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Big vs. small firms: one size does not fit all

Jacques Morisset's picture



Is bigger always better? Economists have long debated what size firms are more likely to drive business expansion and job creation. In industrial countries like the United States, small (young) firms contribute up to two-thirds of all net job creation and account for a predominant share of innovation. (Source: McKinsey, Restarting the US small-business growth engine, November 2012). In developing countries, evidence from Ethiopia, Ghana and Madagascar shows that the vast majority of small operators remain small, and so are unlikely to create many decent jobs over time [Source: World Bank, Youth Employment, 2014]. By contrast, ‘big’ enterprises are seen as the best providers of employment opportunities and new technologies.

The difference in role and performance of small firms in developing and industrial countries reflects to a large extent their owners’ characteristics. In the US, small firm owners are generally more educated and wealthier than the average worker, while the opposite is true in most developing countries. This point was emphasized by E. Duflo and A. Banerjee in their famous book ‘Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty’ (Penguin, 2011). Most business owners in developing countries are considered to be ‘reluctant’ entrepreneurs; essentially unskilled workers that are pushed into entrepreneurship for lack of other feasible options for employment.

This is also very much a reality in Tanzania where small business owners have few skills and limited financial and physical assets. Of the three million non-farm businesses operating in the country, almost 90% of business owners are confined in self-employment. Only 3% of business owners possess post-secondary level education. As a result, their businesses are generally small, informal, unspecialized, young and unproductive. They also tend to be extremely fragile with high exit rates, and operate sporadically during the year. Put simply, most small businesses are not well equipped to expand and become competitive.

Youth Employment—A Fundamental Challenge for African Economies

Deon Filmer's picture
In Addis Ababa, Ethiopia’s sprawling capital, Mulu Warsa has found a formal-sector job as a factory worker thanks to her high school education. In Niamey, a city at the heart of the Sahel region, Mohamed Boubacar is a young apprentice training to be a carpenter. And in Sagrosa, a village in Kenya’s remote Tana Delta district, Felix Roa, who works on a family farm and runs a small shop, dreams of a better life if he can find the money to expand the business and move to a more urban area. His family is too poor to support him through secondary school.