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microenterprises

A new answer to why developing country firms are so small, and how cellphones solve this problem

David McKenzie's picture
Much of my research over the past decade or so has tried to help answer the question of why there are so many small firms in developing countries that don’t ever grow to the point of adding many workers. We’ve tried giving firms grants, loans, business training, formalization assistance, and wage subsidies, and found that, while these can increase sales and profits, none of them get many firms to grow.

Can you help some firms without hurting others? Yes, in a new Kenyan business training evaluation

David McKenzie's picture

There are a multitude of government programs that directly try to help particular firms to grow. Business training is one of the most common forms of such support. A key concern when thinking about the impacts of such programs is whether any gains to participating firms come at the expense of their market competitors. E.g. perhaps you train some businesses to market their products slightly better, causing customers to abandon their competitors and simply reallocate which businesses sell the product. This reallocation can still be economically beneficial if it improves allocative efficiency, but failure to account for the losses to untrained firms would cause you to overestimate the overall program impact. This is a problem for most impact evaluations, which randomize at the individual level which firms get to participate in a program.

In a new working paper, I report on a business training experiment I ran with the ILO in Kenya, which was designed to measure these spillovers. We find over a three-year period that trained firms are able to sell more, without their competitors selling less – by diversifying the set of products they produce and building underdeveloped markets.

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. 

Fixing financial markets when other key markets are broken, too: Guest post by Alex Cohen

This is the eleventh in our series of posts by students on the job market this year
Researchers, policymakers and aid organizations have devoted lots of attention to improving access to credit and, increasingly, insurance for small firms and farms in developing countries. Yet some recent papers find puzzlingly weak effects of insurance and credit on growth and profits (Cole et al. 2014, Banerjee et al. forthcoming).
 One potential explanation may be that in developing countries, it’s not just financial markets that have imperfections, but that other key markets, such as markets for labor and land, have problems, too. In particular, high costs of supervising or finding trustworthy employees may make it expensive to add labor (Eswaran and Kotwal 1986, Fafchamps 2003, Foster and Rosenzweig 2011). For farms specifically, missing land markets may further constrain expansion (Goldstein and Udry 2008, Adamopoulos and Restuccia 2014).

A Technology Letdown: Efforts at using RFID technology to track microenterprise inventories

David McKenzie's picture
Measuring microenterprise profits is hard. Most owners of these small firms keep no records and have very volatile incomes.  Asking firm owners what their profits are can lead to high refusal rates, noisy data, trouble with recall, and then there is the added concern that reporting may change with interventions  (either because an intervention like business training changes recording, or because people who get given finance may want you to think it has benefited them).

Testing different behavioral approaches to get people to attend business training

David McKenzie's picture

A while back I blogged about work using active choice and enhanced active choice to get people to get flu shots and prescription refills. The basic idea here is that relatively small modifications to the way a choice is presented can have large impacts on the take-up of a program. This seemed useful in the context of many of our training programs– attendance rates averaged 65 percent in a review of business training programs I did with Chris Woodruff. Therefore for an ongoing evaluation of the GET AHEAD business training program in Kenya, we decided to test out this approach.
 

Insuring small firms against big political and economic risks: an experiment in post-revolution Egypt

David McKenzie's picture
The Arab Spring brought about a wave of joy in many countries in the Middle East and North Africa as repressive regimes that had ruled for years were overthrown. But the aftermath brought about considerable turmoil and uncertainty as to what was going to happen in many countries. In Egypt, the immediate aftermath of the January 2011 revolution which toppled Hosni Mubarak included closing the stock market for 55 days, curfews of up to 18 hours a day, and an interim government under the control of the Armed Forces.

More on the “just give them cash” debate for small business growth

David McKenzie's picture
There has been a lot of recent debate and discussion about the role of cash grants in aid, and whether aid is more effective when simply given as unrestricted cash compared to approaches such as conditional transfers which try to restrict how recipients use any money received. Traditionally this debate has centered around food aid and education funding, but more recently this discussion has also arisen with respect to funding small businesses.

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