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Massachusetts Institute of Technology Legatum center for development & entrepreneurship

Legatum Center Blog

Below is an article from the Legatum Center

Want to Boost Global Economic Growth? Unleash the Power of Women Entrepreneurs

As the world braces for massive economic decline resulting from the COVID-19 pandemic, women entrepreneurs are among the greatest untapped forces for economic growth and innovation. If men and women participated equally as entrepreneurs, global GDP could increase by 6%, boosting the world economy by up to $5 trillion. (See figure.) In the wake of the pandemic, the urgency to close the entrepreneurship gender gap is an imperative now more than ever. Considering we will need new and innovative solutions to address challenges we haven’t even yet conceived of, it is essential to underscore that women bring different skills and perspectives to the workplace than men, including different attitudes to risk and collaboration. Put simply, increasing women’s participation in the economy would reap larger economic gains than an equivalent increase in male participation.

Beyond economic benefits, recent studies have found that women entrepreneurs – more so than their male counterparts – are driven by the motivation of making a difference in the world.  As jobs in emerging economies become even scarcer, we can expect to see more and more women turning toward entrepreneurship to earn a living. With the right factors in play, women entrepreneurs could become a pivotal force in driving the diversified economic growth desperately needed in emerging economies, as well as the innovation needed to respond in the post-pandemic world.

Ultimate success requires access to capital and influential networks to propel growth – the same qualities that build market-leading companies.  Globally, women-owned businesses (WOBs) garner only 7% of funding from private equity (PE) and venture capital (VC) firms.   In emerging economies, WOBs comprise just 28 percent of business establishments, namely small and medium enterprises (SMEs). More than 70% of these SMEs have no access to financial institutions or are unable to receive financial services on adequate terms to meet their needs.

If we want to affect systemic change in the inclusion of women entrepreneurs at all levels of the economy, then we need to transform the entrepreneurship ecosystem. This requires looking beyond the micro-level toward the meso- and macro-level wherein women entrepreneurs can grow larger enterprises and fill critical value chain gaps in emerging markets and traditionally male-dominated industries – a space where innovation and risk capital is most needed, and where the barriers to entry for women are great but the rewards even greater.

A recent study of women in male-dominated industries found that companies with the highest percentage of women were 47 percent more profitable than those with the lowest. Among the industries with great potential for increased participation from WOBs are consumer goods, energy, technology, and finance.  “We are investing in women-led tech companies in the MENA region because they deliver high financial returns and are often undervalued,” says Heather Henyon, founding general partner of Mindshift Capital, which invests in women-led tech startups.

A growing body of research shows that women are even better at high-growth entrepreneurship than men. Women achieve higher returns and use capital more efficiently than men – a striking consideration for post-pandemic investors who will likely trade-off potential cash-guzzlers in favor of companies that deliver reliable profits and sustainable growth. The Kauffman Foundation showed that women-led tech companies in the US, for example, have a 35 percent higher return on investment; and those with venture-backing generate 12 percent higher returns than male-run tech companies. Women entrepreneurs, moreover, bring in 20% more revenue with 50% less money invested.

In recent years, we’ve seen the emergence of investment funds seeking to address the gender funding gap and reap higher returns from women-led start-ups. In 2018, a consortium of women fund managers launched The Billion Dollar Fund for Women (TBDF) – a global campaign investing in women-founded companies. Within the first month, TBDF raised more than $500 million in capital. In MENA alone, TBDF secured $70 million in pledges from VC firms Mindshift Capital and Global Ventures in Dubai, and Flat6labs in Cairo.

While we see laudable efforts to invest in women entrepreneurs globally, we need much more of it and we need it faster. We know this requires broader adoption of gender-lens investing. Perhaps more important, however, is the need for more women at the decision-making table at lending and investment institutions.

The IFC reports that women only hold 10 percent of senior positions in PE and VC firms globally. Meanwhile, female partners have been found to invest in female entrepreneurs twice as often as male partners; and gender-balanced investment teams generate 10-20 percent higher returns and 25 percent greater valuation increases.

The representation of women in financial institutions is likewise disappointing, even in the most developed economies.  In the US, women make up less than 10% of all fund managers and just a handful of CEOs at major banks. If we want to see the needs and preferences of WOBs reflected in the marketplace then women must be involved in financial product design and service delivery.  In East Asia, for example, where women have particularly high levels of representation in management ranks in central banks, the region enjoys the lowest gender gap in financial access.

Put simply, the more women at the investors table and running financial institutions, the more WOBs are funded and the pipeline of women-run companies grows.  This level of change will require concerted and coordinated long-term effort among a variety of stakeholders, including policymakers, companies, investors, industry associations, and NGOs. In the meantime, these stakeholders must step forward to pursue disruptive and transformational action to accelerate change.

In Sept 2019, for example, Egypt’s Financial Regulatory Authority (FRA) announced a new rule requiring women’s representation on the board of publicly listed companies and non-bank financial institutions. The FRA explained the rationale behind this move was to improve Egypt’s ranking in the World Bank’s Ease of Doing Business Index as part of its strategy to boost growth through women’s economic empowerment. Though this seemed like a bold move for a country ranked among the lowest in the world for gender equality, it’s a no-brainer considering the numbers. The FRA’s announcement cited a study of 2100 Egyptian companies showing that those with women board members and a workforce that is at least 25 percent female, achieved more than double growth in profits. Egypt also stands to gain 32 percent in GDP by closing the gender gap in its workforce.

These types of disruptive measures are needed to send a strong message to companies, investors, and governments that investing in women makes unequivocal economic sense and the time for doing so is now. Throughout emerging economies we’ve seen an increase in accelerator programs, business incubators, and gender-lens investing, but more needs to be done.  We need to dismantle the old boys’ club and give women entrepreneurs access to previously off-limit male spaces where business relationships are cultivated, deals are negotiated, and women can share the spotlight with their male counterparts. Women also need more peer-to-peer networks, not only because they encourage women to set higher aspirations for their businesses, plan for growth, and embrace innovation, but because advocating for each other is how we change the power paradigm.

Closing the entrepreneurship gender gap requires a radical transformation of the entrepreneurship ecosystem, and intentional approaches to open up male-dominated industries and networks to women.  If we want to unlock new sources of economic growth, which we need now more than ever, not only do we need more investments in women entrepreneurs, we need more women in charge of how those investments are made.

Written by: Delila Khaled, international development expert and entrepreneur specializing in financial inclusion, women’s economic empowerment and equality, urbanization, and basic services.

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