently held IIM-Ahmedbad Conclave, the chief minister of Gujarat expressed that Gujarat
was the first state in the country to have formed an innovation commission, was now in the
process of setting up a world class incubation center on public private partnership mode
(Retrieved from http://www.expressindia.com/latest-news/Narendra-Modi-flays-PM-over-Indias- solar-
59
woes/729880/, as on December, 2010). Incubators can go a long way in creating an ecosystem in
India, which is lacking at present. It provides a system to entrepreneur to fall back on for
help in times of crisis. At the outset, incubators help a lot to budding entrepreneurs, firm up
their courage to start up, remove the fear of failure and lack of support; hence there is an
urgent need to promote incubation activity in India (Retrieved from
http://www.dare.co.in/strategy/business-essentials/how-do-business-incubators-help-you.htm, as on May,
2011). Educational and R&D organization, associations can play a leading role in promoting
the incubator culture for supporting the young first generation professionals, innovators and
entrepreneurs. Experiences of developed countries like USA and UK and developing
countries like China, Taiwan and Israel, present a highly encouraging picture to be emulated
by Indian organizations (Nagayya, 2005).
2.1.4 Funding to Entrepreneurs
Entrepreneurs are often technical experts and investors such as banks have an arm’s length
in understanding the risk and possibilities of such investments, which is where the
intermediaries such as expert professional venture capital have a role to play (Sonne, 2010).
The manner in which the business is financed depends on the type of company established,
its creditworthiness, and entrepreneur’s risk taking ability, organizational structure and
entrepreneurial capabilities (Prodan, 2007). The availability of external risk capital has often
been a constraining factor for financing company formation in India (Mani, 2009). Firms in
India rely on internal and external sources of funds for their growth.
Founders, Families
and Friends
Private
Investors
VC Financing
Equity
Market
Commercial Banks
Initiation Start-up Early Growth Maturity
L
o
w
H
i
g
h
Figure 2.5: Technopreneurship and Financial Capital
(Source: Adapted from Mayer, 2002)
60
As shown in the figure 2.5, technopreneurs acquire some of the required limited capital at
establishment (initiation) stage from friends, relatives or acquaintances. For further growth
of the company, technopreneurs rely on corporations, private investors, angels (at start up
stage) venture capitalists (at early growth stage), public stocks, government grants and banks
(at maturity stage). Besides, equity financing, technopreneurs can also apply for debt
financing. This kind of financing is quite limited at first stage since the technopreneurs may
not have enough high-quality guarantees to offer to banks for availing loans (Prodan, 2007,
Mayer, 2002).
Private investors and VCs often have complementary roles in the high tech entrepreneurship
firms, with private investors (business angels) investing mostly at the early growth stage and
VCs financing the later (fast growth) stage (Manigart and Struyf, 1997). In the high tech
entrepreneurial setting, venture capital firms are the most dominant source of finance in the
global network economy (Chesbrough, 2003; Hsu, 2004). The sources that provide the
largest amount of funds at the early developmental stage are private investors and business
angels. VC plays a role later (Mayer, 2002). Business angels (the wealthy individuals) are
considered one of the most significant sources of funding and advice on management
practices for start up firms, especially in providing seed financing to firms at the growth
stage (Elitzur and Gavious, 2003). VCs are institutional investors following principal agent
relations, however, business angels are actively and directly involved in the start ups
management activities, exerting more control (Jeng and Wells, 2000; Mayer, 2002; Davila,
Foster and Gupta, 2003). VCs are focused on exit, but business angels are much less so.
According to Mayer (2002), the transition from the personal funds of the entrepreneurs to
private investors to venture capital financing to the stock market represents a ‘gradual
broadening of the investor base’. This evolutionary progress of a high-tech start-up firm
often implies a ‘strategic re-orientation’. Universally, private equity and venture capital has
been the main source of risk capital for technopreneurs. VC is an important source of
finance for new companies in developed countries and in India the sector has grown
exponentially in the last few years with plenty of domestic and international funds investing
in high growth enterprises in India. VCs invest in already developed ventures compared to
those of the rural innovative entrepreneurs. VCs preferred investment choices are IT and
Information Technology Enabled Services (ITes) (Seven percent), manufacturing (12%),
61
healthcare and life sciences (Three percent), banking, financial services and insurance (28%),
media and entertainment (four percent), Engineering and Construction (11%), Shipping and
Logistics (Five percent), Energy (Eight percent), Telecom (13%) and others (nine percent)
(National Knowledge Commission, 2008).
Compared to various developing countries like Brazil, Mexico, China, Malaysia and Korea,
India has a strong financial system both at urban and rural areas. Apart from private and
state owned banks there are cooperative banks which are particularly important in rural areas,
huge post office network, non banking financial institutions such as savings societies and
credit societies like PACs that have a vast network in rural areas are important in rural
development (Basu and Srivastava, 2005). That formal credit is more difficult to obtain in
rural areas is confirmed by the National Sample Survey (NSS) round in 2003 which
indicates that whilst 75% of households access formal credit in urban areas, only 57% of
rural households do likewise. Instead, moneylenders still play a significant role, providing
about 30% of credit in rural areas (Basu, 2006). To bridge the lacunae of formal credit in
rural areas government and Reserve Bank of India (RBI) pursued the so-called “social
banking” to provide lending and subsidized credit in rural areas.
Several banks, financial institutional and non-institutional rural credit and rural schemes and
programmes are provided to improve the economic conditions and economic ability of rural
entrepreneurs. The various sources from which the entrepreneurs procure loans are non-
institutional agencies (local village moneylenders, agents and landlords) and institutional
agencies (cooperative societies, commercial banks, regional rural banks, land development
banks, farmers service societies, National Bank for Agriculture and Rural Development
(NABARD) etc). A bank concentrate upon MF to meet the credit needs of the rural
entrepreneurs and provides augmenting support by providing Kisan Credit Card to the
farmers. The Local Area Banks (LABs) in private sector and Differential Rate of Interest
(DRI) scheme are also implemented to promote rural savings and rural credit (Paidi, 2006).
Government tried to address various gaps through schemes specially focused on agriculture
like ‘Advancement of Rural Technologies Scheme (ARTS) ‘Women in Science and
Technology” scheme that provide subsidized credit for facilitating agriculture (for e.g.
machinery, fertilizers or seeds) (Sonne, 2010). It was noted that such scheme was not
62
conducive to enterprise growth or innovation. In recent years most discussions surrounding
rural and pro-poor entrepreneurship and innovation have rarely moved beyond MF and
micro credit disbursed through SHG-bank-linkage models.
Pro poor innovation in rural areas is more likely to occur through small scale ventures and
entrepreneurs than industrial research and development (Sonne, 2010). Government schemes
that provide finance and support for innovation and entrepreneurship generally focus on
high technological innovation and large scale projects than entrepreneur-based innovative
activities that take place in rural areas. To promote innovative entrepreneurship DST’s
National innovation fund together with Small Industries Development Bank of India
(SIDBI) called MVCF is established to bridge the financing gap for micro enterprises, which
is discussed further (Sonne, 2010).
2.2 Role, Funding and Drawbacks of Micro Finance
The level of growth-oriented entrepreneurship in a country is a more relevant driver of
economic growth than the mostly used indicators of entrepreneurship like the self-
employment and new firm formation. In contrast to rich countries, entrepreneurship in low
income countries is mainly driven by necessity (Bosma et al., 2008). Most entrepreneurs in
these economies do not start a firm because they desire independence or because they want
to increase their income as compared to being an employee, which are the dominant motives
in rich countries. Most new businesses in low income countries are started out of necessity,
in contrast to high income countries, where entrepreneurship is most often opportunity
driven. This is reflected in the finding that in poor countries self-employed are less happy
than employees, while the reverse is true in high income countries (Blanchflower and
Oswald 1998; Graham, 2005). Entrepreneurs in low income countries most often start a
business because they have no other way of earning a living. These entrepreneurs are not
likely to be involved in a process of self-discovery; their actions are not likely to have an
effect on the restructuring and diversification of the poor economies (Rodrik, 2007).
