The main conclusions of the analysis are that evidence from multiple data sources strongly suggests that HEs in Mozambique are associated with higher household consumption, lower rural poverty, as well as upward mobility particularly for rural and poorly educated households. But if the Mozambican government wants to tap this potential, it will need a different strategy than one designed to support SMEs, as creation and survival in this sector seem to depend on a set of factors related to the human capital in the household and development in the location, not the soft business environment constraints such as licensing/permitting and corruption often cited by larger business.

The outline of this paper is as follows. The first section is a description of the data sources. Next is a section on Mozambique - the economy, the demographics, the labor force and the structure of employment, and in particular, the HE sector and what it means for employment and livelihoods in Mozambique. The paper then turns to the relationship between the HE sector and household welfare, including a dynamic analysis of start-ups, upward mobility, and poverty reduction. The fourth section analyzes constraints household face in starting and sustaining HEs. The final section concludes with the implications for development policy in Mozambique.

# **Data sources and definitions**

This paper focuses on household enterprises (HEs) in Mozambique. HEs are _unincorporated nonfarm enterprises owned by households_<sup>_2_</sup> _._ From an employment perspective, HEs include self-employed business owners and members of their families working in the business. Paid employees working in enterprises from outside of the family are classified in a separate category, as wage employees.<sup>3</sup>

## _Data Sources_

Mozambique has several recent data sources with information on HEs which are utilized for this analysis - national multipurpose household surveys (IAF/IOF/NPS) and specialized enterprise surveys (INFOR and RICs). Below is a brief description of the data sets.

_IAF for 1996–97 and 2002–03._ The _Inquérito aos Agregados Familiares_ (IAF) are national household income and expenditure surveys conducted over a 12 month period. The questions on employment cover only primary activity but they do allow identification of individuals working as self-employed and contributing family members in the nonfarm sector. IAF 2002-03 also has a few questions administrated at the household level on income and expenditures from non-farm enterprises.

> 2 We include enterprises in the study _regardless of registration status_ . In classifying an enterprise as _informal_ , standard practice (ILO, 2011) requires that it meet (i) an ownership criteria (unincorporated, owned by household members) an _d either_ (ii) a size criteria (below a specified level of employment, e.g. 5 or 10 employees depending on the country), and/or (iii) a legal status criteria (non-registration of the enterprise or its employees). We ignore the legal status because “registration” in Mozambique is not a unique identifier. There are several levels of registration - national as well as subnational, with the district government or the municipality. In our experience, the “registration” variable adds little value to the analysis (See Fox and Sohnesen, 2012).

> 3 We can not distinguish between wage employees who work for an HE owner and those who work for a larger firm (e.g. SME).

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