What Determines Success PDF

WHAT DETERMINES
SUCCESS? EXAMINING
THE HUMAN, FINANCIAL,
AND SOCIAL CAPITAL
OF JAMAICAN
MICROENTREPRENEURS
BENSON HONIG
Tel Aviv International School of Management, Israel
This research examines the performance of 215 informal microenterprises

EXECUTIVE in Jamaica, studying the influence of human capital, social capital, and fi-
SUMMARY nancial capital of the owners on their business profitability. Understanding
the importance of particular relationships that result in successful micro-
businesses is important for a number of reasons. First, among many devel-
oping countries, the growth of microenterprise provides the most visibly vi-
brant and growing economic activity. Although considerable effort and resources are being directed to-
ward microenterprise promotion schemes, empirical research on the subject is quite limited. Second,
economies in developing countries mirror many of the social and institutional problems existent in urban
economically disadvantaged areas of the United States and other developed countries. For these areas,
microenterprise may be an essential component of urban renewal and community development. This
study helps in identifying important characteristics of social and individual attributes that may be relevant
to those attempting to strengthen this subsector. Finally, this study seeks to provide insight into a dimen-
sion of microbusiness research for which there are limited data, specifically, the role that social capital
plays among practicing entrepreneurs and owners.
This research found that different structural environments, even within a singular and small econ-
omy, may considerably alter the rates of return to human, social, and financial capital. As a result, the
analysis of enterprises includes segmentation according to both the usage, or not, of employees, and the
sophistication of the technologies used.
Several factors were determined to enhance the profitability of the businesses in all categories. Voca-
tional training, for example, demonstrated consistently strong and positive effects. Mother’s high occupa-
Address correspondence to Dr. B. Honig, Tel Aviv International School of Management, 7 Shulamit Street,
64731 Tel Aviv, Israel.
I thank Moshe Banai and two anonymous reviewers for comments and suggestions on an earlier draft of
this article.
Journal of Business Venturing 13, 371–394

 1998 Elsevier Science Inc. All rights reserved. 0883-9026/98/$19.00
655 Avenue of the Americas, New York, NY 10010 PII S0883–9026(97)00036-0
372 B. HONIG
tional status (a proxy for socioeconomic status) and years of experience in the business were also consis-
tently positive and strongly associated with increasing profits.
Although additional starting capital played an important role for both the businesses with and with-
out employees, increasing amounts failed to differentiate the success of those firms that were already op-
erating in the higher technological tier. Obtaining a small business loan acted in a similar manner, enhanc-
ing the profitability of all firms, except those segmented into a high technological tier. One interpretation
of this finding is that the role of technological choice is extremely important, and appears to dwarf that
of varying amounts of starting capital.
Social capital, as operationalized by frequent church attendance and marital status of the owner,
was found generally to increase the profitability of the business. The data demonstrate that social networks
play an important role in the success of these businesses, and that conditions in the highest tier utilize
social capital in a somewhat unique manner.  1998 Elsevier Science Inc.
INTRODUCTION
Considerable effort continues to be expended promoting entrepreneurship and micro-
business in developing countries, originally by adherents of the McClelland school, and
more recently through the efforts of bilateral and multilateral agencies, as well as nongov-
ernmental organizations such as the Grameen Bank (McClelland 1969; Hossain 1988).1
Much of the international support activity targets what has become known as the
“informal sector.”2 This broadly defined term encompasses a ubiquitous and heteroge-
neous phenomenon: the labor of small firms and individuals, often with minimal re-
sources; operating in the “grey” areas with respect to legality. Viewed as a sector, infor-
mality encompasses a wide range of activities, from the most basic to more advanced,
highly specialized occupations, crossing gender and class backgrounds, engaging indi-
viduals with a diverse set of educational properties (de Soto 1989). From the perspective
of entrepreneurial research, informal sectors in developing countries represent nascent
market capitalism, allowing for the close examination of the influence of individual
properties on business formation and related outcomes (Moser 1978).3 These sectors
contain many microenterprises, defined as small businesses that employ less than ten
people, and often only one or two (Birks et al. 1992).
Although entrepreneurship has been linked theoretically with economic develop-
ment for quite some time, few studies have systematically attempted to examine the
micro environment in a developing country (Leff 1979). Little is known about the micro
level social processes that influence success for microentrepreneurs. Is education impor-
1
McClelland maintained that certain entrepreneurial qualities associated with success could be mea-
sured and taught. For example, a study of rural vocationally trained individuals in India seemed to show a
strong correlation between their predicted success, as indicated by the n achievement test scores, and their
eventual occupational employment 1 year later (Fraser 1968; also, see Broehl 1978).
2
The celebrated 1971 Nairobi conference organized by the ILO provided the following characteristics
of informal activity, and still serves as a guide for scholars and practitioners alike:
1. ease of entry;
2. reliance on indigenous resources;
3. family ownership of enterprise;
4. small scale of operation;
5. operates in a semipermanent or temporary structure or in a variable location;
6. skills acquired outside the formal education system;
7. operating in unregulated and competitive markets; (International Labor Office 1972).
3
The importance of entrepreneurship to developing country markets is implicit in the Shumpetarian
model, which identifies entrepreneurs as those who create new combinations regarding the opening and devel-
opment of new markets, organizations, and industries (Schumpeter 1934).
SUCCESS IN JAMAICAN MICROENTERPRISE 373
tant, or is practical experience more helpful? Is success governed by constraints on start-

ing capital, or is it more important to belong to a closely knit social group or community?
What, if any, is the influence of technology on the success of microbusinesses? Perhaps
the relative dearth of field research in this area reflects the difficulty in obtaining credible
data, as such environments are characterized by a limited institutional framework and
notably weak infrastructure. It is an important area of research, as in many developing
countries informal employment represents the largest share of job growth, comprising,
for example, between 40% to 60% of the urban labor force of most African countries,
including more than 20 million individuals (Fluitman 1989).
Jamaica presents an excellent case study for a number of reasons. As with many
Latin American and Caribbean economies, it sustained a radical transition during the
post war era from a traditional colonial plantation economy to a more diversified market
based on tourism, mining, and textiles. As a result, there was considerable economic
opportunity and mobility for a select few, as new types of employment emerged. Educa-
tional opportunity expanded at accelerated rates following reforms beginning in 1957
(Riak 1983). One unanticipated effect has been a significant reduction in the employ-
ment prospects for secondary graduates, particularly from the lower classes (Anderson
1987). Limited formal sector expansion has produced an exceedingly heterogeneous
group of informal microentrepreneurs, which, due to the relative smallness of the coun-
try, provide considerable opportunity for extensive research.
FINANCIAL CAPITAL AND THE MICROENTREPRENEUR

