BRAC, IGC, iiG Conference on Entrepreneurship and Development Dhaka, March 2011

1. Promoting micro-entrepreneurship in the developing worldChris Woodruff, University of Warwick and International Growth Centre BRAC, IGC, iiG Conference on Entrepreneurship and Development Dhaka, March 2011

2. Self employment: a dominant share of the labour force Source: Gollin 2002

3. Underlying questions • Is there unlocked potential for employment creation in microenterprises? • Can the incomes of the self employed be increased?

4. 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.

5. 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)

6. 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)

7. 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

8. Capital returns: Sri Lanka With Suresh de Mel and David McKenzie

9. 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]

10. Pre-treatment Profits Distribution for Women

11. Post-treatment Profits Distribution for Women

12. Post-treatment Profits for Men

13. 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

14. 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

16. 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

17. 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]

18. 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

19. Labour: results • Offered to 772 enterprises

20. Labour: Who took up the offer

21. Efficiency: training and formality • Training experiments in Sri Lanka with both males and females; formality experiment in Sri Lanka with males

22. Training: females

23. Training: females

24. 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)

26. Formalization: perceived benefits

27. Are any of the channels operating?

28. Impacts on attitudes

29. 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

30. 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

31. Characteristics of the self- employed Source: Fairlie and Woodruff 2006

32. Own account vs. employers

33. 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?

34. Heterogeneity of returns

35. 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

36. Thank You!