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2007 AEC - Determinants of Entrepreneurial Activities and Returns: Evidence from The Gambia
Small, non-farm enterprises have long been considered an important source of income for poor households and therefore potentially very important for reducing poverty and contributing to economic growth. However, their poverty-reduction role depends critically on their generation of high returns. Using two nationally representative household surveys from The Gambia, this paper investigates the determinants of entrepreneurship and investment and also estimates the returns to capital for enterprises. I find that household wealth is a significant determinant of entrepreneurship and investment, suggesting the poor functioning of credit markets in the country. I also found that the returns to investments are very low. Rates of returns are negatively correlated with weather risk. This is consistent with the view that a significant motivation for owning small enterprises for most households is to help them mitigate risk inherent in their main livelihood, which is rain-fed agriculture. Households are apparently willing to tolerate low returns in enterprises in exchange for low income variability.