enhancing activities cross the fixed cost to export markets and become bigger? Some clues to potential answers are offered by the seminal work by Melitz (2003), who put forth an explanation connecting firm size to a firm’s total factor productivity. Melitz proposed a theory for selection into exporting: only the most productive firms overcome the sunk costs of exporting and foreign direct investment (FDI), start to export, and grow as a result.<sup>22</sup> This remains an area for future investigation.

Finally, the effect of the regulatory environment, such as labor market reforms, can vary depending on the exact kind of regulation. Reforms that increase the number of temporary workers — and simultaneously protect existing employees through unions—are linked to lower OJT. While stricter hiring regulations and rigidity in the working hours are associated with a higher investment in OJT, stricter firing costs tend to be associated with reduced investment in job training by employers (Almeida and Aterido 2008). There is a lot of variation in results depending on the type of labor regulation. Constraints in the credit markets do not appear as binding constraints (box 6).

# **Box 6: The Limited Role of Credit Constraints**

<mark>The literature review did not provide much evidence regarding the role of credit constraints as binding barriers to the provision of OJT. Although in most developing countries, capital markets could be imperfect, these imperfections do not appear to have a significant bearing on the under-provision problem. Carneiro and Heckman (2004) suggest a low importance of credit constraints in explaining investments in education. Hannson (2008), using the International Adult Literature Survey (IALS), finds that 25 percent of workers reported wanting to take further training. However, only 4-7 percent claimed that it would be too expensive as the reason for not participating. In evidence from Ghana, Gorg, Strobl and Walsh (2007) note that lower</mark> wage bounds — like credit constraints, efficiency wages or minimum wages — do not prevent OJT.

<mark>In the case of microenterprises, credit constraints could play a role. In an experiment from Sri Lanka, De Mel, McKenzie, and Woodruff (2008) find high returns — higher than existing interest rates — to drops of cash of US$100 or US$200 (or of capital of roughly similar magnitudes). This suggests that the microenterprises might be operating under credit constraints. However, for microenterprises, skills have not arisen as the top constraint in analyses, according to the World Bank Enterprise Surveys. Low-income</mark> workers might be more affected by credit constraints, suggesting some role for government support.

<mark>However, for most firms, the marginal importance of credit constraints for OJT provision is likely to be a consequence of employers financing most of the training, and workers being accustomed to receiving training without paying any direct costs (although they contribute indirectly through compressed wages). Studies have pointed to other challenges involving information gaps about returns, ineffective HR policies, or the barriers to demand for training as the main constraints.</mark> 22 Empirical data seems to support this (Bernard, Eaton, Jensen and Kortum 2003; Mayer, Melitz and Ottaviano 2014). In a recent World Bank study regarding competitiveness in South Asia (World Bank 2016), researchers found that across sectors, local firms were managing to cross the productivity barrier by learning through working with lead firms in the domestic market, acquiring technologies and/or becoming more efficient. Thereafter, as the markets were deregulated and new markets opened (for example, in the auto-parts sector as well as apparel), they were able to meet the stricter requirements of export markets. In addition, they were also able to compete with incoming imports. In time, such firms grew in size.

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