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]

Pre-treatment Profits Distribution for Women

Post-treatment Profits Distribution for Women

Post-treatment Profits for Men

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

Labour: results Offered to 772 enterprises

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

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 benefits

Are any of the channels operating?

Impacts on attitudes

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

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!