Executive Summary
This Global Management Project (GMP) is focused on two different international economic development methodologies, microfinance institutions (MFIs) and business incubators for economic development. This is in response to assumptions made by co-founders Mr. and Mrs. Jones (names have been substituted) and their long-standing interest in international development and poverty alleviation. The Jones’ believe that supporting formal above-board business creation and providing ongoing support through the means of a business incubator is more effective at addressing poverty than the approach taken by MFIs to support the informal market and consumption lending. They also believe that there is a market within the study abroad sector for using students and study abroad programs as a resource for international development. Based on these assumptions, the Jones’ wish to enter the study abroad industry and launch a new venture. This new venture, Global Riplz, is a small and medium-sized enterprise (SME) incubator/accelerator whose mission statement is, “to establish Global Riplz as the premier solution for applied study abroad options for business students, bringing together great minds in an environment conducive to innovation while supporting local economic growth.”
As such, this GMP is being completed as a two-stage analysis for the successful strategic entry of this new venture and to answer the question, are economic incubators more or less effective than MFIs at addressing poverty through job creation? Stage one is literature review and discussion of MFIs and incubators for economic development. While, stage two of the analysis is to evaluate the external environment, the major competitors in the study abroad industry, current products offerings and to define the company’s internal environment through the development of a targeted marketing plan.
Introduction
From the 1970’s onwards a large number of MFIs got underway in Latin America. This was due primarily to US government funding and “the perceived need to provide the poor in Latin America with the hope of a way out of poverty” (Bateman, 2013, p. 12). By the 1990’s the microfinance model was thoroughly embedded within Latin America’s economies. Financial systems and resources were being shifted away from higher risk and less profitable applications such as registered SME development and into microfinance and consumption lending (Bateman, 2013). This shift in economic development policy sparked rapid rise in the informal sector in the 1990’s (Loar and Marquez, 1998).
After extensive experience working and traveling in Latin America, Mr. and Mrs. Jones have developed a long-standing interest in international development and poverty alleviation. They have developed a desire to launch a new venture that might be able to help address economic development and job creation. The founders have based the concept for this new venture on two major assumptions including, their belief that supporting formal above-board business creation and providing ongoing support is more effective at addressing poverty the approach taken by MFIs to support the informal market and consumption lending. Moreover, they believe that there is a market within the study abroad sector for using students and study abroad programs as a resource for international development.
A literature review will be conducted comprised entirely of secondary research and will focus on the three major components or sectors relevant to the success of the new venture. These sectors are; the microfinance sector, business incubators for economic development and the study abroad sector. The literature review will be conducted to provide the evidence required to perform a thorough analysis and discussion.
The purpose of this GMP is to test the assumptions of the founders by performing a two-stage analysis and discussion and will answer the question, are economic incubators more or less effective than MFIs at addressing poverty through job creation? Stage one will be a literature review and discussion of microfinance institutions and incubators for economic development. This discussion will answer the three questions; what are they, how are they supposed to operate as well as what are the intended results and what are the actual results? It will also discuss the limitations of these methodologies and provide a broad picture of the study abroad sector. Stage two will be used to describe the organization and its structure, evaluate the external environment and the study abroad industry, and to define the company’s internal environment through the development of a targeted marketing plan. This two stage analysis will be done to effectively choose a strategic path of entry for this new venture.
The findings for the two stage analysis support the founder’s assumptions that formal above-board business creation and providing ongoing support is more effective at addressing poverty than the current approach taken by MFIs. The findings also support their belief that there is a market within the study abroad sector for using students and study abroad programs as a resource for international development.
After the 2 stage analysis is performed, two sets of recommendations will be made and are drawn from analyzing the research data. The first is a specific set of recommendations intended for the founders of Global Riplz and are specific to the strategic entry of a new venture into Latin America and will include all resulting recommendations based on the extensive strategic business analysis. These recommendations state that Global Riplz should choose to enter the Costa Rican study abroad market, with a particular interest in the Quepos/Manuel Antonio area. Additionally, Global Riplz should focus its product differentiation and marketing plan on the business student niche market with a secondary focus on students interested in economic development and poverty alleviation. It should also focus on where those two target segments intersect. This will successfully set Global Riplz apart both in the country and within the market. Of particular note is the potential for a lower cost entry model benefitting from a strategic alliance with an existing organization that already has facilities sufficient to house the Global Riplz Accelerator Program.
The second set of recommendations will employ three different change management models and is intended for the international development community as a whole. These recommendations include, developing a top down approach to industry shift, providing resources and education around the eight key points that encourage successful incubation and refocusing the existing incubator network toward economic development in developing countries.
