Innovative Support of Pro-poor Innovation: Lessons from India

Sonne, Lina (2011). "Innovative Support of Pro-poor Innovation: Lessons from India" Paper presented at the 8th annual conference of the HDCA, 6-8 September 2011, the Hague, the Netherlands.

Most rural poor are entrepreneurs out of necessity (Lingelbach et al., 2005) and therefore unlikely to have the capacity to take on risks associated with scaling up to make a real impact on the rural economy. A few, generally those that are relatively less poor, are opportunity entrepreneurs pursuing a profitable business, innovating and a looking to grow. These growth focussed innovative entrepreneurs are likely to have a large indirect effect on the poor by providing livelihood opportunities as well as improved goods and services. One of the vital factors influencing and supporting entrepreneurship is finance (UNDP, 2004). Beck and Demirguc-Kunt (2008) note that indirect effects of supporting innovative entrepreneurs may have a higher poverty-alleviating effect than direct targeting through, for instance, microcredit. Turning to India, the Indian banking system does not efficiently support such rural pro-poor entrepreneur-based innovation. Instead, a pioneering alternative financing sector has been emerging recently. There are three broad categories of organisations in this sector: grassroots innovators and incubators, micro venture capital firms, and small-scale financiers beyond microfinance. Together they complement each other and form a system of finance for different types of rural entrepreneur-based innovation. This paper presents one case study of each category of pioneering organisations that support, financially and non-financially, pro-poor innovation in different but complementary ways. These are micro venture capital firm Aavishkaar, facilitator S3IDF and rural innovation incubator Villgro. The discussion of these case studies suggests that there is a move away from microfinance and self-help groups as the all-encompassing solution to rural pro-poor finance among these organisations. Instead the focus is on how to support rural ventures, entrepreneurs and innovation. An eco-system of different innovation support has sprung up- including finance among other services, rather than exclusively relying on finance. There is a recognition that there are different kinds of needs within rural areas. For example, those involved in small-scale livelihood promotion work differently to those supporting innovation through micro venture capital. These organisations are supporting rural innovation but at different extremes, for different kinds of entrepreneurship with different models or instruments of support. Such heterogeneous rural finance needs an enabling environment and supportive policies by government which allows the organisations to retain the flexibility in the provision of finance for innovation and entrepreneurship that they currently have, something that the final section of this paper will discuss. The paper is based on the empirical and policy chapters of a PhD thesis on financing pro-poor entrepreneur-based innovation in India
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