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How Does Ethnicity Affect the Success of Small Businesses in Developing Economies?

Keiichi Takaki
Department of Sociology
Stanford University
December 2001

Researchers and policy makers have recognized the importance of small businesses in developing countries because they are the dominant form of business and the main source of employment. In the effort to promote the success of small businesses, experts have addressed problems of management, technology, and macro-economic environment. However, they have paid much less attention to social contexts where the small businesses operate. In particular, many developing countries are ethnically diverse and divided, and small businesses often have to do business with those of their own ethnic group. This would narrow the range of their opportunities and adversely affect their success. This research attempts to empirically analyze how ethnicity affects the performance of small businesses in Ghana.

From 1991 to 1993, I lived in Ghana and personally observed the predominance of small businesses and the salience of ethnicity, which is consistent with the available statistics: In the 1987 census, 75 percent of all establishments employed less than 10 persons. The population census in 1960 identified more than 100 ethnic groups. I also observed that people tended to prefer business with those of same ethnic identity. Why is there such a tendency?

Ghanaian economy is full of uncertainty. People are often not sure about the quality of products and this makes people hesitant to purchase especially costly products. For example, when a person wants to buy a piece of furniture, she may be concerned that it may develop some defects after the purchase. In Ghana, warranty is not common and the seller of the furniture may not take responsibility if the problem arises. Thus, there is risk that the customer wastes money for buying a defective product without any effective legal protection.

In such uncertain and risky environment, the customer tries to find an entrepreneur that she can trust so that she can be sure of the product quality and be taken good care of. Thus, earning trust from customers is the key for the success of an entrepreneur. It is often difficult, however, for an entrepreneur to earn trust from a person of ethnic identity different from her own. That is because earning trust requires the entrepreneur to effectively communicate with the customer so that the entrepreneur convinces the customer of her competence and integrity. Having different ethnic identities makes the effective communication difficult because they have different cultures and different ways of thinking.

My personal experience and literature indicate that some entrepreneurs have more customers of various ethnic groups than others. Why is it so? I argue it is due to multiplicity of salient social identities. In Ghana, ethnicity is not the sole social identity. Ghanaians are seriously religious. Most people living in the southern part of the country are Christians and those in the north are Muslim. Even if they are from different groups, they may believe in the same religion. Some authors emphasize gender as another salient identity as many Ghanaian women of various ethnic identities organize credit association and cooperate with each other. When they share social identities, they may attend the same social organizations, such as church or mosque where they are exposed to other fellow people of whatever ethnic origins, Bible, Koran, and preach. These can be the moral basis upon which they can share their thoughts and communicate with each other, and nurture trust. My Ghanaian friend, an owner of a small business, told me that they find lots of customers among their fellow Christians. Multiple identities and broader social life does seem to help them to overcome ethnic boundaries.

It is my contention that individuals have varied degrees of multiple identities and different ways of participation in social organizations, which facilitates or obstructs communications, and affects the chances of entrepreneurs of earning trust from people of various ethnic identities, which in turn would affect their success. I intend to go to Accra, the capital city of Ghana, and undertake ethnographic study to collect qualitative data about work and social life of entrepreneurs and their customers, and administer questionnaires to collect quantitative data for subsequent statistical analysis.