Article

Who creates jobs in developing countries?

Authors:
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

This paper investigates the contribution of small firms to employment, job creation, and growth in developing countries. While small firms (< 20 employees) have the smallest share of aggregate employment, the small and medium enterprise sector's (< 100 employees) contribution is comparable to that of large firms. Small firms have the largest shares of job creation, and highest sales growth and employment growth, even after controlling for firm age. Large firms, however, have higher productivity growth. Conditional on size, young firms are the fastest growing and large mature firms have the largest employment shares but small young firms have higher job creation rates.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... To have a clear picture of the variables of our interest, we present descriptive statistics of firms by size. Previous studies have extensively discussed the contribution of micro and small firms in the creation of jobs, as shown in Ayyagari et al. (2014) and Haltiwanger et al. (2013). Table 1 presents firm size and employment distribution. ...
... To examine to what extent the perceived relationship between firm size and employment growth is due to firm size per se rather than other observable firm characteristics, we follow Ayyagari et al. (2014) and write our general specification as follows: ...
... Similarly, Cho et al. (2017) also find results that confirm the importance of very young firms (0-5 years) in employment growth in the Korean economy. Further, Ayyagari et al. (2014) study job creation in developing countries and find that young firms play an important role in job creation. Correspondingly, Esaku (2020c) and Esaku (2019) reach similar conclusions for Sub-Saharan Africa. ...
Article
Full-text available
Plain English Summary Young firms play an instrumental role in creating more jobs and driving employment growth in Sub-Saharan Africa. Using firm-level data from Kenyan manufacturing firms, we evaluate the hotly debated and popular view that small firms create the most jobs and are the primary source of employment growth. We find evidence of systematic differences in how firms create jobs in Sub-Saharan Africa. There is evidence that the age of the firm rather than its size is important in job creation. We find that it is young firms that are large (in terms of employment level) that drive employment growth in Sub-Saharan Africa. These results imply that; firstly, addressing unemployment in Sub-Saharan Africa requires creating enabling business environment that supports very young firms. Secondly, research on small and medium enterprises (SMEs) should focus on understanding the theoretical mechanisms that help young firms to create more jobs than any firm category.
... Consistent with extant literature, Coad and Tamvada (2012) established that firm age had a negative relationship with growth rate among Indian small firms. Utilising data from 104 developing countries, Ayyagari et al. (2014), in line with the PLM, established the negative relationship between firm age and growth rate. These findings align with a few studies that have been carried out in the African region, which also established an inverse relationship between growth rate and the firm's age and size (McPherson, 1995;1996;Mengistae, 1998;Bigsten and Gebreeyesus, 2007). ...
... Given the complexity, and the importance of firm growth, it is important that the researchers test the consistency of the findings under different assumptions (Weisberg, 2006). Previous related studies utilised different measures of firm size, with some using employees (Teruel-Carrizosa, 2006;Bigsten and Gebreeyesus, 2007;Mamburu, 2018) and others using assets (Dunne and Hughes, 1994;Aslan, 2008;Ayyagari et al., 2014). As such, to establish the robustness of our results, the researchers used employees and total assets as alternative size measures and the results are presented in Table 3, below. ...
... Just like above, for all the models, the Hausman test shows that Fixed Effects were more efficient than Random Effects estimators. The results in Table 3 are in line with the wider body of literature that shows that despite the measure of size, H1 is satisfied as Gibrat's Law does not hold for SMMEs in the KwaZulu-Natal province, and ceteris paribus smaller sized firms grow faster than their larger counterparts (Farinas and Moreno, 2000;Ayyagari et al., 2014;Almsafir et al., 2015;Mamburu, 2018). This is consistent with findings by Achtenhagen et al. (2010), indicating that despite different types of size measure used in firm growth studies, the findings are generally consistent and provide insight on the growth dynamics of small firms. ...
Article
Full-text available
Previous studies in both developed and developing economies have reported that firm growth declines with firm age and size. However, review of literature showed that there are limited studies to empirically assess the validity of this fact on firm growth in developing countries. As such, this paper assesses the role of firm size and age on firm growth in KwaZulu Natal, South Africa. The study employed a unique balanced three-year panel dataset of 191 manufacturing Small Medium and Micro Enterprises (SMMEs) in the province. As expected, the results showed a negative relationship between firm growth and size especially in the short term. However, contrary to the wider body of literature, the study established a positive relationship between firm age and growth. The study also established that older firms grow faster than their younger counterparts despite their size. On the other hand, small sized firms despite their age grow faster than large firms when employment and total assets were used as measures of firm size. It was recommended that the government should be cognisant of the complexity of SMMEs when crafting various sector policies.
... Numbers of Malawian employees increase as refugees experience business growth. This is in line with findings by Ayyagari, Demirguc-Kunt & Maksimovic (2014) concluding that, in economies like Malawi, it is indeed microenterprises that have the highest employment creation rates. While my research data shows that refugees employ Malawians in low-paying, unskilled work, literature provides valuable perspective by highlighting that informal economy network interactions are often a training ground for people with little previous experience, and a source of further skill acquisition based on observing others (Mamabolo, Kerrin & Kele, 2017;Musara & Nieuwenhuizen, 2020). ...
... If "youth employment tops Africa's development agenda" (Sumberg, Flynn, Mader, Mwaura, Oosterom, Sam & Shittu, 2020), the informal economy has a role to play. Data from Ayyagari, Demirguc-Kunt & Maksimovic (2014) demonstrates that, in developing countries, firms with 20 employees or less have the highest job creation rate, with potential for further employment creation were it not for barriers such as lack of access to finance, lack of tax incentives and benefits, and poor infrastructure, say Titus, Bakare & Obiwuru (2013). ...
... According to Global Entrepreneurship Research Association (2018), Africa is the region with the lowest proportion of entrepreneurs expecting medium to high job creation opportunities, defined as the addition of six or more jobs over a five-year period. A comparison to other regions is illustrated in Table 2, below: One important clarification is that -according to findings by Ayyagari et al. (2014) -job creation in small enterprises does not translate into faster growth, because of limitations in productivity, defined by OECD (n.d.) as the efficiency ratio of production inputs ("such as labor and capital") "used to produce a given level of output". Ayyagari et al. (2014) therefore caution that policy geared toward "growth and increase in productivity" must concentrate on resolving the systematic shortfalls in the economic environment and relevant institutions. ...
Thesis
Refugee entrepreneurship forms part of the informal economy of Malawi, despite a national encampment policy that denies refugees freedom of movement and of employment outside Dzaleka refugee camp. Using a sample of refugee entrepreneurs working in an urban and in a rural location, my research utilizes a quantitative method to analyze refugee-owned enterprise in Malawi.
... researched the opportunities provided by AI for business organisations and argued that the nature or organisational culture of SMEs facilitates adoption of technological elements in business premises. Ayyagari, Demirguc-Kunt, and Maksimovic (2014) claimed that a significant orientation among SMEs would be required to enhance their existing AI framework. They strongly recommended that SMEs should run a continuous system for AI because a steady system can be updated to a better version of a previous one. ...
... Prentice and Nguyen (2020) also provided further evidence supporting the crucial role of AI-based service experience in customers' tendency to engage with service providers. Ayyagari et al. (2014) argued that if SMEs can implement AI technology well then interaction between organisational stakeholders would be smooth. They also argued that AI implementation would be the best approach to engage customers directly with organisational activities. ...
Article
Development of small and medium enterprises (SMEs) is a key approach to achieving economic growth in the Middle East and successful adoption of technology is vital for SMEs' success and continuity. Artificial intelligence (AI) is part of a new generation of technologies that can facilitate competitive advantage but currently there is a lack of evidence regarding AI applications in relation to B2B SMEs in Middle East countries. Therefore, this study empirically examines antecedents to, and consequences of, successful acceptance of AI practices by B2B SMEs in Saudi Arabia. A conceptual model based on the technology-organisation-environment framework is developed which considers the impact of AI enablers and AI readiness on the acceptance of AI practices, and the impact of this on relational governance, performance, and SMEs' AI-based business customer interaction. The conceptual model was tested using structural equation modelling of survey data collected from B2B SMEs (n = 392). The results showed that, of the AI enablers, acceptance of AI practices was significantly influenced by both technology roadmapping and attitude but not professional expertise. Of the AI readiness variables, acceptance of AI practices was significantly influenced by infrastructure and awareness but not technicality. The acceptance of AI practices was found to significantly affect AI-enabled relational governance and performance, and SME's business customer AI-based interaction. This study provides a broader base for theoretical and practical understanding of issues related to AI practices in SMEs and the B2B sector in general.
... In general, if the main motivation to start a new firm is linked to innovative projects, then higher persistence rates and post-entry performance should be expected (Colombelli et al., 2013;Ayyagari et al., 2014;Mitra & Jha, 2015;Santarelli & Vivarelli, 2007;Santarelli & Tran, 2017). ...
... The relationship between inequality and domestic credit to the private sector by banks are robust and negative in the IV models. Access to credit for small firms enables entrepreneurs to expand their businesses, employ more people, and, thus, decrease inequality (Ayyagari et al., 2014;Beck et al., 2007). When we compare both measures of FEI (GVA against Education expenditure- expenditure is used to measure FEI. ...
Article
Full-text available
The lack of innovation hurts small firm access to resources for expansion in frontier markets. This incidence has implications for economic growth and therefore income inequality. Despite an emerging view that front-end innovation (FEI) is critical for small firm’s access to credit, the relationship between FEI and inequality especially in the context of frontier markets is little studied in the empirical literature. To close this gap, this paper contributes to the literature on income inequality, by extending existing models to examine the effect of FEI on income inequality. We use a fixed effect panel regression on annual country-level data for thirty-one frontier markets, over a 15-year (2003–2018) period, and find an insignificant correlation between income inequality and FEI. The instrumental variable estimates, however, show a significant association between both measures of FEI and income inequality. Our instrumentation strategy and robustness checks suggest that this correlation partly reflects a causality from FEI to Inequality: for instance, when measured by education expenditure, a 1% change in FEI increases inequality by 0.234%. When measured by gross value added, a 1% change in FEI reduces income inequality on average by 0.105%. Overall, our findings confirm that FEI is a significant determinant of increases in entrepreneurial income share.
