Why Developing Economies Are Not Short of Risk-Takers
A lazy explanation appears whenever development is described as a cultural deficit: poorer countries struggle because people are unwilling to take risks. There is not enough entrepreneurship, not enough venture capital, not enough ambition.
The explanation mistakes the kind of risk visible to investors for risk-taking itself. Across many developing economies, people start businesses without meaningful safety nets, trade through unstable supply chains, lend through family networks and keep firms operating through power cuts, inflation, regulatory uncertainty and sudden changes in demand. These are not risk-free lives waiting to be awakened by a motivational seminar.
The missing ingredient is often not risk, but a credible relationship between risk and reward. Productive entrepreneurship requires some confidence that successful investment can be retained, contracts can be enforced, failure can be survived and growth will not simply make a firm easier to tax arbitrarily, regulate selectively or capture politically.
When the upside is uncertain and the downside is unbounded, staying small may be less a failure of ambition than a strategy for preserving control.
Risk Beyond the Market
Commercial risk exists in every economy. Customers may reject a product, competitors may respond more effectively, costs may rise and founders may misjudge timing, demand or their own ability to execute. No legal or financial system can remove those uncertainties without also removing much of what makes entrepreneurship useful.
Institutions matter because they determine how much additional uncertainty surrounds the commercial bet. Can ownership be defended? Will a court enforce an agreement within a useful period? Are licences governed by published rules or personal discretion? Can profits be transferred, reinvested or distributed without the terms changing after the investment has succeeded?
Where those answers are reasonably predictable, an entrepreneur can concentrate more of the calculation on the business itself. Where they are not, every expansion becomes a joint bet on customers, officials, courts, tax authorities, customs offices, currency stability and political protection.
The World Bank’s World Development Report 2017: Governance and the Law is useful here because it treats governance as a problem of credible commitment, coordination, cooperation and power. Formal rules do not operate in isolation. Their effect depends upon who can enforce them, who can bypass them and whether powerful actors expect the rules to remain binding when compliance becomes inconvenient.
This is also the connection with corruption as part of a surrounding incentive system. A growing firm may become more visible to legitimate regulators, but also to officials seeking informal payment, political actors looking for patronage or competitors able to use administrative power against it. Success increases the value of the business while simultaneously advertising that value to anyone capable of extracting part of it.
The distinction is not between orderly rich countries and chaotic poor ones. High-income economies also contain regulatory capture, arbitrary decisions, weak courts and politically protected firms. Nor do all lower-income economies share one institutional pattern. The relevant question is whether non-commercial risks are sufficiently bounded that investment decisions can be made without continuously renegotiating the firm’s right to exist.
Why Staying Small Can Be Rational
A shopkeeper may have enough demand to expand, but expansion often changes the firm’s relationship with the state. More employees, larger premises and visible inventory may bring registration, inspections, formal tax exposure, additional permits and greater dependence upon contracts that need legal enforcement. Growth creates opportunity, but it also creates surfaces through which the business can be reached.
A small firm can respond by keeping inventory low, relying on family labour, diversifying household income and avoiding long-term commitments. It may use informal credit, verbal agreements and personal networks because these arrangements remain within relationships the owner can monitor directly. The business sacrifices productivity and scale in exchange for flexibility and reduced exposure.
This does not mean that every street vendor or family shop is a suppressed future manufacturer. Many firms remain small because their market is local, their activity offers little economy of scale, capital is scarce or the owner prefers a business that supports the household without becoming an organisation. Romanticising every informal entrepreneur as an undiscovered founder is another way of refusing to see the business that actually exists.
Informal enterprises are highly varied. Some are survival activities with little realistic path towards substantial accumulation. Others resemble formal firms but remain outside the system because the benefits of entering it do not justify the costs. A smaller group may possess real growth potential while facing precisely the institutional exposure that makes scaling unattractive.
The ILO’s work on enterprise formalisation frames the decision in these terms. Formal status may offer access to finance, larger customers, public procurement, contracts and legal enforcement. It can also bring entry costs, continuing compliance, taxes, social contributions and demands upon the owner’s time.
Formalisation becomes attractive when the promised benefits are real enough to outweigh the exposure. Registration alone cannot produce that result. A firm gains little from becoming legible to the tax authority if it remains invisible to courts, banks, procurement systems and reliable public services.
This is why policies that simply force businesses into the formal sector can disappoint. They may expand the number of registered firms without improving productivity, investment or survival. In the worst case, they remove a protective adaptation before the formal system is capable of offering anything valuable in return.
Starting a Business Is Not the Same as Building One
Entrepreneurship statistics can obscure this distinction. A country may have high rates of self-employment and business formation because formal wage employment is scarce. People create work because no employer is offering it. That activity demonstrates initiative, but it does not necessarily produce firms capable of sustained investment, formal hiring or entry into larger markets.
The latest Global Entrepreneurship Monitor report describes strong early-stage activity alongside a persistent “survival gap”: too few young businesses make the transition into established firms. The finding is useful because it shifts attention away from the number of people starting something and towards the institutional and financial conditions that determine whether the venture can endure.
A survival-oriented enterprise can still be skilled, inventive and socially valuable. It may support several relatives, provide a service the formal economy ignores and continue operating under conditions that would defeat a better-capitalised outsider. Its objective, however, may be dependable household income rather than scale. Judging it by venture-capital expectations misunderstands both the owner and the market.
Development requires more than multiplying the number of firms. Some businesses must be able to accumulate capital, invest in equipment, improve management, enter larger contracts and employ people beyond the owner’s immediate network. That transition demands a different kind of confidence because the firm becomes less capable of retreating into informality if circumstances turn against it.