Description of the Organization
Global Riplz is an SME incubator/accelerator looking to set itself up internationally. It is at the pre-launch stage and looking to establish its flagship location in, Latin America. The founders of Global Riplz, with its tagline, ‘Effect. Change.’, created the company’s mission statement: “to establish Global Riplz as the premier solution for applied study abroad options for business students, bringing together great minds in an environment conducive to innovation while supporting local economic growth.” Global Riplz envisions a world where student entrepreneurs can have a meaningful experience crossing borders, cultures and income divides where success is measurable and where all people can have and create real businesses and relationships. The founders believe that this will in turn create real economic empowerment, jobs and international experiential skill-building opportunities. They envision each person’s actions causing a global ‘ripple effect’ changing for the better the lives of all those affected. The six guiding principles of the company are:
- Provide an environment that enriches minds, bridges culture, advances global skills and connects lives
- Apply the highest standards of mentoring and educating.
- Develop participants that are champions to our cause.
- Embrace diversity as an essential component in the way we do business.
- Contribute positively to our communities and our local economies
- Recognize that profitability is essential to our future success.
Management and organization.
A multi-domestic organization with its head office in Victoria, Canada, Global Riplz will be run by a board of directors comprised of Mr. and Mrs. Jones and a yet to be determined third board member who should have a background in international law or accounting. Looking further in the future, operating as a multi-domestic organization will allow Global Riplz the opportunity and flexibility to maximize cultural and locational customization and leverage strengths inherent with future locations and cultures. It will also facilitate franchising and licensing the Global Riplz brand and accelerator program across borders. The franchise model, capitalizing on a collection of independent subsidiaries, will maximise the scalability and minimize the cost of expansion after the successful establishment of the Global Riplz flagship location.
Mr. Jones, the Chief Executive Officer and President of Global Riplz, is a Small Business Consultant/Marketing Educator and holds a Masters of Global Management from Royal Roads University. He is passionate about small and medium-sized enterprise development as a tool for international economic development and poverty alleviation. With 14 years of experience in small business management, project management and quality assurance, he has developed an acute attention to detail and the ability to strategically execute large projects and long-range plans. Fluent in English, Spanish and Haitian Creole with a working knowledge in French he has enjoyed using his skill set and languages while volunteering for 5 years in Latin America and the Caribbean as a facilitator and educator for various non-governmental organizations (NGOs) in multilingual and cross-cultural settings.
Mrs. Jones, the Vice President of Cultural and Social Integrations, is a Social Entrepreneur, Creative Facilitator, Dance Instructor, Social Worker, and ESL and Spanish Instructor. She is experienced in international social work and finds passion in creating vibrant environments where people feel comfortable and free to express themselves. She is especially adept at relationship building and finding links between people and their communities. A Central American/Canadian bicultural, she understands and has experienced the cultural difficulties that can arise when people are immersed in cultures different then their own.
Outline of Research Methodology
To help identify successful recommendations for the founders of Global Riplz and for the international development community research was conducted with the intent to answer the following question: are economic incubators more or less effective than microfinance institutions at addressing poverty through job creation? Additionally, research was conducted to provide concrete recommendations as to the strategic entry method of Global Riplz in Latin America. The analysis of the research data is to be conducted separately in two stages comprised of; stage one, a detailed literature review and discussion of microfinance institutions versus business incubators and stage two, the strategic business plan. The research methodology of this GMP consisted of only secondary research which was drawn from both academic and non-academic sources. These sources outline the separate methodologies which are used for economic development and job creation that are highlighted in this report. The research was also used to define the business plan and entry strategy for Global Riplz including evaluating the external environment and the study abroad industry and defining the company’s internal environment through the development of a targeted marketing plan. The research was aimed to test the founder’s assumptions of how to most effectively go about international economic development and launch a successful international business.
The topics for the secondary research were derived from the assumptions of the founders and comprise all of the necessary components for strategic entry of a company in Latin America. It is important to understand the background of the work conducted by the international community as it pertains to economic development and the resulting effects of that same work in Latin America. As it pertains to the microfinance institutions and incubators for economic development, the research answered three questions; what are they, how are they supposed to operate including their intended results and what are the actual results? The research regarding the strategic entry of Global Riplz was broken down into different sections which included analysing the study abroad sector, a PEST analysis of potential countries in which to establish the flagship location and an industry analysis of the current market competition. With these different sections, specific ideas or trends were expanded on and researched further by exploring academic journals related to international economic development, and industry relevant non-academic resources.
