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World Bank Research E-Newsletter, December 2016
  Dec 14, 2016

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December 2016 — Small and Medium-Sized Enterprise Growth
Arrow-bullet New evidence shows the way forward for SME growth and job creation
Arrow-bullet SMEs employ around 50 percent of workers in developing countries
Arrow-bullet Introduction of preferential tax regime in Georgia is a partial success
Arrow-bullet Registration reform in Mexico attracted informal business owners most like formal business owners
Arrow-bullet Local branches of Banco Azteca improved access to finance for low-income individuals
Arrow-bullet Psychometric screening tool can improve loan repayment behavior
Arrow-bullet Consulting services can improve SME performance
Arrow-bullet Business literacy program not enough to improve firm performance in Bosnia
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New evidence shows the way forward for SME growth and job creation

Small and medium-sized enterprises (SMEs) play an outsized role in developing economies, where they account for about half of employment and the majority of jobs created. Often, they are not as productive as large firms, so measures that reduce this productivity gap and boost SME growth could translate directly into higher earnings for low-income households. In this Policy Research Talk, Miriam Bruhn, Senior Economist, compared approaches to promote SMEs in three areas where research is providing new insight — regulatory reform, access to finance, and business practice — susing evidence from Mexico, Georgia, Bosnia and elsewhere on effective policies for small and medium-sized enterprise (SME) growth.

Event | Story | Video | Presentation

SMEs employ around 50 percent of workers 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 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.

Ayyagari, Meghana, Asli Demirguc-Kunt, and Vojislav Maksimovic. 2014. “Who Creates Jobs in Developing Countries?Small Business Economics 43(1):75–99. February 2014.

REGULATORY REFORM
Introduction of preferential tax regime in Georgia is a partial success

The introduction of a preferential tax regime for Georgian micro businesses in 2010 increased the number of newly registered firms by 27–41 percent below the eligibility threshold during the first year of the reform, but not in subsequent years. A new tax regime for small businesses did not increase formal firm creation in any year. However, the differentiated tax treatment of micro- and small businesses revealed a reduced tax compliance among small taxpayers for multiple years after the reform and among micro-business taxpayers only during the first year of the reform.

Bruhn, Miriam, and Jan Loeprick. 2016. “Small business tax policy and informality: evidence from Georgia.” International Tax and Public Finance 23(5): 834–53, October.

Registration reform in Mexico attracted informal business owners most like formal business owners

One view on why informal business do not register is that regulations are too complex. Another view claims that business owners are making a living while searching for a job. Both views are correct if you consider there may be two types of informal business owners. When separating informal business owners into those with characteristics similar to wage workers and to formal business owners, the impact of a business registration reform in Mexico becomes clearer. Informal business owners from the wage worker species are less likely to register due to the reform, but more likely to become wage workers since the reform created jobs. Informal business owners more like formal business owners are more likely to register, but only in municipalities with high pre-reform constraints to formal entrepreneurship. These results explain why an earlier study finds no effect of the reform for all informal business owners taken together.

Bruhn, Miriam. 2013. “A Tale of Two Species: Revisiting the Effect of Registration Reform on Informal Business Owners in Mexico.” Journal of Development Economics 103: 275–83, July.

ACCESS TO FINANCE
Local branches of Banco Azteca improved access to finance for low-income individuals

Banco Azteca in Mexico opened over 800 branches almost overnight in 2002, targeting savings and loan services mainly to low-income individuals and informal businesses. The results suggest that Banco Azteca helped informal business owners keep their business running instead of becoming wage earners or becoming unemployed. The fraction of informal business owners increased by 7.6 percent, and overall employment increased by about 1.4 percent as a result of Azteca’s opening. These increases in informal business ownership and employment led in turn to an increase in income of about 7 percent, on average. Finally, real GDP per capita growth rates increased following the opening of Banco Azteca and all 800 branches, which further strengthens the case for the positive impact of access to financial services on economic activity.

Bruhn, Miriam, and Inessa Love. 2014. “The Real Impact of Improved Access to Finance: Evidence from Mexico.” The Journal of Finance 69 (3), June 2014.

