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What are business aspirations worth in developing countries?

Bilal Zia's picture

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.

This is a bit of a puzzle. If indeed the constraints were binding and entrepreneurs were itching to grow, then they would jump at any offer to improve their managerial skills or take full advantage of availability of new credit to invest in their business. But they don’t.

Perhaps there are behavioral constraints at play, or entrepreneurs simply do not know the returns to investing their time and energy in some of these programs. But, what if there are inherent differences in aspirations for business growth, where some entrepreneurs want to grow their business while others do not. The fact that much of entrepreneurship in developing countries is involuntary would also square with this type of variation. More importantly, variation in aspirations would help explain why some of the reform ideas tried in the literature have not resulted in substantial business growth and why take-up of business assistance programs tends to be low. Indeed, if aspirations for growth are low, then there is low demand for such programs.   

In a new working paper, Patricio Dalton, Julius Ruschenpohler (both from Tilburg University), and I carefully unpack the concept and measurement of business aspirations in a panel field study among urban retail shops in Jakarta, Indonesia. We measure business aspirations along four distinct dimensions: shop size, number of employees, number of customers, and sales. We also ask entrepreneurs about the likelihood of realizing their aspirations, which helps us separately construct expectations. We elicit aspirations for the next 12 months as well as ideal aspirations over the long-term.  

Consistent with our hypotheses, we find considerable variation in all four dimensions of business aspirations across the sample. More than half the businesses in our sample do not aspire to grow beyond current levels in size, employees, or customers in the next 12 months. Moreover, a non-trivial proportion of entrepreneurs fail to imagine an ideal business or to have an idea of how long it will take them to achieve their ideal business. Hence, there is considerable heterogeneity in business aspirations.  

But is this heterogeneity economically meaningful? That is, can differences in aspirations explain variation in business performance outcomes beyond the usual suspects such as education levels, business skills, and business practices? Turns out that they can. Exploiting the panel dimension of our dataset, we find that businesses with one standard deviation higher sales aspirations at baseline have 36% higher sales and 50% higher profits at the endline, even after controlling for the entrepreneur's business practices and a comprehensive set of firm- and individual-level characteristics. Likewise, every other dimension of baseline aspirations has significant predictive power over its associated endline outcome. These are quite striking findings and provide new insight into the black box of the determinants of business performance among small-scale entrepreneurs.

These results also have important implications for policy and future research. In terms of policy, these findings can help reconcile why policies aimed at alleviating physical and human capital constraints are often unsuccessful at spurring business growth. The heterogeneity in our findings makes a strong case for better targeting of business aid programs based on aspirations for growth. Given that aspirations are a strong predictor of future behavior, they are likely to complement policies targeting business investment, savings, credit use, and business innovation. We expect that these policies will be more effective for entrepreneurs with higher aspirations for growing their businesses.
 
In terms of future research, our findings motivate further work on the causal implications of entrepreneurial aspirations. In particular, research on understanding what kinds of policies and programs boost aspirations, and mapping the causal channel that leads to successful impacts on business growth, is a valuable next step. My coauthors and I are implementing one such field study with the same sample of urban retailers in Jakarta. Stay tuned for our results!  

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