A literature review was conducted to uncover the following aspects of international economic development:
- The definition of microfinance
- The history of the microfinance sector to date in Latin America
- The reason for the shift from operating microfinance as non-profit to for profit
- Microfinance as an anti-development policy
- The definition of business incubators
- The three main development purposes of business incubators
- Measuring the success of business incubators
- Business incubators supporting economic development
Additionally, the review was conducted to uncover the following aspects pertaining to the strategic entry of an organization in Latin America:
- The history of the study abroad sector globally
- A PEST analysis of 4 countries including; Mexico, Belize, Puerto Rico and Costa Rica
- A competitor analysis in the study abroad sector in Latin America
- An analysis of current product offerings by competitors in the market
- A market analysis of people who participate in study abroad programs
The review of academic literature allowed a better understanding of the international development community and their efforts to stimulate economic growth through the use of different methodologies. It also provided a better understanding of the study abroad sector and resulting market segmentation.
Secondary research using non-academic resources was used to gain further insight into the points listed above but focused on individual aspects of the strategic business plan. These aspects included statistics on competitors and countries from websites, annual reports, industry magazines and newspapers. These helped to provide a current picture of the factors within the business environment which would directly impact the strategic entry of Global Riplz in Latin America.
Analysis/Discussion
The analysis for the viability of the new venture has been divided into two stages. Its purpose is to test the assumptions of the founders by answering the question, are economic incubators more or less effective than MFIs at addressing poverty through job creation? Stage one is a literature review and discussion of microfinance institutions and incubators for economic development. This discussion will answer the three questions; what are they, how are they supposed to operate as well as what are the intended results and what are the actual results? It will also discuss the limitations of these methodologies and provide a broad picture of the study abroad sector. Stage two is used to describe the organization and its structure, evaluate the external environment and the study abroad industry, and to define the company’s internal environment through the development of a targeted marketing plan. This two stage analysis has been done to effectively choose a strategic path of entry for this new venture.
Stage 1: Literature Review and Discussion
The microfinance sector.
As is well known, the concept of microfinance is the provision of very small loans to the poor with the intent of allowing them to start varying forms of revenue generating activities. In practice, these types of activities remain vastly in the informal market and revolve around very basic product and service markets. Examples of these include, subsistence retail, selling handicrafts and souvenirs, and simple services including, shoe shining or bicycle repair, etc.
The history of the microfinance sector to date in Latin America.
In the 30 plus years that microfinance has been in Latin America it has seen rapid growth along with a widespread transformation from non-profit to for-profit organizations. The international community has whole heartedly supported microfinance as the way to end poverty. Bateman (2012) discusses the history of microfinance in Latin America and begins to show how its evolution and impact on the local economy has been largely detrimental (Bateman, 2012).
Even though the microfinance model was already in existence and had arrived in Latin America in the 1970’s (Bateman, 2013), the microfinance movement is most often attributed to Dr. Muhammad Yunus, who established the Grameen Bank in 1983 with apparent success in the village of Jobra, Bangladesh (Bateman, 2013). He later won the Nobel peace prize in 2006 for his work (Bateman, 2013). Dr. Yunus actively promoted microfinance as the answer to addressing global poverty based on the ideology that the world’s poor would take to capitalism and pull themselves from poverty in their efforts to obtain a better life (Yunus, 1997). The ideology was quickly adopted by western governments and international development agencies because it was felt that this model of self-help and individual entrepreneurship would mean that state coordinated institutional vehicles and policies, including trade unions, social movements and basic income programs, among others, would no longer be necessary (Bateman, 2013). Initially, the majority of MFIs were dependent on international donations or government subsidies (Bateman, 2013). However, this model grew to be unacceptable with the general consensus under the neoliberal mindset being that all manner of organizations including NGOs must operate on a full cost recovery model (World Bank, 2002). As such, in the 1990’s MFIs we restructured as privately-owned, profit driven businesses (Robinson, 2001). This led to a massive increase in the supply of microfinance supported by USAID and the World Bank (Bateman, 2013). In Latin America as a whole, microfinance now accounts for around 45% of total lending with a portfolio reaching $27.6 billion and serving 18 million clients (OECD, UN-ECLAC, 2012)
The reason for the shift from operating microfinance as non-profit to for-profit.
In the 1990s the original subsidized model of microfinance based on the Grameen model began to be phased out and was replaced by a for-profit commercialized version (Robinson, 2001). There are three mains reasons for this; there was a perceived notion that the growth of the sector was limited by the availability of subsidies, a full cost recovery model was necessary to conform entirely to the neoliberal mentality and high-profile advocates of microfinance including USAID and the World Bank saw privatization as a means to rapidly expand the agenda. As predicted, microfinance rapidly increased in the years after the commercialization (World Bank, 2002).