Psychometric screening tool can improve loan repayment behavior

A study of small business owners in Peru compared entrepreneurs offered a loan based on the traditional credit-scoring method versus a psychometric test, designed by the Entrepreneurial Finance Lab (EFL). The psychometric test can lower the risk of the loan portfolio when used as a secondary screening mechanism for banked entrepreneurs — i.e., those with a credit history. The EFL tool can also allow lenders to offer credit to some unbanked entrepreneurs — i.e., those without a credit history — who were rejected based on their traditional credit scores, without increasing the risk of the portfolio.

Arráiz, Irani, Bruhn, Miriam, and Rodolfo Stucchi. 2016. “Psychometrics as a Tool to Improve Credit Information.” World Bank Economic Review.

BUSINESS PRACTICES
Consulting services can improve SME performance

A randomized control trial with 432 small and medium enterprises in Mexico shows positive impact of a one-year management consulting services program on total factor productivity (TFP) and return-on-assets. Owners also showed heightened “entrepreneurial spirit” (an index that measures entrepreneurial confidence and goal setting). Mexican social security data shows a persistent sizeable increase (about 50%) in the number of employees and total wage bill even five years after the program. The specific managerial practices that improved as a result of the consulting were marketing, financial accounting, and long-term business planning.

Bruhn, Miriam, Dean Karlan, and Antoinette Schoar. “The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico.” Journal of Political Economy, forthcoming (working paper version) | Ongoing project: Can online consulting improve business performance in Brazil.

Business literacy program not enough to improve firm performance in Bosnia

Identifying the determinants of entrepreneurship is an important research and policy goal, especially in emerging market economies where lack of capital and supporting infrastructure often impose stringent constraints on business growth. The impact of a comprehensive business and financial literacy program on firm outcomes of young entrepreneurs in an emerging post-conflict economy, Bosnia and Herzegovina did not influence business survival, but significantly improved business practices, investments and loan terms for surviving businesses. Female-run businesses further exhibited some improvements in business performance and sales.

Bruhn, Miriam, and Bilal Zia. 2013. “Stimulating managerial capital in emerging markets: the impact of business training for young entrepreneurs.” Journal of Development Effectiveness 5 (2): 232–66.

ANNOUNCEMENT

The Social Observatory is an effort to improve the adaptive capacity of anti-poverty projects and transform the quality of citizen engagement. Visit our revamped website with all new content to see how the Social Observatory works in rural India through embedded research and the democratization of data.
Website | Video: Participatory Tracking | Data Visualization

UPCOMING EVENTS

All upcoming events

MEDIA AND BLOGS

International trade and integration: The latest research

Let’s Talk Development, 8 December 2016

What’s the latest research in international trade and integration? Researchers from the World Bank, the IMF and the WTO recently gathered for a one-day workshop to present their latest research on the topic. The papers presented addressed topical questions in areas as diverse as the links between trade, wage inequality and the poor, global value chains, non-tariff measures, preferential trade agreements, FDI restrictions, and migration. We provide a quick roundup on the papers presented during the workshop.

Read the blog by Alejandro Forero and Ana Fernandes.

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Let’s build the infrastructure that no hurricane can erase

Sustainable Cities, 5 December 2016

The news from Haiti about the aftermath of Hurricane Matthew is a familiar story: more chaos, rubble, and loss of life from another natural disaster. Though recent improvements to Haiti’s infrastructure at the local level kept the death toll at 534 — 3,000 died in the 2004 hurricane; more than 200,000 in the 2010 earthquake — the number is still way too high.

Worldwide, natural disasters claimed 1.3 million lives between 1992 and 2012, with earthquakes accounting for 60% of disaster deaths in low- and middle-income countries, where the preponderance of sub-standard housing increases the risks. Today, 1.2 billion people live in substandard housing. By 2030, this figure will almost triple.

The good news is that most of those deaths and property losses can be prevented. In 2003, for example, within three days of each other, earthquakes of similar magnitude struck Paso Robles, California and Bam, Iran. The death toll in Bam was 40,000 — nearly half the city’s population. Two people died in Paso Robles.

Even when destruction does take place, proper planning and measures can ensure a speedy recovery. In 2005, within weeks after Hurricane Katrina flooded 80% of New Orleans and damaged 500,000 houses — the costliest disaster in U.S. history — the authorities identified the owners and assessed the losses, providing the banks, insurance companies, real estate and utility companies with the information they needed to rebuild. The city invested in a $14.5 billion hurricane and flood protection system that created high-paying jobs and an urban renaissance.

Read the blog by Luis Triveno and Klaus Deininger.

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What can you do with a high-resolution population map?

