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.
Photo: This photo taken December 14, 2010 shows a map on a page from Facebook. The map displays friendships as lights on a deep blue background. The eastern half of the U.S. and Europe shine the brightest, while China, Russia and central Africa, where Facebook has little presence, are mainly dark. Source: The Wall Street Journal
With millions around the globe feeling the impact of the financial crisis and slower economic growth and job losses, it is important to understand regulatory and policy constraints on entrepreneurs wanting to start a formal business. Entrepreneurial activity is the basis of sustainable economic growth, and the first step for entrepreneurs joining or transitioning to the formal sector is the registration of their business at the registrar of companies. For evidence of the economic power of entrepreneurship we need look no further than the United States, where young firms have been shown to be an important source of net job creation, relative to incumbent firms (Haltiwanger, et al.).
To measure entrepreneurial activity, we’ve constructed with support from the Kauffman Foundation the World Bank Group Entrepreneurship Snapshots (WBGES) – a cross-country, time-series dataset on new firm registration in 112 countries. The main variable of interest is “Entry Density”, defined as the number of newly registered limited liability firms as a percentage of the working age population (in thousands). We employ annual figures from 2004 to 2009 collected directly from Registrars of Companies and other government statistical offices worldwide. Like the Doing Business report, the units of measurement are private, formal sector companies with limited liability.
One hears less about the base of the pyramid these days. Instead, "inclusive" remains the clear buzzword of choice for now. The recent UN Millennium Development Goals Summit generated a side workshop on Inclusive Business organized by a roll call of organizations. Now IFC is hosting its own event on Inclusive Business Solutions around the IMF/World Bank Annual Meetings this week. The term is pervasive.
We learned that the idea to start a rose farm first came to Ryaz’s (Owner of the farm) father, an Indian- origin head of a successful Ugandan conglomerate, after a visit to Ethiopia, where he scoped out potential business opportunities. Although he considered banking and bottled water, highly favorable soil and climatic conditions (warm days and cold nights), competitive fuel and electricity costs and, above all, competitive air freight costs - which account for more than fifty percent of the export-related production costs - made rose farming an easy choice, despite Ethiopia not having any flower industry to speak of at the time.
It is well established that financial development is necessary for the efficient allocation of capital and firm growth, yet firm-level surveys have repeatedly found access to finance to be among the biggest hurdles to starting and growing a new business. For instance, in the World Bank’s Enterprise Surveys standardized dataset for 2006-2009, 31% of firm owners around the world report access to finance as a major constraint to current operations of the firm, while this figure is 40% for firms under three years of age.
In a recent paper with Larry Chavis and Inessa Love we address two types of questions: (1) What is the relationship between firm age and sources of external financing? and (2) Is there a differential impact of the business environment on access to financing by young versus old firms?
To summarize, we find systematic differences in the use of different financing sources for new and older firms. We find that in all countries younger firms rely less on bank financing and more on informal financing. However, we also find that young firms have relatively better access to bank finance in countries with stronger rule of law and better credit information and that the reliance of young firms on informal finance decreases with the availability of credit information.
According to a new paper by World Bank economists Paulo Correa and Mariana Iootty, the recovery won't look pretty. The financial crisis and concomitant global economic crisis have had a disproportionately harsh impact on young and innovative firms in Eastern Europe, and this does not bode well for future growth prospects.
A few weeks ago, our corner of the World Bank hosted an event where Correa and Iootty presented their findings. (This was the first in a new series called FPD Academy that will highlight excellent new analytical work on financial and private sector development.) Video of the event appears below the jump. The presentation itself starts at 4:30 and runs to 27:30. A discussant provides remarks immediately after the presentation, and a Q&A follows.