Access to Finance
Limited access to finance can severely constrain a firm’s capacity to grow and create jobs. The finance gap for micro, small and medium enterprises (MSMEs) in LMICs is estimated to be approximately $5 trillion USD, with 131 million—or 41 percent—of formal MSMEs having unmet financing needs.1 Financial institutions often restrict lending to MSMEs due to their opaque credit histories and lack of collateral, as well as to the higher default risk and transaction costs associated with these loans. Over the past few decades, financial institutions, governments, and donors have invested considerable resources in developing new products and programs to provide SMEs with the financing they need to grow. These solutions, which have aimed to address different challenges along the SME lending cycle, have included: innovative ways of screening potential clients to handle the problem of their limited credit history; non-traditional collateral to compensate for lack of real estate; more flexible financial products to better adjust to the needs of SMEs; novel incentive schemes to encourage SME borrowers to repay loans on time. In addition, matching grants programs, business plan competitions, and financial technology innovations have flourished around the world as alternative funding options for entrepreneurs and SMEs. The EPSD Program rigorously evaluates potential solutions and promotes the most efficient and cost-effective ways to expand access to finance for SMEs. View studies in this research area here.
Access to Markets
Firms need connections to new markets, networks, and opportunities to grow: buying inputs at reasonable prices, selling products to reliable buyers, connecting to other businesses, accessing new technologies and information to upgrade production, etc. However, SMEs can often find it challenging to make some of these connections, and this can become a barrier for growth. Around the world, only about 10-25 percent of industrial SMEs export, relative to 90 percent of large industrial firms.2 SMEs struggle to participate in global value chains due to a variety of reasons, including lack of access to finance, limited capacity or skills, poor infrastructure, and inability to comply with international standards and certification.3 Lack of information and trust also make it hard for them to develop new relationships and partnerships with other firms to grow their business.4 A variety of programs and policies exist to help SMEs access new markets and opportunities, like export promotion programs, local content policies, e-commerce platforms, networking and training, but there is still limited evidence on which types of policies work best. The EPSD Program rigorously evaluates the best ways to integrate LMIC firms into high value-added global and domestic supply chains and the impact of increased market access on firm growth and employment. View studies in this research area here.
Firm management is critical for productivity and growth—low managerial ability limits how managers use existing inputs and how they plan the use of new inputs.5 There is a positive correlation between the quality of management practices and per capita economic output, and firms in LMICs score poorly on management practices compared to their peers in high-income countries.6 This is particularly true for SMEs, where managers are seldom chosen competitively, they often have less education than their peers in larger firms, and firm size prevents them from specializing in specific areas.7 This highlights the importance of programs that can improve the management of firms in low and middle-income countries. Private, public and nonprofit organizations have channeled significant resources towards business training, consulting, and mentoring programs aimed at improving the management practices of SMEs.8 However, not all programs are as effective in achieving this goal, and rigorous impact evaluations are playing an important role in understanding which types of interventions work best. The EPSD Program investigates the role that managerial capital plays in firm growth, identifying and promoting the most effective ways to improve the skills of entrepreneurs and managers. View studies in this research area here.
Women’s Entrepreneurship and Economic Empowerment
On average, women’s businesses are smaller than men’s,9 are concentrated in sectors with lower profit margins,10 and are disproportionately represented in the informal sector.11 There are also gender differences in time-use12 and women often have to balance childcare or taking care of sick members of the family with running a business. The EPSD Program supports research on interventions that address the gender gap in entrepreneurship and business outcomes, including flexible financing for women-led SMEs, cash and in-kind grants, soft-skills training, information provision, role models, mentoring, consulting, digital literacy training, and e-commerce platforms. We are also interested in studying the impacts of access to childcare, stress management and cognitive behavioral therapy, as well as, potential interventions to address gender inequalities through gender-inclusive employment policies and scaling gender-focused business models. We officially kicked off this new area of work in 2020 with the launch of the Women’s Work, Entrepreneurship and Skilling (WWES) Initiative, which combines data collection efforts, research projects, and policy work, focusing on two key themes: (i) women’s work, entrepreneurship, and time use, and (ii) youth skilling and school-to-work transitions. While the focus countries of the WWES initiative are Kenya and Bangladesh, we plan on expanding the geographic scope of this work going forward.