The Data Blog, 23 November 2016

Population density is one of the most important statistics for development efforts across many sectors, and since early 2016 we’ve been collaborating with Facebook on evaluating a new source of high-resolution population data that sheds light on previously unmapped populations.

As mentioned in the Living Standards Measurement Study (LSMS) team’s blog post, Facebook Connectivity Lab announced last week the public release of high-resolution population maps for Ghana, Haiti, Malawi, South Africa, and Sri Lanka, jointly produced with the Center for International Earth Science Information Network (CIESIN).

With the building footprints detected by artificial intelligence (AI) over high-resolution commercial satellite imagery, the data sets provide estimates of population at 30m spatial resolution, making these maps the highest-resolution population maps ever produced. This is only possible through recent breakthroughs in computer vision due to deep learning algorithms and technological development of computer processors, as well as the increasing availability of high-resolution commercial satellite imagery.

Read the blog by Kiwako Sakamoto, Vivien Deparday, Talip Kilic, and Holly Krambeck.

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A first look at Facebook’s high-resolution population maps

The Data Blog, 22 November 2016

Facebook recently announced the public release of unprecedentedly high-resolution population maps for Ghana, Haiti, Malawi, South Africa, and Sri Lanka. These maps have been produced jointly by the Facebook Connectivity Lab and the Center for International Earth Science Information Network (CIESIN), and provide data on the distribution of human populations at 30-meter spatial resolution. Facebook conducted this research to inform the development of wireless communication technologies and platforms to bring Internet to the globally unconnected as part of the internet.org initiative.

Figure 1 conveys the spatial resolution of the Facebook dataset, unmatched in its ability to identify settlements. We are looking at approximately a 1 km2 area covering a rural village in Malawi. Previous efforts to map population would have represented this area with only a single grid cell (LandScan), or 100 cells (WorldPop), but Facebook has achieved the highest level of spatial refinement yet, with 900 cells. The blue areas identify the populated pixels in Facebook’s impressive map of the Warm Heart of Africa.

Read the blog by Talip Kilic, Brian Blankespoor, Hai-Ahn H. Dang, Siobhan Murray, Espen Beer Prydz, and Kiwako Sakamoto.

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Of quacks and crooks: The conundrum of informal health care in India

Let’s Talk Development, 22 November 2016

I usually don’t wake up to hate mail in my inbox. What prompted this deluge is a recent paper that evaluates the impact of a training program for informal health care providers (providers without any formal medical training) in the state of West Bengal, India (paper summary). Training improved the ability of informal providers to correctly manage the kind of conditions they may see in their clinics, but it did not decrease their overuse of unnecessary medicines or antibiotics.

This paper complements two others on rural health care in India. The first shows that 77 percent of rural primary care is provided by informal providers in the state of Madhya Pradesh. The second (ungated) demonstrates that people receive the same quality of care between informal providers and public-sector clinics in the same setting; it also shows that the same doctor provides higher quality care in his private clinic relative to the public one.

The hate mail I received would lead one to believe that simply studying quality among informal providers is illegal or that finding an equivalence of care between the public sector and informal providers is blasphemous. These are surface markers of disquiet. The deeper discomfort is, I believe, because our findings substantially complicate an existing narrative that pins all the blame for poor health care on the private sector and on informal providers.

Read the blog by Jishnu Das.

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Lessons from a crowdsourcing failure

Development Impact, 17 November 2016

We are working on an evaluation of a large rural roads rehabilitation program in Rwanda that relies on high-frequency market information. We knew from the get-go that collecting this data would be a challenge: the markets are scattered across the country, and by design most are in remote rural areas with bad connectivity (hence the road rehab). The cost of sending enumerators to all markets in our study on a monthly basis seemed prohibitive.

Crowdsourcing seemed like an ideal solution. We met a technology firm at a conference in Berkeley, and we liked their pitch: use high-frequency, contributor-based, mobile data capture technology to flexibly measure changes in market access and structure. A simple app, a network of contributors spanning the country, and all the price data we would need on our sample of markets.

One year after contract signing and a lot of troubleshooting, less than half of the markets were visited at the specified intervals (fortnightly), and even in these markets, we had data on less than half of our list of products. (Note: we knew all along this wasn't going well, we just kept going at it.)

So what went wrong, and what did we learn?

Read the blog by Maria Jones and Florence Kondylis.

List of New Policy Research Working Papers
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