Within the groups of transition and developing economies there are substantial differences
in entrepreneurship rates. Chile stands out because of a particularly high rate of growth-
oriented entrepreneurship, while Mexico has a particularly low rate of growth-oriented
63
entrepreneurship. In contrast to rich countries, entrepreneurship in developing economies is
mainly driven by necessity: self-employment is often the only occupational choice given a
paucity of other sources of employment (necessity-based entrepreneurship; Acs and Amoros,
2008; Bosma et al., 2008). The actions of most of the entrepreneurs in low income countries
are not likely to have an effect on the restructuring and diversification of the poor economies.
This would be the whole story if the rates of growth-oriented entrepreneurship would also be
marginal in these economies. This is only the case for Mexico. Next to Chile— where
opportunity-driven entrepreneurship is dominant—Brazil, India, and Argentina perform
quite well with respect to growth-oriented entrepreneurship. This means that there still is a
substantial group of entrepreneurs in low income countries that might get involved in a
process of self-discovery.
The problem in practice is that in contrast to rich and transition economies, growth-oriented
entrepreneurship is less likely to be realized in developing economies, due to constraints on
the provision of capital and (skilled) labour. An additional constraint in low income
countries is that there is generally a lack of (foreign) larger companies, which could act as a
training ground for prospective growth-oriented entrepreneurs, and could open up
distributions channels for new fledgling enterprises (Knorringa, 1996). One should make a
distinction between productive (manufacturing) and resource extractive (mining, oil)
activities here, as the former will be a more useful for the development of entrepreneurship
than the latter. The presence of growth-oriented entrepreneurs seems to be more important
for achieving GDP growth than general entrepreneurship (Stam and Stel, 2009).
MF is the term that has come to refer generally to such informal and formal arrangements
offering financial services to the poor (Brau and Woller, 2004). It predates the rise of formal
financial system and it dates back to early mid 1980s, last four decades where global efforts
were made to formalize grassroots movement (Brau and Woller, 2004) of providing
financial service to an estimated 100-200 million of world’s poor (Christen et al,, 1995).
Scholarly interest in MF has lagged behind industry development, but since 1997 onwards it
is growing rapidly. Scholars started looking at the gamut of MF services as upcoming topics
of mainstream finance research (Brau and Woller, 2004). In ancient time the credit flowed
through ubiquitous money lenders, traders, friends, trade credit from local shops,
64
pawnbrokers, local landowners, suppliers and extended family sources or through traditional
group based practices (Harper, 2003).
There is a rich body of literature, based on surveys, case studies, regional and cross-country
analysis, that explores how poor save, factors that propel or constrain savings. This fact has
considerable implications for policy and resource mobilization for national economies and
financial markets (Adams, 1973; Miracle, Diane and Lauire, 1980; Maloney and Ahmed,
1988; Meyer et al., 1988). Bankers do not have symmetric information of potential
consumers and unorganized private money lenders do not fall in the perimeter of
government regulations, which makes them stronger to fill the void of financing the poor
and are able to strongly decide the terms of credit (Harper, 2003).
A plethora of studies on MF exists at both national and international level in the form of
conceptual context (Singh, 2009; Lokhande, 2009; Patel, 2009; Sengupta, 2007; Roy, 2007;
Tripathy and Tripathy, 2007) and disbursement context (Hema et al., 2009). Conceptual
study in Latin America outlined that the relationship between MF and poverty reduction is
both complex and contextual (Gulli and Berger, 1999). There is no dearth on unidirectional
study aimed at evaluating success or failure of the most vital disbursement model of MF
through SHG and its role to empower women (Saha, 2007; Namboodiri and Shiyani, 2001;
Sreelakshmi and Shetty, 2008).
Majority of the literature on SHGs pertains to district/region specific impact oriented
investigation. Researchers are attracted to study the developmental strategies of SHGs from
empirical as well as conceptual perspective (Kumar and Sharma, 2007). Raikar (2007)
considered Bank-SHGs linkage model as important institutional mechanism for poverty
alleviation and Meeti (2008) treated SHGs as indispensable economic units for attacking
poverty and unemployment in economically backward states. Singh (2009a) treated SHGs
Bank linkage programme as a paradigm of rural and developmental financing. Many
researchers concluded that SHGs have succeeded in eliminating moneylenders. Reasons for
emergence of MF are slow economic growth, low connectivity, high poverty incidence, and
failure of formal financial institutions in densely populated areas (Sriram and Kumar, 2007).
65
A descriptive study on credit lending model of MF are associations, bank guarantees,
community banking, cooperatives, credit unions, Grameen, group, intermediaries, non
government organizations, peer pressure, rotating savings and credit associations, small
business and village banking (Jaiswal, 2007). Jackelen (1999) studied the classic
evolutionary Grameen model of Bangladesh has delineated, that savings is vital service and
an efficient alternative for transfer payments.
In an Indian book by P. Arunachalam (2011) describes a consolidated compilation of
various contributor researchers on topics like women empowerment, SHGs, Branchless
Banking, Impact of SHGs on rural development, NGOs and rural development, Corporate
Partnership, Role of banks in empowering women, financial promotion of rural banking
system in India etc. The study covers either conceptual or empirical or case based research.
Some studies are based on region specific areas of Tuticorin district, Kerala, Nepal, Chittor
district, Tamil Nadu, Andhra Pradesh, Kanyakumari district, Erode district, Karnataka,
Sikakulam district, Thoothukudi district, Nagercoil town and Salem District. Vol.II of the
same author inscribes the collection of research papers on women empowerment through
SHGs, economic empowerment of women, rural women entrepreneurs’ empowerment,
progress of SHGs, impact of women empowerment, MF delivery model, MF for solving
housing problem, gender budgeting etc. Study of SHGs were specifically done in various
regions like Tirunelveli, Nanjangud Taluk, Karnataka, Hassan district, Coimbatore district,
Rajasthan, Tirivannamali district etc.
People borrow for survival loans to meet the hardships, loans for socio cultural
commitments, loans for improving productivity, small loans to meet recurrent operating
needs- loans as small as `10 to `20 (Gupta and Shroff, 1987). They often shuffle capital
from one purpose to another depending upon seasonal activities. Banks consider such
shuffling as misutilization of funds. If a farmer cannot shuffle funds, he will have to
continue losing an activity or dispose it off at a loss. In either case he is forced to take a sub
optimal decision. What he needs is greater ability and flexibility in reallocating funds on a
long term basis (Gupta and Shroff, 1987).
66
Researcher Brau and Woller (2004) had done a comprehensive review of all available
research papers and articles on MF. They have segregated the research work under six
different heads. Under the first categorization of self sufficiency and sustainability of MFIs,
researcher found that MFIs are unable to offset their cost against their revenues. Most of the
MFIs rely on grants and donations with the objective of higher social return rather than
commercial return. MFIs considered lending to poor as a priority sector lending and they
undertook lending at the cost of their financial self sufficiency. Authors commented that if
feasibility study of MF in world capital market was done through commercial bank loans,
papers, bonds and equity, then it would be considered as a tailored study of finance.
Researchers under the second head of MFI products and services explained that MFI
provided services of savings, loans, insurance, emergency loans and at times tailored loans
to poor with social collateral and joint liability (Balkenhol, 2007). Forced savings served as
collateral and formal insurance scheme not only covered the risk but it also increased the
repayment rate.
