metadata: authors: 0: author: Grover,Arti Goswami
1: author: Imbruno,Michele
count: World,Malawi
docna: 0: docna: Using Experimental Evidence to Inform Firm
            Support Programs in Developing Countries
docty: Policy Research Working Paper
subtopic: Financial Sector Policy,Skills Development and Labor Force Training,Private Sector Economics,Private Sector Development Law,Marketing,Labor Markets
teratopic: Law and Development,Private Sector Development,Social Protections and Labor
abstracts: cdata!: Countries design programs for supporting
            firms, with varying levels of success. Firm growth is
            constrained by several factors, such as low firm
            capabilities (e.g. management), availability of finance, and
            access to markets. Based on the available experimental
            evidence on firm support programs in developing countries,
            this paper makes three broad observations. First, there are
            huge knowledge gaps in understanding the success of
            instruments that alleviate firm constraints. Various
            instruments, such as early-stage equity finance, incubators,
            and accelerators, remain untested due to the lack of good
            design, results framework, or monitoring and evaluation
            systems and so on. Second, since these interventions are
            expensive, policy makers expect such programs to be designed
            more effectively to pursue their objectives. However,
            evidence provides little guidance on the criterion for firm
            selection because the existing evaluations of instruments
            reveal little information on the heterogeneous impact by
            firm characteristics, such as the age, size, sector, and
            location of firms. Third, most interventions seek to address
            only one of the broad constraints faced by firms. To this
            end, the paper concludes with a novel proposal for a firm
            support program that attempts to sequentially address
            multiple constraints to firm growth. This program will be
            implemented in Malawi through the "Financial Inclusion
            and Entrepreneurship Scaling" project.
geo_reg_key: 517195,517191
repnme: repnme: Using Experimental Evidence to Inform Firm
            Support Programs in Developing Countries
display_title: Using Experimental Evidence to
            Inform Firm Support Programs in Developing Countries
listing_relative_url: /research/2020/10/32522647/using-experimental-evidence-inform-firm-support-programs-developing-countries
topicv3: Private Sector Development m1326060 1921,Education, Skills Development and Labor
            Market m1326135 1484,Financial Sector Development m1327681 1920,Training Programs m1504140 2817,Entrepreneurship m1582903 4424
publishtoextweb_dt: 2020-10-28T00:00:00Z
historic_topic: Law and Development,Private Sector Development,Social Protections and Labor
origu: EFI-FCI-TIC-Firms,Entrep,&Innov. (ETIFE)
no_of_pages: 34
author_keys: 0: author_key: 1066720
1: author_key: 1186497
model_extractions: Policy Research Working Paper 9461 Using Experimental Evidence to Inform Firm Support Programs in Developing Countries _Arti Grover Michele Imbruno_ Finance, Competitiveness and Innovation Global Practice October 2020
Policy Research Working Paper 9461

# **Abstract**

Countries design programs for supporting firms, with varying levels of success. Firm growth is constrained by several factors, such as low firm capabilities (e.g. management), availability of finance, and access to markets. Based on the available experimental evidence on firm support programs in developing countries, this paper makes three broad observations. First, there are huge knowledge gaps in understanding the success of instruments that alleviate firm constraints. Various instruments, such as early-stage equity finance, incubators, and accelerators, remain untested due to the lack of good design, results framework, or monitoring and evaluation systems and so on. Second, since these interventions are expensive, policy makers expect such programs to be designed more effectively to pursue their objectives. However, evidence provides little guidance on the criterion for firm selection because the existing evaluations of instruments reveal little information on the heterogeneous impact by firm characteristics, such as the age, size, sector, and location of firms. Third, most interventions seek to address only one of the broad constraints faced by firms. To this end, the paper concludes with a novel proposal for a firm support program that attempts to sequentially address multiple constraints to firm growth. This program will be implemented in Malawi through the “Financial Inclusion and Entrepreneurship Scaling” project.

