Promoting micro-entrepreneurship in the developing world

Chris Woodruff, University of Warwick and International Growth Centre

BRAC, IGC, iiG Conference on Entrepreneurship and Development

Dhaka, March 2011

Self employment: a dominant share of the labour force

Source: Gollin 2002

Underlying questions

• Is there unlocked potential for employment creation in microenterprises?

• Can the incomes of the self employed be increased?

Specific questions from research

• Y = f (K, L, A) : Income depends on capital, labour and technology / efficiency.

– How does income change when capital is injected into the enterprise?

– Will microentrepreneurs hire workers when given the chance and will incomes increase?

– Can efficiency be increased with: 1) training, or 2) formality?

• I will talk about evidence on these three questions based on research in Sri Lanka, Ghana, and Mexico.

Capital

• Experimental evidence from Sri Lanka, Ghana and Mexico:

– Randomized experiments where we provide grants to enterprises to create exogenous variation in capital stock

– Random samples of enterprises representative of urban microenterprises with invested capital < $US1000 (median around $200)

Capital: Structure of experiment

• Capital injected through grants rather than loans

• 100% takeup; many reasons why entrepreneurs may not apply for loans

• Provided in cash or through in-kind purchases of assets / inventories selected by the entrepreneur

– Between 75 and 90 percent of the grants were invested in the enterprise, on average

– In all three countries, the majority of the grants were spent on working capital (inventories)

Capital: Results

• Mexico: Very large increases in profits following the injection of capital.

– Monthly profits increased by 30 pesos for each 100 pesos of grants; sample of male-owned enterprises only

• Sri Lanka: The capital injection resulted in very large increases among enterprises owned by males; but no returns in enterprises owned by females

• No difference between cash grant and in-kind grant

Capital returns: Sri Lanka

With Suresh deMel and DavidMcKenzie

Capital: Results

• In Ghana: Large increase in profits for both male- and female-owned enterprises, on average.

– ~30 GhC increase in monthly profits following a 150 GhC grant.

• But more nuanced outcomes underneath:– Lowest baseline income vs. higher baseline

income– Cash vs. in-kind grants.

[Joint work with Marcel Fafchamp, David McKenzie and Simon Quinn]

0.2

.4.6

.81

0 200 400 600 800 1000Wave 2 Profits - Females

Control CashEquipment

Pre-treatment Profits Distribution for Women

0.2

.4.6

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0 500 1000 1500Waves 5 and 6 profits - Females

Control CashEquipment

Post-treatment Profits Distribution for Women

0.2

.4.6

.81

0 500 1000 1500Waves 5 and 6 Profits - Males

Control CashEquipment

Post-treatment Profits for Men

Capital: GhanaThe real puzzle: Why does the impact of cash and in-kind

vary?- We ‘forced’ the capital into the business with the in-kind

purchases. Or did we?- Since majority of in-kind grants used to purchase inventories and

raw materials, should be relatively easy to de-capitalize if owners want

- Differences are then really:- Earmarking for a specific purpose- Initial liquidity

- Literature suggests two possible reasons why effects may then differ:

- Self-control - External pressure to share

Measures of Self-control and External Pressure

• Self-control:– Use a susu collector at baseline– Agree with statement “I save regularly” at baseline– Hypothetical discounting questions – to form measure of

discount rate and hyperbolicity.– Lack of Self-control Index: first principal component of these

• External pressure– Whether they feel pressure to share with others rather than

invest in the business– Can spend income without consulting spouse– Household size– Number of siblings in Accra/Tema area

-150

-100

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50

100

150

200

250

0 1 2 3 4 5

Trea

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Quarters Since Treatment

Are In-kind Grants Decapitalized?

Cash - High Control

Equipment - High Control

Cash- Low Control

Equipment - Low Control

Capital: Summary

• For male-owned enterprises: very large increases in profits following cash / in-kind grants in Sri Lanka, Ghana, Mexico– Marginal returns to capital which are much higher

than microfinance lending rates in all three countries

• For females: No increase in profits in Sri Lanka, but a large increase in Ghana. – More central to household income generation in

Ghana

Labour

• Experiment in Sri Lanka, with a sample of male-owned enterprises with 0-2 employees at baseline

• Provided a wage subsidy of 4000 Rs per month for 6 months, then 200 Rs per month for 2 additional months, if they hired a new employee– 4000 Rs is about half a typical salary of a laborer.

