Business training and female enterprise start-up, growth, and dynamics : experimental evidence from Sri Lanka

We conduct a randomized experiment among women in urban Sri Lanka to measure the impact of the most commonly used business training course in developing countries, the Start-and- Improve Your Business (SIYB) program. We work with two representative groups of women: random sample of women operating subsistence enterprises and a random sample of women who are out of the labor force but interested in starting a business. We track impacts of two treatments – training only and training plus a cash grant – over two years with four follow-up surveys and find that the short- and medium-term impacts differ. For women already in business, training alone leads to some changes in business practices but has no impact on business profits, sales or capital stock. In contrast the combination of training and a grant leads to large and significant improvements in business profitability in the first eight months, but this impact dissipates in the second year. For women interested in starting enterprises, we find that business training speeds up entry but leads to no increase in net business ownership by our final survey round. Both profitability and business practices of the new entrants are increased by training, suggesting training may be more effective for new owners than for existing businesses. We also find that the two treatments have selection effects, leading to entrants being less analytically skilled and poorer

Innovative Firms or Innovative Owners? Determinants of Innovation in Micro, Small, and Medium Enterprises

Innovation is key to technology adoption and creation, and to explaining the vast differences in productivity across and within countries. Despite the central role of the entrepreneur in the innovation process, data limitations have restricted standard analysis of the determinants of innovation to consideration of the role of firm characteristics. We develop a model of innovation which incorporates the role of both owner and firm characteristics, and use this to determine how product, process, marketing and organizational innovations should vary with firm size and competition. We then use a new large representative survey from Sri Lanka to test this model and to examine whether and how owner characteristics matter for innovation. The survey also allows analysis of the incidence of innovation in micro and small firms, which have traditionally been overlooked in the study of innovation, despite these firms comprising the majority of firms in developing countries. More than one quarter of microenterprises are found to be engaging in innovation, with marketing innovations the most common. As predicted by our model, firm size is found to have a stronger positive effect, and competition a stronger negative effect, on process and organizational innovations than on product innovations. Owner ability, personality traits, and ethnicity are found to have a significant and substantial impact on the likelihood of a firm innovating, confirming the importance of the entrepreneur in the innovation process.innovation, microenterprises, SMEs, development

Enterprise recovery following natural disasters

Using data from surveys of enterprises in Sri Lanka after the December 2004 tsunami, the authors undertake the first microeconomic study of the recovery of the private firmsin a developing country following a major natural disaster. Disaster recovery in low-income countries is characterized by the prevalence of relief aid rather than of insurance payments; the data show this distinction has important consequences. The data indicate that aid provided directly to households correlates reasonably well with reported losses of household assets, but is uncorrelated with reported losses of business assets. Business recovery is found to be slower than commonly assumed, with disaster-affected enterprises lagging behind unaffected comparable firms more than three years after the disaster. Using data from random cash grants provided by the project, the paper shows that direct aid is more important in the recovery of enterprises operating in the retail sector than for those operating in the manufacturing and service sectors.Microfinance,Debt Markets,Banks&Banking Reform,Natural Disasters,Hazard Risk Management

Are Women More Credit Constrained? Experimental Evidence on Gender and Microenterprise Returns

In a recent randomized experiment we found mean returns to capital of between 5 and 6 percent per month in Sri Lankan microenterprises, much higher than market interest rates. But returns were found to be much higher among men than among women, and indeed were not different from zero for women. In this paper, we explore different explanations for the lower returns among female owners. We find no evidence that the gender gap is explained by differences in ability, risk aversion, or entrepreneurial attitudes. Nor do we find that differential access to unpaid family labor or social constraints limiting sales to local areas are important. We do find evidence that women invested the grants differently from men. A smaller share of the smaller grants remained in the female-owned enterprises, and men were more likely to spend the grant on working capital and women on equipment. We also find that the gender gap is largest when we compare male-dominated sectors to female-dominated sectors, although female returns are lower than male returns even for females working in the same industries as men. We then examine the heterogeneity of returns to determine whether any group of businesses owned by women benefit from easing capital constraints. The results suggest there is a large group of high-return male owners and smaller group of poor, high-ability, female owners who might benefit from more access to capital.microenterprises, gender, microfinance, randomized experiment