Brau and Woller (2004) under the third head of best practices, involved determining optimal
interest rate, group or individual lending, commercialization of MFIs, loan size and growth,
credit scoring and customers lending relationships. The negative aspect in practices was
attributed to charging higher interest rates from poor borrowers. MFIs found that customer
loyalty was a prime key for its success. The fourth head constituted of client targeting of
MFIs, who were exclusively women. Gender based funding was emphasized as women were
treated more efficient managers than men. Only child bearing was treated as a differential
role of women. Overall client portfolio of MFIs consisted of poorest rural and poorest urban
borrowers. With respect to the fifth head of policy and microfinance researcher disagreed to
the notion of failure of MFI industry on account of its similarity with poverty alleviation
programmes. MFI movement was treated as different to rural credit agencies. MF was
treated as bottom up policy as against the top down approach of rural credit programmes.
Brau and Woller (2004) explained that the last head of, impact of MFI for poverty
alleviation is an un-researched area. Moreover, MFIs operate on double bottom line i.e.
financial and social. Financial return is easy to compute by borrowing concepts from formal
finance lingua, but measuring social impact is a tough task. Impact study of MF was found
67
to be a mixed one, the positive impact constituted of higher positive income for labour
intensive enterprises; women empowerment (Roy, 2007); improved healthcare, children
education and nutrition (Sengupta, 2007). Negative impact constituted of dominating male
controlling financial affairs thereby limiting woman’s ability to develop, increased assets
and income became vulnerable if borrowers over levearaged. School dropout rate among
young girls increased as they were made responsible to carry out household chores
(Balkenhol, 2007).
Sundaresan (2008) commented that micro enterprises ran with the due support of MF and
with flexible employees who were close associates or family members of entrepreneurs. A
notable observation was made by Brau and Woller (2004) that borrowers in a trade off
between future schooling returns and current return to child labour outweighed the schooling
benefits as compared to child labour. It was also commented that less jobs were created by
women who were of child bearing age. Sheokand, (2000) described that poverty perpetuated
in rural sector as poor were serviced by informal sector at a usurious interest rate. MC was
the basic lubricant for sustaining life, income generating activities and promoting rural
development, Kaur and Saini (2007). Basu and Srivastava (2005) explained that inadequate
finance lead to ancestral debt and denial from formal financial access pushing farmers to
accept extortionate terms of informal finance.
Ravindranath (2009) highlighted the pupose of borrowing. According to him Borrowers
took loan for income generating activities like livestock, dairy farming, agriculture, trade,
vegetable vending, weaving, pottery, beauty parlour and photography. Karalay (2005) came
out with the reason of borrowing with respect to squaring of the old debt or servicing the
medium/long term requirements. Balkenhol (2007) meant that MF was means to achieve
MDGs by disbursing loans for productive activities. Lokhande (2009) briefed that poverty
and unemployment were arrested by MF by boosting micro entrepreneurial activities and
employment generation. Basu and Srivastava (2005) believed that void of formal financial
access can be filled by MF which is a blend of formal finance (safety and reliability) and
informal finance (convenience and flexibility). Karmakar (1999) and Chavan (2002)
considered MF as a “silver bullet” as it dismantles the web of poverty by generating income
and employment for rural poor.
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Kaur and Saini (2007) briefed that MF enhanced qualitative areas of education, health
services, water and social services. Von Pischke (1991) described that MF pushed rural
areas from the frontier of financial sector pioneering where commercial institutions do not
yet dare to tread. The latest development in the field of MF is narrated in a CGAP report
(2007), which explained that the landscape of MF has dramatically changed, where capital
markets are being integrated with financing and investment needs of MF markets and NGOs
have remained at the mainstay for the poorest borrowers. Walker (2008) explained that non
profit organizations, governmental development agencies and individuals are contributing to
the surge of MF, since 2004 the novelty is with the private sector participation seeking full
market returns. Lard and Barres (2007) made a very important observation that MF does not
transform all clients into entrepreneur, but it prepares them to adapt to shocks. It can reduce
vulnerability of the poor but is not a poverty cure-all.
2.3 Role, Funding and Drawbacks of Venture Capital
The history of the VC industry in India can be traced to the late 1980s (Mani, 1997). The
history of the VC industry can be divided into four phases (Indian Venture Capital
Association, 2007): Phase I: Formation of TDICI in the 1980s and regional funds as GVFL
and Andhra Pradesh Industrial Development Corporation Ltd. (APIDC) in the early 1990s.
Phase II: Entry of Foreign Venture Capital Funds between 1995-1999, Phase III: (2000-07)-
Emergence of successful India-centric VC firms and Phase IV: (2007)-Global VCs and PE
firms actively investing in India (Mani, 2009).
Most of the research on informal investments has focused on business angels who invest
comparatively large sums of money in entrepreneurial ventures with the potential to become
substantial companies. Business angels often ignore micro-companies that are destined to
stay tiny. Informal investment is a crucial component of the entrepreneurial process. Small
investments primarily by family and friends are crucial in funding not only micro-companies
but also future superstars. In comparison, formal VC and business angel investments are
very rare at the seed stage of a new venture. For example, the GEM reports (Zacharakis et
al., 2002) indicate that literally several of million Americans are nascent entrepreneurs
attempting to start new ventures.
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In a typical year, however, only a few hundred of them have formal VC and another 10,000
or so have business angel investments in hand when they launch their businesses. (The
number of startups backed by business angels was derived by multiplying the number of
companies launched with formal venture capital by 40, which is Van (1999) “guesstimate”
of the ratio of the number of firms backed by business angels to the number backed by
formal VC.) Hence, it is guesstimated less than 0.5 percent of nascent entrepreneurs launch
their new ventures with formal VC or business angel investments. But in most developed
nations, formal VCs get a disproportionate amount of attention from policy makers, whereas
informal investors—other than business angels—are almost ignored. Therefore, it seems as
if public policy initiatives aimed at various sources of seed-stage financing are inversely
related to their importance for nascent entrepreneurs raising funds to launch their ventures
(Retrieved from http://www.babson.edu/entrep/fer/BABSON2002/XII/XII_P1/XII_P1.htm, as on December,
2010).
There has been plethora of literature on VC finance, which assists the practitioners like VC
finance companies and fund mangers for better understanding the role of VC in economic
development. Exhaustive study on the VC and activities of VCs in developed countries has
been undertaken. The analysis of VC in the literature proceeds from two directions –as a
financial asset class; and as a means of supporting new technology-based firms (NTBFs),
who in turn act as vehicles for the commercialization of innovative activity (Hughes and
Storey 1994; Denis, 2004). Small high tech firms are viewed as pillars of knowledge based
economy which emanates products and services for present and future markets through
higher levels of innovation and deployment of research and development (Sainsbury, 2007).
Connection of VC activity and economic development is strengthened by including VC
activity in public policy as a part for supporting and encouraging the supply of VC (Sharpe,
2009).