... A vibrant SME sector could play a major part in resolving economic problems. SMEs are, in specific, a main source employment in emerging and developing countries, estimated to account for about 45% of jobs created (Ayyagari, Demirguc-Kunt, & Maksimovic, 2014). The importance of SMEs to GDP in MENA economies consists of four to 40 per cent, highlighting either the opportunities for higher position for SMEs in such regions and their also major role in another. ...
... The literature focussed primarily on developing economies but failed to find consensus. Although, Ayyagari et al., (2014) have recently found indications that smaller firms are an important source of job growth, Dong and Men (2014) found that considerably younger companies faced severe capital difficulties in developing countries that would in effect, have an adverse impact on growth, sustainability and profitability. Quartey, Turkson, Abor, Iddrisu, 2017;Ndiayea et al., 2018 have found evidence that the effects of company characteristics, such as company size and age, suggest that company size is a significant element of financing in developed countries, which can therefore affect the functioning of SMEs. ...
Article
Full-text available
In the Middle East and North Africa (MENA) region, Small and Medium Enterprises (SMEs) are now widely recognized as engines of economic development. This paper discusses the importance of SMEs in the MENA economic area and identifies the challenges and barriers facing SMEs in MENA countries. In addition, this study analyses the effects of two 'black swan' Coronavirus disease (COVID-19) phenomena and a decline in oil prices on the economy of MENA in 2020. The current study found that the most significant challenges were identified as lack of access to finance, lack of managerial expertise, inefficiencies of government, lack of a well-trained workforce, inadequate infrastructure, corruption and bureaucratic obstacles. Among these challenges, the lack of access to finance appears to be the major challenge and suggests that future research is required to identify the role of Islamic finance models in the financing of SMEs in MENA countries. This research provides all stakeholders with policy implications intended for enhancing the different features of SME improvement in the MENA region and generally in developing countries.
... According to Dheer (2017) the findings of the Global Entrepreneurship Monitor Report (GEM) (2017/2018) concerning the sluggish scope, together with the magnitude of the level of low Total early-stage Entrepreneurial Activity (TEA), continues to be a systemic challenge which is evidenced by the monumental socioeconomic ills of poverty, inequality and unemployment currently experienced. This problem was earlier expressed in the Global Competitiveness Index (GCI) Report (2014) which indicated the degeneration of South Africa's entrepreneurial activity within the international competitiveness benchmarks and the subsequent lethargic pace of economic growth (Ayyagari et al., 2014). ...
... The assumption that the female owners of SMEs in Serbia generate lower debt rates in comparison to their male counterparts, which was proven in this research paper, has additionally confirmed what many previous studies had found (Ayyagari et al., 2014;Bouzekraoui and Ferhane, 2017) -the majority of women-owned SMEs operate positively and have higher returns. ...
Article
Full-text available
The paper explores the ownership structure of small and medium-sized enterprises (SMEs), which fell into a debt crisis due to business failures, in order to indicate the differences between male and female entrepreneurs. We conducted the empirical research on a sample of 186 small and medium-sized loss-making enterprises in the Republic of Serbia. The results obtained by descriptive statistical analysis of the observed sampleshow that the participation of female companies among loss-making enterprises is considerably low. The ratio of companies owned by women and those owned by men was 18.8%: 81.2%. Furthermore, we have recorded a significant difference in the amounts of debt, indicating that female companies have significantly lower debt rates when compared to those owned by men. The findings of this research can be applied as a strategic framework for policymakers to encourage female entrepreneurship. Key words: SMEs, owners, female entrepreneurs, loss-making enterprises, capital
... Therefore, small and medium-sized enterprises (SMEs) become an important link in the creation of wealth across the globe. According to Ayyagari et al. (2014), the SME sector's contribution is comparable to that of large firms. SMEs have the largest share of employment creation and the highest sales and employment growth. ...
Article
Purpose. Small and medium-sized enterprises (SMEs) are essential contributors to employment creation and global economic growth. For long-term survival in the market, SMEs need the capabilities to organise their resources in a way that leads to high performance and competitive advantage. Based on the conceptual framework of entrepreneurial orientation and the resourcebased view of the firm, performance-influencing organisational factors among SMEs providing manufacturing services are analysed. Methodology. In this study, the financial performance of 47 SMEs was analysed, and a survey of 499 employees was conducted. Financial performance was evaluated by ROA and ROS, and productivity was measured by turnover and net profit per employee to identify high-performance SMEs. Competitive aggressiveness was measured by changes in the market share to verify whether the high-performance group of SMEs corresponds to the entrepreneurial orientation construct. A questionnaire with a six-point Likert scale and the Mann–Whitney U test were used to test the hypotheses. Findings. The managerial capabilities to create strong workplace performance exist where: (a) management has a respectful attitude toward employees, (b) management supports the development of employees’ professional skills, (c) employees are provided with everything they need to achieve high job results, (d) employees want to work for the company in the long term, (e) remuneration to employees is fully in line with their level of professional skills, (f) co-workers perform their work effectively, (g) employees work shorter job shifts. These elements constitute the knowledge-based resources of high-performance SMEs, giving them, at a minimum, a temporary competitive advantage. Value. The findings of this article contribute to the literature on entrepreneurial orientation, supplementing the construct of organisational factors with the characteristics of managerial capabilities leading to high performance and competitive advantage. Keywords: entrepreneurial orientation, managerial capability, performance, forestry SMEs Paper category: research paper
... Ainsi, des taux élevés de création d'entreprises se traduiraient directement par des niveaux élevés de croissance économique (Acs, 2006). En termes de contribution, les petites et moyennes entreprises (PME) constitueraient la principale source de création d'emploi, dans les pays en développement (Ayyagari et al., 2014) ...
Thesis
La perception dominante de l’entrepreneuriat, notamment dans les pays développés, est celle d’une activité risquée, dynamique et entreprise volontairement par une certaine catégorie d’individus – des « superstars » - afin de bénéficier d’opportunités de gains et une influence sociale plus importante. Cependant, ce point de vue dynamique de l’entrepreneuriat contraste avec celui généralement présenté dans les pays en développement où l’emploi indépendant est en grande partie exercé dans le secteur informel ; un segment considéré « précaire » du marché du travail et permettant uniquement à l’individu d’échapper au chômage. Néanmoins de plus en plus d’études, en Afrique et davantage en Amérique Latine, montrent que ce segment est désirable et susceptible de procurer à certains individus, notamment aux entrepreneurs, des revenus plus compétitifs que ceux travaillant dans la sphère formelle.De ce fait, la première partie de cette thèse s’intéresse à l’entrée des individus dans l’entrepreneuriat au Burkina Faso, notamment dans le secteur informel. Ce choix est-il rationnel et motivé par les opportunités de gains et/ou plutôt contrainte par l’absence d’opportunité d’emploi ? Cette partie questionne aussi les motivations d’entrée dans l’entrepreneuriat selon le genre. Pour répondre à ces interrogations, nous avons utilisé les données de l’Enquête Nationale sur le Secteur Informel collectées en 2015 auprès des ménages, au Burkina Faso. Nous avons analysé les écarts de gains entre les différents segments d’emplois et examiné les déterminants du choix de l’entrepreneuriat par le biais de modèles structurels. Dans un premier temps, l’analyse sur l’ensemble de la population active occupée montre que les salariés disposent en moyenne de revenus plus élevés que les entrepreneurs. Elle montre également que le choix du statut d’entrepreneur est principalement fondé sur le différentiel de gains escompté, soutenant ainsi le principe de l’avantage comparatif décrit dans les modèles d’auto-sélection. Cependant, en tenant compte de l’hétérogénéité des statuts d’emplois (formel et informel) nous remarquons que les emplois informels sont en moyenne moins rémunérateurs que les emplois formels, et que l’écart de gains escompté a, cette fois-ci, un impact négatif et significatif sur la probabilité d’entreprendre de manière informelle. Par ailleurs, le risque d’être au chômage constitue un élément déterminant du choix de ce statut d’emploi. Ces résultats, observés chez les hommes comme chez les femmes, indiquent que le marché du travail dans les pays en développement est segmenté et que l’entrée dans l’entrepreneuriat informel est particulièrement contrainte.Les résultats de cette partie nous ont ensuite conduit à nous interroger, dans une deuxième partie de la thèse, sur le projet professionnel des individus qui n’étaient pas encore entrés sur le marché du travail. A partir de données collectées auprès des étudiants des Universités Ouaga 1 et Ouaga 2, nous avons cherché à comprendre quels pourraient être les facteurs susceptibles de favoriser ou d’inhiber leur projet de création. Nous avons ainsi analysé les déterminants de l’intention entrepreneuriale à travers différentes méthodes d’estimations. Les résultats de nos analyses montrent que l’aspiration entrepreneuriale des étudiants est fondée sur l’espérance de gains mais également sur des attentes non pécuniaires, en particulier le besoin d’indépendance/d’autonomie. Nous remarquons que ce sont les individus disposant d’un stock de capital humain plus étendu – les jack off all trades – qui sont plus susceptibles de proclamer leur projet de création, et non ceux qui étaient à un stade avancé dans leurs études. Nous constatons également que ce sont les individus qui ont une plus grande maitrise en compétences managériales et spécifiques, et qui ont bénéficié d’un enseignement spécifique à l’entrepreneuriat qui sont davantage susceptibles de vouloir créer une entreprise.
... We construct the monthly average of cumulative confirmed cases per 1000 population in each province using those two 4 According to the 2016 National Establishment Survey in Korea, 94% of small-and medium-sized establishments is single-unit establishments, and only a few large enterprises consist of multiple establishments. For this reason, we can consider establishments in our data as stand-alone enterprises (Ayyagari et al., 2014). 5 The top tier of administrative divisions in South Korea is province-level areas, including nine provinces, six metropolitan cities, one special city (Seoul), and one special self-governing city (Sejong). ...
