Very small businesses are abundant in many developing countries, but few grow to the point where they employ more than one person. If even a small percentage of these microenterprises were able to scale up enough to hire a few employees, a significant number of new jobs could be created. While some research suggests that injections of capital into microenterprises increase profitability, there is little evidence suggesting that this profit increase would help a business grow enough to require additional employees. Is it possible to generate growth from microenterprises which leads to significant job creation?
The study focuses on microenterprises with two or fewer employees, located in urban areas of, Colombo, Kandy, and Galle/Matara in Sri Lanka. The 1,525 microenterprises in the sample were engaged in either the retail sector or manufacturing and service industry. Only male-owned enterprises were included in the sample because previous work showed that capital alone had a much larger effect on male-owned businesses.[1]
In this randomized controlled trial, three constraints thought to inhibit firm growth were relaxed: capital, labor, and entrepreneurial skills. A matched savings program was used to address capital constraints (details below). To incentivize hiring additional employees, a wage subsidy was used, and an entrepreneurial training based on the International Labor Organization’s (ILO’s) Improve your Business (IYB) program was used to improve entrepreneurial skills. Enterprises in the sample received either zero, one, or two of the interventions to determine which one, or combination was most effective. The group of businesses that did not receive any support was tracked as a comparison group.
Matching Savings Program
In November 2008, enterprises in this group were offered a matched savings bank account with National Savings Bank. Participants were told that they could deposit, but not withdraw, funding until August 2009. Savings were initially matched at a rate of 50 percent up to 1000 Sri Lankan Rupees (LKR). The match rate was later raised, ultimately reaching a maximum match of 100 percent up to 5000 LKR. Just before the account was unlocked, 5000 LKR was added to every account, regardless of previous deposit patterns to ensure that all enterprises in this group had some capital injection.
Business Training
The ILO’s IYB training program is one of the most widely implemented entrepreneurship training programs, reaching approximately 4.5 million people around the world.[2] IYB is a five day program intended to generate growth in microenterprises. The modules cover marketing, buying, costing, stock control, record keeping, and financial planning. The Sri Lanka Business Development Centre (SLBDC) delivered the ILO’s IYB training. Additional training on hiring and managing employees was added to the core modules.
Wage subsidy program
The subsidy provided a flat amount of 4000 LKR per month for a period of six months to businesses in this sample that hired an additional employee to work at least 30 hours per week. A flat amount of 2000 LKR per month was offered for an additional two months. The initial subsidy of 4000 LKR represented about half of the earnings of a typical unskilled worker.
Semi-annual follow-up surveys were conducted in 2009, 2010, 2011, 2012 and early 2013. The large number of surveys over a long time period enabled researchers to trace the trajectory of impacts.
Project ongoing. Results forthcoming.
[1] De Mel, Suresh, David McKenzie, and Christopher Woodruff. "Returns to capital in microenterprises: evidence from a field experiment." The Quarterly Journal of Economics 123.4 (2008): 1329-1372.
De Mel, Suresh, David McKenzie, and Christopher Woodruff. "Are women more credit constrained? Experimental evidence on gender and microenterprise returns." American Economic Journal: Applied Economics (2009): 1-32.
[2] “Start and Improve Your Business Programme,” International Labor Organization, accessed June 3, 2014, http://ilo.org/empent/areas/start-and-improve-your-business/lang--en/index.htm.