Microfinance as an ‘anti-development’ policy.
Building evidence, as well as case studies highlighting four different countries including, Bolivia, Peru, Colombia and Mexico has shown that microfinance is detrimental to local economies (Gonzalez, 2011, Kappel, 2010, Jimenez, 2011 and EIU, 2012). Additionally, the IDB, using data from right across Latin America demonstrated its current belief that poverty and underdevelopment in Latin America is directly caused by channeling to many resources into low productivity informal microenterprises and self-employment ventures (IDB 2010).
Fundamentally, microfinance operates on the concept that with guaranteed access to startup capital, the poor would be able to create a microenterprise and generate a cash flow allowing them to build wealth for both themselves and their community (Smith and Thurman, 2007). The microfinance model’s entire rational and existence are predicated on supporting the informal sector and that in so doing make a major contribution to bottom-up development. Paradoxically, the opposite effect is true. All evidence purporting to show a positive impact from microfinance was reviewed in a UK government funded systematic review. The systematic review team was forced to conclude, in face of the hope of finding solid evidence in favor of the effects of microfinance, which despite thirty years of operation there was actually very little evidence in support of microfinance as having a positive impact on local economies (Duvendak et al, 2011). Yunus stated that a “Grameen-type credit program opens up the door for limitless self-employment, and it can effectively do it in a pocket of poverty amidst prosperity, or in massive poverty situation” (Yunus, 1989, p. 156). This represents a complete misunderstanding of the ‘fallacy of composition’, the mistaken idea that what is true of the parts of a whole must also be true of the whole. It is also based on the erroneous assumption that sufficient demand will result from and absorb any increase in supply. The resulting assumption made by the microfinance sector is that one new microenterprise that manages to survive in a local economy is evidence that more of the same new informal microenterprises will also survive. The problem arises in that these new microenterprises are not being met with an equal increase in local demand. The resulting impact is intense competition which in turn leads to a combination of market displacement and enterprise exit. All of this combined ends up cancelling out all of the assumed economic growth, additional jobs and additional income.
One example of the effects of the microfinance sector on an economy is the arrival of the microfinance model to Mexico in the 1990s. In 1940 nearly 38% of the non-agricultural Mexican population was involved in the informal market. By 1980, due primarily to the success enjoyed by Import-Substitution-Industrialization (ISI) polices in the SME sector this figure was reduced to 23%. However, as state support for industrial development declined and more resources were directed toward microfinance applications this number rapidly increased (Amsden, 2001). Moreover, the arrival of microfinance began to shift resources away from formal enterprise development where bank lending to formal SMEs dropped from 60% to 48% in only a 6-year period at the beginning of the new millennium. On an individual level, global attention has shown microfinance institutions such as Comparatamos and Crediconfia charge interest rates of 195% and 229% respectively (Nuevas alianzas, 2012). In an unregulated market, private commercial banks have been given market freedom to make incredibly large profits by selling ultra-expensive credit to the poor (Bateman, 2013). In 2007 with the IPO of Compartamos senior managers rewarded themselves with several millions of dollars in bonuses, this too was effectively paid for by its poor clients (Sinclair, 2012). This ‘Wall Street’ style greed along with the false assumptions upon which the microfinance sector is predicated on demonstrate the failure that this methodology has shown in effectively alleviating poverty and creating employment.
Business incubators and economic development.
Business incubation is a term describing a business development process that is used to grow successful, and create sustainable entrepreneurial ventures that will contribute to the economic development of a healthy economy. A successful incubation process involves a supportive environment in which new ventures can develop and fulfil their potential. Additionally, they are provided, through the incubator, access to a wide range of business development resources and tailored services.
An incubation program or accelerator program is defined as a dynamic process of developing and supporting emerging commercial business or SMEs (Pappas, 2003). Incubators nurture young firms, helping them to survive and grow during the start-up period when they are most vulnerable to failure. Incubators will often provide hands-on management practice, access to financial resources, and orchestrated exposure to critical business thinking or technical support services. In addition, the incubator program can offer entrepreneurial firms the facility to share office services, access to equipment and expandable space along with many other services (see Appendix A).
Development purposes of business incubators.
Incubators can be established and designed to reflect their own particular operating environments and to represent the stakeholders. They will often focus on one or more objectives, e.g. economic development, technology transfer, innovation or commercially viable ventures. They are frequently used as tools to promote the economic development of a community, a region or a country. The growth of business incubators has been justified by well established theoretical arguments and existing empirical evidence that innovation promotes economic growth (Wagner, 2006). Also, business incubation leads to the creation of new and sustainable jobs, acceleration of business growth, development of fast-track companies, reduction in the rate of failure of new enterprises, empowerment, opportunities for specific groups of entrepreneurs, and developing a role model for an entrepreneurial culture (Wagner, 2006).
