Social Capital and Entrepreneurial Outcomes: Evidence from Informal Sector Entrepreneurs in Ethiopia

Abstract

In Africa, social capital (SC) is an important resource for the informal economy. It substitutes the limited formal business support systems as factor inputs for enterprise development. This article investigates the effect of Burt’s structural holes theory of social capital in the context of the Ethiopian informal economy. Data were collected from street entrepreneurs in Addis Ababa using multiple name generators constructed on the basis of entrepreneurs’ frequent interaction with people related to resources needed for entrepreneurial activities. Social network analyses and statistical procedures of instrumental variables estimation were used to analyse the data. By controlling the potential endogeneity problem between structural holes and enterprise outcomes, the findings of the study show that entrepreneurs’ dense network structure, which lacks structural holes, has a significant negative effect on entrepreneurial outcome. Accordingly, policies that aim at supporting informal entrepreneurs need to consider the benefits of social contacts while taking into account the downside of being excessively embedded in dense networks.