Article
Using province-level establishments and employment data from the Korean Employment Insurance Database, this paper investigates how the regional spread of COVID-19 affects local businesses and unemployment by establishment size and industry. We find that the number of small establishments declines substantially after the COVID-19 pandemic through a decrease in new establishment creation and a surge in establishment closures. By contrast, large establishments are not affected significantly. Examining the numbers of unemployment benefits applicants, an indicator of unemployment, we find that the higher the rate of COVID-19 confirmed cases in a province, the higher the number of unemployment benefits applicants, regardless of their previous workplace size. Our analysis of employment insurance subscribers further confirms that the regional spread of COVID-19 leads to a significant reduction in employment and job mobility in small establishments. Regarding industry heterogeneity in the COVID-19 effects, we find that local COVID-19 outbreaks affect local industries more through the reduction in establishment creation and new employment than through an increase in establishment closures. Industries that require face-to-face operations, such as lodging & restaurant, experience a substantial adverse impact in the early phase, and the impact also tend to last longer as COVID-19 situations prolong. This article is protected by copyright. All rights reserved.
... Economic restructuring and mass privatization in most of the postcommunist countries resulted in labor shedding, and the newborn smaller firms assisted economies in retaining the employment level in that stage (Hashi & Krasniqi, 2011). In most developing countries, small firms create the largest share of jobs and have the highest sales growth (Ayyagari et al., 2014). However, business environment-related obstacles prevent the growth of SMEs and diminish their contribution to overall economic growth. ...
Article
Full-text available
This study investigates the firm- and country-specific factors that affect SMEs’ access to finance and the relationship between financial constraint and firm growth in emerging economies of Central Asia. To address the research questions, a two-stage empirical analysis including ordered probit, probit, and feasible generalized least squares (FGLS) specifications were conducted. Firm-level data used in the analysis is obtained from the fifth round of the Business Environment and Enterprise Survey (BEEPS V) and country-level data acquired from national and international datasets. The study's findings implied that in the Central Asian economies, country-specific factors are more likely to affect access to external finance of SMEs than firm-specific determinants. Among firm-specific factors, only foreign ownership is significantly related to financing constraint perception of SMEs; where, the interest rate is positively, and domestic credit market, inflation, and log of GDP per capita are negatively related to financing constraint level. In Central Asia, an insignificant relationship between growth and financing constraints was found. The determinants of financing constraints and access to finance–growth relations, which address the issue of great significance for SME growth in the selected countries, were interpreted with region-specific factors.
... The growth of small and medium-sized enterprises assists domestic economic development in developing and under-developing countries since small firms generate jobs, return on investments, and more economic synergy among small and medium enterprises, boosting the domestic multiplier outcome in companies [1,2]. Small and medium firms contribute more to creating employment than large firms [3,4]. However, labor productivity in low and middle-income countries is crucial to identify the impact of key drivers of a firm's performance rather than more developed nations [5,6]. ...
Article
Full-text available
Uninterrupted availability of energy and power resources is essential for the productivity and smooth functioning of an enterprise. However, constrained by financial resources, smaller firms in developing economies face a plethora of challenges concerning the access to electricity. However, less attention has been paid in the extant literature to explore this phenomenon. The present study investigates the impact of access to electricity on labor productivity in Bangladesh in the presence of electricity constraints, electricity obstacles, and SME firm size. It employs the OLS regression and propensity score matching (PSM) technique for treatment effect to deal with the selection bias and endogeneity issue using the World Bank Enterprise Survey’s cross-sectional firm-level data for 3196 sample firms over the period of 2007–2013. The results provide evidence in support of SMEs’ labor productivity in response to electricity access. Lack of electricity access was partially found to affect SMEs’ labor productivity significantly negatively. Further, the results show a positive impact of firm size on firm performance. However, results from this model appear that constrained SMEs’ access to electricity has a negative relationship with firm performance. The article then suggests several policy implications on changing government regulations regarding the efficient use of renewable energy resources to enhance electricity generation for optimized SME performance and sustainable economic development in Bangladesh.
... Gonzales et al. (2014), Agénor and Canuto (2017) and Law et al. (2018) reveal that credit markets do not favour innovation activities by SMEs because they are associated with lack of collateral, significant informational opaqueness and higher monitoring costs. This makes their valuation a difficult undertaking (Nofsinger & Wang, 2011), leading them to be excluded from a creditworthy category by financial institutions (Mina et al., 2013;Ayyagari et al., 2014). Banks may not consider the intangible capital produced by a research process not as a collateral of value (Lee et al., 2015;Mina et al., 2013). ...
Article
Full-text available
SMEs in the Arab region are widely viewed as important for their multiple roles, notably in employment creation. Yet, they consistently encounter several constraints such as financing, which impede innovation, growth and internationalisation. This paper examines the external finance-innovation nexus for SMEs operating in five non-oil Arab countries—Egypt, Jordan, Lebanon, Morocco and Tunisia. To achieve this, a probit regression with instrumental variables is applied to firm-level data from the World Bank Enterprise Surveys. The primary findings reveal that the external finance providers are more likely to be reluctant to fund SMEs’ innovation; yet, it thrives with finance. The findings accord with the hypothesis that the accessibility to external funds is a mainstay of SMEs’ innovation. There is a need to develop policies that support equity and debt capitals for innovative SMEs.
... Existing studies, emphasising the need to distinguish between necessity versus high growth entrepreneurs, point out that it is only the dynamic high potential entrepreneurs that contribute positively and significantly to economic growth (Ayyagari et al., 2014;Naude, 2010). Identifying the set of factors associated with self-employment profitability is therefore very important for unleashing the growth potential in developing countries as well as generating more decent wage employment. ...
... In spite of the broad consensus on the SMEs' prominence in providing employment (Ayyagari, Beck, & Demirguc-Kunt, 2007;Ayyagari, Demirguc-Kunt, & Maksimovic, 2011, 2014De la Torre, Soledad Martinez Peria, & Schmukler, 2008;Hallberg, 2001;Harwood & Konidaris, 2015;International Finance Corporation, 2013), it is disputed whether SMEs contribute more to employment creation than large firms. Survey evidence indicates that SMEs generate most new jobs in LMICs, even when controlling for firm age and other characteristics (Ayyagari et al., 2007;Ayyagari, Demirguc-Kunt, et al., 2011;Ayyagari et al., 2014). 1 Critics emphasise that survey data cannot control for survivor bias and the composition effect so that the net effect is not measured adequately (Page & Söderbom, 2015;Rijkers, Arouri, Freund, & Nucifora, 2014). The net effect is crucial because of the churning of smaller firms: small young firms are characterised by significantly lower survival rates (Klapper & Richmond, 2011). ...
Article
Full-text available
The vast majority of enterprises worldwide can be categorized as small and medium-sized enterprises (SMEs). They play a crucial role in providing a livelihood and income for diverse segments of the labour force, in creating new jobs, fostering valued added and economic growth. In addition, SMEs are associated with innovation, productivity enhancement as well as economic diversification and inclusiveness. However, almost half of the formal enterprises in low and middle-income countries (LMICs) are financially constrained, meaning that SMEs’ financing needs are unserved or underserved. Digitalisation is often seen as game changer that overcomes the challenges of SME finance by capitalising on the reduced transaction costs, the broader access to more and alternative data and the new customer experience shaped by convenience and simplicity. This paper aims to answer the question what the role of digital financial instruments in SME finance in Sub-Saharan Africa is. It reviews and discusses the opportunities and challenges of digital advances for SME finance in general and of three specific financing instruments, namely mobile money (including digital credits), crowdfunding (including peer-to-peer lending) and public equity. It contrasts the hype around digital finance with actual market developments and trends in Africa. Main findings indicate that even though digital advances have led to impressive growth of certain digital finance instruments, it has not triggered a remake of the financial system. Digitalisation of the financial system is less disruptive than many expected, but does gradually change the financing landscapes. Some markets have added innovative and dynamic niches shaped by digital financial services, but new digital players have in general not replaced the incumbents. Furthermore, the contributions of digital instruments to finance in general and SME finance in particular are still very limited on the African continent compared to either the portfolio of outstanding SME finance by banks or the capital raised by similar innovative instruments elsewhere in the world. Many uncertainties remain, most importantly the response of regulators and responsible authorities. They need to provide a suitable legal framework to strike a balance between the innovation and growth aspiration of the digital finance industry and the integrity and stability of markets and the financial system at large. Also regulators have to safeguard data privacy and cybersecurity and prevent illicit financial flows, bad practices around excessive data collection, intransparency and poor reporting as well as exploitation of vulnerable groups with limited financial literacy. Governments also have to address the increasing gap towards those left behind by digital finance due to issues with ownership of a digital device, mobile network coverage and the internet connection or issues of basic digital and financial literacy.
... Therefore, small and medium-sized enterprises (SMEs) become an important link in the creation of wealth across the globe. According to Ayyagari et al. (2014), the SME sector's contribution is comparable to that of large firms. SMEs have the largest share of employment creation and the highest sales and employment growth. ...
Article
Purpose. The goal of the current study is to gain an understanding of how various informal institutional elements such as trust and corruption control affect the relationship between entrepreneurial ventures’ social capital and their ability to reach the worldwide market. Design/Methodology/Approach. The paper draws on internationalization and social capital data from the Global Entrepreneurship Monitor (GEM), which includes 482,257 observations from 44 countries between 2003-2013, with a focus on early-stage entrepreneurs (as defined by the TEA index) who are involved in significant international entrepreneurial entry. A multi-level modelling strategy is employed for analyzing the various hypotheses by using STATA. Findings. Possessing a high level of social capital makes it easier to start a business at the international stage. And further, informal institutional variables, i.e., trust and control of corruption, positively moderate the association between social capital and international entrepreneurial entry; thus, societies where honesty prevails and corruption is controlled facilitate better international entrepreneurial entry. Limitations/Implications. The study is based on informal institutions, i.e., the variable trust taken from the World Value Survey (WVS) and the variable control of corruption by using a large sample size and multi-level modelling from World Governance Indicators, which demonstrates the importance of institutions as systems of shared meanings and noncodified standards. However, there are a number of other informal institutional indicators to examine that could have an impact on the relationship at the individual level. Implications from a theoretical perspective explain advancement of the institutional perspective as a conceptual framework for explaining international entrepreneurial activity and, further, the study empirically validates the significance of informal institutional environmental factors in the context of international entrepreneurship. Originality/Value. With the increasing interest of scholars in using the institutional approach and the availability of limited empirical studies in light of informal institutions, using a multi-level approach the current study empirically investigates the role of trust and control of corruption in the context of social capital and international entrepreneurship. Keywords: social capital, internationalization, international entrepreneurship, informal institutions
... Despite this, as stated in Rashid and Leonard [12], Leslie [13], World Trade Report [14], and Ayyagari, Kunt, & Maksimovic [15], SBEs offer a great potential for revenue generating and job creation, particularly in developing countries like Tanzania. Furthermore, as Higon [16], Esselaar et al. [17] and Prasanna et al. [18] show, they play a critical role in poverty reduction, recovering national economies, and achieving long-term economic development, particularly in developing economies. ...