As the owner of a commercial enterprise, a businessperson, by definition, is concerned
with sales, markets, and ultimately, profits. When examined from a purely economic
perspective, successful firms should realize an evident return on capital invested, as op-
erating profits. Due to the marginal nature of many activities in the informal sector,
expecting a consistent observable positive rate of return requires considerable opti-
mism. Owners of microenterprises rarely keep financial records and typically fail to dis-
tinguish between household and business transactions. Due to this lack of separation,
detecting fully how much, if any, return to capital has occurred over a specific period
is difficult, if not impossible.
The most available approach to assessing informal sector capital is to measure and
evaluate the financial capabilities utilized in launching a new business, an important
question in attempting to ascertain the size and effects of economic barriers to entry.
Identifying whether variations in starting capital are important to the long range success
of businesses is critical to understanding the viability of assistance and loan schemes
and is the approach taken in this study.
Financial Variables
The dependent variable used in this study, log of average monthly profit, was deter-
mined through extensive interviews with business owners at the site of their activities.
Estimates of income, particularly in developing countries, and most especially among
informal labor markets, often rely upon household surveys conducted by census takers
or large scale research projects funded by multilateral organizations. Although these
techniques provide a robust number of cases, there continues to be considerable specu-
lation as to their accuracy, particularly regarding issues such as income, which are sensi-
374 B. HONIG
tive to regulation and taxation. Typically, the proprietor of an informal firm will have
little if any accurate conception of profit or income, as accounting and bookkeeping
are rarely evident, whereas personal and business accounts typically mingle within a
single cash box.
To establish more accurate incomes for this study, considerable time was spent with
informant microentrepreneurs, discussing the range of typical business expenses and
overhead, as well as the average sales volume for each business, before arriving at esti-
mated average income. As a result, the data are asserted to be much more reliable than
research based on conventional survey techniques.4 Estimated average monthly income
was reduced by expenses, including wages, rent, repairs, supplies, parts and mainte-
nance. Observations were made regarding the capital stock and technology used in the
firm. Average monthly profit was determined by a series of questions that assessed the
size and capability of the firm. Questions were asked regarding the average monthly
gross receipts, monthly overhead, wages and salaries, parts, repairs, and supplies. In
addition, the microentrepreneurs were asked how much they would need to earn in
order to be willing to close their business and work elsewhere. Each of the questions
were carefully evaluated for consistency, and developed into a standard profit and loss
format, for the average monthly earnings during the most recent 12 months of business.
Starting capital was determined by asking the microentrepreneur how much in “to-
day’s” money it took to start their business. All the tools and capital stock were invento-
ried and verified according the present replacement value of the items in question. In
addition, the firm owners were asked the current value of their present tools and equip-
ment. The answer was compared with the known market value of the items in question
to ensure a measure of consistency and reliability.
The constraint of insufficient capital for informal sector microenterprise has been
well documented (Von Pischke, Adams, and Donald 1983; Stiglitz and Weiss 1981; Ha-
shemi, Schuler, and Riley 1996; Holt and Ribe 1991). Because credit is a primary avenue
of microenterprise assistance for bilateral and multilateral assistance agencies, as well
as governmental and nongovernmental organizations, a close examination of the owners
of firms who received credit support is both warranted and useful. To what extent have
such microenterprises prospered compared to businesses that have not had equivalent
capital support? In this research, a robust number of borrowing firms were studied, with
a variable created for those firms that had successfully obtained credit for their business,
whatever the source.
HUMAN CAPITAL AND MICROENTERPRISE

One of the most critical issues facing those who are trying to assist the informal sector
in developing countries is to understand where microentrepreneurs originate from and
what characteristics are relevant to their success (Fluitman 1989). Shultz (1959, 1980)
theorized that individuals may reallocate and augment their activities in an entrepre-
neurial fashion due to environmental circumstances. Education is central to this view,
expressed as human capital theory.
Human capital theorists hypothesize that education is an investment that yields
higher wage compensation in return for individual variations of skills, training, and ex-
4
The trade-off in expending the necessary time for each survey is in the somewhat limited number (250)
of cases studied.
perience (Mincer 1974). Taken collectively to the national level, they theorize that in-
vestment in education leads to economic growth (Psacharopoulos and Woodhall 1985).
However, the extension of various types of educational investments across many social
classes, each with unique environmental conditions, may yield vastly different results.
McClelland, among others, argued for the importance of ensuring that entrepreneurial
talent be drawn from as wide a range of social classes as possible—failure to do so, he
warned, may constrain economic development (McClelland 1969; Rostow 1960).
The majority of empirical studies attempting to test the human capital model are
based on data that examine wage rates in the labor force, controlling for various in-
tervening variables such as race, gender, experience, and socioeconomic background.
The main weakness in this approach is that wages may be subject to other considerations
beyond skill levels and experience, including gender, race, and class prejudice. In addi-
tion, both signaling theory (Spence 1974) and credentialing theory (Dore 1976) suggest
that the relationship between education and income is not the result of increased pro-
ductivity due to investments in education, but rather due to arbitrary or rationalized
selection criteria by managers faced with the difficulty of rationing the most remunera-
tive jobs. Examining the productivity of self-employed labor provides an effective op-
portunity to avoid the aforementioned theoretical complications. In this study, the edu-
cational levels of microentrepreneurs are examined to evaluate human capital theory,
which predicts an increasing likelihood of entrepreneurial activity, productivity, and
relative success associated with education and experience.
Human Capital Model

The analysis of labor market segments by technological tier typically utilizes income
as a dependent variable. To examine self-employed labor, the model used in this study
was a human capital equation with average monthly income as a dependent variable,
also incorporating years of schooling and a term for experience. The basic human capital
equation for the models utilized in this study is as follows:
log Yi 5 bo 1 b1Si 1 b2Ti 1 E
where Yi is a log of individual income, Si represents dummy variables for the levels of
schooling, and Ti is the years of experience in the trade.
Human Capital Variables

The Mincer human capital equation (Mincer 1974) includes an assumption that the skills
and income attributed to experience in the labor force have diminishing returns, thus
requiring a nonlinear independent variable expressed with a Mincer type earnings func-
tion (experience squared). Whereas most models rely on age less schooling for a proxy
of experience, this research uses the exact number of years of experience in the same
occupation for which the microentrepreneurs were engaged.
The educational variables used in this study were dummy variables for levels, speci-
fied to identify nonlinear relationships by type of education. Five categories were cre-
ated for attendance of primary, secondary, high school, vocational, and post secondary
education. Although more specific categorization of the education variable would most
likely prove useful, the small sample size prevents such divisions (Kerckhoff, Campbell,
and Trott 1982). An additional complication was the variation of the structure of educa-
376 B. HONIG
tion in Jamaica during the past 50 years, for which categorization according to formal
completion rates of primary and secondary education would prove inconsistent and
quite useless (Miller 1990). The Jamaican public “traditional” high schools, as differenti-
ated from the all-age schools and junior secondary schools, severely restrict enrollment
according to the common entrance examinations to less than 15%, thus necessitating
a distinctive category.
SOCIAL CAPITAL AND THE MICROENTREPRENEUR

