Table of Contents
2.1 Financial Capital
2.2 Human Capital
2.3 Behavioral Characteristics
3. Experiment Design
3.1 Sample Selection
3.2 Baseline Survey
3.4 Follow up surveys
3.5 Measuring Growth
Appendix A: Survey Schedule
Appendix B: Teaching Schedule
Through a global economic perspective, it is striking that some countries are very rich and some countries are very poor. In order for poor countries to catch up, their economies have to grow. This growth can be generated through foreign companies in developing countries or firms run by local elites. However, these comprise the dangers of profits not staying in the country and of strengthening corrupt of oppressing elites. An alternative way lies in the generation of growth of very small enterprises. The incomes they generate are more likely to reach the poorer part of the population (e.g. by creating employment) or to be reinvested generating further growth than when money flows to local elites or abroad.
We thus see the generation of growth for microenterprises as crucial in terms of the economic development and alleviation of poverty in poor countries. However, we agree with Easterly, that it is wrong to ask “the question of what the end of poverty requires” (Easterly, 2006, p. 11). Instead, it is important to look at more concrete problems and find ways to solve them. We see growth of microenterprises as one of such problems, as it is inhibited by a number of constraints. Some researchers even raise “doubts that microenterprises can generate general economic growth” (Fiala, 2013). Even the young, widely implemented phenomenon of microfinance has not changed much in terms of growth. In Poor Economics, Banerjee and Duflo write about microfinance: “”We cannot count on it to be a stepping-stone for larger business to be created”, and that this would be “the next big challenge for finance in developing countries” (Banerjee & Duflo, 2012, p. 181).
Our study, despite these general doubts, aims to deliver answers to how exactly growth of microenterprises is possible. Our proposed experiment combines different aspects of recent studies that found positive effects on growth. We thus want to set our study in the context of a larger, new strategy in development economics, proposed by Banerjee and Duflo in “Poor Economics”: “the accumulation of a set of small steps, each well thought out, carefully tested, and judiciously implemented” (Banerjee & Duflo, 2012, p. 15).
More concretely, we design an experiment in which we assign two different treatments to our sample, an accounting training course and a rule-of-thumb training. Both have showed positive effects on microenterprise growth in earlier studies (Drexler, Fischer, & Schoar, 2014; Fiala, 2013). Additionally, through a survey, we will determine certain personal characteristics of the study subjects, such as competitiveness or the willingness to grow their enterprise. Banerjee and Duflo claim that lack of commitment or desire to grow is a major constraint for growth of mircoenterprises (2013). The results will indicate whether a certain treatment works particularly well with a certain group of people rather than another. These insights can be crucial for efforts to increase microenterprise growth in poor countries. We will proceed in this proposal with a literature review, a detailed experiment design and finally a discussion including possible implications and limitations.
2. Literature Review
2.1 Financial Capital
Growth can be generated through increasing capital, which can be invested to increase production. We are interested in several different forms of capital, namely financial (and physical), human and managerial capital. Banerjee and Duflo argue that one of the major constraints to microenterprises is lack of financial capital that would be ne needed to make the crucial investment necessary to increase production, e.g. a sowing machine (2012). However, studies have shown that providing microenterprises with financial capital has generally not increased their production. Cash grants, which are essentially pure capital, were tested without finding a positive effect (Karlan, Knight, & Udry, 2015; Fiala 2013; Fafchamps, McKenzie, Quinn, & Woodruff, 2014). Although the lack of success of cash grant programs suggests interesting avenues for further research, we have decided to build on the knowledge of effective programs. We hence exclude cash grants from our study.
Lack of financial services, notably borrowing money, has also been pointed out as a key constraint to micro- and small enterprises (Lawson, 2007). Microfinance institutions (MFIs) can provide small firms with the financial services necessary to mobilize the resources for more productive use (Watson and Everett, 1999). Similar to cash grants, it has also been shown that microfinance by itself has almost no effect on the growth of microenterprises (Babajide, 2012; Banerjee & Duflo, 2012).
