March 2011, Miriam Bruhn and Bilal Zia, DECFP
On March 30th, our group hosted a conference on “New Ideas in Business Growth: Financial Literacy, Firm Dynamics and Entrepreneurial Environment.” This event brought together researchers and practitioners working on private sector development. The conference focused on three broad themes 1) business and financial literacy training 2) the business environment and 3) corporate governance and firm dynamics.
1. Business and Financial Literacy Training
So far, we know relatively little about the impact of business and financial literacy training on business performance and growth. However, this is about to change: the conference included six recent papers that are studying the impact of different types of business and financial literacy interventions, for the most part through randomized controlled trials, in different countries: Bosnia-Herzegovina, Canada, the Dominican Republic, Mexico, Pakistan, and Sri Lanka. Most of these papers find that training improves financial literacy and business practices. The effects on business performance and growth tend to be weaker in some of the papers, or perhaps just harder to detect since these outcomes are very noisy and might take a longer time to change. A challenge in this emerging literature will be to reconcile the findings from different studies and to determine why results differ, given that they vary in several respects, including the content of the training, delivery mechanism, and target group.
2. The Business Environment
The second theme discussed in the conference was the impact of entry regulation reforms on business creation and firm formalization. A new paper examining that impact of reforms across countries and time suggests that the size of the reform is very important, i.e. regulation needs to be reduced by at least 40-50% to have a meaningful impact on firm creation. New within country evidence from Portugal (that implemented a very large reform) supports earlier findings from Mexico that a simplification in entry procedures can lead to more firm creation. However, this appears to be due to employees setting up new firms instead of informal firms formalizing. The study for Portugal uses a very rich dataset that also allows the authors to show that most of the newly created firms post-reform are “marginal”, i.e. less productive and less likely to survive than firms that registered under the more complicated regime. A paper on Sri Lanka goes deeper into examining why informal firms are not registering and finds that reducing the initial costs of registration does not entice firm to register, but paying firms relatively large amounts of cash does, suggesting that informal firms worry about the ongoing cost of registration, such as profit and labor taxes.
3. Corporate Governance and Firm Dynamics
The final session of the conference focused on the role of corporate governance in determining firm productivity and growth. One of the papers uses a confidential firm dataset detailing bribes paid to the firm’s buyers to document that corruption within firms (even private firms) is common. The paper also provides some evidence that this can lead to inefficiencies in transactions between firms. Another paper in this session worked closely with a bank in Colombia to change work incentives provided to loan officers. These incentives led to improved time management, less stress, and better individual performance among loan officers. Finally, this session included a paper that examines how firm dynamics influence productivity growth overall, drawing a link from individual firm growth to aggregate productivity in the economy.
4. Lively Panel Discussion: Should We Focus on Microenterprises?
The conference also included a lively panel discussion, highlighting that one of the open questions in the private sector development policy and research agenda is whether the recent focus on microenterprises is warranted, or whether interventions should target larger “high growth” firms instead. Arguments in favor of focusing on microenterprises included that they provide employment and income to many low-income household around that world, so that focusing on these firms can lead to poverty alleviation; that providing business training may be an efficient way of redistributing income; and that raising the incomes of micro-entrepreneurs may increase consumption demand, allowing larger firms to grow and create employment. The main counterargument was that, unlike median or large sized firms, microenterprises do not contribute a large share to productivity or output growth. Finally, the panelists expressed the concern that it may be politically and morally difficult to support programs that provide more resources to firms or individuals that are already relatively well-off compared to microenterprise owners.