Scaling also changes the organisation itself. Informal trust must give way to accounting, delegation, contracts, payroll and more specialised management. The owner must believe that these investments will remain valuable rather than becoming records through which officials, creditors or political rivals can exert control.
The problem is therefore not that all entrepreneurs are secretly waiting to scale. It is that the economy may fail to distinguish between firms that cannot scale, firms whose owners do not wish to scale and firms that would grow if the institutional return made growth worthwhile.
Capital Cannot Escape Institutions
When local firms struggle to expand, external capital appears to offer a shortcut. Venture funds, development-finance institutions, guarantees and foreign investors can bring money, technical expertise and access to networks that local banks may not provide.
Capital still needs enforceable claims. Venture investment assumes that ownership will be recognised, financial information will be sufficiently trustworthy, minority rights will have some meaning and an exit will eventually be possible. If a profitable firm cannot be sold, listed or transferred without political interference, the investor faces more than uncertainty about the business model.
IFC research on risk-capital investment in fragile African markets identifies political uncertainty, limited infrastructure, weak business information and constrained exit routes among the practical difficulties. Investors often adapt by favouring export-oriented sectors, flexible financial instruments, local partnerships or businesses capable of generating returns without depending upon a conventional stock-market exit.
This helps explain why venture capital clusters inside particular cities, sectors and institutional pockets. Capital is not simply searching for the bravest founder. It is searching for environments in which claims can be documented, monitored and eventually realised. Technology, fintech, logistics and export-facing businesses may attract investment partly because they can route around local constraints or connect to markets where the exit is more legible.
Venture capital also works by distributing failure across a portfolio. As discussed in “Who Pays for Failure? The Hidden Role of Venture Capital”, founders can attempt projects whose outcomes are highly uncertain because investors expect many individual companies to fail. That system depends upon losses remaining bearable and successful investments remaining sufficiently valuable to compensate for them.
In an environment where failure can leave the founder permanently indebted, legally trapped or personally exposed, the same experimentation becomes much harder. A recent World Bank review of the economic effects of insolvency regimes finds evidence that effective frameworks can support entrepreneurship, access to credit and the preservation of viable businesses. It also cautions that much of the underlying research comes from developed economies and that the quality of courts and implementation determines whether legal reform works in practice.
Making failure survivable does not mean protecting every owner from the consequences of bad judgment or fraud. It means distinguishing honest commercial failure from permanent exclusion. Assets should be reallocated, viable firms should have a path to restructuring and entrepreneurs should not always have to stake the rest of their economic lives upon one attempt.
What De-Risking Can and Cannot Do
Development finance often responds to these constraints by altering the distribution of risk. Guarantees, political-risk insurance, concessional loans and blended-finance structures can protect investors from events they cannot reasonably control or compensate them for entering markets that do not yet offer commercial returns.
Political-risk insurance, for example, can cover specified non-commercial risks such as expropriation, currency-transfer restrictions, war, civil disturbance or breach of contract by public authorities. It does not make the underlying business profitable. It separates some political risks from the commercial ones the investor is still expected to bear.
That separation can unlock useful investment. A sound business may remain unfundable because one low-probability political event would produce a loss too large for a private investor to accept. Public or multilateral support can absorb that narrow risk more efficiently than asking every project to price it independently.
De-risking becomes less defensible when public finance protects private actors from ordinary commercial failure or provides subsidies for investments the market was already willing to fund. The OECD’s 2026 review of concessionality in blended-finance funds warns that excessive support can crowd out commercial capital, distort competition and weaken the claim that the investment is genuinely additional.
The subsidy should therefore be no larger than the gap it is intended to close. Public support is most useful when an investment is developmentally valuable and potentially commercial but faces a specific risk-return imbalance. If the project remains weak even after the surrounding institutional problem is understood, financial engineering may simply postpone recognition of that weakness.
Transparency matters because de-risking divides gains and losses between private investors and the public. The terms should reveal what risk is being transferred, why the transfer is necessary, what development result is expected and whether the same investment could have proceeded without subsidy. Otherwise, “mobilising private capital” can become a flattering description of protecting private returns.
Making Productive Risk Worth Taking
The response to weak entrepreneurship is therefore not motivational language and cannot be reduced to providing more capital. The calculation around growth has to change.
Contracts need to be enforceable within a commercially useful period. Tax and licensing systems should limit discretionary bargaining. Customs procedures must be predictable enough that firms can promise delivery dates. Ownership needs protection from both private seizure and administrative opportunism. Access to electricity, transport, finance and larger markets must be reliable enough that investment in productivity can earn a return.
Partial improvements can matter. A functioning commercial court, a transparent procurement platform or a licensing process with published fees may alter decisions long before the wider state becomes exemplary. Entrepreneurs do not require institutional perfection. They require enough reliability that a successful investment does not immediately change the rules governing it.
Formalisation should become valuable rather than merely compulsory. Firms should gain access to contracts they can enforce, markets they could not enter informally and services capable of supporting their growth. The state, in turn, gains a broader tax base and a larger constituency with an interest in predictable administration.
That feedback loop is not guaranteed. Governments may tax without becoming accountable, and large firms may use their organisation to demand protection from competition rather than better institutions for everyone. Formalisation can reproduce privilege if access to courts, procurement and finance remains reserved for politically connected businesses.
The aim is not simply to replace small firms with large ones. An economy needs enterprises of different sizes and purposes. The institutional achievement lies in allowing firms with productive opportunities to pursue them without requiring political sponsorship, while permitting unsuccessful ventures to exit without destroying every future attempt.
Developing economies are not uniformly short of people willing to act under uncertainty. What many lack is a dependable path through which initiative can become accumulation, employment and durable productive capacity.
The development problem is not how to make people braver. It is how to stop making ambition more dangerous once it becomes visible.
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