This paper is a product of the Finance, Competitiveness and Innovation Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at agrover1@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Using Experimental Evidence to Inform Firm Support Programs in Developing Countries**

Arti Grover and Michele Imbruno<sup>1</sup> JEL classification: D22, L25, L26 Keywords: firm performance, constraints, support program, randomized control trial, entrepreneurship

> 1 World Bank, 1818 H Street, Washington DC, USA. Arti Grover (Finance, Competitiveness and Innovation Global Practice, World Bank), Email: <u>agrover1@worldbank.org; Michele Imbruno (Sapienza University of Rome, Italy, and</u> Nottingham Centre for Research on Globalisation and Economic Policy, United Kingdom), Email:michele.imbruno@uniroma1.it. We would like to thank Miriam Bruhn, Francisco Campos, Justin Hill, Leonardo Iacovone, David McKenzie, Denis Medvedev, Bilal Zia for sharing their knowledge and experience on firm support programs across developing countries. We would also like express special thanks to Gabi Afram, Randa Akeel, Efrem Chilima, Niraj Verma and Greg Toulmin for their guidance on the intervention in Malawi. All remaining errors are our own. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
# **1. Introduction**

Firms in developing countries face multiple constraints to access both input and output markets. This paper reviews the evidence on firm support programs, focusing on randomized control trials (RCTs) implemented primarily in Sub-Saharan African countries.<sup>2</sup> Following the “firm performance” or “profitability” approach (De Loecker and Goldberg, 2013), we organize the discussion separately from supply- and demand-side interventions. This framework allows us to distinguish several mechanisms through which firm-level interventions affect productivity, input expenditures, output prices and markups. Interventions on the supply side address market failures in accessing factors of production, such as labor, finance, intermediate inputs, and firm capabilities. Commonly offered _firm capabilities_ programs are business support and business development services, mentoring, networking, access to technology, and so on. Programs to support _access to finance_ include loans at concessional or market terms, grants, and venture capital. On the demand side, firms face frictions in accessing information and networks, and hence developing trust in market interactions. Efforts aimed at improving _access to markets_ , such as supplier development programs, are used somewhat less frequently.

Firm support programs can help address market failures. On the supply side, weak financial systems in developing countries lower firms’ access to finance. Programs that enhance access to finance are generally found to have positive effects on capital investment and employment, but no significant impact on productivity and profitability (Kersten et al., 2017). However, recent evidence highlights that size and mode of financing matter. For instance, large grants provided through a business plan competition in Nigeria’s YouWin! program had positive effects on the probability of starting a new business, firm survival, sales, profits and innovation (McKenzie, 2017). In-kind grants had larger and more significant positive effects on profits than cash grants in Ghana (Fafchamps et al., 2014). By comparison, micro loans in Bosnia, Ethiopia, India, Mexico, Morocco, and Mongolia had weak effects on several firm performance outcomes (Banerjee et al., 2015).

Access to finance is not sufficient for firms to succeed because they lack appropriate knowledge and technology to combine finance with inputs in an efficient manner. Firm capabilities, such as entrepreneurship or managerial skills and innovation abilities are very important for a business to be successful (Bloom et al., 2017; Brun et al., 2018). For example, Kaizen management training in Kenya and in Tanzania (Mano et al., 2014; Higuchi et al. 2019) and personal initiative skills training in Uganda and Togo (Glaub et al., 2014; Campos et al., 2017) have been effective in increasing firm performance. Marketing and finance training programs led to an increase in firm profits in South Africa (Anderson et al.,

> 2 We also consider evidence from other countries whenever we fall short of evidence from Africa.

