Old and New India: A Comparison of Entrepreneurs in Delhi Using...

1

Old and New India: A Comparison of

Entrepreneurs in Delhi Using Experimental

and Non-Experimental Data

JUN GOTO,6,1 HIRONORI ISHIZAKI,3 TAKASHI KUROSAKI,1

YASUYUKI SAWADA,2,4 and SHUNSUKE TSUDA2,5

1 2 3 4 5 6

Broad Research QuestionsWhat are the key entrepreneurial abilities in

growth? • This paper: Role of individual and social preference elicited by

incentivized lab experiments => Today, focus on risk-taking, leadership, and time preferences

What are the roles of the informal & formal sectors in employment generation & poverty reduction?• We compare “OLD” and “NEW” India and compare “Informal”

and “Formal” India by examining MSSI (micro & small-scale industries) and IT.

2018/6/22 Speaker: Takashi Kurosaki (Hitotsubashi University) 2

IT MSSI (registered) MSSI (unregistered)

Formal Informal

NEW (Modern) OLD (Traditional)

Service Service & Mfg

Literature Behavioral Foundation of Firm Performance

• Kremer et al. (2013, AER P&P): behavior biases’ impact on firm performance in Kenyan retail shops; using risk games

• Fehr and List (2004, JEEA): Trust games to CEOs in Costa Rica• Fafchamps and Quinn (forthcoming, WBER): random assignment of peers to

entrepreneurs in Ghana• Holm et al. (2017, Management Sc): risk pref of Chinese entrerpreneurs• Mixed Evidence of the reciprocity-based informal network:

＋：social capital literature (Durlauf and Fafchamps 2005, etc.);－：kinship taxation literature (Squires 2016; di Falco and Bulte 2011 JDS; Jakiela and Ozier 2016 RES, etc.)

Sectoral Heterogeneity:• Formal vs. informal: Many research on Informality & Economic Development

La Porta and Shleifer (2008, 2014); de Soto; ILO; McKinsey Global Inst. Report;Meghir et al. (2015, AER); Ulyssea (2017), etc.

• Indian Context Comparison of organised & unorganised manufacturing firms: Kathuria et al. (2010,

2012); Sato (2008); Nikaido et al. (2015); Sasidharan and Raj (2014); Sharma (2014) Delhi Context: Hayami et al. (2006, JDS) [Waste Pickers]; Kurosaki et al. (2012)

[Cycle Rickshaws]; Kurosaki (2018) [Focus on MSSI Informality], etc.

3

Our contribution Answer the two broad questions through our

research strategy:• Unique survey and experiments w/ IT and MSSI in Delhi,

covering both manufacturing and services, and, different level of informality, and 2 periods

• Conventional firm data plus data from artefactual field experiments (lab-in-the-field experiments) and self-reported social preferences

• RCT-based interventions (different paper)

Preview of main findings of this paper:• Significant differences in social, risk, and time preferences

across sectors.

• Heterogeneous relationship between social/risk/time preferences and firm performances across sectors.

2018/6/22 4

Presentation Outline

1. Introduction

2. Institutional Background & Surveys

3. Artefactual Field Experiment

4. Empirical Strategy

5. Main Results

6. Further Results: Leadership multidimensionality & robustness checks

7. Conclusion

2018/6/22 5

Micro, Small, and Medium Enterprises (MSMEs) in India Importance of MSMEs & informal sector in India:

• Govt promotes labor-intensive MSMEs

• Large informal sector: “Unorganised” mfg share =35% in total mfg in GDP, “Unorganized” service’s share =54%.

Definition: Organised-sector firm & firm registration:• Organised sector = Those firms registered under Factories Act of 1948

(mandatory if more than 9 employees) or Companies Act of 2013

• Among unorganised-sector firms, some register under MSME Development Act of 2006, covering both manufacturing and service sector units.

Whether register or not entails the tradeoff:

• Benefits under MSMED Act of 2006: (1) MSME promotion policies such as indirect tax exemption, ISO support, low-interest credit, supply to govt procurement, etc.

(2) Credit improvement from private financial institutions.

• Costs under Factories Act of 1948 and MSME Act of 2006:Strict labor and environmental regulations; Tax compliance (but the majority of MSMEs are below the exemption limit)

6

Institutional Background & Surveys

Baseline Survey of Micro and Small Scale Industries (MSSI) in northeastern Delhi

Random sampling from about 1,000 firms listed in ShahdaraIndustrial Directory 2013, containing both manufacturing- and service-sector firms.

Large & medium firms a la the 2006 MSMED Act were excluded.

506 firms were surveyed in November-December 2014.