... In other sources, the share of MSME employment in the Arab region is reported to be 45 percent (Ayyagari, Demirguc-Kunt and Maksimovic, 2014). ...
Technical Report
Full-text available
The COVID-19 crisis has hit the region at a time when many economies have already been limping their way through a wide range of long-standing downturns, structural problems and fragilities. Following a series of largescale protests in 2011 calling for economic and political reforms, countries such as Libya, Syria and Yemen have slid into civil armed conflicts, leading to destruction, high death tolls, and humanitarian and refugee crises which spill over into their neighbouring States. Most middle-income countries have all suffered episodes of political instability. Oil-dependent economies, such as Algeria, Bahrain, Qatar, Saudi Arabia and the United Arab Emirates, have been struck by the 2014 oil price free fall – the result of surplus supply and fading demand. The COVID-19 crisis is unprecedented in terms of the danger it poses to health globally. Most countries – including Arab countries – have introduced full or partial lockdown measures to save lives. But protecting human life has had an economic cost in terms of slowed growth and productivity, massive job losses, enterprise closures and broken value chains. Micro-, small and medium-sized enterprises (MSMEs) account on average for over 90 percent of all enterprises in the region and provide a major source of new job creation, thus occupying a central role in the economies and livelihoods. These MSMEs have been disproportionately affected by the crisis. This paper examines these effects.
... Studies have shown that very small businesses are mainly informal in their operation and are very dynamic in terms of their innovative ability (Martínez-Román and Romero, 2013;Williams and Shahid, 2016;Jegede and Jegede, 2018;Ogunjemilua et al., 2020;Jegede, 2020a). Microenterprises and enterprises in the informal sector contribute significantly to both employment (Romero and Martínez-Román, 2012;Adams, Johansson de Silva and Razmara, 2013) and gross domestic product (GDP) in developing countries (Quaddus and Hofmeyer, 2007;Awojobi et al., 2014;Ayyagari et al., 2014). Williams and Shahid (2016) identified that 62% of entrepreneurs operate wholly informal enterprises, 31% largely informal, while only 7% operated largely formal enterprises. ...
Article
Even though the informal sector is the largest contributor to African economies, very little empirical research has been done on determinants of and barriers to product innovation in the informal sector. The study assessed how informal businesses overcome barriers to product innovation by econometric analysis of 996 informal enterprises in a township in KwaZulu-Natal Province in South Africa. Analysis showed a significant positive relationship between technological challenges and product innovation, but a significant negative relationship between social challenges and product innovation. Also, there was a significant positive relationship between percentage of family members in the business and product innovation, but a significant negative relationship between educational qualifications and product innovation. The study concludes that, based on their high level of flexibility due to their smallness, proximity to another and to their customers, these informal sector businesses found suitable alternatives to their technology related barriers.
... Developing countries recognize micro, small and medium enterprises (MSMEs hereafter) as instrumental to ensure inclusive and broader socioeconomic development (e.g. Ayyagari et al., 2014;Gebru, 2009;Shibia & Barako, 2017). In particular, Sub-Saharan African countries acknowledge MSMEs as crucial players in resolving socioeconomic challenges, such as youth and women unemployment, inequitable income distribution, and poverty (de Jongh et al., 2012;Gebreeyesus et al., 2018;Quartey & Kotey, 2019). ...
... The initial sample consists of 135500 firms across 155 countries. In the WBES survey, SMEs are defined as firms having less than 100 employees (Ayyagari et al., 2011(Ayyagari et al., , 2014. After removing the firms with more than 100 employees, the author obtained a sample of 57847 SMEs. ...
Article
This study explores the interrelatedness between the various temporal concept of internationalisation. Using organisational learning perspective, this study explores the impact of foreign entry timing and time since first foreign entry on the speed of subsequent internationalisation intensity or growth. The author tests the proposed hypotheses on a sample of 10295 exporting small and medium-sized enterprises (SMEs) from 100 countries based on World Bank Enterprise Survey (WBES) data. The results show that foreign entry timing reduces the speed of internationalisation while time since first foreign entry increases the speed of internationalisation. Further, the author finds that manager prior domestic industry experience reduce disadvantages associated with the late start of internationalisation and increase the speed of internationalisation. In contrast, the author finds support for the negative moderating effect of manager domestic industry experience on time since first foreign entry and internationalisation speed relationship.
... Therefore, Regional and local governments and development agencies often have significant responsibilities for SMEs and entrepreneurship policies and programmes in their own right, alongside national governments and agencies (OECD, 2008). In fact, the role played by SMEs in employment generation and economic recovery is a key question for policy makers (Ayyagari et al., 2014). The role of SMEs is worldwide acknowledged for their unique contribution to the economic development. ...
Conference Paper
Full-text available
The omnipresence of small and medium-sized enterprises at the international level has aroused the interest of several research authors to study to what extent these small structures influence and affect the economies at the national level of each country on different levels. On the economic level, the issue of small and medium-sized enterprises is often highlighted in relation to their ability to create stable and permanent jobs. Also, these companies are analyzed in times of crisis and volatility in order to test their resilience. Faced with these multiples analyzes and different readings, we propose to review, in a general and progressive manner, the main themes and facets related to the study of the role of SMEs in the light of recent developments following the publications of international organizations responsible for economic and works of certain academic authors. Keywords: Small and medium-sized enterprises, Role of SMEs, SMEs challenges, National economies. Full text at: https://www.esd-conference.com/upload/book_of_proceedings/Book_of_Proceedings_esdTangier2022_Online.pdf
... 018;Rawhouser, Cummings & Newbert, 2017;UN, 2017). This is because SMEs have been shown to make significant contribution towards delivering substantial increase in global wealth and improved standards of living through innovation, job creation, income generation and poverty alleviation (Banjoko, et.al, 2012;Haltiwanger, et al., 2010). According to Ayyagari, et. al., (2012), SMEs also facilitate balanced economic development since they can easily be undertaken in rural and semi-urban areas, which in turn prevents rural to urban migration of people. The resultant positive impact of this is reduction of social ills connected with idle youths and inadequate infrastructure had the rural urban migration of peop ...
Article
Full-text available
The purpose of this study was to review literature using a meta-analysis approach in collecting data to identify gaps in the phenomenon of sustainable development goals, social entrepreneurship education, regulatory framework and its link to sustainability objectives. The study established that progress in vital areas of the global sustainability agenda, including reducing inequality, lowering carbon emissions and tackling hunger, had either stalled or reversed. Activities necessary in the global sustainability agenda amidst coronavirus disease outbreak are non-binding with countries expected to create their own national plans, including the sources and extent of required financing remaining ambiguous, resulting in little global progress towards the desired objectives. There are also social entrepreneurship education related research gaps, in addition to studies proposing varied models on how best to realize the 2030 global sustainability agenda. This study concluded that young people especially without jobs, children out of school, families without hope, displaced people or those living in fragile or conflict afflicted areas will be left behind especially in the context of COVID-19. This study argues that sustainable development goals can be realized if government, academia and other stakeholders move beyond the current forms of engagement and have social entrepreneurship education cascaded to lower levels of the school curricula. The study has therefore proposed an integrated theoretical model upon which propositions at the abstraction level can be advanced and empirically tested as part of the research agenda.
Article
Purpose Promoting and supporting entrepreneurship is a critical pillar of Oman’s vision 2040. The need to understand to what extent the effectiveness of public funds given to micro and small enterprises in Oman as well as to understand the characteristics of the funds that can drive the impact of such government financial support programs on those enterprises motivated us to conduct this study. Therefore, the purpose of this study is to investigate the impact of the government loan support programs on job creation in micro and small enterprises in Oman. Design/methodology/approach Hypotheses were tested using data collected from 1,127 micro and small enterprises that received loan supports from the Government of Oman. The authors explored the impact of a set of predictors on a dependent variable (job creation) to understand to what extent do the supported micro and small enterprise characteristics significantly influence job creations in the enterprises. Multiple regression and General Linear Model Multivariate Analysis statistical techniques were used to test the hypotheses. Findings There is a positive relationship between government supported firms’ characteristics and job creation for both nationals and expatriates’ employment. The empirical results suggest that, when compared with the micro enterprises, the small enterprises were able to create more jobs for nationals than for expatriates, although the effect of the support program on job creation was significant for both groups. Originality/value This paper contributes to the literature debate on the effectiveness of Oman’s entrepreneurship policy. Using multivariate analysis, the study analyzes the public support program for enterprises in Oman and how it can be improved to support the Oman 2040 Vision.
Article
Purpose This study aims to examine the relationship between human resource development (HRD) and the interaction between corporate social responsibility (CSR) and marketing capabilities in small and medium enterprises (SMEs) in the food industry. Design/methodology/approach This research uses the extended regression model on a sample of 2,649 food SMEs in Vietnam. Findings This research found that CSR and marketing strategies positively influence HRD; the interaction of CSR and marketing capabilities has a negative effect on HRD; the endogenous role of network capabilities on the effects of CSR and marketing capabilities on HRD. Originality/value This research helps food companies use their resources in allocating resources for CSR and conduct marketing reasonably and effectively. This study highlights that the impact of CSR and marketing on HRD is dominated by endogenous networking.