Financial capital thus seems not to be a sufficient factor to generate growth. However, it is likely to be a necessary factor for growth. Without any financial capital, it is difficult for any firm to increase production. The studies that showed a positive effect on microenterprise growth all used microfinance combined with other treatments (Fiala, 2013; Drexler, et al., 2014, Berge, Bjorvatn & Tungodden, 2014). Therefore, we will also use a sample of individuals who already receive microfinance services.
2.2 Human Capital
Up until a decade ago, it was common practice among researchers to assume human capital in these environments was fixed, and to focus solely on the financial capital aspects (Banerjee & Newman, 1993). There were many studies that reference the usefulness of education in helping alleviating issues with direct connections to poverty in areas such as health, but no study has been performed that investigated the effect of education in a microfinance setting (MkNelly, Watetip, Lassen and Dunford 1996).
In 2006, Karlan and Valdivia performed a study to determine the economic benefits of a business education program designed to help microentrepeneurs increase their human capital and help make more informed business decisions. Although the results of the study were statistically non-conclusive, the data indicated that the business training had made a noticeable difference and the sector of education in microfinance was formed (Karlan & Valdivia, 2010).
In the past ten years since this paper was published, dozens of studies have been published in regards to education and business growth in microfinance. These studies have investigated the efficacy of business training as well as the varying impact the training programs have in combination with other capital incentives (McKenzie & Woodruff, 2013; Berge, Bjorvatn & Tungodden, 2014; Karlan, Ryan & Udry, 2015). These papers offered mixed results, but overall business training treatment was found to be mildly effective.
Despite this indication that business training may help, there was still a question of whether the business training program used by Valdivia and Karlan (2010), as well as many subsequent studies was the most effective training method to increase sales and profits for microentrepreneurs. This question was addressed by Drexler, Fischer and Schoar (2010) in a study in which they compared the efficacy of the standard accounting training with a “rule-of- thumb” heuristics training. Their results indicated that the rule of thumb training had a significantly better business results.
However, relaxing financial and human capital constraints has been found to be necessary, but not sufficient to guarantee of microenterprise growth. In an experiment with 106 tailors in Accra, Ghana, cash grants and long-term one-on-one consulting yielded negligible results on microenterprise growth (Karlan, Ryan & Udry, 2015). This research highlights the fact microenterprises in developing countries may face other understudied, and likely context-specific constraints to growth. Of course, it is possible that these may simply be unfavorable market conditions.
2.3 Behavioral Characteristics
Recent research into the behavioural characteristics of entrepreneurs suggests that there are links between risk-preference, competitiveness of microentrepreneurs and entrepreneurial decisions in the field leading to business growth (Berge, Bjorvatn & Tungodden, 2014). The highly gendered nature of these behavioural traits has been widely studied in a variety of contexts (Garcia, Tor, & Schiff, 2013; Bjorvatn, Ranveig Falch & Ulrikke Hernæs, 2016; Hogartha, Karelaia , Trujillo, 2012), and are usually more prominent in males, although this appears to be culturally dependent (Andersen, Ertac, Gneezy, List, & Maximiano, 2013). Additionally, several studies have found male entrepreneurs enjoying greater business growth than their female counterparts (Fiala, 2013; Berge, Bjorvatn & Tungodden, 2014)
These findings have strong implications in the field of microfinance, which largely serves female clients. Unless gender and context-specific constraints placed on female microfinance clients are adequately understood and addressed, relaxing financial and human capital constraints is unlikely to yield widespread success among female entrepreneurs (Berge, Bjorvatn and Tungodden, 2014).
 If financial capital is only a necessary and not a sufficient factor, it makes sense to use microfinance instead of cash grants. People pay their loans back which makes microfinance more cost-effective and sustainable than aid.