Size matters for firm growth, but institutions matter for labor productivity
Firms in the United States usually follow a mantra: think big, start small, move fast. But how do firms in developing countries grow? A new paper looks at data from 120 developing economies to assess how firm characteristics at the time of creation explain the full lifecycle of the firm. Firm-level characteristics have more power than institutional factors (another dimension the paper looks at) in predicting size and growth, but not productivity. Size at the time of creation affects firm size and growth over its lifecycle, whereas country-level institutional factors dominate in predicting variation in labor productivity. Older firms are larger, partly because they are more efficient.
Are Large Firms Born or Made? Evidence from Developing Countries, Meghana Ayyagari, Asli Demirguc-Kunt, and Vojislav Maksimovic, World Bank Policy Research Working Paper 7406, August 2015.
Creating transport networks in developing countries: a primer
Investments in transport and improved technology are thought to lead to falling transport costs and stimulate growth and development. Yet, the nature and magnitude of the broader impact of transport investments is not well understood. Solid evidence is scarce for developed countries and even more so for low- and middle-income countries because impacts are widely dispersed throughout the economy and difficult to identify and quantify. A review of the economic literature identifies diverse mechanisms through which transport policies benefit developing countries. There is a need to think more broadly about the benefits of transport investments, beyond standard measures such as shorter travel times and savings on vehicle maintenance. The paper presents evidence on the potential impact of transport investments on growth (trade, agglomeration effects, economic activity, income and employment, and structural transformation); inclusion (rural poverty, urban labor markets, education, health, and crime); and sustainability (negative socio-economic impacts and design of sustainable transport policies). The review explores hurdles to transport project success by touching on pricing, funding, operational management, politics that underpin transport investment choices, as well as the potential for complementarities between various transport policies that can operate at all levels of the economy.
Transport Policies and Development, Claudia N. Berg, Uwe Deichmann, Yishen Liu, and Harris Selod, World Bank Policy Research Working Paper 7366, July 2015.
Growing businesses in Nigeria: Entrepreneurs just need a leg up
99.6 percent of Nigerian firms employ fewer than ten workers. Where are the entrepreneurs who can grow a firm to more than ten workers? How can they be identified? And can public policy help them overcome constraints to firm growth? A national business plan competition launched in 2011 in Nigeria addressed these questions. The competition attracted almost 24,000 entrants, and of these the top 6,000 applications received a 4-day business plan training course. 729 winners were selected at random from a group of 1,841 semi-finalists to receive awards averaging US$50,000. If applicants were not credit-constrained, then receiving a cash grant would not change the optimal investment decisions of their businesses. But the grants resulted in large increases in business performance. Three annual follow-up surveys show that winning the business plan competition led to greater firm entry, higher survival of existing businesses, higher profits and sales, and higher employment, including increases (of over 20 percentage points) in the likelihood of a firm employing more than ten workers. These effects appear to occur largely as a result of the grant and the ability to purchase more capital and hire more labor.
Identifying and Spurring High-Growth Entrepreneurship: Experimental Evidence from a Business Plan Competition, David McKenzie, World Bank Policy Research Working Paper 7391, August 2015 | Blog | Policy Note.
Removing barriers to democratic participation in fragile states
Fragile states like Liberia receive considerable donor aid for citizen-oriented democracy promotion. To better understand democratic expression through elections, a large-scale ﬁeld experiment in war-affected rural Liberia looked at how lack of information about institutions and politics, few opportunities to coordinate, and insecurity vis-Ã -vis local political factions might undermine the quality of elections. The interventions introduced nine months prior to the 2011 elections in 101 villages (41 of them randomly selected control villages) included new interactions between rural citizens and third-parties (non-governmental organizations). These interactions included civic education and town halls, and monthly security committee meetings that brought together rural community representatives and United Nations peacekeepers. The results from the election—polling place data on votes, a voter survey, and a set of novel behavioral measures—show that the civic education and town hall programs increased enthusiasm for civic participation and preferences for national versus parochial candidates (who have incentives to limit opportunities for citizens to discuss and coordinate politically), while possibly heightening citizens’ willingness to report intimidation. The security monitoring program had negligible effects. Barriers to political information and voter coordination appear to be important but resolvable problems for elections in fragile states.
Promoting Democracy in Fragile States: Insights from a Field Experiment in Liberia, Eric Mvukiyehe and Cyrus Samii, World Bank Policy Research Working Paper 7370, July 2015.
Integrated rural-urban land reform in China shows promise
Rural-urban land conversion in China was among the highest in East Asia between 2000 and 2010. But an institutional framework that included weak protection of existing rights often led to land being converted without being able to put it to use, large inequality, and concerns about food security. To explore if alternative arrangements could be more effective, the Chengdu prefecture was chosen for a national reform experiment in 2008. Major elements of this experiment included titling of all land under a registration system run by administrative villages; a system of tracking transactions through the new Chengdu Rural Property Rights Exchange for all types of rural property rights, including construction land quotas to allow more market-oriented and transparent mechanisms for price discovery; and elimination of the hukou restrictions to encourage migration along with regulations for easier transfers of rural construction land. A comparison of 529 villages just inside and outside the prefecture’s border suggests the reforms increased tenure security, aligned land use closer to economic incentives, mainly through market transfers, and led to an increase in enterprise start-ups.
