# **1. Introduction**

Many studies have shown that micro and small firms in low- and middle-income countries exhibit high marginal returns to investment, yet most of them also seem to rapidly reach their optimal size and can neither generate very high profits nor much employment (Banerjee and Duflo 2004; Blattman et al. 2016; de Mel, McKenzie, and Woodruff 2008; Fafchamps et al. 2014; Grimm, Krüger, and Lay 2011; Kremer et al. 2011; McKenzie and Woodruff 2006, 2008; Udry and Anagol 2006; Schündeln 2005). Banerjee and Duflo (2011) suggest that growing further requires in many cases adopting more sophisticated technologies and organizational structures which in turn demand entrepreneurial skills, risk-taking behavior, and determination, traits that many firm owners do not have (Banerjee et al. 2019; Karlan, Knight, and Udry 2015). This may explain why many support programs whether they used training, microcredit, cash grants, business development services (BDSs), or combinations of these have not shown transformative effects but instead, at best, had lasting effects on specific subgroups (Banerjee, Karlan, and Zinman 2015; Cho and Honorati 2014; Grimm and Paffhausen 2015). Building on these insights, such programs are increasingly implemented with targeting mechanisms that select those entrepreneurs that can potentially make the most of such support. Those who lack the necessary skills and entrepreneurial spirit can then instead rather be targeted with social safety nets, hoping that they do find jobs in those firms that flourish.

With this background, this paper assesses the impact of cash grants and matching grants for a sample of entrepreneurs that have been carefully selected using a business plan competition and personal interviews in the Bagré growth pole area, which is located in the Centre-Est region of Burkina Faso. In 2018, 2,279 men and women, many already owners of small or medium-size informal or formal firms, submitted a business plan to the Maison de l’Entreprise du Burkina Faso (MEBF), a semipublic local business organization, with a detailed plan on how they would use their grant in case they are chosen. In the course of the competition, which also included a standard business training and personal interviews, 1,200 entrepreneurs were selected based on their performance and their potential to develop their business and ultimately to create jobs and randomly allocated into two treatment groups (cash grants and matching grants) and a control group. Firms could ask for grants in either form for up to US$8,000. Whereas cash grants can be used for any type of investment including machines, tools, livestock, construction, land, training, and inventories and came with only light procurement rules to prevent misuse outside the business, matching grants can be used only for technical training, require an own contribution of 20 percent, and follow much stricter rules and regulations. Matching grants have already been administered for some time by MEBF but so far are perceived as rather ineffective. A baseline survey was conducted in November/December 2018, disbursements started in August 2019, and a first follow-up survey was conducted in October/November 2020.<sup>1</sup> Both the implementation and accompanying evaluation were co-financed and technically supported by the World Bank.

This paper contributes to the literature on small firm growth in several respects. First, it adds to the literature on targeting business support (Crépon, El Komi, and Osman 2020; Fafchamps and Woodruff 2017; McKenzie 2017), and similar to McKenzie (2017), the grants in this project are much bigger than in most other support programs that targeted small and medium-size firms and have so far been rigorously assessed. Second, it is the first that compares cash grants that can be used for business purposes only with matching grants that are earmarked for technical support. Previous projects rather compared fully fungible cash grants with in-kind grants (de Mel, McKenzie, and Woodruff 2008) or cash grants with loans

> 1 This study is registered in the American Economic Association (AEA) Randomized Control Trial (RCT) Registry (AEARCTR0004867).

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