2
2018). Nevertheless, firms in developing countries rarely invest in these trainings due to information asymmetry regarding the content and quality of trainings and failure in understanding their capability constraints. The impact of firm training can be very heterogeneous, depending on the content and modality of the training and the target group who receives the training (Mckenzie and Woodruff, 2014; McKenzie, 2020). Some lessons from training programs include: _i)_ more-experienced firms increase sales relative to less-experienced ones (e.g. Tanzania; Bardasi et al., 2017); _ii)_ both male- and female-led firms can benefit from personal initiative skills training (e.g. Togo; Campos, et al. 2017); and _iii)_ mentorship can be more successful than formal classes, especially for microenterprises (e.g. Kenya, Brooks et al., 2018).

Interventions can also address frictions in the labor market due to the skill constraints among unemployed people, minimum wage laws, hiring/firing regulations, and search costs. Evidence from skill training programs, wage subsidies, and search/matching assistance suggests that labor market interventions have generally modest effects on employment and earnings (McKenzie, 2017). However, more recent studies have found that temporary wage subsidies to microenterprises in Sri Lanka had positive effects on employment and on firm survival (De Mel et al., 2019); while a worker placement program in Ghana drastically increased employment, revenues and profits, suggesting the presence of significant hiring costs (Hardy and McCasland, 2017). Finally, providing information on the main labor regulations in South Africa helped firms expand employment (Bertrand and Crépon, 2019).

On the demand side, buyer-supplier relationships may be subject to problems of information asymmetry, moral hazard, coordination failures, externalities and spillovers, along all stages of the supply chain. For instance, firms are constrained due to networking frictions, such as lack of information or trust when attempting to reach their potential customers. Interventions that improve the access to more sophisticated customers, such as large (trading) domestic producers or multinationals, can also help firms upgrade their technology or the quality of their output (Bastos et al., 2018; Javorcik, 2004). Interventions to improve the access to markets, such as providing vouchers to buyer firms in order to facilitate exchange from local suppliers can also help. A supplier development program in Chile has been effective in enhancing firm sales, employment, wages and the survival probability of small suppliers by dissemination of information, opportunities for expanding networks with buyers at fairs, missions and conferences, etc. (Arráiz et al., 2013). Positive effects on firm performance are also found from the “Productive Linkages” program, in Costa Rica, export promotion programs in Tunisia and the Arab Republic of Egypt, and public procurement programs in several Sub-Saharan African countries (Alfaro-Urena et al., 2019; Cadot et al., 2015; Atkin et al., 2017; Hoekman and Sanfilippo, 2018).

Overall, policy makers use only a few instruments of the available arsenal to support firms and hence the evidence on the effectiveness of others remains unknown. For example, grants and subsidized loans are the 3
most widely used financial instruments (Kersten et al., 2017). Recently, developing countries, are increasingly using incubators and accelerators to support firms, but these policies generally lack the features of good design, such as a results framework, clear objectives, well-defined eligibility and selection criteria, and robust monitoring and evaluation (M&E) systems (Grover, Medvedev and Olafsen, 2019). Such design and implementation gaps do not bode well for the success and scalability of public efforts to support firm growth. The lack of strong M&E systems (including program impact evaluations) also means that it is unclear whether these programs generate greater benefits than their costs.

Given that several factors simultaneously limit firm growth, evidence underscores the importance of addressing multiple constraints. An intervention in Tanzania that offered both business training and grants to micro firms was successful in improving firm performance in terms of sales, profits and happiness relative to a program that did either training or grants alone (Berge et al., 2015). Similar results were found in Uganda (Fiala, 2018).

In line with this evidence, this paper proposes a novel three-stage program that will sequentially address multiple constraints among Malawian firms. The process of arriving at the firm support program was informed by extensive discussions with the policy makers and private sector and is described in Box 1. The _first stage_ aims at changing mindset by offering a psychology-based personal initiative training to all firms. Firms that record substantial changes in their mindset will graduate to the _second stage,_ which will build technical capabilities through two alterative programs: one prepares firms to access finance, whereas the other prepares firms to access markets. Firms that show improved capabilities will graduate to the _third stage_ that will support in establishing linkages with potential customers through network programs, as well as offer financial assistance. This program design will be implemented in Malawi through the Financial <u>Inclusion and Entrepreneurship Scaling</u> project of the World Bank.