Article
Purpose Generating meaningful employment has become a major concern for countries across the globe to break the vicious circle of poverty. Employment creation becomes more intricate in a developing economy like India where the population is at an incessant rise, without a simultaneous increase in the employment generation. In the event of situations of mounting unemployment, micro small and medium enterprises (MSMEs) being largely labour-intensive have been claimed as a significant contributor in an economy’s development to induce employment generation. The study at hand is an attempt to gauge the overall contributions of MSMEs in employment creation in Assam, a developing region of the Indian sub-continent. However, most importantly, the purpose of this paper is to determine if men and women are differently employed in the sample MSMEs and if the pattern of employment creation is different across male and female-owned sample MSMEs. Design/methodology/approach The study is based on a uniquely large sample of 320 MSME entrepreneurs with an equal representation of 160 each from male and female entrepreneurs. Secondary data sources were also consulted. Study areas comprising Kamrup-Metropolitan and Kamrup-Rural, depicting both urban and rural Assam, respectively. The choice of activities undertaken by the entrepreneurs includes a wide variety of 12 activities pertaining to all the MSME entrepreneurs in general and certain gender-specific in particular. The two hypotheses ( H01 and H02 ) formulated were tested using the Chi-square test and the Mann-Whitney U test. Furthermore, the growth rate of employment generation in Assam along with the growth rate of the number of MSMEs established and investment made by the MSMEs were computed. Findings The calculated growth rate of employment creation, capital investment and MSMEs established were found to be positive. Based on the results of the Chi-Square test and Cramer’s V test, this paper establishes a strong association between the MSMEs and the total employment generation by the sample entrepreneurs ( H01 ). The primary data suggested that 320 MSMEs are Employing 2,766 people in the study area with an average of 8 people per unit. Employment in the service sector is higher than the manufacturing units with an average of 4 people per unit. Another vital finding of the study professed that the women-owned MSMEs have a relatively lesser number of people (32.2%) employed than their male counterparts (67.8%). The mean rank of male entrepreneurs is considerably higher (211.49) testifying a higher employment creation by the male-owned MSMEs than the women-owned ( H02 ). Moreover, women (33.4%) are thinly employed than men (66.5%). Women entrepreneurs were seen to have mostly limited themselves in micro-units followed by small-units. In terms of the nature of employment, full-time employees (81.8%) supersede part-time employees (6.6%). The pattern of self-employment is equal (5.8%) across both male and women entrepreneurs. MSMEs have been well identified as an impeccable answer to mitigate the problem of mounting unemployment. Originality/value The novelty of the study lies in its meticulous and explicit understanding of the employment scenario in Assam by the MSMEs. Empirical works on employment creation by the MSMEs in Assam were fundamentally based on secondary data sources. The study fills in the gap by providing a holistic picture of employment creation based on both primary and secondary data, but prominently on the primary. The study accounts details about the nature of MSME employment, the gender of the MSME employees, employment creation by male and female MSME entrepreneurs, the growth rate of MSME employment and self-employment to name a few
Article
Full-text available
This paper, at first, examines the determinants of the labor income share (LIS) and second calculates the own, cross, and output elasticities of the labor force demand for three sizes of firms in Iran's industry: 10-49 employees, 50-99 employees, and more than 100 employees. Since the dependent variable was limited to the interval 0 and 1, a Fractional Panel Probit technique has been used for the period 2004-2014 and provincial level. The findings from the first section of all groups showed that the relation between labor share income and wages, capital prices, and the ratio of skilled to non-skilled employees is positive. Labor income share is reduced by increasing real output, tax, the premium paid, and the value of raw materials. The share of labor income is reduced by increasing production can make sense that the rising in production is more capital-intensive than labor-intensive, and leads to a reduction of the labor income share. In the second part, the own wage elasticity was negative for all groups. The relationship between labor and capital price was positive that implies substitution elasticity between them. There is a positive sign for output-employment elasticity. The nonlinear relationship among the elasticities is consistent with our finding that within all groups, small and large firms have more own and output elasticities. There is a U-shape relationship between firm size and elasticities. In reverse, cross elasticity is high for medium-firm size. Based on research results and since the labor market of Iran is suffering from labor demand shortage, some suggestion to the economic policymaker may be helpful such as applying appropriate facility to increase industrial growth, eliminating production barriers, reducing the risk of investment, and improving human resources skills following the requirements of industrial sectors.
Article
This study examines the impact of environmental munificence on young firm revenue growth. One hundred and ninety young U.S.-based firms from 42 states are studied for their growth over a three-year period. Specifically, we find that the environmental munificence in terms of entrepreneur’s selected industry has a significant impact on young firms’ revenue growth but the state’s economic condition has no such impact. However, the positive effect of industry growth on young firms’ revenue growth is significantly stronger in states with declining GDP. The findings suggest that state economy may not be as important for starting a business for its revenue growth, and the choice of industry for the business is more important in a declining regional economy than has been previously understood.
Thesis
Full-text available
Minority-owned small business enterprises play a significant role in the development of the U.S. economy by providing employment and contributing to its GDP. However, despite their contributions to the economy and labor markets, the problem is minority small business owners are denied credit more frequently than non-minority business owners. The purpose of this qualitative multi-case study was to understand how minority small business owners perceive the issues that make them more likely to be denied credit than non-minority applicants, and to evaluate their strategies. A theoretical framework of financial inclusion guided this study. During the data analysis stage, nine themes were identified. The most cited ones were: family and friends as significant sources of financing in the initial startups, insufficient business credit and collateral, and lack of financial preparedness in applying for loans. The participants asserted that they did not receive proper assistance in the loan application process. Recommendations for practice included minority acquisition of knowledge regarding loan application requirements for business. Future research could be focused on expanding the current study beyond rural areas and investigating the development of programs specifically focused on minority borrowers.
Article
This study adds to the literature by evaluating for the first time not only the short-term but also the long-term effects of formalization on loan access for small and medium-sized enterprises (SMEs) in Vietnam between 2005 and 2015. We find that businesses that formalize their status have a better chance of obtaining a formal loan, but the benefits of formalization are only apparent in the short term and not in the long run (five, seven or more years). Also, our study indicates that promoting formalization and loan availability for private SMEs in Vietnam requires encouraging the adoption of accurate financial records, accounting books, and anti-corruption measures.
Article
Small and medium-sized enterprises (SMEs) faces much more severe financial constraints compared to large mature companies and it is more vulnerable to market imperfection. To alleviate SMEs’ financial constraints, Public Credit Guarantee Schemes (CGSs) have been introduced and widely used around the world. Having provided a thorough analysis of the effectiveness of the traditional CGSs, we introduce an innovative financing contract, referred to as equity-for-guarantee swap (EGS), with the aim of reducing SMEs’ financial constraints in a more effective way. We show that EGS effectively alleviates SMEs’ severe financial constraints as it transfers the information asymmetry between lenders and SMEs to that between insurers and SMEs We investigate how asset prices vary across time under the EGS contract and analyze insurers’ risk exposure, i.e. value-at-risk (VaR) and expected shortfall (ES), of participating in the EGS contract. Consistent with pecking order theory, SMEs tend to use debt financing first and equity financing even considering the benefit of boosted growth rate from equity financing.
Chapter
Unemployment reduction is one of the grand challenges to achieve the sustainable development goals. More specifically, graduate youth unemployment is a rising concern for low and middle-income countries. Accordingly, government and policymakers seek to promote entrepreneurship to address the issue of unemployment through entrepreneurship education and training. Building on this notion, this chapter discusses STEP (student training for entrepreneurial promotion) as an action-oriented entrepreneurship training program. This chapter shows the theoretical and methodological underpinnings of STEP, how the impact of STEP unfolds over time, and the processes that happen during STEP. This chapter also covers cases where STEP has been extended to different academic settings, bringing systemic change in academic curriculums and for different target groups. Finally, this chapter discusses some common challenges when implementing STEP at partner institutions. The chapter concludes that STEP is an effective tool to tackle graduate youth unemployment in developing economies.
Chapter
Existing evidence has shown that SMEs make great contributions to innovation, job creation and economic growth. This chapter reviews recent literature on (1) the important roles played by SMEs in emerging markets and (2) the impacts of financial development on SME finance in such markets. It also uses a unique database form World Bank Enterprise Survey (WBES) to document the financing patterns, constraints and other financial issues of SMEs in emerging markets. The descriptive statistics derived from WBES show clear variations of SME financing patterns between emerging and developed markets and shed light on the important role played by financial development in financing SMEs.
Article
We assess the impact of state-level employment protection laws in India on discouraged borrowers. Using data from the World Bank Enterprise Survey for 2013-14, we find that labour laws in isolation discourage borrowing. When the complementarities between these laws are considered, the discouragement for borrowers is lower. The analysis suggests the need to ensure a holistic assessment of such laws to better understand the behavior of discouraged borrowers.
Chapter
Sustainable economic growth is a top priority for Oman, aiming to lessen reliance on oil and increase economic diversification. The government sees entrepreneurship and innovation as vital players in creating jobs, diversifying the economy, and transforming the economy from a traditional to a knowledge-based economy. Under the Visions 2020-2040, the government has developed programs to enhance and encourage women's engagement in SMEs to maximize returns, create employment opportunities, and reduce the market and institutional failures. Lack of women engagement in SMEs is due to barriers of entrants and women who intend to start their own business can face challenges that lead to failure in their business endeavors. Among these challenges are government policies, financial support, supporting R&D, and culture. Further research is necessary to investigate factors that motivate Omanis to become entrepreneurs and overcome the obstacles. The main objective of this chapter is to develop a conceptual framework to highlight the main challenges that limit Omani women from participating in SMEs.
Experiment Findings
Full-text available
The Micro, Small and Medium Enterprises (MSMEs) play a vital role in the economic and social development of the country often acting as a nursery of entrepreneurship and innovation. They also play a key role in the development of the economy with their effective, efficient, flexible, and innovative entrepreneurial spirit. The MSME sector contributes significantly to the country‘s manufacturing output, employment and exports and is credited with generating the highest employment growth as well as accounting for a major share of industrial production and exports. This research report delineates the findings of the dipstick during the pandemic that was conducted to understand the loan giving and taking process to the MSMEs and its effects on financial institutions. While the enthusiasm of the sector is extremely high – the financial span of the segment makes the entrepreneurs of MSME struggle to survive.
Article
One of the most striking contrasts between the anatomies of the business sectors in higher‐ versus lower‐income economies is the overwhelming dominance of very small production units in the latter. Contrasting manufacturing sector data for Colombia and the USA, we show that weaker ‘up‐or‐out’ dynamics are behind this pattern and behind weaker average lifecycle growth. Dampened growth dynamics, not only in terms of upward mobility but also for exit and downward mobility, characterize both micro‐establishments and young establishments in Colombia relative to their US counterparts. These patterns lead to a more dominant role of small older businesses in accounting for employment. Since dynamic selection among startups is a crucial driver of productivity growth in the USA, our findings point to a shortage of high‐growth entrepreneurship and a relative high likelihood of long‐run survival for small, likely unproductive plants, as two key elements at the heart of the development problem. We also show that analysis of establishment lifecycle dynamics based solely on cross‐sectional data substantially underestimates lifecycle growth.