Social relations have previously been examined in terms of the importance of ethnicity
and ethnic enclaves in the entrepreneurship literature (Aldrich and Waldinger 1990;
Portes 1987; Portes and Stepick 1993; Wong-Siu-Lun 1988; Light 1972; Ben-Porath
1980). The arguments highlight the importance of self-contained business environ-
ments, characteristics of immigrant groups, their size, and their cultural and linguistic
abilities. From a macro perspective, population ecologists attribute the relative success
of ethnic enclaves to demands for special products, as new competitive niches are cre-
ated (Hannan and Freeman 1977). From a micro perspective, Matthews and Moser
(1995) have shown that individual family level variables, such as having a parent that
owned a family business, increased the likelihood that an individual would be interested
in owning a business of their own (Matthews and Moser 1995). This study is designed
to go one step further, examining the importance of individual affiliation within the com-
munity, referred to as social capital, on the financial success of microentrepreneurs—the
founding owners of small businesses in the informal sector of Jamaica.
Social capital theory posits that the extent and effectiveness of social and commu-
nity relations modifies the returns to human capital (Loury 1987; Coleman 1988, 1990).
In this view, social networks provided by extended family or community-based relation-
ships are likely to amplify the effects of education, experience, and financial capital,
facilitating the most advantageous accumulation and utilization of resources, such as
credit.5 There is some evidence that in certain environments, informal networks play
a larger role than formal in the establishment and growth of a firm. Birley (1985) found
that new firms in Indiana relied primarily upon networks of informal contacts for assis-
tance, followed by cold contacts, and that this pattern did not differ between growth
and no growth businesses. Informal networks have also been associated with mutually
beneficial exchange structures between firms. Social dimensions are claimed to have
been central in the execution of interdependent relationships based on trust and reci-
procity (Larson 1992).
Informal networks based on social capital may also be critical in establishing formal
relationships, such as with lending institutions. Access to financial capital is particularly
important because research has shown that even in developed countries, where financial
markets are more accessible, constraints of credit are one of the most significant causes
of small business failures (Fredland and Morris 1976; Peterson and Shulman 1987). In
Jamaica, as with many developing countries, the unavailability of credit to the informal
sector is frequently cited as a major impediment to the operation and growth of small
firms (Anderson 1992; Dessing 1990; Davies, Fisseha, and Kirton 1981; Lubell 1991;
5
The relationship between collective action and credit allocation has been studied at the macro level
in Tunisia, where credit is offered at negative real rates of interest. Nugent (1989) used the ratio of total bank
credit by sector to indicate one measure of the strength of collective action in that sector.
Lycette and White 1989). Thus, the successful negotiation of the credit market may be
viewed as evidence of entrepreneurial qualities, including tenacity and risk-taking. So-
cial capital can help obtain limited resources (such as credit), because it provides exter-
nal actors with full or partial control over interests or activities that are shared by mem-
bers. Granovetter (1985) calls this “embeddedness,” maintaining that actors’ attempts
at purposive action are “imbedded in concrete, ongoing systems of social relations.”
He argues that these patterns of interaction are prevalent among and within busi-
ness networks.
Thus, whereas human capital is embodied in the skills and knowledge acquired by
an individual, social capital is embodied in the relations among persons (Coleman 1990).
Membership in community organizations, political groups, and associations are pre-
dicted to amplify the returns to human capital. Coleman (1988) specifies social relation-
ships that can be banked, as with favors and debts, and identifies rotating credit associa-
tions6 as examples where this trust is put to use. In credit rationed environments such
as Jamaica, social capital can be instrumental in the entrepreneur obtaining scarce re-
sources. Further, networks and associations give small-scale entrepreneurs an obvious
potential market for their products and services. The more tightly linked the individual
is to such communities, the stronger the predicted effects of social capital will be. Closure
represents the extent of exchange or interrelatedness among groups—the greater the de-
gree of mutual exchanges, the stronger the closure and social capital. 7 Thus, social capital
is predicted to provide considerable resources when properly leveraged for the emergent
entrepreneur and may be of particular importance in environments of incomplete infor-
mation and weak economic markets, such as in developing countries (Leff 1979).
OPERATIONALIZING SOCIAL CAPITAL

In this study, it was hypothesized that social capital would be important in determining
the success of individual microentrepreneurs. Among the population researched, secular
associations were virtually nonexistent. The primary avenues for community closure ex-
isted with churches, of which there were many, particularly in the low income neighbor-
hoods under study. Frequency of church attendance was analyzed, and a dummy variable
was created for those with the highest frequency of attendance (semiweekly or greater).8
In the developed world, including the United States, marital status may be considered
an important measure of social capital, both with respect to the status of individuals and
their parents. It is the primary point of departure into the social and economic world and
provides a social situation that promotes trust. Jamaican society has been characterized
as matrifocal, where women play central roles but allow for some component of male
6
Rotating credit markets are popular informal credit institutions in many developing countries, includ-
ing Jamaica. A number of individuals meet monthly, contributing a small sum to a joint “pot.” Each member
has control of the combined assets for 1 month, or a period, after which the assets rotate, interest free, to
the next member, until all have received one payout.
7
In the preceding example, imagine two communities: one in which religious, social, and business activi-
ties are highly interconnected, and the other in which they are discrete systems. In the former, shared informa-
tion regarding, say, the availability of resources, will have ramifications in extra-market activities, as agents
outside the marketplace demand conformity. This additional social pressure is a byproduct of closure, the
results of which are readily apparent among various highly integrated sects.
8
Analysis indicated market differences between individuals who attended church at the highest frequen-
cies versus the remaining group. Examinations of less frequent attendance (weekly, monthly, and annually)
failed to demonstrate distinct characteristics and were dropped from the analysis due to limited degrees
of freedom.
378 B. HONIG
dominance when men are present (Smith 1962; Douglass 1992). Among the lower class,
marriage rates are very low and represent an exception to nonlegal, common law, or multi-
ple nonbinding relationships. One of the major constraints on marriage is a belief in the
necessity for a relatively lavish wedding celebration out of reach for the majority of the
Jamaican lower class. Thus, marital status, for the informant’s parents may be considered
as a proxy for their economic and social class background (Clark 1957; Massiah 1983).
Although there may be some overlap in Jamaica between social class and social capital,
this study will focus on parents’ occupational and marital status to determine class and
on religiosity and owners’ marital status to determine social capital.
A Jamaican marriage or close church affiliation was expected to multiply the number
of potential sources of clients, loan collateral, and recommendations, thus having a positive
influence on the financial success of microentrepreneurs. Marital status for the microentre-
preneur provides a measure of social status, respectability, and important networking
capabilities representative of social capital. Dummy variables were created for “ever mar-
ried” status of both generations. Marital status for the microentrepreneur should be partic-
ularly important in obtaining credit resources, where signaling is more likely to take place.9
The two social capital variables, frequent church attendance and the entrepreneur’s
marital status, provide some measure of concurrent validity. Although working and lower
class Jamaicans are less likely to be married, they often participate in regular religious
gatherings. The distinction regarding the social capital variable is designed to comple-
ment two social capital characteristics: that of extended resources and that of close ob-
servation and community closure. Thus, whereas church attendance may be common
from a lower class perspective in Jamaica, so are non-married families. The observation
of both married status and frequent church attendance was expected to create distinct
social capital advantages in the availability of resources for the microentrepreneur than
either of the variables singularly, and so they remain as separate independent variables.
A dummy was used for frequent church attendance to capture nonlinear effects of indi-
viduals most closely linked to their religious community; limited degrees of freedom
in the model prevented the comparison of multiple levels of religiosity.
LABOR MARKET SEGMENTATION

There is an extensive body of literature suggesting that labor markets vary greatly be-
tween sectors of developing countries (Lewis 1954; Harris and Todaro 1970; Doeringer
and Piore 1971; Gerry 1974; Tolbert et al. 1980). Individual earnings are said to be deter-
mined not by inputs such as years of education, as advocated by human capital theory,
but by institutional factors that artificially alter the equilibrium between labor and wages
in modern and traditional sectors. In the Harris-Todaro model, self employment and
informal employment in the urban sector are considered temporary holding measures
by which aspiring rural migrants await their turn in the queue for limited and highly
desirable formal employment. The wage rates between the formal and informal sectors
are said to be in equilibrium when the informal wage equals the formal wage multiplied
by the probability of finding a job (Harris and Todaro 1970).
Recent theoretical and empirical research suggests that informal labor markets are
not homogeneous holding tanks, as perceived by dual labor market theorists, but are
instead segmented, comprising individuals who have left the formal sector for increased
9
See Spence (1974) or Collins (1979) for a discussion of signaling.
opportunity, as well as those who utilize management and entrepreneurial abilities to

