Despite regulatory efforts designed to make it easier for firms to formalize, informality remains extremely high among firms in Sub-Saharan Africa. In most of the region, business registration in a national registry is separate from tax registration. This paper provides initial results from an experiment in Malawi that randomly allocated firms into a control group and three treatment groups: a) a group offered assistance for costless business registration; b) a group offered assistance with costless business registration and (separate) tax registration; and c) a group offered assistance for costless business registration along with an information session at a bank that ended with the offer of business bank accounts. The study finds that all three treatments had extremely large impacts on business registration, with 75 percent of those offered assistance receiving a business registration certificate. The findings offer a cost-effective way of getting firms to formalize in this dimension. However, in common with other studies, information and assistance has a limited impact on tax registration. The paper measures the short-term impacts of formalization on financial access and usage. Business registration alone has no impact for either men or women on bank account usage, savings, or credit. However, the combination of formalization assistance and the bank information session results in significant impacts on having a business bank account, financial practices, savings, and use of complementary financial products.
We conduct a business plan competition to determine whether survey instruments or panel judges are able to predict which participating firms will grow fastest. Participants were required to submit a simple six- to eight-page business plan and then defend that plan before a panel of three or four judges. We surveyed the pool of applicants shortly after they applied, and then one and two years after the business plan competition. We use the follow-up surveys to construct a measure of enterprise growth, and use the baseline surveys and panel scores to construct measures of the potential for growth of the enterprise. We find that a measure of ability correlates quite strongly with future growth, but that the panel scores add to predictive power even after controlling for the measure of ability and other variables from the survey. The survey questions appear to have more power to explain the variance in growth. Participants presenting before the panel were give a chance to win customized training. Fourteen months after the training, we find no positive effect of the training on growth of the business.
Many micro-enterprises in Kenya have low productivity. We focus on one particular business decision which may indicate low productivity: keeping enough change on hand to break larger bills. This is a surprisingly large problem. Our estimates suggest that the average firm loses approximately 5-8% of total profits because they do not have enough change. We conducted two experiments to shed light on why this happens: surveying firms weekly about lost sales, thereby increasing the salience of change, and explicitly informing firms about lost sales. We find that both interventions significantly altered change management and reduced lost sales. This largely rules out many potential explanations such as the risk of theft or the costs of holding change being too high. One explanation consistent with firms’ response to the survey and information on their lost sales is that firms were not perfectly attentive to change management prior to the interventions.
Standard models of investment predict that credit-constrained firms should grow rapidly when given additional capital, and that how this capital is provided should not a§ect decisions to invest in the business or consume the capital. We randomly gave cash and in-kind grants to male- and female-owned microenterprises in urban Ghana. For women running subsistence enterprises we find no gain in profits from either treatment. For women with larger businesses we strongly reject equality of the cash and in-kind grants; only in-kind grants cause growth in profits, suggesting a flypaper e§ect whereby capital coming directly into the business sticks there, but cash does not. The results for men also suggest a lower impact of cash, but di§erences between cash and in-kind grants are less robust. There is suggestive evidence that the di§erence in the e§ects of cash and in-kind grants is associated more with lack of self-control than with external pressure.
Do the repayment requirements of the classic microfinance contract inhibit investment in high-return but illiquid business opportunities among the poor? Using a field experiment, we compare the classic contract which requires that repayment begin immediately after loan disbursement to a contract that includes a two-month grace period. The provision of a grace period increased short-run business investment and long-run profits but also default rates. The results, thus, indicate that debt contracts that require early repayment discourage illiquid risky investment and thereby limit the potential impact of microfinance on microenterprise growth and household poverty.
We use detailed contract level data on a portfolio of 197 coffee washing stations in 18 countries to identify the sources and consequences of credit markets imperfections. Due to moral hazard, default rates increase following unanticipated increases in world coffee prices just before (but not just after) the maturity date of the contract. Strategic default is deterred by relationships with the lender and foreign buyers: the value of informal enforcement amounts to 50% of the value of the sale contract for repaying borrowers. A RDD shows that firms are credit constrained. Additional loans are used to increase input purchases from farmers rather than substituting other sources of credit. Prices paid to farmers increase implying the existence of contractual externalities along the supply chain.
In 2013 IPA celebrated ten years of producing high-quality evidence about what works, and what does not work, to improve the lives of the poor. It was a year of celebration for our accomplishments. More so, it was a time to prepare our organization for the next phase as we continue to pursue our vision of a world with More Evidence and Less Poverty.
View an online version of the report at annualreport.poverty-action.org/2013annualreport/
Roughly two billion people in the world live on $2 a day or less. Of these a staggering 50 percent are estimated to be micro-entrepreneurs, running a small business to make ends meet but employing only a handful of people. If just a small proportion of these entrepreneurs were encouraged to grow and invest in their business, and hire more employees, it could transform the fortunes of the developing economies, and billions of people living in poverty. But how? It is a challenge that Stephen Anderson-Macdonald is hoping to help tackle.
