Connecting Poverty to Purchase in Informal Markets

• Date: 01 March 2014
• Author: Heather Esper,Ted London,Geoffrey M. Kistruck,Andrew Grogan‐Kaylor
• Published date: 01 March 2014
• DOI: http://doi.org/10.1002/sej.1173

CONNECTING POVERTY TO PURCHASE IN

INFORMAL MARKETS

TED LONDON,1,2* HEATHER ESPER,1ANDREW GROGAN-KAYLOR,3and

GEOFFREY M. KISTRUCK4

1William Davidson Institute, University of Michigan, Ann Arbor, Michigan,

U.S.A.

2Ross School of Business, University of Michigan, Ann Arbor, Michigan, U.S.A.

3School of Social Work, University of Michigan, Ann Arbor, Michigan, U.S.A.

4Schulich School of Business, York University, Toronto, Canada

Base-of-the-Pyramid (BoP) enterprises seek to serve impoverished customers in informal

markets. While BoP enterprises have grown in prominence, comparatively little multidimen-

sional theoretical work has explored why these customers ultimately elect to purchase their

products. Using a sample of 555 potential customers in rural India, our results indicate that the

influence of different dimensions of poverty on likelihood of purchaseis largely a function of the

strength of the formal institutional environment. Specifically, stronger formal institutional

environments can act as both a complement to, and a substitute for, the influence of individual-

and network-level norms on purchasing decisions in informal markets. Copyright © 2014

Strategic Management Society.

INTRODUCTION

Base-of-the-Pyramid (BoP) enterprises are organiza-

tions that seek to be economically sustainable and

contribute to alleviating poverty by creating new

transactional linkages between formal and informal

markets (Godfrey, 2011; Kistruck et al., 2012a;

London, Anupindi, and Sheth, 2010; London and

Hart, 2011). We define informal markets as markets

where transactions are largely guided by norms,

values, and tradition rather than formal rules and

laws (London and Hart, 2004; Mair, Marti, and

Ventresca,2012; Webb et al., 2012). BoP enterprises

often accomplish this dual mission by introducing

lower priced or previously unavailable products and

services to impoverished individuals within informal

markets (Prahalad, 2005). For example, Sanergy is

a BoP enterprise based in Kenya that provides

low-cost sanitation services to people living in urban

slums who lack affordable access to clean toilets

(Esper, London, and Kanchwala, 2013). Sanergy’s

objective is to help decrease the nearly 1.7 million

deaths that occur each year worldwide as a result

of diseases associated with improper sanitation

(Sanergy, 2013). To accomplish this, Sanergy seeks

to generate sufficient profits from the sale of its ser-

vices to scale across Kenya as well as to other urban

slums throughout Africa.

While BoP enterprises can certainly link formal

with informal markets by purchasing goods from

impoverished individuals, a great deal of practical

and academic focus has been on how such enterprises

can provide socially valuable products to impover-

ished individuals (London et al., 2010; London and

Hart, 2011; Webb et al., 2009a). This consumer

segment, referred to as the BoP, live in deep po-

verty with an annual per capita income of less than

$3,000 in purchasing power parity (Hammond et al.,

2007; London et al., 2010). Furthermore, such indi-

viduals typically purchase goods and services from

subsistence-oriented microenterprises that are not

Keywords: base of the pyramid; informal markets; povertyalle-

viation; institutional environment; informal economy; poverty

*Correspondence to: Ted London, 724 E. University Ave.,

Wyly Hall, Ann Arbor, MI 48109, U.S.A. E-mail: tlondon@

umich.edu

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 8: 37–55 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1173

Copyright © 2014 Strategic Management Society

formally registered with the government (de Soto,

2000; Godfrey, 2011).As such, they transact within

the informal economy, which is defined as the subset

of the economy where businesses operate illegally in

that they do not adhere to established laws and regu-

lations, yet are perceived as legitimate by large

groups in a particular society in that they adhere to

specified norms (Webb et al., 2009b). Thus, the

buying habits of BoP consumers are often influenced

by norms and cultural traditions in addition to price

and product attributes. To serve this segment, BoP

enterprises must become skilled in understanding and

responding to the complex set of factors that impact

purchase decisions within informal markets

(Kistruck et al., 2011).