increase their incomes (Teihet-Waldorf and Waldorf 1983; Tokman 1989; Tueros 1993).
Labor market segmentation theory takes the structural distinctions of dual labor mar-
kets one step further. It posits that the most lucrative jobs will be allocated according
to criteria unrelated to productivity, such as ethnicity, gender, or social class. The varia-
tion of complexity of jobs according to technological specification is one theorized char-
acteristic of the labor market (Piore 1980). Empirically tested, occupational income will
not be wholly determined by productivity-compensating wage differentials, as predicted
by neoclassical theory.10 Others have found that occupational mobility varies by race
within segmented tiers, and that the returns to education differ according to race within
the same tier (Carnoy 1980). In the upper tier of the occupational mobility, the sophisti-
cation of technology and a more dynamic market provides a more favorable environ-
ment to capitalize on advanced skills.
Considering the previous discussions of financial, human, and social capital, we now
come to the first hypothesis under study, as follows:
H1: The effects of human, social, and financial capital available to a microentreprise
will have a differential impact on financial performance for firms in high versus low
technology tiers.
In this view, labor market segmentation is most critical in determining the profitability of
an enterprise, controlling for differential returns to education, experience, social capital,
and financial capital, as technological constraints are manifested. Individuals in the low-
est tier are predicted to lack the necessary information and bureaucratic acumen to ne-
gotiate the most favorable markets, opportunities, and credit. They may rely upon the
closeness and insulation afforded by their communities, rather than venturing out to
external agencies. For them, a reliance on social capital, such as family and friends, and
parents’ occupational status was predicted to provide higher rates of return to income
than they would in the higher tier. Education was expected to play the weakest role
in family and informal credit markets, where literacy, numeracy, and signaling are of
little value. In these situations, the lender and borrowers are well acquainted, and trust
is established with a high degree of confidence by both actors. It was anticipated that
education would have a higher value in more complex technological activities. Differ-
ences regarding the importance of increasing amounts of starting capital were not ex-
pected to be evident according to technological tier.
VARIABLE SPECIFICATION FOR TECHNOLOGICAL

SEGMENTATION
Two tiers were defined according to the technological complexity of the business of the
microentrepreneur. Job skills can be assessed in three ways: through nonmeasurement,
such as dividing workers into blue collar and white collar; with indirect measurement,
by examining educational criteria; and, most reliably, through direct measurement and
observation (Spenner 1985, 1988). Direct measurement and observation of skill charac-
teristics of jobs require a decision regarding what dimensions are used for analysis. Job-
skill requirements can include a substantive complexity that evaluates the mental, inter-
10
For example, compensation according to job-related risk of life has been shown to hold for the primary
labor market of the United States, whereas no such relationship can be demonstrated for the secondary labor
market (Graham and Shakow 1990).
380 B. HONIG
personal, and manipulative tasks, or an autonomy-control dimension that examines the

discretion with which the work is done. Because this study examines self-employed firm
owners, only the former measure is of any consequence. A supplemental approach
taken in this study is derived from Bright, who devised a taxonomy to test the variation
of technologies utilized in industrial jobs (Bright 1966). By examining machines and
tools utilized in firms and jobs, a comparison was made between the different levels
of technological sophistication used. Thus, firms in this study are categorized according
to a predefined taxonomy of used technology and categorized by tier accordingly.
Technologically complex (high tier) firms were considered to be those that required
routine abstract problem solving skills, such as auto mechanics and electronic/television
repair, or those with a wholesale component greater than 50 percent. Such activities
typically require two or more years of apprenticeship, experience, or vocational training
versus considerably less time in the other informal occupations surveyed. Not all firms
were allocated into a technological tier simply by industry—a number of industries had
manufacturing that occupied both the high and low tier. For example, a few tailors and
dressmakers, by virtue of the type of machinery used, were allocated to the high tier,
while others remained in the lower tier.11
The two technological models allow for a comparison based on entrepreneurial
choice, as opposed to resource constraints. For example, there were dressmakers and
tailors in the study who used a range of different technologies and market strategies.
Some microentrepreneurs utilized many simple sewing machines and avoided more
technically complex machinery of equal cost, such as surging machines. Other individu-
als employed only two machines—but one of them was of a superior and more complex
technology. As a result, the latter business was more competitive in the retail and mass
market trade, due to the higher quality of the finished product.12 Thus, the constraint
was not one of financial resources (in this example, the simpler technology had much
more costly machinery), but one of technological choice.
EMPLOYERS AND OWN-ACCOUNT ENTERPRISES