Micro-entrepreneurs often lack the financial literacy required for the complex financial decisions they face. We conduct a randomized control trial with a bank in the Dominican Republic to compare the impact of two distinct programs: a standard accounting training versus a simplified, rule-of-thumb training that teaches basic financial heuristics. Only the latter produced significant improvements in firms’ financial practices, objective reporting quality and revenues. Looking at treatment heterogeneity, the impact is specially pronounced for microentrepreneurs with lower skills or poor initial financial practices. These results suggest that reducing the complexity of training programs might improve their effectiveness, especially for less sophisticated clients.
Las pequeñas y medianas empresas (PYMEs) de los países en desarrollo suelen enfrentarse a una serie de obstáculos para ampliar sus negocios y emplear a más trabajadores, como el acceso limitado al crédito y a otros servicios financieros. En Colombia, donde las PYMEs afirman que el acceso a la financiación es uno de los mayores obstáculos para el funcionamiento de sus negocios, los investigadores están evaluando el impacto de la Reforma de Garantías Mobiliarias, que proporcionará un marco legal para el uso y la ejecución de las garantías haciendo uso de bienes muebles, en resultados a nivel de empresa, como ventas y empleo.
A long-standing question is whether differences in management practices across firms can explain differences in productivity, especially in developing countries where these spreads appear particularly large. To investigate this, we ran a management field experiment on large Indian textile firms. We provided free consulting on management practices to randomly chosen treatment plants and compared their performance to a set of control plants. We find that adopting these management practices raised productivity by 17% in the first year through improved quality and efficiency and reduced inventory, and within three years led to the opening of more production plants. Why had the firms not adopted these profitable practices previously? Our results suggest that informational barriers were the primary factor explaining this lack of adoption. Also, because reallocation across firms appeared to be constrained by limits on managerial time, competition had not forced badly managed firms to exit.
Business training programs are a popular policy option to try to improve the performance of enterprises around the world. The last few years have seen rapid growth in the number of evaluations of these programs in developing countries. We undertake a critical review of these studies with the goal of synthesizing the emerging lessons and understanding the limitations of the existing research and the areas in which more work is needed. We find that there is substantial heterogeneity in the length, content, and types of firms participating in the training programs evaluated. Many evaluations suffer from low statistical power, measure impacts only within a year of training, and experience problems with survey attrition and measurement of firm profits and revenues. Over these short time horizons, there are relatively modest impacts of training on survivorship of existing firms, but stronger evidence that training programs help prospective owners launch new businesses more quickly. Most studies find that existing firm owners implement some of the practices taught in training, but the magnitudes of these improvements in practices are often relatively modest. Few studies find significant impacts on profits or sales, although a couple of the studies with more statistical power have done so. Some studies have also found benefits to microfinance organizations of offering training. To date there is little evidence to help guide policymakers as to whether any impacts found come from trained firms competing away sales from other businesses versus through productivity improvements, and little evidence to guide the development of the provision of training at market prices. We conclude by summarizing some directions and key questions for future studies.
Incentive pay is a key component of management strategy, and yet field evidence on the impacts of both individual and team incentives is limited to studies carried out in high-income countries. The mechanisms that lie behind individual responses to incentives go far beyond rational considerations of wage maximization, and encompass concerns for social visibility, preferences for collective work and other behavioral norms. These norms tend to vary by culture, potentially creating considerable heterogeneity in responses to incentives across countries. We present evidence from a field experiment designed to evaluate the impact of individual and group monetary incentives and individual and group rank incentives in Accra, Ghana. We precisely estimate that, contrary to earlier findings in other settings, these incentives have no impact on productivity, work quality and firm profitability. The findings indicate that more research is needed to shed light on the cultural characteristics of the setting that determines whether performance pay is effective.
Many basic economic theories with perfectly functioning markets do not predict the existence of the vast number of microenterprises readily observed across the world. We put forward a model that illuminates why financial and managerial capital constraints may impede experimentation, and thus limit learning about the profitability of alternative firm sizes. The model shows how lack of information about one’s own type, but willingness to experiment to learn one’s type, may lead to short-run negative expected returns to investments on average, with some outliers succeeding. To test the model we put forward first a motivating experiment from Ghana, and second a small meta-analysis of other experiments. In the Ghana experiment, we provide inputs to microenterprises, specifically financial capital (a cash grant) and managerial capital (consulting services), to catalyze adoption of investments and practices aimed towards enterprise growth. We find that entrepreneurs invest the cash, and take the advice, but both lead to lower profits on average. In the long run, they revert back to their prior scale of operations. The small meta analysis includes results from 18 other experiments in which either capital or managerial capital were relaxed, and find mixed support for this theory.
This paper studies the causal impact of credit constraints on exporting firms. We exploit a natural experiment provided by two policy changes in India, first in 1998 which made small-scale firms eligible for subsidized direct credit, and a subsequent reversal in policy in 2000 wherein some of these firms lost their eligibility. Using firms that were not affected by these policy changes (in each case) as our control group, we find that expansion of subsidized credit increased the rate of growth of bank borrowing by about 20 percent and export earnings by around 22 percent. Interestingly, the subsequent policy reversal in 2000 had no impact on the rate of growth of bank borrowing and on export earnings.