Innovation and Technology Adoption
Technological progress is key to increasing productivity and accelerating growth, as well as to creating employment and reducing poverty, especially in LMICs. It also brings new challenges related to the future of work and how LMICs can best prepare to go through the technological transition while minimizing negative social impact. The EPSD Program rigorously evaluates interventions that foster technology upgrades and innovation through financial support, information dissemination, and technical assistance. We are also interested in examining the role of accelerators and incubators for innovative start-ups. Innovation and technology adoption have strong links to access to finance, skills, and access markets, and thus the knowledge accumulated in our program’s original core research areas also provides useful insights.
A key challenge of our time is adaptation to climate change and the transition to more sustainable patterns of production. The COVID-19 crisis has had a tremendous impact on businesses (especially SMEs), but the recovery process presents an opportunity to move faster into a greener economy. The EPSD program examines innovative policies with potential to assist firms in adapting to new challenges brought by climate change and enable them to be drivers of green growth and innovation. This includes programs that promote the development and adoption of climate-smart technologies, interventions that foster compliance with environmental regulations, and programs that help businesses become more resilient in the face of climate change. The program is also interested in evaluating financing options for green innovations, information provision, and consulting services to assess firm-specific climate-related risks and develop adaptation strategies given that transition into more sustainable patterns of production can involve information, management, and financial challenges for many firms.
1 SME Finance Forum. “MSME Finance Gap”, Accessed October 21, 2021. https://www.smefinanceforum.org/data-sites/ msme-finance-gap.
2 Organization for Economic Co-operation and Development. 2019. “Fostering Greater SME Participation in a Globally Integrated Economy,” in Strengthening SMEs and Entrepreneurship for Productivity and Inclusive Growth: OECD 2018 Ministerial Conference on SMEs.” OECD website. Accessed November 1, 2021. https://doi.org/10.1787/400c491d-en.
3 Cusolito, Ana Paula, Raed Safadi, and Daria Taglioni. 2016. “Inclusive Global Value Chains.” World Bank.
4 Quinn, Simon and Christopher Woodruff. 2019. “Experiments and Entrepreneurship in Developing Countries”. Annual Review of Economics. Vol. 11: 225-248.
5 Bruhn, Miriam, Dean Karlan, and Antoinette Schoar. 2010. “What capital is missing in developing countries?.” American Economic Review, Vol. 100 (2): 629-633.
6 Scur, Daniela, Raffaella Sadun, John Van Reenen, Renata Lemos, and Nicholas Bloom. 2021. “The World Management Survey at 18: lessons and the way forward.” Oxford Review of Economic Policy, Vol. 37 (2): 231–258.
7 Bloom, Nicholas, Christos Genakos, Raffaella Sadun, and John Van Reenen. 2012. “Management practices across firms and countries.” The Academy of Management Perspectives Vol. 26 (1).
8 McKenzie, David, Christopher Woodruff, Kjetil Bjorvatn, Miriam Bruhn, Jing Cai, Juanita Gonzalez Uribe, Simon Quinn, Tetsushi Sonobe, and Martin Valdivia. 2021. “Training Entrepreneurs” VoxDevLit, 1(2).
9 IFC. 2020. “MSME Finance Gap: Assessment of the Shortfalls and Opportunities in Financing Micro, Small and Medium Enterprises in Emerging Markets.” Washington DC: International Finance Corporation.
10 Goldstein, Markus, Paula Gonzalez Martinez, and Sreelakshmi Papineni, “Tackling the Global Profitarchy: Gender and the Choice of Business Sector.”
11 International Labour Organization. 2018. “Women and Men in the Informal Economy: A Statistical Picture.” Geneva: ILO.