From the very inception of organizational studies, assumptions were made as to the
inherent superiority of manufacturing systems, composed of multiple individuals spe-
cializing in a particular aspect of the production process (Smith 1776). Whereas most
businesses are suitably studied this way, not all firms are composed of multiple actors.
Indeed, a number of studies in the U.S. suggest that self-employment during the last
25 years is a growing phenomenon (Dennis 1996; Kirchhoff 1996). Unfortunately, the
“individual” has all but disappeared in the study of organizational behavior, as attention
has shifted to the macro arena of markets, demography, culture, and politics (Nord and
Fox 1996). Yet, the attempt empirically to demonstrate sociological concepts must be
rooted in the study of individual behavior, as theory attempts to describe summaries
of active agents (Collins 1981). Thus, our understanding organizational authority is
based on learning about the shared perspectives of groups, consisting of individuals who
11
This was not strictly a question of capital machinery costs—some owned six basic sewing machines and
were classified into the low tier, whereas others owned only two machines, including a more technologically
sophisticated surging unit. Only the latter would have been designated as high tier.
12
The surging machine discussed provides a factory-type finishing stitch where two pieces of material
are joined. Profits were considerably more in the upper tier; a mean log of 7.71 for the low tier as compared
to 8.46.
monitor each others’ feelings. Individuals form the basic building blocks of all organiza-
tions, and determine their relative success.
Organizational psychology continues to provide the principal role in our under-
standing of the individual. For example, Hogan (1991) describes five primary personality
factors used for social functions: neuroticism, extroversion, openness to experience,
conscientiousness, and agreeableness. Much interest has been generated around the
roles of these characteristics in terms of organizational development. In this way, indi-
vidual variation and ability are said to modify and eventually determine the character
of the organizational environment.
Increasingly, evidence suggests that individuals choose to become self-employed
based on preference, rather than necessity (Dennis 1996). Exactly why they make this
choice is still of considerable debate, with factors such as family background, gender,
and psychological characteristics all in evidence in the literature (Matthews and Moser
1995; Begley 1986; Gatewood, Shaver, and Gartner 1995; Hornaday and Aboud 1971).
Nevertheless, not all individuals who decide to be self-employed develop organizations.
Whether by choice, or by necessity, some people continue to work alone. These own-
account workers are considered to occupy a sufficiently different sociological position
as to warrant distinctive categorization and analysis (Dale 1991). Importantly, their indi-
vidual incomes are not exclusively constrained by this decision—as witnessed by the
relatively high incomes of selected actors, musicians, consultants, and lawyers.
In an organization composed of multiple individuals, the leader is provided an op-
portunity to motivate and capitalize on the wealth and breadth of abilities of the other
members. One approach to this study is provided by SYMLOG, allowing for the system-
atic study of individual interaction in a group setting (Bales, Cohen, and Williamson
1979). In an organization of one, the leader is limited to his or her own psychological and
cognitive characteristics, and relative success may be partially attributed to subsequent
individual decision-making in the exogenous environment. The ability to maximize op-
portunity between these frames (those of the individual and the external environments)
may be enhanced through appropriate social processes, shared visions, and “banked”
reciprocity. Although we cannot presently study the exact processes that occur inter-
nally to the actor, we can nonetheless examine outward manifestations of social activity,
in the form of unrelated group membership and exchange. It is in this vein that this
study examines the following hypothesis:
H2: The effects of human, social, and financial capital available to a microentreprise
will have a differential impact on financial performance for firms with employees
versus firms without employees.
METHODS
Respondent Sampling
Two hundred fifty Jamaican informal microentrepreneurs were interviewed at their
business locations during a 6-month period, yielding data for 215 enterprises.13 All inter-
13
Two initial pilot projects were undertaken 1 and 2 years before beginning this study. The survey instru-
ment went through eight formal testing trials. The re-sampling of respondents yielded an extremely high
incidence (95%) of instrument reliability—specifically, respondents provided similar information regarding
the characteristics of their business 1 year after the pilot study was conducted. Further comparisons were
also made with similar surveys in the Jamaican environment conducted by the Statistical Institute of Jamaica
(Statistical Institute of Jamaica 1993). Thirty-five cases were dropped due to missing data, including six entre-
preneurs that refused to participate, yielding 215 firms for this analysis.
382 B. HONIG
views, including pilot surveys, were conducted solely by the author. This technique was
most probably responsible for the high degree of participation and candor by the respon-
dents. The neighborhoods surveyed often included urban ghettos—areas where Cauca-
sians (such as myself) were seen only rarely, mostly as clergy. My presence was clearly
seen as a private, non-governmental function, and only two potential respondents re-
fused to participate in the study.
Informal sector firms are often hesitant or unable to provide accurate financial in-
formation. Perhaps because I was perceived as an outsider, the Jamaican respondents
seemed to be quite forthcoming with financial information, as best they could. Addition-
ally, reticence to disclose personal financial information is a culturally determined char-
acteristic—this study found such reticence absent from the lower and working class Ja-
maicans surveyed. Further financial confirmation was provided by a series of questions
that enabled on-site analysis of income, rather than relying upon an abstract (and possi-
bly inaccurate) figure provided by the respondents. All of the surveys were conducted
at the place of business, where some evidence of income was expected to appear in the
form of tools, machinery, and other inventoried fixed assets. In addition, the respon-
dents were asked questions regarding their private or business ownership of significant
items, such as cars and video recorders, and this information was used to assess the possi-
bility of gross income discrepancies or erroneous reporting. On-site surveys also allowed
for the confirmation of much of the economic data through alternative evidence, such
as the amount of raw material, value of tools and equipment, and extent of foot traffic
in my daily visits to these communities. Thus, whereas self-reporting data should always
be examined with suspicion, there was considerable independent observation and cor-
roboration regarding much of the study.
All microenterprises were classified as “manufacturing and repair,” defined for this
study as producing or repairing goods, except for food items and the construction trades.14
Businesses consisted of tailors, dressmakers, automotive repair (electrical, mechanical,
and body work), upholstery, electronic and appliance repair, tinsmithing, broom and
wicker, wood carving, shoe repair, and bicycle repair.
Micro firms employing less than 10 individuals were studied, utilizing informality
defined as the failure of the firm to comply with Jamaican commercial law, which in-
cludes mandatory deductions for income, unemployment, education, minimum wage
legislation, and business registration.15
By definition it is not possible to randomly select informal sector firms from a master
list as they are by nature unrecorded and undocumented. To examine a selection of firms
that most closely approximated the Jamaican environment, the sample was designed to
reflect each of three populations, urban, urban loan recipients, and semi-rural. This pro-
vided a comprehensive and statistically accurate population and also served to deflect criti-
cism that either an urban or a rural bias was applied.16 A chow test between the urban
14
Although commercial vending is the most prevalent (and itinerant) component of the informal sector,
it was hypothesized that the productive labor market segment would demonstrate the most clearly discernible
variation on the returns to education, due to the additional complexity as well as the range of technolo-
gies used.
15
The term “informal sector” dates back to an interagency employment mission conducted in Kenya
in 1971, with the ILO instrumental in defining and researching the field (King 1977). The lack of institutional
regulation of informal sector microenterprise and its heterogeneity makes this market an ideal location to
study the impact of human and social capital on economic activity. A limit of 10 employees is a size constraint
used by many other researchers.
16
Weighting of the three sample populations was accomplished by using a national microenterprise
survey conducted in 1992 as a baseline (Statistical Institute of Jamaica 1993). Based on 2,392 businesses, the