Theoretical research on VC comprises of comprehending the work undertaken by VC to add
value (Gorman and Sahlman, 1989; Hellman and Puri, 2000; and Lerner, 1994); to test the
theories of investor/ principal agent conflict (Kaplan and Stromberg, 2001, 2001a 2002; and
Gompers, 1995), to study the characteristics of VC investments (Macmillan, Zemann and
Subbanarasimha, 1987; Macmillan, Siegel and Subbanarasimha,1985 and Fried and Hisrich,
70
1994); to know VCs facing valuation uncertainty (Sahlman, 1990), to recognize facets like
staging capital, use of convertible securities and anti-dilution provisions, skewing the pay-
offs in favour of VC investor (Sahlman, 1990), to study on economic value of legal feature
in real option context (Cossin, Leleux and Saliasi, 2002), to know VCs right to liquidate bad
stage ventures (Kaplan and Stromberg, 2001), to learn about Ex-ante funding or contingent
pre contracting funding mechanism (Cossin, Leleux and Saliasi, 2002), to learn the increase
in financing rounds (Gompers, 1995) and to interpret variation in VC projects with respect
to innovator or imitator firms (Hellman and Puri, 2000). The extensive literature on VCs can
be categorized under different heads. Ample empirical study on VCs is undertaken by
various researchers like Sahlman (1990); Amit, Brander and Zott (1998); MacIntosh (1997);
Gompers and Lerner (1999); Jain (2001) and Kaplan and Strömberg (2001).
Analytical study on examination of the relationship between VCs and entrepreneurs was
carried by eminent scholars like Cooper and Carleton (1979); Chan (1983); Amit, Glosten
and Muller (1990); Admati and Pfleidere (1994); Gifford (1997); Bergemann and Hege
(1998); Neher (1999) and Elitzur and Gavious (2003). Another line of VC research deals
with the cause and effect relationship. Zacharakis and Meyer (2000) suggested that actuarial
model could improve the VCs screening process of prospective investments. It was found
that angel backed ventures helps the VCs to screen the investment options in a better way
(Zacharakis and Meyer, 2000). VCs, investment overconfidence negatively affects the
accuracy of their decision (Zacharakis and Shepherd, 2001). Higashide and Birely (2002)
analyzed the post investment conflicts between entrepreneurs and VCs with respect to UK
based investee firm. Disagreement between the VC and the entrepreneur resulted in positive
performance but personal friction between the two negatively affected the performance.
VC studies are examined from supply and demand cycle (Christofidis and Debande, 2001).
Studying the supply side via equity, (Sharpe, 2009) segments it into three broad categories
viz. start up or early stage finance, expansion finance and buyout finance. Business Angels,
VCF and corporate venture funds are primarily equated as providers of early stage or start
up capital (Sharpe, 2009). VC activities are guided by five phases (Fund raising, screening,
negotiating, monitoring and exiting) cycle (Gompers and Lerner, 2004; Sharpe, 2009).
Gompers and Lerner (2004) describe the activities of contract negotiation, decision on
71
management fees, disbursement timings and profit distribution as a part of fundraising phase.
Macmillan, Zemann and Subbanarasimha, 1987; Hisrich and Jankowicz, 1990; Diaz de
Leon and Guild, 2003; Lange et al.,2007 extensively contributed to the literature of second
phase i.e. screening and selection process. Intermediaries information (Shane and Cable,
2002), entrepreneur’s position and network status, entrepreneur’s experience (Hisrich and
Jankowicz, 1990) and funds investment objective are emphasized in order of screening
activity. Pandey (1996) adapted the work of Macmillan, Siegel and Subbanarasimha, (1985)
by adding new variables in evaluation criteria, adopted during screening new venture
proposal. Prominent criteria rated by VC were integrity, managerial skill and urge to grow.
Due diligence (De Clercq D et al., 2006) and informal as well as intangible methods of
screening (Macmillan, Zemann and Subbanarasimha, 1987; Hisrich and Jankowicz, 1990)
are deployed in negotiation process.
Researchers view in monitoring phases does not comply. Bygrave and Timmons (1992);
Lange et al., (2007) explore the role of VCs ‘more than money-providers’ that of mentors,
advisors, guide, recruiters and as seat occupant in board of directors (BODs). Berglund,
Hellstrom and Sjolander (2007) brought out unconscious and ill-considered behaviour of
portfolio firms. A set of commentators claim non-capital value as overstated whereas VCs
modest involvement was treated unmet by Berg-Utby, Sorheim and Widding, (2007).
Various researchers described the last phase of exit mechanisms of VCs had been described
through five varied forms that are initial public offering (IPO), trade sale, and secondary sale,
buy back by entrepreneur or write off by various researchers. Prominent work on exit
strategies can be credited to eminent scholars like Soderblom (2006); Manigart et al., (2002),
Gottschalg, Phalippou and Zollo (2004); Sharpe et al., (2009); Sharpe (2009) who described
IPO as celebrated and trade sale as successful (Soderblom, 2006) exit mechanism.
Pandey et al., (2003) observed that now a days VCs are playing safe by investing in those
companies, which are already well established, thus parting away from its core role of
providing seed capital. Elitzur and Gavious (2003) pointed out the commonalities and
difference between angel investor and VCs. They pointed out that angels are close associates
or wealthy individual who provides seed fund, advice and possess a tendency of ‘exit’ or
72
‘cash out’ from the enterprise by referring at a later stage. The researcher highlighted three
player game consisting of entrepreneur, angel and VC, which was earlier explicitly ignored.
Jain (2001) explored that VC and managerial factors predict performance in which former is
a reliable predictor than latter. Sethi (1999) brought out generic parameters as viewed in
ordinal by VCs like professional team, potential idea, scalability, entry barriers and value
creation before qualifying a potentially winning investee company. Brand building was
treated critical for increased valuation. Sethi (1999) brought out a common fact that in
developed countries VCF took above 50 percent and up to 70 per cent stake in a seed stage
company, which was treated uncomfortable as ‘taking control’ among Indian entrepreneurs
who though brought best ideas, best teams but unfortunately had no capital.
Tyebjee and Bruno (1984) in an empirical research highlighted the parameters adopted by
VCs for taking funding decision. Market attractiveness, product differentiation and liquidity
preference were found to be the most critical factors. Macmillan, Siegel and
Subbanarasimha’s, (1985) study reported the importance of business plan for screening new
venture proposal. Macmillan, Zemann and Subbanarasimha’s (1987) stretched the
foundational screening criteria of Tyebjee and Bruno (1984) and Macmillan, Siegel and
Subbanarasimha (1985) to differentiate the patterns within successful and unsuccessful
ventures. Using the posteriori ratings five major risk management technique were found like
unqualified management team, inexperience management, viability doubt, competitive
threats and profits and lastly ventures which look at the investment for longer horizon,
played a role for demarcating between the two types of ventures.
Sandberg and Hofer (1987) adopted a qualitative technique called verbal protocol, borrowed
from Cognitive Psychology to access the criteria adopted by VCs at the time of screening
the funding proposal. Most important criteria were industry characteristics and management
track record. Hall and Hofer (1993) based on the similar technique of Sandberg and Hofer
extended the research to bring out the time consumed by VC. It revealed that 6 minutes and
21 minutes were taken to screen and assess the project or reject it respectively. Ventures
congruence with VCs long term growth and profitability was found to be vital criteria for
fund release. Zacharakis and Meyer’s (1998) study replicated Sandberg and Hofer’s (1987)
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research technique to comprehend the problem of venture screening. Research revealed that
policy capturing was a superior tool for overcoming the systematic biases which are capable
to hinder VC decision at screening stage. Shepherd (1999) compared ‘in use’ versus
‘espoused or self reported’ policies used by VC for taking decision. Research showed the
tendency of VCs to overstate least important criteria and understate very important criteria
respectively. Study pointed out the need for collecting real time data but failed to provide
real time criteria, which can pave the way for future research with newer findings.
Various scholars studied VCs across the globe. Ray and Turpin (1993) attempted bifurcating
criteria and methods for evaluating prospective portfolio clients as compared between the
US and the Japanese. The research explored that US VCs were stringent and Japanese VCs
were flexible and used wide range of information to evaluate prospective investments.
Pandey and Angela (1996) discussed the status of VC for financing technology in Taiwan.
