The World Bank’s World Development Report 2014 will focus on ‘Managing Risk for Development’. As the Bank frames it in a concept note, “responsible and efficient risk management is crucial not only to reduce the negative impacts of shocks and hazards but also to enable individuals, households, and entrepreneurs to pursue new opportunities for growth and prosperity”.
The recognition of entrepreneurs as a category of agents, whose decisions are influenced by shocks and hazards, is part of a growing recognition of the role, both positive and negative, of entrepreneurs in development – see for instance my 2010 overview paper in the Small Business Economics Journal. One particular risk that entrepreneurs face in most fragile states is that of violent conflict. How can entrepreneurs manage the risk and impacts of violent conflict?
This is a non-trivial question: helping small firms cope with and manage risks of violent conflict is important for development – both before, during and after conflict. Until fairly recently policy makers, donors, peace keepers and academics were however limited by the lack of data and research on the coping mechanisms of small indigenous entrepreneurs in environments of conflict (most research to date has focused on the relationship between multinational enterprises and conflict). In particular, data was lacking on how precisely the risks of violent conflict affect small businesses across the various stages of business development: from start-up, formality, growth, internationalization, transfer and failure / closure. Furthermore, approaches based on firm coping in the face of other shocks, such as those caused by natural disasters, is of limited use in understanding firm coping in the light of risk of violent conflict, given that the risks in the latter are quite different from the risks inherent in normal business or risks related to natural hazards. For one, conflict can be more persistent, and two, conflict-shocks often generate more conflict in return, unlike naturally occurring disasters.
Two recent journal special issues tried to address this vacuum in the research literature by gathering quantitative and qualitative studies on entrepreneurship and violent conflict in fragile states. The findings contained in these journals go some way to answering the question raised above: How can entrepreneurs manage the risk and impacts of violent conflict? I will focus here on three key lessons (for more details the interested reader should view the two special journal issues listed below under ‘further reading’).
First, it is helpful if entrepreneurs can themselves understand the impact that violent conflict has on their and other businesses. The impacts of violent conflict include the destruction of infrastructure, expenditure diverted to the military, as well as the much higher indirect costs of disrupted markets and increased risk and uncertainty. Violent conflict is thus bad for business and bad for entrepreneurship. Destroyed infrastructure, insecure property rights or falling consumer demand all increase transaction costs and the ease of doing business. It also diminishes productivity and increases the constraints underlying entrepreneurial decisions, while hindering international entrepreneurship as the latter depend on reliable access of transport and logistical infrastructure, often the first to be damaged in a war. This is all well-understood. What is less well understood is that the impacts of such violent conflict tend to vary – depending on the type of firm, ownership, location, and the stage at which the firm is in its lifecycle. Hence some companies can be positively affected, and some negatively. The diagram below sums up the salient impacts of violent conflict on firms across their lifecycles.
A second requirement for entrepreneurs to manage the risks and impacts of violent conflict is to simplify business processes and products and to diversify supply chains. This implies good management skills! Often good managers or entrepreneurs find ways to produce the same good or service but using locally rather than globally sourced inputs, and to shift their sources cleverly around the frontier of conflict-affected areas. The social networks, experience, access and use of information, forward planning and management capabilities of entrepreneurs are important factors contributing to the survival of firms during civil conflict. For post-conflict reconstruction it should however be kept in mind that such ‘innovative’ adjustments can come with a longer-term cost: Paul Collier and Marguerite Duponchel described this as “forgetting by not doing”. Development of management skills and investment in human capital and technological upgrading are thus important bulwarks before and after conflict.
Third, keeping business in the family is often a smart recourse for firms planning on surviving the war. Within such firms issues of trust, uncertainty and investment are dealt with in ways that internalize conflict risks. Often however, firms get hamstrung by this when women face discrimination in markets and society, as women tend to take over the reins in many firms during periods of civil war. Empowerment of women, boosting of female entrepreneurship and understanding family business better could thus be potent instruments to manage the risk of conflict and facilitate firm survival and recovery.
If the primary goal of firms affected by violent conflict or the risks of violent conflict is survival through the above three points of advice then that may itself be good: there is a body of research that confirms a ‘phoenix’ effect, of firms that have managed to survive experiencing a rebound after peace is established. But this is not automatic: often the (adverse) coping mechanisms that ensure survival during conflict is ill-suited for a peace economy; and often business interests built up during the war continue to dominate and crowd-out competition after the war.
Ultimately though, addressing the deep issues of fragile states, and institutional weaknesses, also in the West, that perpetuate these environments, offers the best prospects for managing the risks of violent conflict that not only entrepreneurs, but also individuals and households face in countries that are presently home to almost a billion people.
Further reading: Special Issue of the Journal of Small Business and Entrepreneurship (2011, vol. 24, no. 2), and the Special Issue of the Journal of Conflict Resolution (2013, Vol. 57, no.1) edited by Wim Naudé, Tilman Brück and Philip Verwimp.
by Wim Naudé, Professorial Fellow at UNU-MERIT and the Maastricht Graduate School of Governance and Dean of the Maastricht School of Management.
Images: IRIN / George Kurian. UN Photo / Tobin Jones / Martine Perret.
Source: UNU-MERIT blog, 8 January 2013