Article
Does the perception of high corruption lower the probability of innovation for Indian firms? Using World Bank Enterprise Survey's firm level data, we show that a unit rise in corruption perception of firms in India could lower innovation rate by about one percent. The result is important in terms of policy implementation since recent studies have shown that perceived obstacles can affect firms’ probability to innovate. Such analysis is missing in the Indian context where both big and petty corruption are rampant. Our results further show that perceptions about financial barriers matters only when firms also view corruption to be bad. Perceived difficulty in accessing credit in conjunction with corruption perception lowers probability of innovation by 4%. This is also true for perceived non-financial obstacles for firms. The results remain to robust to alternate identification strategies.
Article
The central question we pose is: which firms are likely to create or destroy jobs and does the quality of institutional environment affect the pace of firm-level job creation or destruction? Using Enterprise Survey data for 30 African countries, we find that jobs are destroyed at almost half the rate at which they are created. Small and starter firms report higher rates of job destruction. Though services firms account for higher rates of gross job creation, they still have higher rates of gross job destruction. We use Pooled Ordinary Least Squares estimation technique and at some point, account for possible endogeneity using the Two Stage Least Squares estimation technique. Our results indicate that improving the quality of institutional environment reinforces firm-level job creation and reduces job destruction. This effect is more pronounced among firms in the manufacturing sector. Findings draw attention to the importance of the quality of institutional environment and support towards small and starter firms.
Article
Would different types of ownerships affect each other's effect on firm behavior? We investigate the effect of residual state ownership, foreign ownership, and the interaction between the two on firms' financing patterns, employing the World Bank Enterprise Survey (WBES) dataset, which covers over 130 thousand firms in 139 economies from 2006 to 2017. We find that neither firms with residual state ownership only nor firms with foreign ownership only are positively related with external finance. In comparison, firms with both state and foreign ownerships are associated with higher external finance. The coefficient of the state-foreign interaction is both statistically and economically significant. The increased external finance for firms with both state and foreign ownerships mainly comes from private banks and new equity. Moreover, we explore the channels through which residual state ownership and/or foreign ownership affect firms' financing patterns. Firms with residual state ownership only or foreign ownership only do not actively expand in the market or innovate their products. While firms with both state and foreign ownerships are eagerly engaging in market expansion and product innovation.
Article
Full-text available
SMEs is consider as an important component of economic development, create job opportunities, and bring innovation and social welfare. Empirical evidence shows that SMEs plays a major role in creating employment in developed countries. In developing countries there are mixed results-- there is no direct relation between entrepreneurship and employment growth. However, there are very few studies investigates the links between the growth of SMEs and the growth of employment creation in oil dependent economy. Present study investigates the growth of future employment creation across the size of SMEs by using recent survey data conducted by Global Entrepreneurship Monitor (GEM) in Oman. Regression analysis was used to examine the association with future job creation and other factors influencing job creation. Study found that early stage entrepreneurs expecting to provide more than two times of current level of employment by next 5 years. However, established business (EB) entrepreneur’s expected employment growth is negative. This means that after 5 years’ job opportunity will be reduced in established SMEs. Our regression result shows that the male entrepreneur who have higher level of qualification and earning higher income from the business are more likely to create more jobs in next 5 years and so. The study also found that the self-perceived innovation and creativity have positive and significant relation with job creation in future. However, the skills, experience and optimism towards business environment have negative relation with future job creation.
Article
Full-text available
While competition in the financial system generally mitigates small- and medium-sized enterprises' (SMEs) financing constraints, this paper theorises that competition by microfinance institutions (MFIs) has adverse effects through aggravating the ‘graduation problem’: Small firms outgrowing microfinance struggle to find financing as conventional financial institutions abstain from downscaling and developing suitable lending instruments for smaller firms if these market segments are narrowed down by upscaling MFIs. Using data from 51 countries between 2002 and 2015, microfinance is found to significantly lower SMEs' access to credit. Credit bureaus can reverse this effect indicating that credit information infrastructure can reconcile a strong microfinance sector with functioning SME finance.
Article
Full-text available
Plain English Summary The winner of the 2020 Global Award for Entrepreneurship Research, John Haltiwanger, has pioneered research showing that it is mainly firm age, not size, that matters for job creation. Through analyzing the relationship between employment, growth, and firms, he has advanced our understanding of how the economy works. He has done this by building new datasets and introducing a new measure of firm growth, solving problems encountered with earlier techniques. His work has also broadened the policy debate on entrepreneurship and inspired people all around the world. From a policy perspective, John Haltiwanger has shown that it is difficult to justify targeted industrial and commercial policies, and if job creation is to be supported, politicians need to target young firms rather than small firms. These important findings from John Haltiwanger’s pioneering work have been published in world-class leading academic and scientific journals.
Article
Full-text available
Survival and growth-oriented entrepreneurs follow qualitatively different logics. In this article we retrace the scattered previous theorization of this distinction and present a consolidated set of key characteristics of the two types of enterprises, enriched by our own observations in the field. Our main purpose is to typify the different rationalities of the two groups of entrepreneurs. Second, we argue that because most existing interventions are based on the implicit assumption that all entrepreneurs are growth-oriented, they often fail to address the specific needs of survivalists. Finally, we outline an intervention rationale more attuned to the logic of survival entrepreneurs. Les entrepreneurs axés sur la survie suivent des logiques qualitativement différentes de ceux dont l′objectif est la croissance économique. Dans cet article nous revenons sur la théorisation déjà vaguement esquissée de cette distinction et présentons un ensemble consolidé des caractéristiques clés des deux types d′entreprises, en nous appuyant sur nos propres observations de terrain. Nous cherchons, en premier lieu, à caractériser les logiques des deux catégories d′entrepreneurs. Puis, nous montrons que les interventions sont généralement fondées sur l′hypothèse implicite que tous les entrepreneurs sont axés sur la croissance. De ce fait, celles-ci répondent mal aux besoins spécifiques des entreprises axées sur la survie. Enfin, nous décrivons une approche d′intervention plus en lien avec la logique des entrepreneurs qui sont axés sur la survie.
Book
Full-text available
1. Introduction 2. Causal and non-causal models 3. Microeconomic data structures 4. Linear models 5. ML and NLS estimation 6. GMM and systems estimation 7. Hypothesis tests 8. Specification tests and model selection 9. Semiparametric methods 10. Numerical optimization 11. Bootstrap methods 12. Simulation-based methods 13. Bayesian methods 14. Binary outcome models 15. Multinomial models 16. Tobit and selection models 17. Transition data: survival analysis 18. Mixture models and unobserved heterogeneity 19. Models of multiple hazards 20. Models of count data 21. Linear panel models: basics 22. Linear panel models: extensions 23. Nonlinear panel models 24. Stratified and clustered samples 25. Treatment evaluation 26. Measurement error models 27. Missing data and imputation A. Asymptotic theory B. Making pseudo-random draw.
Article
Full-text available
The potential dynamic benefits of a firm having the option to adopt informal status are analysed. Informality may be a stepping stone, without which formality may never be achieved. This result is obtained for a broad range of realistic parameter values, suggesting a potential dynamic case for government support of informal firms. Informality may alternatively play a converse role as a consolation prize, with a firm only entering an industry (formally) because it recognizes that if profitability is disappointing, it can switch to informality. However, this result is obtained for a range of parameter values so narrow as to be of no practical significance.
Article
Full-text available
In this paper, we compare two datasets designed to measure entrepreneurship: The Global Entrepreneurship Monitor (GEM) dataset and the World Bank Group Entrepreneurship Survey (WBGES) dataset. We find a number of important differences when the data are compared. First, GEM data tend to report significantly higher levels of early stage entrepreneurship in developing economies than do the World Bank business entry data, while the World Bank business entry data tend to be higher than GEM data for developed countries. Second, we find that the magnitude of the difference between the datasets across countries is related to the local institutional and environmental conditions for entrepreneurs, after controlling for levels of economic development. Our findings suggest that entrepreneurs in developed countries have greater ease and incentives to incorporate, both for the benefits of greater access to formal financing and labor contracts, as well as for tax and other purposes not directly related to business activities.
Article
Full-text available
This article analyses the growth performance of a large set of entrepreneurial firms in ten manufacturing sectors of 11 Sub-Saharan African countries. The focus of the article is on identifying those entrepreneurs’ attributes and firm characteristics that tend to generate a significant number of high-growth firms in these countries. To this end, we use a quantile regression, which provides a more complete estimation of the growth distribution of firms conditional on different attributes. The results indicate that firms that engage in product innovation, have their own transport means and are connected to the internet through their own website are especially characterized by higher growth rates and also display a distribution of growth rates skewed to the right, hosting a higher number of high-growth firms. The effect of the last two variables, which relate to distance-bridging modes of infrastructure, points to the self-reinforcing growth effects they generate in creating wider input and output markets. Education raises growth opportunities by affecting the lower quantiles, but it does not appear to influence the upper quantiles. The estimated conditional growth distributions for the technology-intensive machinery and electronics sectors show more extreme tails and a lower mean in comparison to the traditional industries, indicating the more risky nature of doing business in these industries.
Article
Full-text available
We examine the relationship, across 39 countries, between regulation and entrepreneurship using a new two-equation model. We find the minimum capital requirement required to start a business lowers entrepreneurship rates across countries, as do labour market regulations. However the administrative considerations of starting a business – such as the time, the cost, or the number of procedures required – are unrelated to the formation rate of either nascent or young businesses. Given the explicit link made by Djankov et al. [Djankov et al. 2002, ‹The Regulation of Entry’, Quarterly Journal of Economics 117(1), 1–37] between the speed and ease with which businesses may be established in a country and its economic performance – and the enthusiasm with which this link has been grasped by European Union policy makers – our findings imply this link needs reconsidering.