**Box 1: The context of Malawi: Proliferation of programs with large gaps**

To inform the design of the entrepreneurship support program component of the <u>Financial Inclusion and Entrepreneurship Scaling Project, the World Bank team met with key actors of the entrepreneurial</u> ecosystem in Malawi including (i) policy makers; (ii) several small and medium firms (randomly selected from the World Bank enterprise survey sample frame, 2014; beneficiaries of current support programs); (iii) large firms in various sectors (identified beneficiaries of current support programs) (iv) development partners; and (v) business development service providers. In addition, the World Bank team also conducted a complete mapping of firm support interventions in Malawi. Discussions with the stakeholders and the mapping of existing programs supporting firms clarified that the multiplicity of programs have not been able to make much progress in forming a critical mass of firms that can contribute to a vibrant private sector in Malawi.

The World Bank team identified the following key gaps in current programs: 4
_What to support (Objective)_ : Although we did not have access to any comprehensive firm level datasets for Malawi at the time of designing the firm support program, several stakeholders expressed concerns about the heavy lefttailed size distribution of firms. Most small firms do not have the aspiration to grow. Nonetheless, in Malawi there are relatively fewer programs focused on enhancing the growth potential of SMEs. Although proponents of firm support programs and researchers may find improving firm productivity and performance as end objectives, policy makers may have slightly different objectives that may be related to employment and job creation or sometimes fuelled by political motivations.

_Who to support (Beneficiaries)_ : The last large-scale SME support program in Malawi was instituted about two decades ago. Most support programs are benefiting the larger firm, which are perhaps better positioned to access finance from the market. It is not clear that the current portfolio of programs appropriately addresses the market failures.

_How to support (Firm constraints and instruments):_ `o` _Firm capabilities gap_ : Firm capabilities needs to be developed along dimensions ranging from changes in attitudes/mindset to skills such as financial literacy, management practices, business language, market assessment and so on. Large firms recognize such skill gaps among their potential suppliers, while SMEs do not have the information that such capabilities could be pivotal for their growth. `o` _Technology/finance gap_ : Small firms do not adopt the much-needed technology perhaps due to capital constraints and lack the technical skills. `o` _Demand/market linkages_ : There are possible information gaps/asymmetries (on demand and skills) on the part of both the larger firms as well as potential suppliers. Given that firms face multiple constraints in most developing countries, the proposed program is designed to handle these constraints, albeit in a sequential manner.

_<u>Source: Authors’ discussions with the stakeholders in Malawi</u>_ The rest of the paper is organized as follows. Section 2 introduces an analytical framework to explore the determinants of the firm performance, citing mainly non-experimental evidence to support the hypothesis. Section 3 reviews the experimental evidence on firm support interventions directed at enhancing supplyside capabilities, while section 4 reviews those that improve demand-side linkages. In section 5, we discuss the knowledge gaps in the design of firm support programs along with other challenges. A major gap in the available experimental evidence is that most interventions address only one of the firm’s constraints even though firms face many. To this end, section 6 describes interventions addressing multiple constraints, and provides details of the three-stage firm support program in Malawi.

# **2. What determines firm performance: Analytical framework**

Following the “firm performance” or “profitability” approach (De Loecker and Goldberg, 2013), we organize our review by considering that many empirical studies in the literature consider firm performance 5
( i ) as the residual in a regression of output revenues ( i ) and input expenditures, such as expenditures in labor (YY i ), capital ( i ) and intermediate inputs ( i ):3 YY ππ rr LL KK MM ee ee i = i ee i i (1) i YY LL KK MM YY LL KK MM This firm performance measure irr is closely related to profits, although it is often interpreted as total factor ββ ee + ββ ee + ββ ee + ππ YY productivity (TFP) in the existing empirical literature. Only when firms are assumed to produce ππ homogenous goods within perfectly competitive output and input markets, equation (1) can be alternatively read as the standard Cobb-Douglas production function and i as physical productivity. Otherwise, the YY firm performance measure will normally capture more than productivity. More generally, firm performance ππ is positively related to physical productivity and output price, and negatively related to input prices. Thus, firm support programs that affect firm productivity and input expenditures (supply-side) are distinct from those that affect output prices and markup (demand-side).