Comparison between the perception of VC and the investee companies was made to draw
the relationship between the two.
Chotigetat, Pandey and David (1997) described VC development in Taiwan, Sri Lanka and
Thailand to analyze criteria used by VCF in each country for making investment. Kumar and
Kaura (2003) expressed that financial and management team is vital criteria for VC
companies in Sri Lanka and Taiwan, apart from management team, entrepreneurial
characteristics was found critical in Thailand. Pandey (1998) described the evolution of VC
firm Technology Development and Information Company of India Ltd. (TDICI) and
problems faced prior to the development of VC industry in India. Kumar (2002) attempted
to relate location and ownership preference of VCs vis-à-vis different funding stages. The
study reported that later stage funding dependent on the percentage of ownership offered to
VCs. Kumar and Kaura (2003) brought forth that early stage ventures were governed by
location preferences. Kumar (1996); Verma (1997) and Mitra (2000) used secondary data to
come up with pertinent issues which were to be addressed by future government policy. The
study highlighted the need for congenial government policy and lacked aspect of actual
practice. Lack of research to understand interaction process between VC and investee
companies in India can be attributed to lack of investee companies data and researchers
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laggardness to modify modern financial economic theory into VC investee firm research
(Kumar and Kaura, 2003).
Due to such reason researchers have not been able to evolve the criteria of success and
failure. Singhvi (1999) personified the take off of VCs as catalyst (Mukhopadhyay, 1995) in
the growth of Indian economy, which can back up ideas for wealth creation, by providing
start up capital. VCs awarded finance at first stage (seed capital to prove the concept),
second stage (for product development and research activities) and final stage (for expansion
programmes) and even bridge financing (when sanctioned finance is not disbursed due to
bureaucratic reasons) (Mukhopadhyay, 1995). A trend of minimizing investment risk was
explored across developing and developed countries by researchers who expressed that VCs
deviated from their original goals. VCs like TDICI, Canfina-VCF and GVFL etc., are
moving away from patronizing tech frontiers (Bygrave and Timmons, 1992). Pandey and
Dutta (1999) expressed that GVFL has a regional bias. Entrepreneur’s personality and
experience were the most emphasized evaluation criteria of VCFs in India and across the
globe (Pandey, 1996). With reference to specific entrepreneurial personality and experience
the Indian practice varies significantly from that in USA, Singapore, and Japan (Pandey and
Dutta, 1999). VCs favourite investment choices are in the sectors like healthcare, publishing,
tourism, IT and ITes, (Mukhopadhyay, 1995), software services, technology products,
internet retailing and e-CRM services (Rajadhyaksha and Rajshekhar, 2000).
From the above discussion it can concluded that researchers study comprises of the varied
funding criteria adopted by different VCs spread across the globe, VCs favoured investment
avenues and importance of VC funding. Studies of global researchers have been replicated
in India by the Indian researchers. Regional study of VCs in Gujarat is particularly case
based with respect to only one firm i.e. GVFL. No study pertaining to VC funding to
grassroots innovators have been found in the literature review.
2.4 Global Studies on Micro Venture Capital Finance (MVCF)
Pro poor entrepreneurs based innovation is essential to the continuous development of, and
poverty alleviation in, rural areas by creating employment, increasing income and providing
improved goods and services (Sonne, 2010). Much has been written on rural finance in
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general and micro finance in particular. Little has been written on how new innovations are
financed.
Two types of financial organizations provide support to small scale entrepreneur. Existing
MFIs, provide too small amount to productively upgrade an existing venture, which often
lacks in non financial support, resulting in severe financial constraints. Traditionally
different and notable MFIs like BASIX and SKS provide larger grants accompanied with
non financial support to rural ventures that provides employment to poor (Sonne, 2010).
Secondly, outside the MF movement financial organization like S3IDF work in
collaboration with local NGOs to provide infrastructure services and train local
entrepreneurs. S3IDF links technology with finance, suppliers, and markets and also
provides credit risk guarantee to encourage banks to local entrepreneurs. Ashoka is another
example that supports entrepreneurs with socially relevant ideas, and builds general capacity
through its research on pro-poor entrepreneurship (Sonne, 2010).
MVC initiatives are believed to empower local entrepreneurs and enterprises for a
sustainable way of improving rural incomes and distributing wealth (Retrieved from
http://www.aavishkaar.org/index.html, as on, July, 2011). From the perspective of entrepreneur it
means having more approachable sources of capital, after the use of own savings, as well as
money from family and friends has been exhausted (Retrieved from http://www.iccwbo.org/
WBA/id7023/index.html, as on, July, 2011).
Currently it has become extremely difficult for business start ups to attract the attention of
VCs and mostly unique business ideas and innovations with very high chances of long term
success are likely to get funded (Retrieved from http://www.iccwbo.org/WBA/id7023/index.html, as on,
July, 2011). MVC is a feasible tool for investments in small businesses and meets a need for
access to capital in poor neighbourhoods. The lack of access to capital in rural areas is
significant, and small investments can play a critical role in generating sustainable incomes
for proprietors and jobs for unemployed (Spoonheim, 1998).
In MVC’s feasibility study carried at Minneapolis by Spoonheim (1998), “described that
there are two key fields of knowledge critical for understanding the niche of MVC
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investment. The two fields are micro loans (extensively used all over the world) and
Community Development Venture Capital (CDVC) funds available in a few regions of the
US that seek to merge social and financial goals” (Spoonheim, 1998).
It was explained that MVC follows in the footstep of CDVC which seeks a “double bottom
line” in addition to the financial returns; investors also measure the social return on the
investment. Creating new jobs, moving people off the public assistance etc., are all
considered as “social returns”. CDVC industry seeks to combine traditional VC methods
with community development goals. It is a model for micro venture programmes. CDVCs
generally invest $50,000 or more, while micro investments range roughly between $5,000 to
$25,000. Like CDVC, MVCs may not exclusively focus on most profitable investments, but
rather choose among investments that meet its social goals (Spoonheim, 1998).
It was also observed that MVC investors assume a risk of not having collateral and not
achieving a set return, but they negotiate part ownership. Contrary to traditional VC
investments which seek to obtain a return within five years, many socially motivated
investments like CDVC and MVC will not mature quickly. Instead, investors may not see a
return for longer periods and thus their gain may be significantly less. Most VCs are directed
to larger, later scale, high tech investments, while the CDVC investments may have a larger
share of “development stage” companies in their portfolio (Spoonheim, 1998).
The report explained that the primary barrier to a MVC investment tool is identifying a
viable exit strategy, which some argue does not exist. Traditional VCs sell the firm through
IPO and generate good return. Micro and small firms rarely, if ever are sold publicly, this
forces MVC to find alternate methods. Some of the methods of investment and exit option
for MVC are described in the table below (Spoonheim, 1998).
Table 2.3 Model of Investment and Exit Option (MVC)
Mode Investment Exit
Receivable
Financing
Investor provides line of credit to the business and business sells invoice for a percentage of its face value (factoring) to an investor.
Investor is paid back upon receipt of payment, plus a percentage of the operating profit.
Purchase
Order
Financing
Investor pays to the supplier to create a product.
Investor can set a fee return or a percentage of profits from sales.
(Contd.)
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Mode Investment Exit
Equity Invests as equity for first three years.
Investors gets a return out of profits at an agreed upon rate. If investor is not paid off then balance outstanding can be converted to a loan which will be paid at ‘x’ percent return. (Loan can be availed from bank as business might have shown success and built collateral, similar to leveraged buy out).
Preferred
Stock
Money is invested at a fixed dividend rate.
Collection may be deferred for a year. It is subordinated to lenders as investor has rights for payment before the owner is paid. Deferred payment can be delayed until company becomes profitable at which time ‘x’ percent of all profits is paid to the investor.
