Firms in developing countries face many constraints, from lack of access to finance and physical capital to poor infrastructure. Recently, however, there has been a growing focus among researchers on “managerial capital”, or business skills, as an important determinant of entrepreneurship in developing countries. Policymakers have been equally interested in the perceived deficit of managerial capital, and have been pouring resources into financial and business literacy education programs around the world (see my earlier post on The Fad of Financial Literacy?).
Yet we still have a very incomplete understanding of the effectiveness of these programs, and their specific impact on business outcomes. Until recently, there were only two completed randomized impact evaluations of business training programs in developing countries: one in Peru for rural women, which found positive effects on certain business practices but not on profits (Karlan and Valdivia, 2010), and the other in the Dominican Republic, which found that basic rules-of-thumb-based training had a greater effect on business outcomes than formal business training (Drexler, Fischer, and Schoar, 2010).
We contribute to this sparse literature by conducting a randomized evaluation of business training on slightly larger, more established businesses run by young entrepreneurs in Bosnia Herzegovina. In addition, we have data on potential entrepreneurs who had outstanding business exploration loans with our partner financial institution.
Our 5-session business training course covered basic business concepts and accounting skills, as well as investment and growth strategies, with a particular emphasis on the importance of up-front capital investment.
Both the setting and the sample are of special interest for several reasons. As an emerging post-conflict economy, Bosnia and Herzegovina has a low business survival rate, as well as a very high rate of youth unemployment (about 58 percent, 2007 Labor Force Survey). Both factors contribute to making business training programs a high-value proposition.
We find that financial literacy is a strong predictor of baseline financial and business outcomes, consistent with the existing literature. Further, our experimental results show that the training program led to significant improvements in basic financial knowledge for those who start out with low levels of financial literacy at baseline. Our results on business outcomes, on the other hand, are quite stark. We do not find any significant impact on business start-up or survival. However, we find that among businesses that survived, the impact of business training is quite significant. These businesses exhibit improvements in business practices and investments, and business owners with higher levels of ex-ante financial literacy further exhibit improvements in sales and profits.
Our analysis indicates that while business training programs can have a significant impact on surviving businesses, particularly for those entrepreneurs with higher ex-ante levels of financial literacy, in our context it does not seem to affect business start-up or business survival itself. This is perhaps not so surprising in a country like Bosnia and Herzegovina, which is recovering from war and lacks a host of complementary institutions and environments for healthy business growth.
One aspect that is quite clear is that business training has positive effects on businesses that do survive, encouraging them to implement production processes and make investments that they otherwise would not have. This is promising, given that the course specifically emphasized these behaviors. The course seems to have been particularly effective at promoting business growth for those entrepreneurs who exhibited higher levels of financial literacy at the baseline. Policymakers might therefore consider targeting business training resources towards existing firms, with an emphasis on particularly teachable behaviors.
Bruhn, Miriam and Bilal Zia (2011), “Stimulating Managerial Capital in Emerging Markets – The Impact of Business and Financial Literacy for Young Entrepreneurs,” World Bank Policy Research Working Paper No. 5642
Karlan, Dean and Martin Valdivia. 2010. “Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions,” Forthcoming, Review of Economics and Statistics.
Drexler, Alejandro, Greg Fischer, and Antoinette Schoar. 2010. “Keeping it Simple: Financial Literacy and Rules of Thumb,” LSE Working Paper.