In this section, we present non-experimental evidence on the relationship between access to factor markets and firm growth, while section 3, instead reviews evidence based on RCTs on the impact of improving demand and supply conditions for firms.

# **2.1.The supply side of firm performance**

_Labor._ Firms that are able to hire high-skill workers can experience larger growth and are more likely to increase venture capital financing (Ouimet and Zarutskie, 2014). Recent evidence from developing and emerging countries – such as Ethiopia, Hungary, Mexico and Brazil – suggests indeed that worker quality is positively and significantly correlated with firm growth (Grover et al., 2019). Yet, firms face several constraints when hiring workers, which are related to inadequate skills of unemployed workers, stringent regulations, such as minimum wage, and hiring/firing frictions arising from the worker productivity uncertainty (McKenzie, 2017). Labor markets may also be characterized by searching and matching frictions.<sup>4</sup> Training programs, including vocational training, aimed at workers’ skill upgrading, wage subsidies directed to increase firms’ employment, and assistance aimed at matching firms and workers can be effective in dealing with these market failures (McKenzie, 2017). The latter includes providing

> 3 Small letters in the equation denote the log values of the corresponding variables.

> 4 Young people may face credit constraints preventing an optimal search and have unrealistic employment prospects on the one hand (Abebe et al., 2017; Groh et al., 2015). Firms may incur in too large costs of screening inexperienced workers and have pessimistic expectations on the possibility that young people can be employed on the other hand (Glover et al., 2017; Beam et al., 2017; Caria et al., 2014).

6
information about job vacancies to registered job seekers and/or information about job seekers to firms, as well as organizing job fairs.

_Capital (Assets and finance)._ Using firm-level data from 107 countries, Aterido et al. (2007) show that improved access to finance has a significant and positive effect on firm growth, especially for small-size firms. Restricted access to capital markets limits productivity growth, and for several reasons these constraints are relatively high for smaller firms in developing countries (Kersten et al., 2017). _First_ , banks are relatively less willing to lend to small firms because of risks of default, as well as the costs of appraisal, monitoring and liquidizing assets in case of default. _Second_ , developing countries suffer from larger market failures relative to advanced economies, given their weak financial institutions. They may lack information about credit risks and/or operate within a weak legal framework for assets collateralization. Firm financial support includes direct interventions, such as grants, matching grants, subsidized loans, equity financing, vouchers and public procurement, as well as indirect instruments, such as fiscal incentives and loan guarantees. All these market-based instruments induce firms to undertake activities they would otherwise not do, such as technological upgrading, management improvement, market extension (Grover, Medvedev and Olafsen, 2019).

_Intermediate inputs._ A country’s competitive advantage in a given industry is also determined by the presence of networks of suppliers, buyers and competitors (Porter, 1990). For example, improved access to foreign intermediate inputs enhanced firm performance in China and India (Imbruno, 2015; Goldberg et al., 2010). Services policy reforms in India during the period 1993-2005 had a positive effect on manufacturing firms’ productivity (Arnold et al., 2014).<sup>5</sup> In developing countries, large firms, including multinationals, find that local suppliers have poor capabilities in producing high-quality intermediate inputs, due to lack of information, experience, technology, and human and financial resources (Arráiz et al., 2013). In this regard, (large) firms do not have the appropriate incentive to invest in developing suppliers’ capability given that they cannot exclusively benefit from their improvements. At the same time, (small) suppliers also have little incentives to incur costly investments aimed at technology/quality upgrading to better fit their customers’ needs, because they are uncertain about their profitability. Therefore, there are several market failures that can be summarized as information asymmetry, moral hazard, coordination failures, externalities and spillovers. Policy makers can help address these constraints through appropriate interventions to improve firm capabilities rather than the local content regulations that force producers to purchase a minimum percentage of intermediate inputs from domestic suppliers. More

> 5 Trade in intermediation services played an important role in explaining productivity gains of manufacturing firms in China and Romania (Defever et al., 2020; Javorcik and Li, 2013).