Contents of the baseline questionnaire:(1) Firm characteristics (registration, product, market, ownership, etc);

(2) Entrepreneur characteristics (age, education, qualification, religion, migration, experience, etc);

(3) Firm history including innovation;

(4) Sales & current costs in the last month;

(5) GSS (General Social Survey) Trust questions;

(6) Constraints & requests to govt.

They were invited to artefactual field experiments (“BMDT”):• 1st round BMDT (March-Sept 2015): 118 participants

• 2nd round BMDT (March-April 2016): 108 participants2018/6/22 7


9

Shankar Industries (Jhilmil, East Delhi)

10

Rajhans Tailors (Sundar Nagri, East Delhi)

IT Startups in India Selected “seed-early” stage startups, most of which

focus on product developments and are on the way of fund raising. • Small firm size (similar to MSSI) but young & highly educated (opposite to

MSSI)• Hardware (Technology solution, cleaning service, etc) and Software (E-

commerce, Online health care service, etc)

Random sampling of the IT startups out of approx. 350 entrepreneurs belonging to the two “Accelerators”, which support startups in various ways (e.g., co-working space and education programs)

Collect 109 samples from NCR during March-June 2016.

Contents of the baseline survey:• Brief version of (1)-(4) from the MSSI one.• GSS Trust Questions• BMDT

2018/6/22 Reporter: Shunsuke Tsuda (University of Tokyo) 11

Institutional S Background & Surveys

2018/6/22 12

IT entrepreneurs work @ Investopad, Gurgaon.

Summary of the Baseline Survey and Artefactual Field Experiments

2018/6/22 13


Table1. Survey Timing & Sample Distribution

*A short lecture session was given to learn how to set firm goals. This was to be used for the reminder RCT.

Endline Survey of MSSI /IT Startups Target:

• All of 506 MSSI surveyed in the baseline

• 107 of IT Startups surveyed in the baseline

Objective:• Collect panel information on firm performance

• Assess the impact of RCT (reminder exercise of goal-setting lecture) and Demonetisation (Nov 2016)

287 of MSSI and 27 of IT startups surveyed in June -Sept 2017

Attrition higher among:(1) Larger firms, registered MSSI, IT startups

(2) Entrepreneurs who are older, highly educated

(3) Entrepreneurs with lower trust to relatives and friends

(4) Entrepreneurs with lower altruism, higher discount rates

2018/6/22 14


Artefactual Field ExperimentArtefactual field experiments to all IT startups (109) & a

subset of MSSI entrepreneurs (226), incentivized.

“BMDT (Business Management Diagnostic Tests)” including “Dictator game”, “Risk game”, “Leadership game” and “CTB (Convex Time Budget) game” to measure• Altruism toward

(i)Random person in India/(ii)Neighbors/(iii)Business buyer & sellers/(iv)Friends & Relatives

• Reputation concern from neighbors [Cf. Ligon and Schechter 2012]

• Risk preference as individual• Leadership in risk-taking [Cf. Ertac and Gurdal, 2012 JEBO]

• Time preferences (Discount factor, Present bias, andIntertemporal elasticity of substitution)

2018/6/22 15

16

A lab session, East Delhi; explaining how incentive is paid

17

A lab session, IT Startups

Dictator Game

2018/6/22 18

Artefactual Field Experiment

The partner’s characteristics change according to games (neighbors, business sellers/buyers, etc.)

For neighbors, anonymous vs. identity revealed to elicit reputation concern (Ligon and Schechter 2012)

Risk and Leadership Games Canonical risk game w/ different loading factors (1.5, 2, 2.5).

Leadership game (Ertac and Gurdal, 2012, JEBO): Leadership is measured by risk game as a group leader & asking decisions of whether he/she willing to become a leader (after group risk game).

“Cautious Shift”: Difference in risk taking b/w individual & group games [+(-)tive if more (less) risk taking ; and 0 if pure individualism]

CTB (Andreoni & Sprenger, 2012 AER)

2018/6/22

Subjects choose intertemporal allocations of money within a convex budget set, with different t (earlier date), k (time interval between the earlier and later dates), and several interest rates P=(1+r) . 24 CTB decisions for each.

Can elicit:

β : Present bias

δ : Exponential disc factor

α : IES = 1/(1-α)

Max 𝑈(𝑥𝑡 , 𝑥𝑡+𝑘)s.t. 𝑃𝑥𝑡 + 𝑥𝑡+𝑘 = 4000

CTB: intuition of 3 parameters

2018/6/22 21

Appendix: Artefactual Field Experiment

24 CTB decisions for each participant t = {0, 35, 63} days

k = {35, 63} days

Several interest rates P=(1+r)

3 parameters Curvature (intertemporal smoothing): tendency to prefer C in both

Present bias (red zone); no bias (light blue); future bias (orange)

Exponential discount factor: if high, tendency to prefer E in both

A (All k weeks later) B C D E (All 2k weeks later)

A (all now)

B

C

D

E (All later)

"k weeks after" vs. "2k weeks after"

"T

oday" vs.

