Cash or matching grants? Medium-term impacts on small businesses in Burkina Faso

Creating new jobs is a significant challenge in low- and middle-income countries, where employment is mostly in small and medium-sized enterprises (SMEs). Targeted interventions such as training, direct subsidies, or a combination of these are often used, but with mixed results. A key policy question is whether support should be flexible or earmarked. A flexible approach allows firms to cater support to their needs and limit inefficient procurement. An earmarking approach assumes that firms may be unaware of investment returns, and uncontrolled support may lead to inefficiency or misuse. This concern is particularly relevant in fragile countries where firms might be hesitant to invest in risky activities with delayed returns.
 

Comparing matching grants and cash grants

In a recent randomized controlled trial in Burkina Faso, we assessed the medium-term impacts and cost-effectiveness of two innovative interventions to enhance firm growth and job creation in a fragile and rural setting. The interventions were implemented in partnership with the local Maison de l’Entreprise du Burkina Faso (MEBF) and Innovations for Poverty Action (IPA), which fielded the surveys.

The interventions consisted of two types:

• Cash grants to use for any business purpose, including the acquisition of machines, tools, livestock, construction, land, training, inventories, and working capital, without requiring an own contribution.
• Matching grants earmarked for business development services (BDS), such as technical training and expert consulting, requiring a  20% own contribution towards the service costs.

All firms were eligible for up to US$8,000. For cash grants, firms could withdraw the amount from their bank account in two or more transactions. For matching grants, BDS suppliers were reimbursed for 80% of the cost in advance, with beneficiaries paying the remaining 20%. Procurement rules were stricter for matching grants to prevent misuse, and the MEBF provided individual assistance to ensure compliance.

The implementation took place in 2019, accompanied by one baseline and two follow-up surveys conducted one and two years after the roll-out.
 

Key findings

Two years after implementing the interventions, beneficiaries of cash grants showed higher survival rates, improved business practices, more formalization, and more innovation activities compared to beneficiaries of matching grants and firms in the control group. However, neither cash nor matching grants significantly increased profits, sales, employment relative to the control group. Only the smaller share of beneficiaries of cash grants in industry and services saw a slight increase in their profits.

Across all outcomes, beneficiaries of cash grants outperformed those receiving matching grants. The impacts of matching grants were generally small and often statistically insignificant. Unlike matching grants recipients, cash grant beneficiaries increased investment, saw greater growth in capital stocks, and were more resilient to the COVID-19 crisis, which could boost profits, sales, and employment in the longer term. We also find small positive impacts on household asset ownership and self-reported life satisfaction. Most cash grant beneficiaries chose to spend the grant on capital goods, inputs, and livestock rather than BDSs.

Overall, there was little evidence of fraud or misuse, even for the more flexible cash grants. Although matching grant beneficiaries appreciated the quality of training and consulting services, they complained about complex procurement rules and their need for capital. Qualitative evidence from interviews and focus group discussions suggests that firms derived more benefits from cash grants.

Cost-effectiveness

On average, including the grants, the cost per beneficiary was US$6,658 for cash grant recipients and US$7,135 for recipients of matching grants. Excluding the grant itself, firms in the cash grant group generated costs roughly equivalent to the average grant size of US$3,420. Due to stricter procurement rules, matching grants were 25% more expensive (US$4,036 vs. US$3,237) to implement, yet did not lead to better outcomes.

The capital stock of cash grant beneficiaries increased by about US$2,500 on average over two years compared to the control group, implying a cost of US$3.33 to increase the capital stock by one dollar. Increasing the self-assessed survival chances for the coming 12 months by one percentage point would cost of US$1,715. Whether these margins are cost-effective depends on their longer-term effects.

Careful targeting with a focus on aspiring small firms in agribusiness

The intervention’s careful targeting may serve as a model for similar activities. A business plan competition collected 2,279 applications, of which 1,200 entrepreneurs were selected based on expert judgments of their business plans and face-to-face pitches. The business plans detailed firm records and investment needs in physical capital, inventory, and BDSs. Firms were shortlisted for their potential to grow and create jobs, completed a standard simplified business training, and were randomly allocated into two treatment arms (cash grants or matching grants) and a control group through a public lottery.

To our knowledge, this is the first study comparing matching grants with cash grants based on a randomized experiment in a fragile context. In such settings, subsidized investment in risky activities might be more important than in stable environments. Yet, matching grants were perceived as too bureaucratic and time consuming and were also more expensive to implement. Cash grants, on the other hand, appear to be a more promising alternative, especially if survival rather than innovation is the key objective. If left to their own discretion, only a few firms opt for training and consulting services. However, it can be very beneficial to inform and advise firms about the potential returns of tailored training and consulting services.

The findings have been published in:

M. Grimm, S. Soubeiga and M. Weber (2024), Supporting small firms in a fragile context: Comparing matching and cash grants in Burkina Faso, Journal of Development Economics, 171, 103344.