[With Suresh de Mel and David McKenzie]

Labour: results

• Offered to 772 enterprises in August 2009; subsidy offer expired in May 2010– 27% hired a worker at some point during the program– Only 38% of those (10% of the sample) still employed

in the worker in October 2010– Among firms not hiring workers, the most important

reasons given were:• Lack of capital needed to make worker productive• Fluctuating sales levels• Low (expected) MP of labour

Labour: results

• Offered to 772 enterprisesTable 3: Preliminary Impacts on Having a Paid Worker

October April October2009 2010 2010

(1) (2) (3) (4) (5)Savings Treatment 0.0379** 0.0389** 0.00645 0.0271 0.0557**

(0.0170) (0.0190) (0.0196) (0.0236) (0.0258)Wage subsidy Treatment 0.106*** 0.108*** 0.0912*** 0.0902*** 0.0435**

(0.0216) (0.0154) (0.0195) (0.0237) (0.0220)Business Training Treatment 0.0193 0.0142 -0.0101 0.000877 0.00135

(0.0225) (0.0158) (0.0190) (0.0227) (0.0246)Method Ancova FE Ancova Ancova Ancova

Observations 5,606 7,202 1,296 1,264 1,228Note: Robust standard errors in parentheses, clustered at the firm level in columns (1) and (2). *** p<0.01, ** p<0.05, * p<0.1

Averaged over allwaves

Labour: Who took up the offer

Efficiency: training and formality

• Training experiments in Sri Lanka with both males and females; formality experiment in Sri Lanka with males

Training: females

Training: females

Formality

• Experiment which offered incentives to Sri Lankan enterprises if they registered their business at the Division Secretariat level– Ability to obtain bank accounts, electricity, etc. in

business name and to issue formal receipts– Obligation to pay taxes

• Information on registration procedures and implications, plus payment of direct costs

• This plus reward of 10k, 20k, 40k Rs (median prof 25k)

Formalization: perceived benefitsTable 5: Main Benefits of Registering for Firms which Registered

% of firms answeringYet to see any benefit 36.2Improves image of business 20.7Less risk in business, offers protection 12.1Offers potential for loans in the future 10.3Helped in getting business insurance 6.9Offers potential for govt. contracts 5.2Allowed them to apply for a govt. contract 3.4Vague other reasons 8.6Note: based on open-ended questions in August 2010 to firms registering as a result of the intervention.

Are any of the channels operating?Table 6b: Effect of formalizing on different channels

Paid Amount of Formal Has Business Applied for Applied forTaxes Taxes AccountingReceipt book Bank A/c. Business LoanPersonal Loan

Registered with the D.S. 0.294 -1,528 -0.206* 0.385* 0.129 0.0654 0.0112(0.210) (1,356) (0.115) (0.225) (0.140) (0.143) (0.103)

Lag included No Yes Yes No Yes No NoObservations 369 351 352 369 369 369 369Mean for control group in sample 0.64 1081 0.141 0.31 0.14 0.10 0.056

Share of Electric Applied for Participate Advertised Business hasSales madeConnection Govt. in Govt. in Last six clear and Changed to Govt. (%)in Bus. Name Contract SME program Months visible sign Location

Registered with the D.S. 2.372 -0.360 0.0368 0.00493 0.316* -0.280 -0.0994(3.207) (0.234) (0.0654) (0.0719) (0.178) (0.170) (0.147)

Lag included No No No No Yes Yes NoObservations 352 369 369 369 357 352 351Mean for control group in sample 0.96 0.40 0.022 0.033 0.16 0.56 0.18

Impacts on attitudes

Table 6c: Effect of formalizing on attitudesConfident in Agrees Thinks

Trust in Trust in Trust in police & courts being good Govt. chargesProvincial Municipal National Trust in Trust in the to settle citizen means business

GovernmentGovernmentGovernment the courts Police bus. dispute paying taxes too much taxRegistered with the D.S. 0.634*** 0.559** 0.227 -0.0387 -0.0993 0.0267 0.511*** 0.517**

(0.234) (0.234) (0.221) (0.188) (0.238) (0.203) (0.188) (0.238)Lag included Yes Yes Yes Yes Yes No No NoObservations 369 369 369 369 369 369 369 369Mean for control group 0.360 0.310 0.620 0.811 0.567 0.744 0.767 0.444

Evidence on the 2 underlying questions?

• Appears difficult to generate employment. – Some evidence for effectiveness of training,

especially among women. (A number of studies in other countries also indicate modest effects of training.)

– Little evidence of near-term effects of formalization

Employment generation?

• At a minimum, a need for much more careful selection of enterprises to address:– Aspirations for growth– Ability to manage workers, willingness to delegate– Access to capital to make the worker productive,

and to give credibility that may be needed to hire workers

Characteristics of the self- employed

Source: Fairlie and Woodruff 2006

Own account vs. employers

Educational Regression Coefficients--Men

-1.5

-1

-0.5

0

0.5

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Years of schooling

Co

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OwnAccountUnpaid

Paid

More than10 paid

Increasing incomes?

• Can we increase incomes of microenterprise owners? Yes…but:– Perhaps not always:

• Females with household responsibilities, lack of power within household, enterprises which are not the primary income for the household

• Those with self control issues

– Of course, the commitment to repay inherent in loans may help resolve these issues…but:

• Variance in incomes from microenterprises; equity vs. debt?

Heterogeneity of returns

Increasing incomes?

• In short, both support for and a challenge to traditional microfinance.– High returns for males, not the traditional target

group for MFIs– Variance and risk in returns, perhaps more

appropriately met with equity (e.g., savings) than credit

Thank You!