Leasing Purchase equipment and lease to the business.
Investor is paid off over time by regular lease payments.
Adaptive
Limited
Liability
Company
Using legal structure that protects the limited partners who contribute cash, but have no involvement in management and cannot be sued.
(Adapted from: ‘MVC: A Feasibility Study at Minneapolis’, Spoonheim, (1998), Retrieved
from www.cura.umn.edu/publications/NPCR-reports/npcr1104.pdf, as on, July, 2011)
On review of literature it was found that a good idea often slipped away due to
unavailability of small sum of money. Dr. Prahalad’s perception for rapid growth of Indian
economy states to concentrate on Tier-IV market, which is peopled by low income masses.
Collectively, their buying power is enormous and they will buy products and services that
improve their lives. So there lies a potential for such products.
MF is not new, Micro Venture Fund (MVF) is a novel idea, it recognizes the creativity that
exists at the grassroots level and acknowledges that if these innovations are to reach their
potential as products or value added technology, the innovators need the support of VC
(Gupta, 2006). Democratization of innovations and reversing the value chain from
consumers to producers are two key features of people driven innovations which can act as
the basis for promoting innovations at the base of the pyramid (Gupta, 2005). Lately when
the models based on the conceptualization of poor people as consumers (Prahalad) became
dominant, large number of thinkers felt that this indeed was the model to work on.
Eventually theories on developing rural market for people at the bottom of the pyramid
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started taking shape, but supporting the grassroots innovative idea is still an un-researched
area.
MVC is a novel concept and note able innovation in itself. It refers to the idea of barefoot
venture capitalism. MVC is cousin to micro-credit and a down-sized approach to
professional VC. It is treated as a right sized business model catering to different sort of
entrepreneurs who are enriched with ideas but unfortunately have few skills to develop the
ideas for market. From this it could be inferred that MVC is an abridged version of VC
applying all modern management techniques to evaluate the ideas and then take up risk by
investing in the ideas. The literature on MVCF at global level pertains to preliminary
definition and concept level, organized study is not found in the literature.
2.5 Need Emergence and Importance of MVCF (Indian Perspective)
India is a land of paradox where urban sector is developing exponentially and rural sector
still remains backward, despite being blessed with great pool of natural resources. Paradox
reaches the climax when innovations of urban areas are appreciated and innovations of rural
areas are not even documented. Poor are considered sink and not source of rich ideas
(Retrieved from http://news.bbc.co.uk/2/hi/business/4603108.stm, as on, September, 2008).
Rural local products are unfamiliar in most of the world, their public infrastructure is weak
and their skills are unrecognized. Challenging subsistence forces them to induce creativity
and innovation in order to survive (Gupta, 2006). Keeping the poor engaged in the low value
adding activities will only perpetuate their poverty; a market for innovation will not emerge
(Gupta, 2005). Tremendous vibrancy at grassroots level needs to be recognized, respected
and rewarded. To overcome the grappling problem of unemployment, imbalanced growth
and poverty there is a need to boost entrepreneurial spirit and set up more enterprises.
Grassroots based enterprises can be supporting pillar of the economy which needs risk
finance to set up.
In the article by Shrivastava (2010) on ‘Social Entrepreneurship in India- The Complete
Guide to Funding, Profitable Sectors’ explained that social entrepreneurship space focuses
on and emerges from rural areas. Prestigious institutions like Stanford, MIT and Oxford
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have developed interest in the field of SE, VCs interest in funding to many social enterprises
have started picking momentum. Earlier organization solving social problems were often
assumed to be idealistic, philanthropic and lacking business acumen or the ability to be
entrepreneurial. As social sector has been coming in touch with the private sector, it was
realized that either or approach was not suitable to build sustainable institutions (Shrivastava,
2010).
Currently the focus is on enterprising micro groups which want to transform their own and
the community’s circumstances but can’t access any finance. Now–a-days the mainstream
financial institutions are entering social entrepreneurship. Various VC firms are investing in
for profit entities with social objectives. Specialized social investors provide capital,
networking, marketing and business expertise to such ventures. Now the Social Venture
Funds have started coming up which measure their investments on social, environmental and
the traditional financial returns. Mainstream VCs are also recognizing this as a business
opportunity (Shrivastava, 2010).
The growing breed of ‘social venture capital funds’ look to invest in companies that deliver
social benefits and generate decent financial returns. These VCs embody the new mantra of
doing well while doing good. Social capital is treated as an emerging trend globally and in
India. It is estimated that USD one billion will be coming into this space in the next five
years (Ghosh, 2010).
Unlike commercial VC who hold the investment for three to five years, Social Venture
Funds have a minimum lock in period of six to eight years (Shrivastava, 2010). Consultant
of Monitor group in the article of ‘The New Colours of Venture Capital’ opined that social
entrepreneurs are passionate about helping people, so the commercial returns aspect is
usually a secondary concern. The philosophy of social VCs is to make money by serving the
needs of people at the bottom of the pyramid (Ghosh, 2010).
Nageswaran (2003) mentioned that free availability of finance is a prime pre requisite for
innovation and entrepreneurship which in turn proposes growth. It was noted from the paper
that VCs normally supported a kernel of an idea. VCs supporting ideas and start ups in urban
and rural areas was equivalently required irrespective of developed nation or developing
nation.
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Traditional VCs are not fascinated to operate in rural places due to couple of reasons like
explored investment opportunities were found to be below profit potential, number of
investment opportunities were found to be few to provide adequate deal flow, greater
physical distance, inadequate infrastructure support, difficulty in viable exit strategy,
disinterested small entrepreneurs unwilling to accept the conditions set by venture fund for
recovery and hardships involved in attracting VC staff to the region (Nageswaran, 2003).
The absence of traditional VCF is made good by social or non traditional VCF. Although
few and small they offer a glimmer of hope to capital short underdeveloped areas. Social
VCs operate in areas to which traditional VCs does not flow. They accept return that are
lower than returns targeted by traditional VCs. They have a dual bottom line i.e. with
acceptable financial returns with social and economic benefits to the areas served
(Nageswaran, 2003).
According to Nageswaran (2003) social VCs can assume the status of Publicly funded and
Publicly managed institutions, Privately managed funds with Public Funding, Community
level Equity Programmes, Certified Capital Companies, Community Development Venture
Funds and Small Business Investment Companies. The concept of social VC was pioneered
by The Ford Foundation’s Program Related Investment in 1960s. They set up $100 Million
Local Initiative Support Corporation to fund local CDCs who worked in big metros of US.
The Quakers in UK, the Triodos Bank in Netherlands and the Blue Orchard Fund are the
examples of social venture funds in Europe (Nageswaran, 2003).
Debt, equity and VC are the major obstacles for rural and semi-urban places. In India VCs
unleashed the entrepreneurial spirit in urban educated youth by investing as high as above $
5,00,000 in high technology firms. Given the rampant poverty condition and its removal
requires the small amount of VC funding to be available to rural India also. Agriculture
being the mainstay for two third’s of Indian population requires that its productivity must
rise when compared to cross sector and same sector. Innovations in rural India are such that
the city born and bred VCs or banker has little empathy. Rural innovations are born out of
needs and affordability constraints. Rural innovations have a tremendous and obvious social
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value, but the professional VCs finds it difficult to capture private commercial value from
such innovations (Nageswaran, 2003).
As cited by Nageswaran (2003) that, according to C. K. Prahalad empowering local
entrepreneurs and enterprises is the key to develop Tier 4 market. Traditional VCF operating
in India typically make investments in categories less than USD 1Mn, USD 1-5Mn, USD 5-
10Mn and greater than USD 10Mn. As most funds are of private equity kind, size of
investments has been increasing, but the lacunae of funding to grassroots innovations still
persists.