Article
Full-text available
Dans ce papier nous introduisons les articles composant la rubrique de ce numéro du European Journal of Development Research. Cette rubrique est consacrée aux modèles et déterminants de l’entreprenariat féminin dans les différents pays, et se penche plus particulièrement sur le cas des pays en voie de développement. Dans un premier temps, nous présentons les défis que représente la question de l’entreprenariat féminin pour la communauté scientifique, nous décrivons quelques uns des résultats de la littérature concernant la conception trans-nationale de l’entreprenariat féminin, et passons en revue la littérature portant sur le rôle et les expériences des femmes entrepreneurs dans les pays en voie de développement. Bien que l’on comprenne de mieux en mieux les motivations des femmes entrepreneurs, ainsi que les contraintes et problèmes auxquels elles font face, ces questions méritent des recherches plus approfondies. Nous présentons ensuite quatre articles qui font progresser cet agenda de recherche.
Article
Full-text available
This paper presents estimations of the shadow economies for 162 countries, including developing Eastern European, Central Asian, and high-income countries over the period 1999 to 2006/2007. According to the estimations, the average size of the shadow economy (as a percentage of "official" gross domestic product) in 2006 in 98 developing countries is 38.7 percent; in 21 Eastern European and Central Asian (mostly transition) countries, it is 38.1 percent, and in 25 high-income countries, it is 18.7 percent. The authors find that the driving forces of the shadow economy are an increased burden of taxation (both direct and indirect), combined with labor market regulations and the quality of public goods and services, as well as the state of the “official” economy.
Article
Full-text available
This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm-level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, and this variation is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.
Article
Full-text available
Based upon two strands of literature, this paper hypothesizes a U-shaped relationship between a country's rate of entrepreneurial dynamics and its level of economic development. This would imply a different scope for entrepreneurship policy across subsequent stages of development. Regressing GEM's 2002 data for nascent entrepreneurship in 36 countries on the level of economic development as measured either by per capita income or by an index for innovative capacity, we find support for a U-shaped relationship. Testing our results against several control variables, evidence is again found for this relationship with economic development, in addition to significant effects of the business ownership rate (+), social security expenditure (-), aggregate taxes (+) and population growth (+). The results suggest that a 'natural rate' of nascent entrepreneurship is to some extent governed by 'laws' related to the level of economic development. For the most advanced nations, improving incentive structures for business start-ups and promoting the commercial exploitation of scientific findings offer the most promising approach for public policy. Developing nations, however, may be better off pursuing the exploitation of scale economies, fostering foreign direct investment and promoting management education.
Article
Full-text available
In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for nonpayment of rent and to collect a bounced check. We use these data to construct an index of procedural formalism of dispute resolution for each country. We find that such formalism is systematically greater in civil than in common law countries, and is associated with higher expected duration of judicial proceedings, less consistency, less honesty, less fairness in judicial decisions, and more corruption. These results suggest that legal transplantation may have led to an inefficiently high level of procedural formalism, particularly in developing countries. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
Chapter
When the first author reviewed the literature on small firm growth in the mid-1980s for his dissertation, he noted that surprisingly few studies had focused on that specific problem. Today, this is no longer true. In recent years ever more comprehensive lists of studies have been compiled and reviewed. Storey compiled results from more than twenty-five studies. Delmar scrutinized the operationalizations of growth in fifty-five studies. The second author of this chapter recently reviewed and classified close to seventy studies for his dissertation, while Ardishvili et al. included in their classification a full 105 published and unpublished studies focusing on new venture growth. However, rather than presenting a set of solid generalizations on the causes and effects of growth, these reviewers all tend to come up with relatively critical accounts concerning both theoretical and methodological shortcomings.
Article
We survey chief financial officers from 29 countries to examine whether and why firms use lines of credit versus non-operational (excess) cash for their corporate liquidity. We find that these two liquidity sources are employed to hedge against different risks. Non-operational cash guards against future cash flow shocks in bad times, while credit lines give firms the option to exploit future business opportunities available in good times. Lines of credit are the dominant source of liquidity for companies around the world, comprising about 15% of assets, while less than half of the cash held by companies is held for non-operational purposes, comprising about 2% of assets. Across countries, firms make greater use of lines of credit when external credit markets are poorly developed.
Article
Growth theory has traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the micro-development literature, demonstrating that the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return. Prima facie, we argue, this evidence poses problems for old and new growth theories alike. We then review the literature on various causes of this misallocation. We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model. We show that, in order to match the data, it is enough to have misallocated factors: there also needs to be important fixed costs in production. We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data.
Book
"The contributors to this book look at the phenomenon of entrepreneurship in emerging regions in India, China, Ireland, Eastern Europe, North and South America, and North and South-East Asia. The organization is designed to take the reader from a general framework for understanding the relationship between economic development and entrepreneurship to more specific examples of how entrepreneurs and their firms respond to the opportunity and threats that are dynamically evolving in such places. The book represents the first serious attempt to suggest new theoretical frameworks for understanding the emergence of entrepreneurship in regions that do not have all of the classical prerequisites (such as financial and human capital, favorable geography, institutional infrastructures, and so on) predicted in extant development models.". © Phillip H. Phan, Sankaran Venkataraman and S. Ramakrishna Velamuri 2008. All rights reserved.
Article
The view that small businesses create the most jobs remains appealing to policymakers and small business advocates. Using data from the Census Bureau's Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues at the core of this ongoing debate. We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age, there is no systematic relationship between firm size and growth. Our findings highlight the important role of business start-ups and young businesses in U.S. job creation.
Article
Although the literature contains an impressive volume of studies attempting to identify determinants of organizational growth, researchers have recently noted important inconsistencies in findings. They may be explained, in part, by the variety of approaches used to measure growth. Our study provides a critical review of the literature to identify issues regarding the measurement of growth. We examine alternative approaches in order to assess the consequences of using inappropriate measures. Consequently, we consider three concepts as well as three different measurement formulas. Based on comprehensive data from 193 firms in 48 industries for 20 periods, results from comparative regression analyses reveal that the significance of relationships between determinants and organizational growth, as well as amount of explained variance, depend on the specific approaches used to measure growth. Finally, we provide some guidelines to help researchers select appropriate techniques for measuring organizational growth.
Article
Imagine this: a mere century ago, the purchasing power of an average American was one-tenth of what it is today. But what will it take to sustain that growth through the next century? And what can be said about economic growth to aspiring nations seeking higher standards of living for their citizens? In Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, William J. Baumol, Robert E. Litan, and Carl J. Schramm contend that the answers to these questions lie within capitalist economies, though many observers make the mistake of believing that capitalism is of a single kind. Writing in an accessible style, the authors dispel that myth, documenting four different varieties of capitalism, some Good and some Bad for growth. The authors identify the conditions that characterize Good Capitalism the right blend of entrepreneurial and established firms, which can vary among countries as well as the features of Bad Capitalism. They examine how countries catching up to the United States can move faster toward the economic frontier, while laying out the need for the United States itself to stick to and reinforce the recipe for growth that has enabled it to be the leading economic force in the world. This pathbreaking book is a must read for anyone who cares about global growth and how to ensure America's economic future.
Article
Although the literature contains an impressive volume of studies attempting to identify determinants of organizational growth, researchers have recently noted important inconsistencies in findings. They may be explained, in part, by the variety of approaches used to measure growth. Our study provides a critical review of the literature to identify issues regarding the measurement of growth. We examine alternative approaches in order to assess the consequences of using inappropriate measures. Consequently, we consider three concepts as well as three different measurement formulas. Based on comprehensive data from 193 firms in 48 industries for 20 periods, results from comparative regression analyses reveal that the significance of relationships between determinants and organizational growth, as well as amount of explained variance, depend on the specific approaches used to measure growth. Finally, we provide some guidelines to help researchers select appropriate techniques for measuring organizational growth.
Article
In this paper, we show that most small business owners are very different from the entrepreneurs that economic models and policy makers often have in mind. Using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing market. Further, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Article
Explores how jobs are created and destroyed in the United States. Data is derived from 12 million business establishments studied since 1969. Results show that the business population as a whole is extremely turbulent, meaning millions of companies form every year, and a significant portion experience growth -- especially small firms. An era of innovation is on the rise, stemming from a small number of high tech and high-innovation firms that are leading the service industries of the United States. The economies of Canada, Sweden, and the United Kingdom are studied as well, and are found to exhibit strikingly different characteristics from the US, based on differing cultural values; consequently, change will evolve slowly. The spatial implications of the innovation revolution are discussed, and predictions are made for future areas of economic growth. Conclusions show that the US worker must be willing to seek opportunities, acquire knowledge that is valuable across industries, and adapt to multiple jobs and the career shifts that necessarily accompany turbulent, innovation-based markets. (CJC)
Article
This statistical report on the behavior of individual firms assesses how changes in employment and regional growth occur. A longitudinal file is developed for 5.6 million business establishments, using the Dun & Bradstreet Corporation data for December 31st of 1969, 1972, 1974, and 1976. Since rate of job replacement is the key factor in regional growth, the data is analyzed to measure components of change, job generation, and interregional control. Six collective components of change are identified -- birth, death, expansion, contraction, in-migration and out-migration. Among the data provided are components of employment change by state; status of firms vs employment gains; net employment change by region, industry, status and size; components of change by region, industry, size and age; and percentage change for establishments. A profile of the job-generating firm shows that it is not a large corporation, but a small, independent, and volatile business. Therein lies the problem for development policymakers, since these firms tend to be difficult to identify and work with. A 'rifle-shooting' as opposed to 'shotgun-shooting' method of researching small firms is thus suggested. Policymakers should not attempt to stem migration, as this is found to be an insignificant factor in economic development. Rather, policymakers should focus on job replacement rather than reducing the rate of job loss, which has proven difficult to change and is relatively stable across states. Pleasant physical environment and strong local government are important incentives for firm location, and should be further investigated in relation to job generation. In sum, an indirect approach to studying small business as the major generator of jobs is advised, in which the proposed next step is to analyze data on individual firms alongside of the the characteristics of the places where firms decide to locate. (CJC)
Article
There’s been a long, sometimes heated, debate on the role of firm size in employment growth. Despite skepticism in the academic community, the notion that growth is negatively related to firm size remains appealing to policymakers and small business advocates. The widespread and repeated claim from this community is that most new jobs are created by small businesses. Using data from the Census Bureau Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues regarding the role of firm size and growth that have been at the core of this ongoing debate (such as the role of regression to the mean). We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an “up or out” dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation.
