Presentation on theme: "Promoting micro-entrepreneurship in the developing world Chris Woodruff, University of Warwick and International Growth Centre BRAC, IGC, iiG Conference."— Presentation transcript:
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 de Mel and David McKenzie
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]
Capital: Ghana The 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
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
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)
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
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?
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