The original assumption behind most developmental approaches aimed at poverty
alleviation is that poor people are too poor to think and plan on their own. As a result most
interventions are designed externally by civil servants, technocrats or NGOs, poor are
considered as liability and hands and mouth to feed. Poor are never involved in any
developmental activity. There are seldom an institutional window available to recognize,
respect and reward creativity and innovation underlying the solution by the people (Gupta,
1998).
Sonne (2010) observed that there are three types of organizations that provide support to
grassroots innovators namely; government sponsored programmes and council schemes
(MVC), private for profit investors (grassroots innovators and incubators) and NGO’s
targeting sustainable operations (small-scale finance providers). DSIR’s under its TePP
initiative has Micro Technopreneurship Support programme (TS) which invests up to `
75000. CSIR which mainly focuses on R&D offers technologies for rural sector fund. DST’s
effort in setting NIF was focused on supporting technologies for rural livelihood. The
government sponsored early stage VC funds invest in the range of USD 0.5 Million to USD
3 Million. In India DST sponsored national innovation fund together with SIDBI offered
MVC fund to bridge the financing gap for micro enterprises. Despite many venture funds, it
seems government and apex institutions are not able to breach the financing gap (Sonne,
2010).
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‘Angel funds’ which are an alternative to early stage VC financing are out of reach for rural
innovative entrepreneurs (Dutz and Dahlman, 2007). MVCF makes up a very small part of
seed funding. The fund operates on the dual bottom line which combines funding models of
classical VCs and adapts to maximize social as well as financial sides. It provides financial
and hand on non financial support. It assumes larger risk than classical VC, expects lower
returns with a pre condition of longer gestation period. As a part of risk mitigation strategy
MVCF adopts mechanism of royalty rather than equity, equity debt hybrids, or offers loans
on top of non debt investments (Sonne, 2010).
There is no VCF for small and scattered innovations any where in the developing world.
Thousands of programmes on MF are found, but no programme on micro venture finance is
found (Gupta, 2000). Gupta rightly pointed out that venture financing activity itself is highly
skewed in favour of innovators who may have collateral to offer or may already have done
some business development (Gupta, 2001a). TePP covers the financial need of innovations
only up to Rupees Five Lakhs and most venture funds do not touch investments less than
one crore. Thus, a gap between the range of Rupees Five Lakhs to One Crore exists. The set
up of GIAN demonstrates tremendous potential which exists for commercialization of
grassroots innovation with or without value addition from outside (Gupta, 2000a).
Gupta (1999) commented that no amount of registration or grant of patent will help to make
the local knowledge systems vibrant unless venture promotion grant are available to local
entrepreneurs at very low transaction cost. One finds a titled entrepreneurial progress in the
country. There are many Grameen Banks or Savings and Credit Self Help Groups, but there
are no venture promotion funds for small innovations anywhere in the world.
Policy makers are unable to conceptualize the nature of poverty in ecologically high risk
regions and the extent to which government policies in different sectors corresponds with it.
Viability for drought prone and well irrigated regions is treated to be same. IRDP
programme have no conceptual differentiation (Gupta and Shroff, 1987). The paradox has
been that bankers complain about lack of demand for credit. Greater pressure from top to
supply credit without change in basic framework often leads to distortions like fewer
branches in areas of high risk, less credit for purposes pursued by the poor, lesser number of
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small loans, shorter repayment schedule and lack of rescheduling and rehabilitation
measures even in the wake of drought (Gupta and Shroff, 1987). Poverty is oppressive in
regions with low population density, poor natural resources, high risk inherent (in crops,
livestock and craft enterprises), current level of farmers technology which leads towards risk
minimization rather than profit maximization, lack of local employment opportunity, social
and cultural networks are characteristically different from irrigated regions (Gupta and
Shroff, 1987).
In India there is a huge base of need based entrepreneurship due to its social structure. The
creation of MVC initiatives has forced the society to think in terms of entrepreneurship
where opportunity and innovations are treated as bedrock for growth (Retrieved from
http://www.aavishkaar.org/index.html. as on July, 2011). Aavishkaar (MVC provider) and Agora
Partnerships which is a counter part of Aavishkaar addresses the key bottleneck of
entrepreneurs who need more than few thousand dollars that MF offers in order to
effectively scale up, but don’t have the collateral to secure commercial loan. MVC models
aren’t charity based they generate profits for investors (Retrieved from http://www.articlesbase.com/
fundraising-articles/a-new-trend- micro-venturecapital-3174984.html., as on July, 2011).
Micro credit is too small and too restrictive to be used for true business creation.
Conventional VC focuses on businesses requiring US$ 1million plus that target urban
regions or service export. Businesses smaller in scale addressing rural and semi-urban India
cannot find the risk capital they need. Rural India devises new methods and means to ease
the burden of their daily lives, which not only improves the productivity and efficiency of
local farmers but also have significant environmental and social impact by developing eco
friendly appropriate solution to local problems.
Ned.com a global online co-working space for early stage social entrepreneurs and
collaborative social ventures highlighted that there is a huge need for MVF, small amounts
of resources that can be packaged for innovation and prototyping. MF is always concerned
with the delivery of the goods and services to market rather than promoting innovations
(Retrieved from http://www.ned.com/group/microfinance/news/14/., as on July, 2011). The literature
review indicates a huge scope to research on requirement of MVCF, models of MVCF,
repayment strategies and viability of MVCF funding.
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2.6 Regional Studies on MVCF
There are two causes of poverty, one is low productivity and other is unemployment.
Simultaneously there are two ways to remove poverty. One is generation of employment
oriented activities through starting of tiny or micro enterprises which has been possible for
rural poor with the due backing of microfinance. Other way in which poverty can be arrested
is increasing productivity. To increase productivity incremental innovations needs to be
made either in the product or process for which experimental funds are required.
Microfinance has helped to generate income, which is used for subsistence and consumption,
no fund is left for carrying out experiments or inventions. As a result poor are just able to
cross the poverty line but cannot reach to the heights of better standard of living. Low
productivity is the culprit for low income in their cases. Nobody till date have appreciated
and supported the resources in which the poor are rich. No enterprises based on the skills set
and knowledge of grassroots innovators have been found, on the contrary by imparting rural
people the skills and enforcing them to set up the enterprise in which either the person is not
interested or may not have complete skills to operate is often witnessed in rural areas.
A small fund of about One million dollars had been set up at NIF with the help of SIDBI for
ten years to help convert innovations into enterprises (Gupta, 2003b). The delivery functions
like project appraisal, disbursement, monitoring and mentoring and recovery are being taken
care by regional arms of NIF like the GIANs and the collaborators (Retrieved from
http://www.nif.org.in/bd_mvif, as on, July, 2011).
An alternative financial mechanism suggests developing an eco system to support rural
ventures, entrepreneurs and innovation. One such incubator organization which is intimately
involved with grassroots innovators is GIAN. It supports innovation with Micro Venture
Innovation Fund (MVIF), sustains different kind of entrepreneurship with diverse
mechanism or instruments of support. It provides a complementary financial support (Sonne,
2010). As GIAN is registered as a trust and not as a venture fund at SEBI the financial
support that it renders to innovators is treated as MVIF and not MVCF. Existing MVC
providers are quite professional and targets only commercially viable business plans
undertaken by well educated entrepreneurs. From this it can be inferred that the objective of
MVCF is more profit oriented as compared to social benefit (involved in providing goods
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for rural people) and the MVCF here connotes small amount of capital. Whereas the role of
NIF and GIAN is unique it holds the hand of illiterate innovator, who have ideas but no
finance, who have a vision but no business plan and who are capable to offer products at
much competitive price to bring luxury to villagers.