Returns to capital in microenterprises : evidence from a field experiment

Small and informal firms account for a large share of employment in developing countries. The rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. The authors use a randomized experiment to overcome this problem and to measure the return to capital for the average microenterprise in their sample, regardless of whether they apply for credit. They accomplish this by providing cash and equipment grants to small firms in Sri Lanka, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. After controlling for possible spillover effects, the authors find the average real return to capital to be 5.7 percent a month, substantially higher than the market interest rate. They then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns. Returns are found to vary with entrepreneurial ability and with measures of other sources of cash within the household, but not to vary with risk aversion or uncertainty.Economic Theory&Research,Investment and Investment Climate,Microfinance,Small Scale Enterprise,Economic Growth

Innovative firms or innovative owners ? determinants of innovation in micro, small, and medium enterprises

Innovation is key to technology adoption and creation, and to explaining the vast differences in productivity across and within countries. Despite the central role of the entrepreneur in the innovation process, data limitations have restricted standard analysis of the determinants of innovation to consideration of the role of firm characteristics. The authors develop a model of innovation that incorporates the role of both owner and firm characteristics, and use this to determine how product, process, marketing, and organizational innovations should vary with firm size and competition. They then use a new, large, representative survey from Sri Lanka to test this model and to examine whether and how owner characteristics matter for innovation. The survey also allows analysis of the incidence of innovation in micro and small firms, which have traditionally been overlooked in the study of innovation, despite these firms comprising the majority of firms in developing countries. The analysis finds that more than one-quarter of the microenterprises are engaging in innovation, with marketing innovations the most common. As predicted by the model, firm size has a stronger positive effect, and competition a stronger negative effect, on process and organizational innovations than on product innovations. Owner ability, personality traits, and ethnicity have a significant and substantial impact on the likelihood of a firm innovating, confirming the importance of the entrepreneur in the innovation process.E-Business,Education for Development (superceded),Innovation,Labor Policies,Microfinance

Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto

Is the vast army of the self-employed in low income countries a source of employment generation? We use data from surveys in Sri Lanka to compare the characteristics of own account workers (non-employers) with wage workers and with owners of larger firms. We use a rich set of measures of background, ability, and attitudes, including lottery experiments measuring risk attitudes. Consistent with the ILO’s views of the self employed (represented by Tokman), we find that 2/3rds to 3/4ths of the own account workers have characteristics which are more like wage workers than larger firm owners. This suggests the majority of the own account workers are unlikely to become employers. Using a two and a half year panel of enterprises, we show that the minority of own account workers who are more like larger firm owners are more likely to expand by adding paid employees. The analysis suggests that finance is not the sole constraint to growth of microenterprises, and provides an explanation for the low rates of growth of enterprises supported by microlending.entrepreneurship, self-employment, De Soto

Measuring microenterprise profits : don't ask how the sausage is made

A large share of the world's poor is self-employed. Accurate measurement of profits from microenterprises is therefore critical for studying poverty and inequality, measuring the returns to education, and evaluating the success of microfinance programs. But a myriad of problems plague the measurement of profits. The authors report on a variety of different experiments conducted to better understand the importance of some of these problems and to draw recommendations for collecting profit data. In particular, they (1) examine how far we can reconcile self-reported profits and reports of revenue minus expenses through more detailed questions; (2) examine recall errors in sales and report on the results of experiments which randomly allocated account books to firms; and (3) ask firms how much firms like theirs underreport sales in surveys like this, and have research assistants observe the firms at random times 15-16 times during a month to provide measures for comparison. The authors conclude that firms underreport revenues by about 30 percent, that account diaries have significant effects on both revenues and expenses but not on profits, and that simply asking profits provides a more accurate measure of firm profits than detailed questions on revenues and expenses.Business in Development,Business Environment,Competitiveness and Competition Policy,Economic Theory&Research,Income

Are women more credit constrained ? experimental evidence on gender and microenterprise returns

This paper analyzes data from a randomized experiment on mean returns to capital in Sri Lankan micro-enterprises. The findings show greater returns among men than among women; indeed, returns were not different from zero for women. The authors explore different explanations for the lower returns among female owners, and find no evidence that the gender gap is explained by differences in ability, risk aversion, or entrepreneurial attitudes. Differential access to unpaid family labor and social constraints limiting sales to local areas are not important. However, there is evidence that women invested grants differently from men. A smaller share of the smaller grants remained in the female-owned enterprises, and men were more likely to spend the grant on working capital and women on equipment. The gender gap is largest when male-dominated sectors are compared with female-dominated sectors, although female returns are lower than male returns even for females working in the same industries as men. The authors examine the heterogeneity of returns to determine whether any group of businesses owned by women benefit from easing capital constraints. The results suggest there is a large group of high-return male owners and a smaller group of poor, high-ability, female owners who might benefit from more access to capital.Access to Finance,Debt Markets,Gender and Health,,Economic Theory&Research