7
recently, governments have started to implement programs that are directed at improving suppliers’ capability according to their customers’ requests, i.e. the Supplier Development Programs (SDP).<sup>6</sup> _Entrepreneurship and management skills._ Several studies document a positive relationship between firm growth and the entrepreneurship quality or the adoption of structured management practices (Bloom et al., 2017; Bloom and Van Reenen, 2010). Yet, firms in developing countries do not implement standard business practices, such as record keeping, separation between business and household finance, marketing activities, quality control, etc. This may be due to several market failures. _One_ , firms may not have access to information on structured managerial practices, and no resources to identify the assistance for adopting business practices. _Two_ , firms may have higher perception of their competence. _Three,_ firms tend to operate in isolation and perceive very high coordination costs to procure advisory services jointly with other firms (Cirera et al., 2020). _Four,_ firms may not have full information on the available quality and effectiveness of such business development services. In this context, business training programs have become one of the most common supports to firms in developing countries (Mckenzie and Woodruff, 2014; McKenzie, 2020).

Business training programs cover a variety of topics ranging from business record keeping, financial literacy and marketing to personal initiative skills that attempt to change entrepreneurial attitudes and aspirations. The majority of training programs are implemented through free classroom-based courses to groups of individuals in short time periods. Some programs provide additional one-on-one mentoring as well. Targeting of the programs also varies sometimes by firm/entrepreneur’s age, gender (e.g. females), industry (e.g. tourism) and firm-type (e.g. growth-oriented, exporter).

# **2.2.The demand side of firm performance**

Demand shocks can also influence firm growth (Woodruff, 2018). Transportation costs and other trade barriers, customers’ lack of information about the product characteristics (price and quality), and lack of trust in unfamiliar suppliers constrain firm’s access to product markets. Coordination failures due to differences in organization and business cultures are particularly important for interactions between small producers and larger or foreign firms. Networking frictions, such as lack of information or trust inhibit firms from establishing market linkages.

> 6 Through SDP, governments can simply gather and disseminate information and linkage opportunities, given that firms could be unfamiliar with all the available intermediate inputs produced by local suppliers, and therefore prefer relying on their trusted foreign suppliers, due to large search costs. These programs can also imply a more active role of policy makers, through matchmaking, i.e., organizing fairs, missions and conferences to bring together buyers and suppliers, and by providing economic incentives to promote training and technology transfers from buyer to supplier firms, such as subsidies and/or tax exemptions.

8
Policy makers can encourage large or foreign firms to interact with small producers by providing information on the available products and suppliers. If suppliers’ products meet the requisite quality, vouchers may be offered to larger firms to try them out. Buyer-supplier-linkages can also be improved with SDPs. Indeed, by supporting domestic firms in developing countries to have access to international buyers (typically large multinationals), the SDP contributes to the integration of those domestic firms into global value chains. Moreover, by utilizing several support interventions, such as advisory services and grants, SDP improves domestic firms’ capabilities and performance in order to meet the buyers’ requirements. Lastly, public procurements are also used as tools in some countries to encourage growth of SMEs.

