The Role of Business Skills and Capital Constraints in Micro Enterprise Development

Project Active from to Firms, Macroeconomics and State

Recent research suggests that small enterprises in developing countries face a number of challenges to growth, including lack of skills, capital constraints and poor self-control. The “Role of Business Skills and Capital Constraints in Micro Enterprise Development” project is a rigorous evaluation of the issues that constrain young entrepreneurs, using a gold standard methodology to understand what constrains businesses from growing, and what can be done to overcome these constraints.

The evaluation uses a number of novel approaches to understand what constrains entrepreneurs. The first is the baseline measurement of an individual’s ability to succeed in business. Entrepreneurial ability is often identified in the literature as an important component in business success, but it is rarely measured or used effectively.

Individuals were then randomly divided into six groups: (1) those that received a cash grant of $200, (2) those that received a loan of $200, (3) those that were given business skills training with a cash grant equal to $200, (4) those that were given business skills training and a loan of $200 and (5) those that were given the behavioral intervention. There is also a control group that was randomly selected to be used as a comparison. The businesses will be followed up over time and analysis will be done on the differential outcomes between the different groups and the control group.

The evaluation covers two distinct geographic locations in order to understand the role that market structure and development has in the impact of the program. The main intervention was conducted in the central region of Uganda where markets are well developed. An additional intervention was delivered in northern Uganda where a recently ended 20 year civil war has left the markets undeveloped. By testing the effect of the same interventions in these two different areas, the role that market development plays in business growth success can be ascertained.

The results of the baseline analysis suggest that randomization was successful in producing a groups of individuals with similar characteristics. The results of analysis on take-up also suggest some individual characteristics that predict who will be interested in loans and trainings. While only correlations, the results suggest that neither sex nor marriage status predicts interest in loans, while previous experience with loan processes are important. Individuals in the north are also far more interested in loans than people from the south. For interest in training, women and literate individuals are more interested, while previous training experience and being from the north are both negatively associated. The impact of the programs will be presented later in 2013 once all follow-up data collection has been completed.