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microenterprise

Marginal changes for the many or focusing on the few? Trade-offs in firm support policies and jobs

David McKenzie's picture

Should governments aiming to improve job opportunities devote additional resources towards trying to provide programs that attempt to generate marginal changes in many micro and small firms, or try to target the support towards making larger impacts on a smaller number of high-growth and larger firms? For example, should a government spend an additional $5 million on grants and training programs that support 25,000 micro firms at $200 each, use it to give 100 grants of $50,000 each to 100 high-growth potential firms, or use it as a single $5 million tax incentive to encourage one large multinational to set up a manufacturing plant in the country? I’ve been asked my thoughts on this question quite a few times, so thought I’d share them here.
 
The answer involves many different trade-offs and considerations, and I attempt to summarize some of the key ones in this post. The bottom line is that there are trade-offs (at least in the short-run) between poverty alleviation and productivity growth, and that different policies will have impacts on different types of job creation. A key lesson for policymakers is to be clear about what the job problem is that they are trying to solve, and not try to use the same policy instrument to achieve multiple competing priorities.

Halloween Special: Small firm death, and did I mention zombies?

David McKenzie's picture

With tomorrow being Halloween, I thought it perfect timing to discuss a paper about death and zombies. Small firms are an important source of income for the poor in developing countries, and the target of many policy interventions designed to help them grow. But we don’t actually know much about their death, with no systematic evidence available as to the rate of small firm death, which firms are more likely to die, and why they die. Indeed firm death often ends up being hidden in the attrition numbers of much of our data, and out of 35 published RCTs on interventions for small firms in developing countries, only 13 either report a firm death rate or look at death as an outcome.

My new working paper (ungated version) (with Anna Luisa Paffhausen) aims to provide systematic evidence on small firm death in developing countries. We spent several years cleaning and putting together data on more than 14,000 small firms from 16 firm panel surveys in 12 countries, enabling estimation of the rate of firm death over horizons as short as 3 months and as long as 17 years. Detailed questions added to nine of these panel surveys also enable us to dig deeper into cause of death.

We gave Sri Lankan microenterprises wage subsidies to hire workers: 8 years after starting, here’s what happened

David McKenzie's picture

In my very first experiment, Suresh de Mel, Chris Woodruff, and I gave small grants of capital to microenterprises in Sri Lanka. We found that these one-time grants had lasting impacts on firm profitability for male owners. However, despite these increases in firm profits, few owners made the leap from self-employed to hiring others.
In 2008 we therefore started a new experiment with a different group of Sri Lankan microenterprises, trying to see if we could help them make this transition to becoming employers. Eight years later, I’m delighted to finally have a working paper out with the results.

Changing lives along the road in Honduras

Marcela Silva's picture

We arrived in the village of La Redonda-El Aguila, Honduras at ten o’clock in the morning, when the temperature was already about 94 degrees Fahrenheit. We were warmly welcomed and invited to take a short walk to the place they had prepared specially for us to hold our meeting. We were offered bean tamales and coffee, and began the meeting with members of two road maintenance microenterprises that are supported through a World Bank-financed project.

The microenterprises program was launched in 2013 under the Second Roads Rehabilitation and Maintenance project with a goal of creating 10 microenterprises to maintain 310 kilometers (192 miles) of roads. The routine maintenance work includes cutting and clearing vegetation on both sides of the road to ensure good visibility, cleaning drainage systems, keeping the roads free of debris and occasionally patching holes in the road. Microenterprise members earn wages from their work, which they invest into their households and communities.

Each microenterprise is supported by a supervisor, usually a civil engineer, who teaches members how to do the road maintenance work efficiently and effectively. Additionally, members learn how to meet conservation standards, as well as gain understanding of why maintenance activities are so important to extend the life of the road. The supervisor performs a progressive evaluation and on-the-job training for all micro-entrepreneurs. Upon completion of the training, the microenterprise is granted a contract to carry out labor-intensive routine maintenance activities over a stretch of road (at a ratio of about three kilometers per partner) for a period of 12 months, which is renewable subject to satisfactory performance. 

Ultimately, the program empowers entrepreneurs to become permanent contributors to the conservation of their roads. 

Using Engel Curves to Detect Underreporting of Income among the Self-employed

David McKenzie's picture
The self-employed often underreport income to tax authorities. Less is known about how trustworthy the income reported on household surveys is, but there is a concern that they may also underreport their income in surveys too – either because of concerns about it getting linked to official records, or because the easiest number for them to report is the one they tell the authorities. This raises obvious concerns about the measurement of items such as the poverty levels of the unemployed, the differential income gap between wage work and self-employment, and many other such uses.

Long-term effects of a short-term boost to savings – are mental accounts the key to why more small businesses don’t take advantage of high returns?

David McKenzie's picture
Standard economic theory would suggest that a one-time infusion of cash should have at most a temporary effect on business profitability – over time, individuals facing high returns should be able to re-invest business profits and bit-by-bit bootstrap themselves up to the steady-state size. Yet in an experiment I did with Suresh de Mel and Chris Woodruff in Sri Lanka, we find a one-time grant has sustained impacts five years later on male microenterprise owners.

New Ideas in Business Growth

Miriam Bruhn's picture

My colleague Bilal Zia and I organized a conference on New Ideas in Business Growth: Financial Literacy, Firm Dynamics and Entrepreneurial Environment that took place at the World Bank last Wednesday. The conference brought together researchers and policy makers in the area of private sector development to share new findings about the types of policy interventions that are effective at promoting business growth. We decided to focus the discussion on three topics that have recently received increased attention from both a research and a policy angle: 1) business and financial literacy training 2) the business environment and 3) corporate governance and firm dynamics. The selection of these three topics also raised a larger question in my mind—should the research community spend so much of its effort on microenterprises, when larger firms may have much higher growth potential? That’s a question I’ll return to at the end of the post.

In recent years, many governments, international institutions, and NGOs around the world have been providing business and financial literacy training for entrepreneurs. However, so far, we know relatively little about the impact of this training on business performance and growth. In an effort to contribute to filling this knowledge gap, Bilal and I conducted a randomized control trial in Bosnia-Herzegovina, where we collaborated with a microfinance institution and an NGO to provide business and financial literacy training to young entrepreneurs.