and rural population yielded and F of 1.45, suggesting that the rural and urban populations
are, in fact, not significant. Because only a few loan recipients were identified in the original
rural and urban sampling frame, selective sampling was conducted by randomly surveying
from the clientele of five loan agencies (requiring a corresponding re-weighting of the
analysis, see footnote 16). A chow test between the group who received loans and those
who did not yielded an F of 1.92, indicating that the differences between the full sample
and the two subregressions are significant.
In the Kingston environs, 147 urban interviews were conducted, of which 64 were
randomly selected from the clientele rosters of credit agencies. Successful loan clientele
were considered important to study, as these were elite recipients of considerable time
and attention on the part of credit agencies.17 Thus, they were thought to include some
of the most “entrepreneurial” of the small firms, at least in the eyes of the five assistance
agencies queried. The remaining 72 urban firms were identified utilizing a geographical
sampling technique, in which all qualifying businesses in specific locations were thor-
oughly surveyed.18 The semi-rural town of Port Antonio was comprehensively sampled,
yielding 79 firms for the analysis.19 Finally, statistical analysis was performed segmenting
all 215 firms studied into two tiers, according to the following methodology. Analysis
was conducted by the size of the firm, comparing businesses with no employees (solo
self-employed) with those that employed one or more individuals.
Variables
The analysis of labor market segments by both the size of the business and the techno-
logical tier utilizes income as a dependent variable, while examining years of experience
as an independent variable. In addition, measures of social capital as well as human
and market capital are used in this analysis.
Because so few individuals from the general population received loans, it was found
necessary to over sample this sub-population. Corresponding re-weighting (under-
weighting, to ensure each credit recipient was valued at its actual population mean of
4.7%) was assigned to the analysis to correct for this bias.
Socioeconomic status of the parent or head of household was inferred according
to occupational characteristics of the parent(s). Coding consisted of sixteen different
occupational groups, which were collapsed into three levels (high, medium, and low),
corresponding to middle strata, petit bourgeoisie, and manual working class (Gordon
1989). Status was operationalized as a dummy variable, indicating the highest level of
urban component was 33%, rural 61%, and loan recipient group 5%. Thus, the loan recipient group of 64
firms was underweighted in the regression to represent 5% of the sample, the rural component of 79 firms
overweighted to represent 61% of the sample. These weights were conducted for additional accuracy—
analysis without the weighting scheme produced, in the main, similar results for the variables under study.
17
Individuals who obtained loans were over sampled by a factor of approximately 20 to obtain a suffi-
ciently robust sample size. They were identified with the assistance of five different organizations that targeted
microentrepreneurs for credit assistance. The remaining sample was re-weighted to compensate utilizing a
4.7% factor, as determined by the most recent survey of microenterprise conducted in Jamaica (Statistical
Institute of Jamaica 1993).
18
Kingston surveys consisted of two geographical areas: Waltham Park road between Spanish Town
Road and Hagley Park Road, bordering Trench Town; and Old Hope Road between Hope Road and Cross
Roads, bordering New Kingston. These areas were identified as providing an abudant source of informal
activity as well as traversing a cross-section of socioeconomic urban conditions.
19
Port Antonio firms were identified through a comprehensive survey of all business areas. Major resi-
dential roads were systematically covered; however, a house-by-house census was not possible due to
time limitations.
384 B. HONIG
mother’s occupational status and father’s occupational status.20 Much sociological re-
search utilizes occupational status as a measure of parental or individual socioeconomic
status (Hout 1984; Breiger 1981). As stated previously, parental marital status was also
recorded as a means of identifying owners from higher socioeconomic backgrounds.
Model Selection
In a segmented labor market, human capital theory will fail to operate in the same man-
ner for all sectors. Thus, a distinction was made between own-account self-employed
microentrepreneurs, and larger firms that employed one or more individuals.
The analysis of labor market segments by technological tier or by firms with or
without employees utilized average monthly income as a dependent variable, and was
expressed with a Mincer-type earnings function (Mincer 1974). To examine entrepre-
neurial labor the model employs a classic human capital equation that relies on years
of schooling and includes a term for experience, socioeconomic status, and social capital.
The equation for this model is as follows:
log Yi 5 bo 1 b1Si 1 SKi1 1 SKi2 1 SESi1 1 SESi2 1 Ki1 1 Ki2 1 b2Ti 1 T 2i 1 E
where Yi is the log of average monthly earnings, Si is a range of dummy variables for
the levels of schooling, Ski1 and Ski2, two measures of social capital, SESi1 and SESi2
measures of socioeconomic status, K1 and K2, variables for starting capital and loans,
and Ti and T 2i are years of experience in the trade or business occupation. This basic
equation was then run on subsets of the sample by high and low technological tier and
by firms that had employees and those that did not.21
FINDINGS
Table 1 presents the mean values, standard deviations, and correlations for the variables
analyzed in the study.
The correlation between high technological tier and average income was .41, about
the same as for high technology and having employees and more than the correlation
of starting capital and income (.30). A strong positive correlation between primary edu-
cation and years in the trade (.28) shows that more experienced, older microentrepren-
eurs, were less likely to have continued with formal education.
When means were examined by groups (Table 2), microentrepreneurs who had
employees were found to require a larger amount of starting capital and enjoyed much
higher average monthly profits. They were more likely to have obtained some form of
credit and had more education in terms of average years, primarily because of the
20
Collapsing the occupational groups was done for two reasons. First, there were insufficient data and
limited degrees of freedom to include all segments. Secondly, the highest occupational groups were predicted
to demonstrate larger effects on income, as a wide body of sociological literature demonstrates (Kerckhoff,
Campbell, and Trott 1982; Strudwick and Foster 1991).
21
As pointed out by Heckman, the residual variability due to unmeasured factors such as motivation
and ability may be biased for the low income earners of a two-tier model (Heckman and Hotz 1986). The
result will yield an apparent improvement over a single equation model, which is not indicative of the actual
underlying processes. By specifying technological complexity instead of income, the model used in this study
allows for a wider variation in wage earning capacity. If (unmeasured) ability and motivation are highly corre-
lated with income, there will be a reduced likelihood of sample selection bias than with models that differenti-
ate segmentation wholly on the basis of income data.
TABLE 1 Means, SD, and Intercorrelations among Variables
Means SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1. Log monthly profit 8.83 1.45
2. Has employees 0.62 0.48 0.41
3. Higher technology 0.39 0.48 0.41 0.41
4. Urban firm 0.41 0.49 0.2 0.23 0.28
5. Received a loan 0.37 0.48 0.18 0.18 0.32 0.2
6. Years in trade 14.36 10.98 20.05 20.006 20.001 0.001 20.04
7. Years in trade sq 367.09 615.32 20.12 20.05 20.01 0.003 20.04 0.92
8. Primary education 0.23 0.42 0.07 0.005 0.03 0 0.01 0.28 0.18
9. HS education 0.26 0.44 0.11 0.09 0.11 20.09 0.03 20.16 20.1 20.33
10. College education 0.08 0.27 0.1 0.06 0.04 0.08 0.11 20.14 20.09 20.11 20.11
11. Nonformal education 0.23 0.42 0.1 0.07 0.18 0.13 0.08 20.09 0.02 20.14 0.17 0.16
12. Ever married 0.34 0.47 0.07 0.05 0.02 0.03 0.19 0.21 0.13 0.16 20.12 0.09 20.004
13. Semi-weekly church 0.14 0.35 0.01 20.002 0.03 20.04 0.24 0.03 20.01 0.18 20.07 20.02 0.15 0.28
14. Gender 0.28 0.45 20.16 20.04 20.06 20.03 0.19 20.12 20.08 20.05 0.07 0.18 0.35 0.16 0.21
15. Log starting capital 8.06 0.83 0.3 0.23 0.24 0.19 0.14 0.07 0.05 20.04 0.12 0.02 0.13 0.08 20.01 0.08
16. Mother’s high status 0.06 0.24 0.18 0.06 0.12 0.03 0.14 20.12 20.08 20.11 0.12 0.18 20.007 20.03 20.06 0 0.15
17. Father’s high status 0.09 0.28 0.06 20.05 0.02 0.04 0.06 20.01 20.02 20.07 20.1 0.23 0.02 0.24 20.006 0.02 20.1 0.06
18. Parents ever married 0.4 0.49 0.14 0.2 0.09 0.21 0.13 0.07 0.07 20.01 0.14 0.01 0.07 0.03 0.01 0.002 0.14 0.05 20.01
Coefficients greater than 0.035 are significant at p , .001; . 0.025 are significant at p , .05.
SUCCESS IN JAMAICAN MICROENTERPRISE
385
386 B. HONIG
TABLE 2 Means, t-Scores, and Chi-Square Grouped by Firms With or Without Employees:
Selected Variables of Jamaican Microentrepreneurs
Mean without Mean with
Variables Means SD Employees Employees t-Test Chi-Square
Log starting capital 8.83 1.45 8.33 9.07 23.64 d
Log profit 8.06 0.83 7.55 8.31 27.41d

