Small-scale entrepreneurship is widespread in developing countries, yet very few of these entrepreneurs are successful in growing their businesses beyond initial levels. Many constraints play a role, including financial, technical, and informational barriers. Yet, even when these barriers are lifted in experimental studies, we do not see the type of growth one would expect if these constraints were truly binding. In addition, many of the interventions studied, especially those targeting managerial and informational barriers, often suffer from low program take-up.
There are many views about how a country develops. Some view institutions as the key determinant, while others emphasize the fundamental importance of human capital. Still others highlight the importance of infrastructure, while the World Bank and other international organizations have argued for improving the overall business environment in which firms operate. Finally, a recent strand of literature has emphasized the importance of agglomeration economies as a source of long-term growth. What, however, are the relative explanatory power of these alternative, though not necessarily-mutually exclusive, views? And are their effects specific to the context such as the level of development, the sector in which a firm operates, firm size and age? Answering these questions is important because governments only have limited resources to deal with key challenges. If there are bottlenecks to a country’s development, it is important to diagnose these to provide a sounder basis for policy.