Article
Summary Is informal employment a safety net or a growth engine? To address this question, this paper studies the trends and cycles of informal employment. It first presents a theoretical model of long- and short-run behavior of informal labor. Then it analyzes these relationships empirically, using the share of self-employment in the labor force as the proxy for informal employment. In the long run, informality is larger when labor productivity is lower, government services weaker, and business flexibility less prevalent. In the short run, informal employment behaves counter-cyclically, indicating that it acts primarily as a safety net. The degree of counter-cyclicality, however, varies inversely with the size of informal labor itself.
Article
Panel data for 93 countries shows that most countries experienced a sharp drop in new firm registration during the financial crisis. The decline was more pronounced in countries with higher levels of financial development that were more affected by the crisis.
Article
This paper provides an introduction to this special issue of Small Business Economics dealing with the (long-postponed) integration of entrepreneurship into the discipline of development economics and casting a formal light on the role of entrepreneurship in developing countries. The paper departs from the premise that with more than a billion people living in absolute poverty, it is of great practical importance to understand if and when entrepreneurship is a binding constraint on economic development and catching up in developing countries. This in turn requires at least a deeper theoretical modeling of the entrepreneur in development economics. This special edition contains a number of contributions emanating from the UNU-WIDER project on Promoting Entrepreneurial Capacity, which integrates the disciplines of entrepreneurship and development economics. These contributions model and explore the role of the entrepreneur in key areas of concern for development economics, such as structural change and economic growth, income and wealth inequalities, welfare, poverty traps, and market failures. This introduction discusses and contextualizes these various contributions and their implications for further theoretical and empirical work.
Article
Johnson et al. (2002. American Economic Review 92 (5), 1335–1356) examine the relative importance of property rights and external finance in several Eastern European countries. They find property rights to be overwhelmingly important, while external finance explains little of firm reinvestment. McMillan and Woodruff (2002. Journal of Economic Perspectives 16 (3), 153–170) further conjecture that as transition moves along, market-supporting (financial) institutions should become more important. This paper reexamines those issues in the context of China in 2002, when the transition had moved far. We also find that secure property rights are a significant predictor of firm reinvestment. However, in line with McMillan and Woodruff, we find that access to external finance in the form of bank loans is also associated with more reinvestment. Following Acemoglu and Johnson (2003. Unbundling institutions. Unpublished working paper 9934, National Bureau of Economic Research, Cambridge, MA), we separate our proxies for the security of property rights into two groups: those measuring the risk of expropriation by the government and those measuring the ease and reliability of contract enforcement. Whereas those authors’ cross-country results suggest that risk of expropriation is the more severe impediment to economic development, ours indicate that both expropriation risk and contract enforcement play a role in Chinese firms’ reinvestment decisions. We also find that another aspect of property rights, the extent of private ownership, is associated with greater reinvestment. At China's current stage of development, expropriation risk, contract enforcement, access to finance, and ownership structure all appear to matter for reinvestment decisions. Some evidence also exists that access to finance and government expropriation affect small firms more than large ones.
Article
The paper draws on recent evidence––economic, sociological and anthropological––from Latin America to forward a view of the informal sector in developing countries primarily as an unregulated microentrepreneurial sector and not as a disadvantaged residual of segmented labor markets. It offers alternative explanations for many of the characteristics of the sector customarily regarded as evidence of its inferiority.
Article
We survey chief financial officers from 29 countries to examine whether and why firms use lines of credit versus non-operational (excess) cash for their corporate liquidity. We find that these two liquidity sources are employed to hedge against different risks. Non-operational cash guards against future cash flow shocks in bad times, while credit lines give firms the option to exploit future business opportunities available in good times. Lines of credit are the dominant source of liquidity for companies around the world, comprising about 15% of assets, while less than half of the cash held by companies is held for non-operational purposes, comprising about 2% of assets. Across countries, firms make greater use of lines of credit when external credit markets are poorly developed.
Article
We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.
Article
For many less developed countries production of high quality output is a precondition for firms to become exporters. Institutional deficiencies that raise costs of high quality production therefore limit the positive impact that trade facilitation can have on income. Consequently, institutional reforms that reduce costs of high quality production and trade reform have synergistic effects. In contrast, institutional reforms that reduce costs of low quality production (e.g., reforms that disproportionately benefit small businesses) interfere with the impact of trade reform. We obtain these results in a heterogeneous firm model that displays standard “industry rationalization” responses to reduced trade costs.
Article
We survey 1,050 Chief Financial Officers (CFOs) in the U.S., Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008. We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint. Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending. Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks would restrict access in the future, and sold more assets to fund their operations. We also find that the inability to borrow externally caused many firms to bypass attractive investment opportunities, with 86% of constrained U.S. CFOs saying their investment in attractive projects was restricted during the credit crisis of 2008. More than half of the respondents said they canceled or postponed their planned investments. Our results also hold in Europe and Asia, and in many cases are stronger in those economies. Our analysis adds to the portfolio of approaches and knowledge about the impact of credit constraints on real firm behavior.
Article
Many economists claim that entrepreneurship is an important determinant of economic growth and development. In the sub-discipline of development economics however, entrepreneurship is largely absent from explanations of growth and development. This may be because arguments and evidence marshaled by other economists studying entrepreneurship fail to convincingly show that entrepreneurship is a binding constraint on development in the poorest countries. However, by neglecting entrepreneurship development economics may fail to appreciate how institutions shape development outcomes. It is worthwhile to study entrepreneurship in development as it may improve our understanding of the real binding constraints.
Article
Using a firm-level survey database covering 48 countries, we investigate how financial and institutional development affects financing of large and small firms. Our database is not limited to large firms but includes small and medium-size firms and data on a broad spectrum of financing sources, including leasing, supplier, development, and informal finance. Small firms and firms in countries with poor institutions use less external finance, especially bank finance. Protection of property rights increases external financing of small firms significantly more than of large firms, mainly due to its effect on bank finance. Small firms do not use disproportionately more leasing or trade finance compared with larger firms, so these financing sources do not compensate for lower access to bank financing of small firms. We also find that larger firms more easily expand external financing when they are constrained than small firms. Finally, we find suggestive evidence that the pecking order holds across countries.
Article
Growth theory has traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the micro-development literature, demonstrating that the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return. Prima facie, we argue, this evidence poses problems for old and new growth theories alike. We then review the literature on various causes of this misallocation. We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model. We show that, in order to match the data, it is enough to have misallocated factors: there also needs to be important fixed costs in production. We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data.
Article
We survey and interview more than 400 executives to determine the factors that drive reported earnings and disclosure decisions. We find that managers would rather take economic actions that could have negative long-term consequences than make within-GAAP accounting choices to manage earnings. A surprising 78% of our sample admits to sacrificing long-term value to smooth earnings. Managers also work to maintain predictability in earnings and financial disclosures. We also find that managers make voluntary disclosures to reduce information risk and boost stock price but at the same time, try to avoid setting disclosure precedents that will be difficult to maintain.
Article
In most poor countries, small firms and self-employment are the dominant forms of business enterprise—even in the manufacturing sector. For rich countries, in contrast, self-employed people account for very small shares of manufacturing employment and output. This paper builds on Lucas [1978. On the size distribution of business firms. Bell Journal of Economics 9(2), 508–523] to ask whether structural changes of this kind are driven by productivity differences. A model, calibrated to Japanese time-series data, is shown to mimic key features of cross-country and time-series data. The results support the idea that changes in aggregate productivity account for much of the cross-country variation in establishment size and self-employment rates.
Article
Here, I examine returns to entrepreneurship using a standard measure of welfare, the per-capita consumption expenditure. This analysis, using quantile regressions, reveals the existence of a welfare hierarchy in occupations. The results suggest that, across the welfare distribution, entrepreneurs who employ others have the highest returns in terms of consumption, while those entrepreneurs who work for themselves, that is, self-employed individuals, have slightly lower returns than the salaried employees. However, self-employment entails higher returns than casual labor and a relative escape from poverty.
Article
This paper evaluates the importance of property rights institutions', which protect citizens against expropriation by the government and powerful elites, and contracting institutions', which enable private contracts between citizens. We exploit exogenous variation in both types of institutions driven by colonial history, and document strong first-stage relationships between property rights institutions and the determinants of European colonization (settler mortality and population density before colonization), and between contracting institutions and the identity of the colonizing power. Using this instrumental variables strategy, we find that property rights institutions have a first-order effect on long-run economic growth, investment, and financial development. Contracting institutions appear to matter only for the form of financial intermediation. A possible interpretation for this pattern is that individuals often find ways of altering the terms of their formal and informal contracts to avoid the adverse effects of contracting institutions but are unable to do so against the risk of expropriation.
Article
We document that the fraction of entrepreneurs working in the region where they were born is significantly higher than the corresponding fraction for dependent workers. This is more pronounced in more developed regions and positively related to the degree of local financial development. Firms created by locals are bigger, operate with more capital-intensive technologies, and obtain greater financing per unit of capital invested, than firms created by nonlocals. This suggests that there are so many local entrepreneurs because locals can better exploit the financial opportunities available in the region where they were born. This helps to explain how local financial development causes persistent disparities in entrepreneurial activity, technology, and income. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Article
This paper examines the patterns of postentry employment growth and failure for over 200,000 plants that entered the U. S. manufacturing sector in the 1967–1977 period. The postentry patterns of growth and failure vary significantly with observable employer characteristics. Plant failure rates decline with size and age as do the growth rates of nonfailing plants. The expected growth rate of a plant, which depends on the net effect of these two forces, declines with size for plants owned by single-plant firms but increases with size for plants owned by multiplant firms.
Article
The authors examine how well several institutional and firm-level factors and their interactions explain firms'perceptions of property rights protection. Their sample includes private and public firms that vary in size from very small to large in 62 countries. Together, the institutional theories they investigate account for approximately 70 percent of the country-level variation, indicating that the literature is addressing first-order factors. Firm-level characteristics such as legal organization and ownership structure are comparable to institutional factors in explaining variation in property rights protection. A country's legal origin and formalism index predict property rights variation better than its openness to international trade, its religion, its ethnic diversity, natural endowments or its political system. However, these results are driven by the inclusion of former socialist economies in the sample. When the authors exclude the former socialist economies, legal origin explains considerably less than openness to trade and endowments. Examining a broader set of variables for robustness, they again find that when they exclude former socialist countries, legal origin explains comparatively little of the variation in perceptions of judicial efficiency, corruption, taxes and regulation, street crime, and financing.