Based on the secondary study it was found that in 2000, GIAN was the first grassroots
incubator in India, before that no support mechanism existed in the country that supported
innovations which saved energy, improved efficiency and reduced drudgery of rural India.
The reasons for absence of such support could be attributed to guesses like non inclination
towards entrepreneurship or lack of financial support (Nageswaran, 2003).
GIAN is an exception as it does not have any provisions for venture promotion grant from
its own resources. It mobilizes funds for innovators from government programmes for the
purpose of supporting grassroots innovators (Gupta, 1999). Recently an article titled ‘NIF
tie-up to commercialize innovations’, featured in 15th December, 2010 of Times of India, it
narrated the work done by NIF. NIF has recently tied up with Future Group to
commercialize grassroots ideas by creating products to be sold at its outlets, under the label
‘India ka Idea’. The IPR of the product will be owned by the original creator who will also
get royalty in the range of three to five per cent. Article concluded that the tie up will benefit
the innovators and his community as the royalty will be shared between innovators, his
community and nature conservation. NIF being the bank or repository of over 1,75,000
innovations over the past 10-12 years wished to link innovations to the market by
commercialization, through an elaborate model. The ‘feed forward’ mechanism would help
the innovators to improve the product as well.
From one of the interview excerpt of Professor Gupta it was known that several hundred
grassroots innovators in India are using imagination and innovation to solve basic issues of
deprivation at the bottom of the pyramid. Such innovations are finding a market not just in
India but also in other emerging markets and even developed nations. A new reversal model
of grassroots to global is coming up which is emerging from India. As the study pertains to
Gujarat region and GIAN being the only provider of capital to grassroots people is taken for
study and all the cases are examined in the light of MVIF. Unless GIAN incubates
thousands of technologies every year, only a few hundred will mature into viable products,
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which can in turn help in spawning large number of enterprises (Gupta, 2001c). Thus, GIAN
despite not being MVC provider assumes the risk of VCs.
Without a product development, MVIF will only go some distance and not all that far. If
angel funds and VCs are useful for high tech revolution, then it should be even more crucial
for small innovations. It is more important to create a support system for social business i.e.
business which will not recover their entire or sometime any cost from consumers. MVIF is
for ideas and technologies for which markets does not yet exist, it has to be created (Retrieved
from http://www.ned.com/group/microfinance/news/14/, as on, July, 2011). The study pertains to
demand and supply side, of requirement of MVIF and method of supply of MVIF
respectively.
2.7 Research Gap
Despite MF is the best known type of non bank finance, flowing to rural areas, it does not
inevitably support innovative entrepreneurship. A reason for this is the small amounts of the
loans, often not amounting to more than `10,000. MFIs do not provide add on services that
differentiates them from banks at the same time they prefer to invest in proven business
models (Sonne, 2010). The seed sector fund VC, which is to a large extent urban based,
invests chiefly in innovative young ventures related to high tech firms. A critical observation
was made in the paper by Sonne (2010) that Indian banking system does not provide support
to pro-poor innovation, in fact the money dedicated for rural improvement are diverted to
urban areas or are parked in debt oriented safe investment avenues.
MF facilities are available all over the world, but MVCF is almost totally absent. Lack of
MVC prevents the transition of small innovations into enterprises. This gap indicates the
lack of appreciation by global and national public policy towards the abilities of grassroots
innovators to generate employment and overcoming poverty (Gupta et al., 2001). As
discussed above gap between the funds of Rupees Five Lakhs to One Crore, provides an
opportunity to set up MVC for grassroots people.
These funds can be provided which would cover the transition of an idea to innovation
(stage one), from innovation to product (stage two) and from product or service to
entrepreneurship (stage three). The stage one and two are much more risky and therefore
may require a more accommodative and sympathetic financial scheme (Gupta, 2000a). An
incubation fund to convert innovations to products remains to be set up (Gupta, 2003b).
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MVC makes up for the lack of bank finance for innovative entrepreneurs in rural areas
(Sonne, 2010).
A large network of MF initiatives is found but MVF is totally missing. The only implication
can be that either venture finance is not an engine of growth at micro level or that there are
not enough innovations at micro level for which such support is required (Gupta, 2001c).
Fact is there is no venture financing activity for innovations needing finance from few lakhs
to say a crore of rupees (Gupta, 2001c). The incubators for converting innovations to
enterprises are also missing for micro innovations (Gupta, 2001c). The research gap is
diagrammatically represented after conclusion in Figure 2.6.
2.8 Conclusion
Literary work on entrepreneurs and entrepreneurship can be classified into definition level,
its genesis, changing roles of entrepreneurs and importance of entrepreneurship. Economists,
sociologist, psychologist etc., have contributed to explain entrepreneurship in myriad ways.
Indian researchers have tested the theoretical work of researchers in the form of primary
study or case studies of entrepreneurs. Researchers have made an attempt to explain the
demarcating development of rural areas, its causes and reasons. Grassroots and social
entrepreneurship are unexplored areas of researchers. Academicians have started exploring
and appreciating a new combination of entrepreneurship and technology i.e.
Technopreneurship. It was learnt in the study that the true baramoeter of economic growth
and entrepreneurship is invention and innovation. The distinction between the terms and
importance of each is explained by Schumpeter and Manimala. The noteworthy thing is that
even renowned scholars have not contributed to the importance of grassroots innovations
and enterprises based on such innovations. Incubation and funding study just relates to
servicing the need of educated entrepreneurs, leaving the needs of grassroots rural
entrepreneurs being un-served.
It was found that banks and MFIs provide homogeneous model of support for the same
range of customers. MVC is an alternative finance sector that provides different kinds of
financial as well as non-financial services to different kinds of rural entrepreneur-based
innovation. It recognizes and appreciates the heterogeneity of rural innovation and provides
complementary services that form an eco system of financial support, which gives grassroots
innovators, a chance to move ahead with their unique innovation.
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Micro credit is about giving access to small loans whereas micro capital tries to bring the
benefits of VC to rural innovators. Micro capital is a tailored product offered to assist small
entrepreneurs who largely operate in the unorganized sector. Like SE, the role of micro
venture capital fund beings where the role of micro finance ends and the role of traditional
VC begins. Thus, it is a strong niche between MFI and VC firms, which till date was a
missing link. GIAN acts like a social enterprise which promotes entrepreneurs who have
profit motive or social motive or both. The role of social entrepreneur is to unstuck the
society from a problem, which till date has not been solved by commercial entrepreneur and
government. GIAN and its supportive institutions are making a serious attempt to support
social or commericial entrepreneurship.
Figure 2.6: Research Gap (Source: Author’s Own Creation)
Review of Entrepreneurship study
(Global and Indian perspective)
R
E
S
E
A
R
C
H
G
A
P
Existing studies by foreign authors are concept oriented and theory building on entrepreneurship at urban areas. Rural, Grassroots based entrepreneurship study (on problem and prospect) are not found.
Review of Social Entrepreneurship study
Concept is still poorly defined. Study on necessity and importance of social entrepreneur to unstuck the society is required.
Review of Micro finance and Venture capital
study No literature of MF and VC till date has addressed the gap of funding innovative ideas; it only focuses on prospects and problems of MF and VC
Review of Micro Venture Capital Finance
Study (Global and Indian Context)
Study is primarily related to understanding of concept. No study found on role played by how MVC supports grassroots innovations.
Review of Micro Venture Capital Finance
Study for Gujarat No study is found which highlights the problems faced by grassroots innovators and how it is overcomed with the assistance of MVC