Drawing upon three streams of literature, entre-

preneurship in the informal economy, capability

building by BoP enterprises, and consumer beha-

vior in subsistence marketplaces (Bruton, Ireland,

and Ketchen, 2012; London and Hart, 2004;

Viswanathan, Sridharan, and Ritchie, 2010;

Viswanathan et al., 2012; Webb et al., 2009a), we

begin by outlining how separate but related dimen-

sions of poverty,including an individual’s economic,

capability, and relationship well-being, are associ-

ated with likelihood of purchase for BoP consumers.

Specifically, we hypothesize howincome, education,

gender, social support, and household size can create

norms that significantly influence likelihood of pur-

chase within informal markets. We then present a

series of arguments as to how the strength of formal

institutions at a more macro level can moderate

individual-level purchasing decisions. While trans-

actions within informal markets are, in part, gov-

erned by informal norms and values, we hypothesize

that they are also significantly influenced by the

formal institutional environment as it relates to

access to infrastructure, legal systems, health care,

public media, etc. (Godfrey, 2011; Webb et al.,

2009a).

To test our main effect and interaction hypotheses,

we collected data from 555 potential consumers of a

BoP enterprise, VisionSpring, which sells inexpen-

sive, high-quality reading glasses within the infor-

mal markets of rural India. We collected data on

income level (economic well-being), education and

gender (capability well-being), and social support

and household size (relationship well-being), as

well as on the strength of the formal institutional

environment.

We find that the effect of economic, capability,

and relationship well-being on likelihood of pur-

chase within informal markets is highly contingent

upon the strength of the formal institutional environ-

ment. With the exception of gender, we fail to find

support for such factors as main effects as suggested

by prior research. Rather, we find that stronger

formal institutional environments may substitute for

income, but also act to complement larger social

networks and household size within informal

markets.

Our study makes several contributions. From an

empirical standpoint, to the best of our knowledge,

this is the first large-scale, quantitative evaluation of

potential BoP enterprise customers (Kolk, Rivera-

Santos, and Rufin, forthcoming; Walsh, Kress, and

Beyerchen, 2005). From a theoretical perspective,

our study makes two important contributions. First,

we explore poverty as a multidimensional rather than

a unidimensional predictor of consumer behavior

(London, 2009; The World Bank, 2001). Previous

scholars have emphasized that we need to better

understand the influence of poverty on business out-

comes (Bruton, 2010; Gulyani and Talukdar, 2010).

While prior work has attempted to heed this call by

exploring a range of poverty-related factors in infor-

mal markets (Dawar and Chattopadhyay, 2002;

Viswanathan et al., 2012), such work has not exam-

ined such factors in a holistic framework. Second,

our findings suggest that the strength of the formal

institutional environment is an important contin-

gency in modeling transactional outcomes, even

within informal markets. While prior research has

suggested that stronger formal institutional environ-

ments serve primarily as a substitute for individual-

and network-level influences (Greif, 2006; North,

1990), our results suggest that stronger formal insti-

tutions can work as both a substitute for, and a

complement to, micro-level factors.

BASE-OF-THE-PYRAMID

ENTERPRISES

Over the past 50 years, philanthropic efforts have

been the dominant approach to alleviating poverty

(Sachs, 2005). During this time, donors have spent

billions of dollars in primarily grant-based programs

to improve the lives of the poor living in the devel-

oping world, a segment which more recently has

been called the base of the pyramid, or BoP

(Prahalad and Hart, 2002). The BoP is defined both

by financial hardship (annual per capita income of

less than $3,000 in purchasing power parity) as well

38 T. London et al.

Copyright © 2014 Strategic Management Society Strat. Entrepreneurship J.,8: 37–55 (2014)

DOI: 10.1002/sej