"k w

eeks

after"

CTB: A Summary

2018/6/22 22

Artefactial Field Experiment

Our NLS estimates using the pooled sample (cluster-robust standard errors in parenthesis)Curvature: α = 0.6907 (0.0138) < 1 (intertemporal

smoothing)Present bias: β = 0.9765 (0.0146) < 1 (slightly present

biased)Exponential discount factor: δ = 0.9947 (0.0004) (very high

discount rate of approximately 17% per month)

Research questions 1. Are individual & social preferences of micro-entrepreneurs different between traditional and modern sectors in India?

2. How are individual and social preferences of micro-entrepreneurs are correlated with firm performances?

3. If correlated, how are they different between traditional & modern sectors?

2018/6/22 23

Empirical Strategy

IT MSSI (registered) MSSI (unregistered)

Formal Informal

NEW (Modern) OLD (Traditional)

Service Service & Mfg

The Three “Types” we focus in the analyses Table1. Survey Timing & Data Distribution

Different in various characteristics between Unregistered MSSI & Registered MSSI (Kurosaki, 2018) ⇒ divide into two groups

Registration status of IT start-ups just depends on the stage of development ⇒ Just regard IT Start-up as one sector.

2018/6/22 24

Empirical Strategy

Empirical Strategy Bivariate comparisons:

• Socio-economic characteristics of entrepreneurs across types [Unregistered MSSI, Registered MSSI, IT Start-up] (self-selection)

• Preferences (GSS responses, BMDT answers & Estimated parameters) across types [Research Question 1]

• Firm performance (innovation, growth rates, profit, etc.) across types

Multiple regressions: • Dep.Var = firm performance

• Expl.Var. = (i) preferences (GSS responses, BMDT answers), (ii) firm & entrepreneur characteristics (age, education, etc), (iii) industry, location, round fixed effect [Research Questions 2 & 3]

2018/6/22 25

Empirical Strategy

Regression Specification

Y = a0 + a1D1 + a2D2 + {b0(1-D1-D2)+b1D1+b2D2} *Z + Xβ + u

Y : Innovation dummies, capital growth rate, profit variables

D1=1[Registered MSSI], D2=1[IT Startup]

Z : Individual and social preference variables

X: Other controls

• Entrepreneur characteristics (age, education, sex, and dummy for birthplace in Delhi)

• Firm's age

• Industry fixed effects (15 sectors for MSSI distinguished by the product/service codes, and 3 sectors for IT distinguished by the customer type)

• Location Fixed Effects (10 locations for MSSI & 4 locations for IT)

• Round dummies for MSSI2018/6/22 26

Empirical Strategy

Regression Specification (Cont’d)

Y = a0 + a1D1 + a2D2 + {b0(1-D1-D2)+b1D1+b2D2} *Z + Xβ + u

b0, b1, and b2: Main parameters of interest

Z: Preferences expected to improve firm performance

• Risk-taking in individual risk games

• EU maximizer dummy in individual risk games

• Willingness to become the leader in group risk games

• “Cautious Shift” (Difference in risk taking b/w individual & group risk game)

• Low discount rate (long-run horizon)

• Absence of present bias

• Not too much intertemporal smoothing

2018/6/22 27

Empirical Strategy

TABLE 3. SOCIO-ECONOMIC BACKGROUND OF THE SAMPLE ENTREPRENEURS

2018/6/22 28

Background of Sample Entrepreneurs

TABLE 4. GSS TRUST INDICATORS

Sectoral Heterogeneity in Social Preferences

TABLE 5. CHOICE IN BMDT (1. DICTATOR GAMES)

Sectoral Heterogeneity in Social Preferences

TABLE 5. CHOICES IN RISK & LEADERSHIP GAMES

2018/6/22 31

Sectoral Heterogeneity in Risk/Social Preferences

TABLE 6. ESTIMATION RESULTS FOR CTB PARAMETERS

Present Bias: No significant differences across sectors

Discount factor & α: IT > Unreg. MSSI > Reg. MSSI !2018/6/22 32

Sectoral Heterogeneity in Time Preferences

Sectoral comparison of preferences of entrepreneurs: Summing up

The three types (Traditional Registered & Unregistered, and Modern) of micro-entrepreneurs are different not only in socio-economic characteristics but also in social, risk, and time preferences:• Basic socio-economic characteristics: large difference between traditional

& modern ↔ small difference within traditional (Registered & Unregistered).

• In terms of social, risk, and time preferences, IT startups are similar to Unregistered traditional, but not to Registered traditional.