Received a loana 0.37c 0.48 0.27 0.41 9.32d
Years trade experience 14.36 10.98 14.85 14.11 0.49
Number of employees 2.17 1.93 0 2.58 27.83d
Genderb 1 5 female, 0 5 male 0.28 0.45 0.33 0.24 39.09d
Age in years 39.28 11.43 41.3 38.2 1.99b
Primarya 0.23 0.42 0.22 0.23 74.77d
Jr. secondarya (referent) 0.43 0.50 0.53 0.37 3.46b
High schoola 0.26 0.44 0.22 0.28 53.53d
Collegea 0.08 0.27 0.02 0.10 149.80d
Nonformal/vocationala 0.23 0.42 0.21 0.24 63.71d
Ever marrieda 0.34 0.47 0.29 0.35 17.0d
Parents ever marrieda 0.40 0.49 0.27 0.46 8.56d
Mother high occupationa 0.06 0.24 0.04 0.06 169.98d
Father high occupationa 0.09 0.28 0.09 0.08 146.56d
Semiweekly churcha 0.14 0.35 0.17 0.12 116.12d
a
Dummy variable.
b
Significance p , 0.1.
c
d
greater participation at the high school and college levels. There was a higher represen-
tation of females in the group with employees than in the group without employees.
In addition, the latter were less likely to be married and less likely to have received a
loan for their business.
The first baseline OLS regression model analyzes the average monthly income for
the entire sample of microentrepreneurs, irrespective of tier or size. Subsequent models
compare between self-employed (without employees) and larger firms (Table 3) and
between low and high technological tiers (Table 4).
A chow test conducted on the model displays a significant F statistic of 3.34, indicat-
ing that the groups should not be combined because they are so different as to make
pooled results meaningless. Starting capital and most educational variables were posi-
tive and statistically significant across the entire sample, as well as between firms with
and without employees, supporting findings by other researchers.22 The coefficient was
interpreted as a constant elasticity due to the log-linear form. Thus, for firms without
employees, a 1% increase in starting capital resulted in a 16% increase in monthly
profits, and a 10% increase for businesses with employees. Receiving a business loan
was also a strong indicator of financial success and was a particularly strong variable
for the solo self-employed, whose incomes were 64% higher as a result. Both social
capital variables, semiweekly church attendance, and marital status of the entrepreneur
demonstrated a positive relationship to profits. Being married increased incomes 20%
for the self-employed only and 15% for those with employees. Having a mother of high
occupational status resulted in incomes 42% and 14% higher, respectively; a father’s
high status increased incomes 42% and 28% for those with employees.
22
See, for example, Cooper, Gimeno-Gascon, and Woo (1994) for empirical evidence of human capital
on business success.
TABLE 3 Regression Analysis of Log of Monthly Income for Jamaican Informal Sector: Full
Sample and Firms with and without Employees
Variables All Cases Without Employees With Employees
c c
Years experience in field/business 0.040 (0.002) 0.035 (0.004) 0.043c (0.004)
Years in business/experience squared 20.001c (6.02E205) 28.87E204c (7.89E205) 20.001 (1.11E204)
(L) Starting capital 0.144c (0.007) 0.166c (0.011) 0.100c (0.008)
Received a loan 0.274c (0.026) 0.647c (0.060) 0.164c (0.027)
Nonformal/vocational ed. 0.294c (0.027) 0.283 c
(0.056) 0.326b (0.028)
Primary school 6 years or less 0.298c (0.024) 20.034 (0.042) 0.344c (0.027)
High school 10–11 years 0.314c (0.023) 0.230c (0.043) 0.188 (0.027)
College 12 or more years 0.762b (0.059) 20.800b (0.331) 0.606c (0.058)
Semiweekly church attendance 0.083c (0.031) 0.083 (0.054) 0.061a (0.036)
Marital status 0.131c (0.022) 0.202c (0.039) 0.147c (0.025)
Parent’s marital status 0.156c (0.020) 20.343c (0.039) 0.282c (0.021)
Gender male 5 0; female 5 1 20.599c (0.024) 20.992c (0.044) 20.344c (0.028)
Mother’s high occupational status 0.383c (0.048) 0.426c (0.100) 0.147c (0.025)
Father’s high occupational status 0.142b (0.036) 0.424c (0.051) 0.282c (0.021)
Intercept 6.14c (0.061) 5.98c (0.091) 6.61c (0.082)
F 117.0c 83.21c 91.91c
Adjusted R2 0.339 0.382 0.278
n 215 70 144
a
p , 0.1.
b
p , 0.05.
c
p , 0.01.
Beta (standard error).
TABLE 4 Regression Analysis of Log of Monthly Income for Jamaican Informal Sector: Full
Sample, Low, and High Technological Tiers
Low High
Variables All Cases Technological Tier Technological Tier
Years experience in field/business 0.040c (0.002) 0.036c (29.43E204) 0.035c (0.006)
Years in business/experience squared 20.001 (6.02E205) 29.43E204 (6.74E205) 20.001c (1.65E204)
c c
(L) Starting capital 0.144c (0.007) 0.204c (0.009) 0.007 (0.010)