Impact of Property Rights Reform to Support China’s Rural-Urban Integration: Village-Level Evidence from the Chengdu National Experiment, Klaus Deininger, Songqing Jin, Shouying Liu, Ting Shao, and Fang Xia, World Bank Policy Research Working Paper 7389, August 2015.
Attending secondary school in Kenya is a good investment
Average years of schooling among young Africans rose from 2.6 years to 6.1 years between 1970 and 2005, and continues to grow. But the classic measurement of the wage returns to education is difficult and only part of the story in Sub-Saharan Africa, because employment in the formal sector is low. In Kenya, for example, only 32 percent of men were employed by someone outside their family in 2008. Instead of focusing on wage returns, measures of socially relevant effects of education on human capital accumulation, occupational choice, and fertility decisions can say a lot about returns to secondary education. Administrative test score data along with a recent survey of young adults show that, in Kenya, completion of secondary schooling increases human capital, as measured by performance on cognitive tests. For men, there is a drop in the probability of low-skill self-employment, as well as suggestive evidence that the probability of formal employment rises. For women, teen pregnancy and secondary school completion are nearly mutually exclusive; the opportunity to attend secondary school sharply reduces teen pregnancy rates.
The Impact of Secondary Schooling in Kenya: A Regression Discontinuity Analysis, Owen Ozier, World Bank Policy Research Working Paper 7384, August 2015.
How capital market financing and firm growth is connected
Stock and corporate bond markets have expanded rapidly since the early 1990s. How have firms responded? By analyzing firm-level domestic and international issuances of equities and bonds and balance sheets of 45,527 listed firms in 51 countries during a period of rapid capital market growth, some key patterns emerge. A small number of large firms issued securities in the typical country, and a small subset of these firms raised an increasing amount of funds during the 1990s and 2000s. Issuers grow faster than non-issuers in assets, sales, and employment, especially in the same year. Smaller issuing firms grow faster than larger ones, generating a tighter firm-size distribution among issuing firms. But larger non-issuing firms grow faster than smaller ones, generating a wider firm-size distribution among non-issuing firms. The results suggest that firms use capital markets to grow, not just to adjust their capital structures; that there is a direct, positive connection between capital raising activity and growth at the firm level; and that when considering corporate finance in assessing the evolution of the distribution of firm sizes in an economy, it is important to take into account firm performance around capital market raising activity.
Capital Market Financing, Firm Growth, and Firm Size Distribution, Tatiana Didier, Ross Levine, and Sergio L. Schmukler, World Bank Policy Research Working Paper 7353, July 2015 | Blog.
Achieving better agricultural policies through better statistics
The neglected state of agricultural data collection is about to change. Initiatives like the Global Strategy to Improve Agricultural and Rural Statistics are emerging to help with a number of data challenges, such as measuring smallholder agriculture, coordinating data collection across ministries of agriculture and national statistics offices, and improving analysis based on higher-quality data. This contribution highlights a few of the shortcomings of the current system and offers ideas on how integrated household surveys can fill knowledge gaps, particularly in the areas of methodological validation and policy analysis. The “quick-wins” and low-cost solutions offered can be implemented in the shorter term as part of a longer-term effort by countries and development partners to support better-informed agricultural policies.
From Tragedy to Renaissance: Improving Agricultural Data for Better Policies, Gero Carletto, Dean Jolliffe, and Raka Banerjee, World Bank Policy Research Working Paper 7150, January 2015.
Survey evidence on the cost of international freight delays in Serbia
The task of navigating the complicated maze of international freight transport is outsourced by producers and traders to specialized service providers called “freight forwarders.” The evidence presented here—on operational behavior of freight forwarders and how it is affected by delays in border procedures—is based on a survey of 153 freight forwarders in Serbia conducted in 2014. One key purpose of the study is to investigate operational trade-offs between time and cost that arise when import shipments are in transit. The freight forwarders’ responses to several hypothetical questions on those trade-offs and to questions on their operational decisions suggest that saving money tends to take priority over saving time. Based on the freight forwarders’ reported penalty rates for late delivery of import shipments and values of a typical import shipment, it is estimated that the contracted value of one additional (unexpected) day of delivery time costs approximately 1 percent of the underlying shipment value.
Understanding the Operations of Freight Forwarders: Evidence from Serbia, Alejandra Mendoza Alcántara, Ana M. Fernandes, and Russell Hillberry, World Bank Policy Research Working Paper 7311, June 2015.