• Registered MSSI is the most “problematic” (high disc. rate & low IES)!

The bivariate comparison results were found robust in multiple regression analyses where firm age, entrepreneur characteristics (age, education, sex, migrant dummy), and BMDT round fixed effects were controlled.

2018/6/22 33

TABLE 7. PERFORMANCE & CHARACTERISTICS OF SAMPLE FIRMS

Main Results: Firm Performance

TABLE 8. FIRM PERFORMANCE & ENTREPRENEUR’S PREFERENCE


Main Results for Firm Performance

*17 indicators x 3 entrepreneur group x 10 firm outcome measure = 510 coeff. 5% significance could occur for 25.5 cases by a chance. We find 66 cases of 5% significance.


2018/6/22 36

Main Results


2018/6/22 37

Main Results

DiscussionsMore risk taking => Better performance (IT)

More negative change in risk-taking as a leader => More innovative (IT): Flexible risk-taking ability as a leader is important in firm innovation

More present biased => More product innovation, but the less innovative in marketing (IT):

• Reflecting the typical characteristic of IT startups. In the seed- early stage of IT start-ups, once funds come in, entrepreneurs tend to expand their products (service variation, new applications, etc), even at the expense of their marketing strategy.

Smaller discount factor (larger disc. rate) => Less innovative(IT) & More product innovation (formal MSSI):

• By the institutional reason (e.g. govt procurement), impatient entrepreneurs (who also might be credit constrained) might devote to excessive product innovation.

Intertemporal smoother => Worse performance (IT & formal MSSI)

2018/6/22 38

Main Results

Leadership multidimensionality

2018/6/22 39

Further Results

“Willingness to be the leader” & “Change in risk-taking as the Leader” (Tables 9-10): • More negative change in risk-taking as the leader => More innovative (IT):

Consistent w/ three facts: (i) More risk taking => More negative change (by construction; care as the leader), and more risk taking => better performance (IT); (ii) Cautious shift dummy => better performance (IT); (iii) More adjustment as the leader => better performance (IT).

“Change in risk-taking as the Leader” decomposed into “Cautious shift dummy” and “Flexibility (Table 11):• Both => better performance (IT)

Well-performed entrepreneurs might be aware of importance of more cautious risk management when more people are involved and willing to change flexibly.

TABLES 9-10. “WILLINGNESS TO BE THE LEADER” & “CHANGE IN RISK-TAKING AS THE LEADER”

Further Results

TABLE 11. “CHANGE IN RISK-TAKING AS THE LEADER” DECOMPOSED INTO

“CAUTIOUS SHIFT DUMMY” AND “FLEXIBILITY”

Further Results

Robustness checks

2018/6/22 42

Further Results

Analysis of endline data • Robust = individual risk taking, cautious shift, willingness to be the leader,

intertemporal smoother

• Opposite result = present bias and discount rate among ITs, which could be due to attrition, change in preferences, and change in performance-preference relation

Other robustness checks• MSSI-BMDT preferences for non-owner? (App.Table 9)

• Definition of preference indicators

Robustness checks

2018/6/22 43

Further Results

Analysis of endline data:

Table 12: Summary stats of firm performance

Table 13. Firm performance and risk, time, and leadership preference (endline data)

2018/6/22 44

Further Results

Conclusion The three types (Traditional Registered & Unregistered, and

Modern) of micro-entrepreneurs are different not only in socio-economic characteristics but also in social, risk, and time preferences:• Basic socio-economic characteristics: large difference between traditional

& modern ↔ small difference within traditional (Registered & Non-registered).

• In terms of social, risk, and time preferences, IT startups are similar to Unregistered traditional, but not to Registered traditional.

• Registered MSSI is the most “problematic” (high disc. rate & low IES)!

Social, risk, and time preferences significantly affect firm performances, and the relationships are largely heterogeneous across the three sectors. • Standard predictions from microeconomics are generally supported

among IT start-ups ↔ Among Registered MSSI, opposite signs (statistically significant) are often observed (e.g., individual risk taking, extent of cautious shift, discount factor, etc).

2018/6/22 45

Tasks ahead Linking heterogeneous relationship between

firm performance and entrepreneurs’ preference with institutional/policy background more tightly• Theoretical modeling

• Endogeneity of registration among MSSI

• Endogeneity of firm entry/exit/attrition

• Measuring preferences after the macro shocks

• Distinguishing impacts of Demonetisation, GST, and RCT

2018/6/22 46


Thank you very much for your attention.

Comments & questions: [email protected]

Old and New India: A Comparison of Entrepreneurs in Delhi Using...

Documents

Transcript of Old and New India: A Comparison of Entrepreneurs in Delhi Using...