Received a loan c
0.274 (0.026) 0.363c (0.044) 20.003 (0.032)
Nonformal/vocational ed. 0.294c (0.027) 0.505c (0.043) 0.185c (0.034)
c c
Primary school 6 years or less 0.298 (0.024) 0.180 (0.031) 0.258c (0.036)
High school 10–11 years 0.314c (0.023) 0.317c (0.031) 0.095 (0.036)
College 12 or more years 0.762b (0.059) 0.177b (0.084) 0.976c (0.079)
Semiweekly church attendance 0.083c (0.031) 0.172c (0.041) 20.158c (0.045)
Marital status 0.131c (0.022) 0.137c (0.027) 0.302c (0.034)
Parent’s marital status 0.156c (0.020) 20.091c (0.026) 0.341c (0.028)
Gender male 5 0; female 5 1 20.599c (0.024) 20.818c (0.033) 20.316c (0.041)
Mother’s high occupational status 0.383c (0.048) 0.519c (0.080) 0.181c (0.054)
Father’s high occupational status 0.142b (0.036) 0.364c (0.047) 20.157b (0.052)
Intercept 6.14c (0.061) 5.66c (0.076) 7.71c (0.125)
F 183.4c 117.0c 56.11c
Adjusted R2 0.327 0.339 0.276
n 215 105 109
a
p , 0.1.
b
p , 0.05.
c
p , 0.01.
Beta (standard error).
388 B. HONIG
Finally, education appears to have different outcomes with the two different
groups. Owners with employees appeared to be bimodal, capitalizing on either primary
education or college education. Owners without employees took advantage of both the
jr. secondary referent, and high school, failing to capitalize on a college education.
In sum, the financial, human capital, and social status variables were found to vary
considerably between the two groups. These findings support H2 in that the effects of
human, social, and financial capital available to a microentreprise were found to have
a differential impact on the financial performance for firms with employees versus firms
without employees.
There were only minor differences between the remaining coefficients of the re-
gressions for owners with versus those without employees. Semiweekly church atten-
dance was positive (but weak) for firms with employees, but not statistically significant
for those without. Finally, parents’ marital status was strongly negative for those without
employees, and strongly positive for those with employees.
In Table 4, the businesses are grouped by technological sophistication into a high
technological tier and a low tier. A chow test conducted on the model displays a signifi-
cant F statistic of 2.43, indicating that the groups should not be combined because they
are so different as to make pooled results meaningless.
In the higher technological tier, the variation in starting capital has little effect on
profits, whereas each 1% increase in the lower tier results in a 20% increase in average
monthly income. This relationship also holds true for loans, which seem to assist in the
low tier, but not in the high technological tier. Education, in the higher tier, had out-
comes similar to the other models. Vocational education continues to provide a positive
and significant coefficient, increasing incomes by as much as 50% in the low tier and
18% in the high tier. College nearly doubles incomes in the high tier, whereas the pri-
mary school continues to provide an advantage of 18% to 26%, respectively, over the jr.
secondary school referent. High school-educated microentrepreneurs earn 31% more in
the lower tier, but fail to appreciate any differences in the high tier, where returns to
college are particularly high. Marital status, as predicted, shows a positive return of 13%
and 30%, respectively, although the relationship is negative for parent’s marital status
in the low tier. Females, overall, earned less money than men; however the differences
were less apparent in the high technological tier (31% less) than in the low one (81%
less). The findings thus clearly support H1: The effects of human, social, and financial
capital available to the microentreprises were found to have a differential impact on
financial performance for firms in high versus low technology tiers.
DISCUSSION
This study shows the importance of considering heterogeneity when examining informal
sector microentrepreneurship, as well as the influence of critical human capital and so-
cial capital variables. The first model, examining the difference between the solo self-
employed and those with employees, shows the importance of higher levels of educa-
tion, in particular college, when operating a complex business that involves multiple
actors.
The regression for the full model demonstrated significant relationships from a
range of human, social, and financial variables, explaining more than 30% of the differ-
ences of incomes between firms. Social capital variables based on marriage and church
attendance, as well as socioeconomic and human capital factors, were found to increase
average incomes.
When solo self-employed were compared with those who had employees, slightly
different human capital relationships emerged. For firms with employees, a college edu-
cation was shown to be both statistically significant and very positive—for those without
employees, it was statistically significant and very negative. This finding may be the re-
sult of individuals seeking higher returns to human capital by self-selecting themselves
into businesses that have a certain amount of market potential or may simply reflect
favorable returns to higher cognitive skills introduced at the college level. Another pos-
sibility is that the relationship between business size and college education reflects the
social status of the microentrepreneur—the additional starting capital, parental occupa-
tional, and marital status, and the owner’s marital status, all suggest a higher socioeco-
nomic background. What, then, accounts for the negative relationship between college
and the solo self-employed? Perhaps it reflects the “seriousness” of the activity—those
with college degrees that owned businesses without employees may simply have been
waiting for a better opportunity, whereas those with employees may have considered
their enterprises from a more strategic viewpoint.
Although there was confirmation regarding the importance of social capital, the
outcome was not precisely as anticipated. In both segments, individuals who were mar-
ried earned higher incomes, and the coefficient is somewhat larger among the solo self-
employed versus those with employees. With semiweekly church attendance, however,
the effects were consistently positive, but statistically insignificant for the individual
workers. Thus, we can see that social capital, particularly marital status, was a good
predictor of income, controlling for other human capital factors; however, the relation-
ship between structural constraints and returns to social capital may vary in unantici-
pated ways. Subsequent research is required to understand these complex processes
better.
Considering gender, women earned less than men, although the gap was not as wide
for the larger firms. The finding regarding female income is matched by many studies;
however, the greater equalizing effects for larger firms is worthy of note, and somewhat
encouraging. It is difficult to determine from this analysis whether the narrower gap
is due to selection bias or to other aspects of the social or economic structure. Parental
occupational status was also positively associated with profits, as was marital status. An
exception to this was with owners who did not have employees, where there was a nega-
tive relationship between parental marital status and income.
The second measure of heterogeneity regarded the technological tiers, as provided
in Table 4. Marital status, a form of social capital, was consistently positive across the
tiers. Social capital as defined by frequent church attendance, however, has a negative
coefficient in the high tier model. Perhaps this is due to the nature of the technologically
more complex market exploited by these microentrepreneurs. Rather than focus on
community markets and resources, these individuals may be operating in a larger more
bureaucratic or competitive environment. The advantages provided by maintaining
close associations with community groups may be lost on individuals aiming their pro-
duction at wholesale and export markets. Indeed, discussions with a number of these
individuals highlighted the importance of obtaining special export and import licenses,
negotiating with unfamiliar and successful business owners, and generally operating in
a “cold call” environment. Socioeconomic background maintains a strong positive effect
in the high tier, but the relationship may be more related to social status and credibility.
390 B. HONIG
As can be observed, those individuals who maintained an active church life appeared
to be penalized in terms of financial profit, and the relationship between fathers’ occupa-
tional status and income was negative as well. This may have been due to the absolute
amount of time necessary to maintain a fully active church life in Jamaica (it was consid-
erable). Those entrepreneurs in the high tier may have literally paid for their religious
activities as an additional opportunity cost.
We would expect that larger amounts of starting capital should provide an advan-
tage regarding the range, quality, and technological capacity of the business. So should
obtaining a small business loan. The result should be a competitive advantage from capi-
tal providing higher quality and greater productivity. The failure of starting capital or
loans to show significant effects on income in the high tier was an unexpected finding.
Perhaps, microentrepreneurs who have already crossed into the higher technological
tier are less constrained by resource limitations than the more marginalized low tier
firms. More probably, they are in a better position to mobilize social resources, as well
as alternative sources of finance and capital that did not show up as loans, such as sup-
plier credit. In addition, they may be situated in a better position with which to capitalize
on human capital characteristics due to the relative technological complexity of their
firms. Both the smaller and larger businesses seem to benefit from increasing amounts
of starting capital and from loans.
Education, also, seemed to assist in the profitability of the firm, with a few major
exceptions. While vocational education and college education were mostly found to in-
crease incomes, those individuals with only primary educations fared better than the
referent group, who had jr. secondary school attendance. Here, the advantages to addi-
tional work experience may have outweighed the returns to conventional formal educa-
tion. An argument can be made that for many microentrepreneurs, basic literacy and
numeracy are important to their day to day operations, whereas more advanced studies
may be somewhat esoteric and provide little economic advantage.
Developing countries are characterized by weak and inefficient markets, with in-
complete information and considerable barriers to entry. Such an environment would
seem inhospitable to entrepreneurship. Yet, despite the difficulties, self-employment
growth in the informal sector continues to be among the most vibrant components of
labor markets in developing countries. This growth is in marked contrast with the gov-
ernment sector, where structural adjustment policies mandate downsizing and privatiza-
tion. Small business owners who succeed in such infertile territory represent some of
the most readily observable entrepreneurial activities. They enable the examination of
a wide range of market interactions and provide a wealth of information relevant to
enterprise promotion schemes in economically backward areas of many urban devel-
oped countries, including locations in the United States.
This study of Jamaican entrepreneurship provides a number of specific variables
useful to practitioners who are engaged in promoting or supporting small-scale enter-
prise in marginal market environments. Whereas human capital demonstrated generally
favorable returns to the profitability of the businesses, it was not universal. High school
education failed to enhance the income of microentrepreneurs who owned larger busi-
nesses or businesses of a higher technological level. For these groups, college education
was found to be most beneficial. Socioeconomic status seemed to be a good predictor
of success in terms of income levels. Measured by parent’s occupational and marital
status, as well as the owners’ marital status, it consistently provided higher incomes,
controlling for the other variables used. Exactly how socioeconomic status effects suc-
cess remains a subject for further study, but is certain to be of interest to researchers
of the subject.
Social capital, as operationalized by very frequent church attendance and marital
status, was found to be quite influential for most of the segments. Should it be demon-
strated that there are corollaries in other environments (as the literature on both ethnic
enclaves and networks strongly suggest), the implications for entrepreneurship research
are considerable. Social capital may help explain other findings, highlighting variations
in self-employment participation according to gender and race (Aldrich and Waldinger
1990; Bates 1995). Developing and promoting community cohesion may prove as instru-
mental to entrepreneurial success as any other sort of educational or institutional inter-
vention.
This research shows that some market environments reward specific types of social
capital, such as marital status, whereas others may actually penalize it—as was observed
in the higher technological tier with church attendance. Because Jamaica is quite typical
of a middle level developing country, these findings suggest that community develop-
ment strategies offer unexpected benefits to individual entrepreneurs and may be of
interest to a broad range of urban development scholars. On a cautionary note, however,
social capital is certain to be culturally rooted, and thus some of the particular findings
of this study may lack generalizability. As previously discussed, Jamaica has a compara-
tively weak family structure. How would social capital play out in a society characterized
by strong relationships? How might it play in a cultural environment noted as highly
entrepreneurial? Further research regarding the relationship between social capital and
entrepreneurship is both warranted and necessary, to better understand these dynamic
aspects of organizational activity.
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WHAT DETERMINES

This research examines the performance of 215 informal microenterprises

Journal of Business Venturing 13, 371–394

tant, or is practical experience more helpful? Is success governed by constraints on start-

FINANCIAL CAPITAL AND THE MICROENTREPRENEUR

HUMAN CAPITAL AND MICROENTERPRISE

Human Capital Model

Human Capital Variables

SOCIAL CAPITAL AND THE MICROENTREPRENEUR

OPERATIONALIZING SOCIAL CAPITAL

LABOR MARKET SEGMENTATION

opportunity, as well as those who utilize management and entrepreneurial abilities to

VARIABLE SPECIFICATION FOR TECHNOLOGICAL

personal, and manipulative tasks, or an autonomy-control dimension that examines the

EMPLOYERS AND OWN-ACCOUNT ENTERPRISES

Log profit 8.06 0.83 7.55 8.31 27.41d

(L) Starting capital 0.144c (0.007) 0.204c (0.009) 0.007 (0.010)

Bright, J. 1966. The Relationship of Increasing Automation to Skill Requirements. Washington,

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