This year saw the end of a five-year project on Productivity in Low-Income
Countries, funded by DFID, and in which I have been extensively involved, together with several former colleagues from Tilburg University. The goal was to undertake empirical studies in a number of low- and middle-income countries to understand
the constraints that micro- and small enterprises face for productivity and growth and instruments/tools and policies to overcome them. The project thus comprised independent teams across a number of countries in Sub-Saharan Africa and South Asia asking
different but related questions and using a variety of different methodologies, but in most cases using data collected specifically for this project. In some cases, randomised control trials (RCTs) give us confidence that we have discovered causal relationships,
in other cases, cross-sectional regressions limit our interpretation to partial correlations that we relate back to existing theories or – in one case – to our own model. Some of the papers have now been published or are under review. Herewith
a short summary of the different papers – as you can see while a large share of papers focus on financing constraints, other look beyond finance to other important growth constraints:
One of the focus countries has been Kenya. Using
a calibrated general equilibrium model, Haki Pamuk, Ravi Ramrattan, Burak Uras, and I show that the availability of mobile money increases supply of
trade credit and reduces its price, thus expanding external finance for entrepreneurs and ultimately economic growth (see
here for a longer summary). This shows the importance of payment technologies for the financial inclusion debate. In a follow-up paper, Patricio, Dalton, Haki, Ravi, Daan van Soest and Burak report on an RCT that tries to identify the barriers to the adoption of the mobile money technology. There is quite some unmet demand as take-up is quite high when businesses
are helped to overcome information, registration and technological barriers. The authors also find that 16 months after adoption, businesses using mobile money were more likely to feel safe and have access to mobile loans from the mobile money
In a paper using firm-level survey data for Uganda, Mikael Homanen, Burak Uras and I show
that access to external (bank) finance is associated with firms’ being more likely to hire skilled workers as they increase sales and profits, while the hiring of casual or family workers is not. This result links to an expanding literature on the importance
of financing constraints not just for firms’ investment, but also for hiring and training.
In a paper using firm-level survey data from Ethiopia, Mohamad Hoseini, Burak Uras and I show that trade credit and bank credit can be substitutes on the aggregate level (regions with more limited access to bank credit see higher provision of trade credit), while complements on
the firm-level – i.e., having access to supplier credit helps a firm signal creditworthiness and thus gain access to bank credit. These findings relate back to different theories on the role of trade finance – as substitute for more formal
sources of funding, but also as signalling tool.
In a paper using Indian data, Mohamad and I focus on the relationship between financial development and formality. We distinguish between two different dimensions of financial deepening – banking sector outreach and credit deepening. We find
that bank outreach has a stronger effect on reducing the incidence of informality by cutting barriers to entering the formal economy, especially for smaller firms, and thus diminishing opportunistic informality. In comparison, financial deepening increases
the productivity of formal sector firms (important note: this paper is currently being revised, so expect new version soon).
In a paper using firm-level survey data from Tanzania, Haki, Burak and I focus on internal finance constraints, i.e., micro-entrepreneurs not being able to reinvest their savings into their business if they save within the household. Specifically, we find that there is a significantly
lower association of saving within the household with the likelihood of reinvesting profits than other savings form, most importantly, formal saving forms. These results clearly point to the importance of looking beyond micro-credit to micro-savings products.
Looking beyond financing constraints, one important question is whether micro-business owners are only life-style entrepreneurs, being self-employed in the absence of salaried opportunities, or have growth aspirations. Among a representative
sample of retail shop owners in Jakarta, Patricio, Julius Rueschenpoehler
and Bilal Zia find that the average business has strong short- and long-term aspirations for growth in shop size, number of employees customers, and sales. Yet, there is also pronounced heterogeneity, with more than half of the businesses
reporting no aspirations for growth in the next 12 months, and 16 percent failing to imagine an ideal business over the long-term. However, there might be opportunities for such micro-entrepreneurs to learn from successful peers. Patricio, Julius, Burak and Bilal test such opportunities
with an RCT among the same group of retail shop owners in Jakarta. They identify local best practices and disseminate the information through a handbook tailored to their business culture. Eighteen months after the intervention, they find that the handbook
alone does not lead to significant performance gains, while documentary videos and individualised help from peers significantly improve sales and profits, up to about 35% compared to the control group. These findings show that business growth can be
achieved through disseminating local knowledge in ways that are simple, cost effective and scalable.
In a complementary paper, Patricio, Julius and Bilal test whether the exposure to successful peers can change retailers’ aspirations. They find that that business growth aspirations respond strongly to these interventions, measured up to eighteen months
afterwards though the direction depends on the initial aspirations. Entrepreneurs with initially high business aspirations respond positively to the treatments and increase business aspirations, sales, and profits, while those with initially low aspirations
An even simpler method to increase productivity (at least in agriculture) might be production measurement and goal setting. Patricio and Kim Cole train a random sample of small informal Ghanaian cassava processors on these two simple business practices and find that firms trained in goal-setting increase their productivity by 50% relative to those
trained in production measurement only. Goal setting can thus be an inexpensive tool to increase productivity amongst small informal enterprises.
Finally, Patricio, Nguyen Nhung, and Julius, use a sample of small low-income retailers in Vietnam to test with experiments whether financial worries affects their risk attitudes. They find that entrepreneurs exposed to financial worries
are more likely to seek financial risks than those assigned to a placebo treatment. This effect is stronger for owners of shops which are smaller and less exposed to large income shocks in their everyday business. They further show that the effect of financial
worries on risk attitudes is not explained by changes in the cognitive functioning of the treated.
In a nutshell, micro- and small entrepreneurs face a variety of growth constraints that might also reinforce each other. And it is not necessarily
bank or micro-credit loans that are the best solution to overcoming their productivity and growth constraints, but rather an array of different financial products and management tools, but also entrepreneurial networks. Critically, different entrepreneurs
have different growth aspirations and the tools and instruments have to be tailored to their respective needs.