Second, given the costs of banking, small firms often do not have accounts or cannot get loans through the formal banking system.<sup>14</sup> Research in India used a phased‐in and phased‐out subsidized lending program for formal firms to see if they were constrained by a lack of credit. Large firms did indeed borrow more when credit was subsidized, and they expanded production and profits during that period. Small firms did not show the same results. An expansion in production is not the same as an expansion in employment, but the study also found that more labor‐intensive firms benefitted more from the credit subsidy. Another program used excess demand and a discontinuity design to study the effect of subsidized credit in Brazil and Colombia. Businesses that received the credit expanded their operations and increased employment. These results suggest that credit constraints prevent formal firms from expanding employment, in part because they need credit to pay wages.

Lending to small firms has had more mixed results. A program in Nigeria gave very large grants (US$50,000) to half of the small, established businesses (on average five employees) that were semi‐ finalists in a business plan competition. The evaluation showed highly positive employment effects. – Not surprisingly, the cost per job was high (US$8,500 9,600), equal to approximately 60 months of wages at the average rate.<sup>15</sup> In contrast, a program in Uganda provided much smaller sums (closer to the size of a microfinance loan) to owners of established small businesses that expressed a desire to grow, and found no employment effects from either grants or loans. The Ugandan businesses were much smaller than the Nigerian ones, as at least half had no employees. Meanwhile, evidence from several studies of microfinance expansion shows no effects on employment in existing firms. Most of the microfinance client businesses were also very small, closer in size to those in the Uganda experiment. These results show the difficulty of expanding employment within small household and microenterprises, which are usually not growth‐oriented.

While these studies provide the clearest possible evidence that the _price of credit_ is a constraint to expanding employment, _scaling up grant programs or subsidized credit is probably not feasible in many settings_ —for example, in Africa the costs would be much too high. These programs point to an alternative, however, which is the potential for financial sector reforms to lower the cost of funds to existing businesses. Reforms could entail changing regulatory regimes to encourage entry and competition in the sector, for instance, or reducing the cost of business for banks by setting up credit bureaus.

**Management training and business development services (BDS).** Management training is a popular intervention in developing countries to help firms grow. Numerous studies have shown that the quality of management and business practices has a large effect on sales, profits, productivity, and survival. It may also have an effect on employment, although this dimension is often neglected in impact evaluations. Programs offered included:

- Business skills training for potential or existing entrepreneurs (with or intending to have employees), covering topics such as bookkeeping, business planning, pricing, and legal requirements.

- Comprehensive interventions to improve management, including training but also mentorships or other specialized support (BDS). Financing is sometimes added.

> 14 Owing to regulatory requirements and other issues, retail banking has high fixed costs, making it uneconomical to serve customers with small accounts or servicing small loans. While mobile banking and microfinance innovations and the introduction of credit bureaus have improved access for lower‐income customers, larger businesses still have an easier time getting credit. See Filmer and Fox (2014), Focus Note 3.

> 15 McKenzie (2015) notes that this is gross job creation. If the expanding firms put other firms out of business, then net job creation would be less. On the other hand, if the expanding firms increased demand for products produced by other firms, then the effect would be greater. He argues that it is unlikely that these spillover effects were large in either direction.

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