Business incubators actively contribute to the local, regional and national economic development. When considering the launch of an incubator, the development team should fully understand and formulate the economic purpose or mission of an incubator to achieve the required return on the resources invested in the program. Business incubators can be used for one or more of the following three economic development purposes:
New business formation.
New business formation is the most common economic development focus of business incubators around the world. These programs focus on supporting entrepreneurs from practical business concept development to launching a product. The purpose of this type of incubator is to nurture businesses until a business becomes stable enough to operate without the day-to-day support of an incubator (Almubaraki, 2008).
Business stabilization.
A number of countries around the world have begun to investigate the ways that business incubators can be used to help existing SMEs that have become unstable. The purpose of these programs is to provide business support services and guidance to help to stabilize the business and reduce the chance of failure (Chandra, 2007).
Business expansion.
Many countries have begun to deploy business incubators to help existing SMEs to expand. These programs provide services to help business owners; improving operational efficiency, identifying and accessing new markets, expanding production capabilities, hiring and managing labour and securing capital. The purpose of these programs is typically to help businesses that employ 1-5 employees to expand to 10-20 employees (Campbell, 2001).
Measuring the success of business incubators.
Business incubators offer a range of potential economic development benefits. Their actual impacts on economic development have generally been measured in terms of basic quantitative measures such as number of jobs created, firm graduation rates and tax receipts (Lourenco, 2004).
Recently, there has been a shift in the focus of literature concerning business incubation to the potential role that incubation contributes to economic development due to the facilitation and the creation of social and intellectual capital (Clark and Minor, 2000; CPAC, 1998).
Business incubators supporting economic development.
Business incubators help in accelerating the economic development process. They provide access for small businesses though the provision of resources that small enterprise might not otherwise be able to access due to limitations on capital or network resources. The difference between business incubators and small business development centres is that, unlike small business development centres, incubators nurture or adopt the businesses, supporting them in their infancy until they can be independent on their own. In order to offer legitimate business incubation, the programs should offer a full support network and take on the challenge of embracing the business owner and assuming responsibility for the growth and success of the business itself rather than simply acting as landlord to entrepreneurs. The development of business incubators has been shown to have the following benefits; stimulation of the economy, creation of jobs, and diversion of the local economic losses, the commercialisation of research, the transfer of technology into new and different commercial applications; and the enhancement and sustainability of small business success (Greene and Butler, 1996; NBIA, 1996; Smilor and Gill, 1986).
According to a report by the NBIA (2000), business incubators reduce the risk of small business failures. In fact, statistics show that 87% to 90% of all businesses that graduated out of incubators programs are still in business. This is in contrast with approximately 20% to 30% of non-incubation businesses (NBIA, 2000). The effect of taking up residence in a business incubator has also been shown to dramatically increase revenue when compared to a businesses in the same environment but operating outside of an incubator. The average sales of a firm increase by more than 400% from the time it enters the program until the time it leaves the incubator. Also, start-up firms in incubators have increased sales by $240,000 annually and contribute an added average of 3.7 full-time and part-time jobs per firm (NBIA, 2000).
Akcomak (2009), outlined eight key points that encourage successful incubation including; defining a clear purpose and mission of the incubator, setting clear criteria for selection, entry and exit of participants, hiring qualified incubator managers with business experience, ongoing monitoring of participants, strategically selecting the services provided by the incubator to help participants avoid start-up costs, focusing more on intangible service including networking strategy, marketing advice, help with making business plans etc., having a deliberate strategy around networking inside the incubator and lastly, that the incubator itself should be self sustaining.
The study abroad sector.
The study abroad industry is demonstrating growth increasing by about 12% each year (Estes, 2013). There were over 290,000 students from the USA studying abroad for credit in 2013 (Klebnikov, 2015) and almost half of all institutions surveyed in the USA reported an increasing number of students participating in non-credit education abroad activities (NCEA) (Mahmoud & Farrugia, 2016). International experience is becoming an increasingly significant component of a student’s educational experience; offering the opportunity to experience another culture, gain real international work experience or credits towards their degree along with many other benefits (Lukosius & Festervand, 2013). Many educational institutions have recognized this and have begun to offer short international components to their programs or allow and even encourage international internships granting full credit towards graduation (Mahmoud & Farrugia, 2016).
2017-11-30-1512028832