# **3. Do firm support interventions address supply side constraints?**

Several instruments are available to address firm constraints and most studies report average effects of the interventions. Nonetheless, these average effects mask the heterogeneity based on factors, such as firm size, whether the firm is private or publicly listed company, the baseline level of outcome variable (e.g. exports and labor/capital ratio), type of instrument, size of support, length of support program, and implementing party. Unfortunately, evidence is not available on all these aspects of firm support programs. Below we focus our discussion based on instrument type and firm size considerations and if possible, on the gendered impact of the intervention. Table 1 summarizes some examples of the instruments that help address a specific firm constraint.<sup>7</sup>

**Table 1 – Instruments for supporting firms: Some examples**

||**SUPPLY-**<br>|**SIDE INTERVENT**<br>|**IONS**<br>||**DEMAND-SIDE**<br>|
|---|---|---|---|---|---|
|**Access to labor**|**Access to**|**Access to**|**Firm c**|**apability**|**INTERVENTIONS**|
||**capital/finance**|**intermediate**<br>**inputs**|**_Content of training_**|**_Modality of training_**||
|Worker placement<br>programs<br>Vocational<br>apprenticeship<br>Job fairs<br>Information campaigns<br>on labor regulations<br>Wage subsidies|Grant<br>Business plan<br>competition<br>Loans<br>Early-stage equity<br>investment<br>Vouchers<br>Inducement awards<br>Fiscal incentives<br>Loan guarantees|Supplier<br>development<br>program (SDP)<br>Pure subsidy on<br>inputs<br>Rationing of<br>inputs<br>Enhanced<br>access to digital<br>services|Marketing<br>Financial literacy<br>Management<br>practices<br>Best practices of the<br>successful local<br>peers<br>Kaizen management<br>Personal initiative<br>skills training<br>Entrepreneurial<br>training<br>Consulting|Classroom training<br>Mentorship<br>Individual on-site<br>visits<br>customized Services<br>or one on one<br>Consulting<br>Group consulting|Supplier<br>development<br>program(SDP)<br>Subsidies<br>Vouchers to buyer<br>firms<br>Network/Connect<br>with foreign firms<br>Export promotion<br>programs<br>Creating business<br>networks and<br>learning from peers<br>Public procurement|

7 Although we use the De Loecker and Goldberg (2013) approach to classifying firm support instruments, there are several other alternative approaches available, see for instance, Cirera et al., 2020 for one such approach.

9
# **3.1.Interventions improving access to labor skills**

Programs addressing labor market frictions usually do so from worker’s perspective, rather than a firm’s perspective. For instance, an RCT of 1,900 vocational apprenticeships and entrepreneurial trainings for youth in Malawi highlighted important differences between male and female trainees (Cho et al., 2016): _One,_ although both males and females improved their skills, men were more likely to start a business and spent more time in skill development than women. Constraints for women were larger and they faced larger implicit costs in terms of family obligations and financial constraints. _Two,_ females were less likely to receive financial help and paid work after the training because they sorted into occupations that invested less in trainees.

Through a literature review, McKenzie (2017) found that labor market programs often had a modest impact on employment and earnings, reaching the conclusion that labor markets generally work better than any expectation with fewer market failures. When looking at few empirical studies on the impact of employment support programs on firm performance, we find evidence that worker placement programs, that reduce the search costs by matching interested apprentice in small firms, improve firm employment, revenue and profits in Ghana (Hardy and McCasland, 2017)<sup>8</sup> . By comparison, the impact of job fairs that attempted to bring job-seekers and firms together in Ethiopia did not have any positive impact on employment due to mismatch in expectations regarding quality of workers (Abebe et al., 2017). Nevertheless, filling information gaps on labor regulations in South Africa did lead to an increase in employment by 12%-15% among small firms (Bertrand and Crépon, 2019).

Wage subsidies to micro and small firms are usually ineffective in generating long-term effects under normal circumstances. The marginal returns to labor are lower for micro and small firms. They are also less likely to have learning effects and labor market frictions. Temporary wage subsidies to microenterprises in Sri Lanka had temporary positive effects on employment during the subsidy period of about eight months. Any positive effects on profits and sales dissipated subsequently over the four-year post-treatment period, with the exception of effects on firm survival. Capital constraints and lack of skills do not explain this lack of sustainability (De Mel et al., 2019). Similar results are found for Jordan (Groh et al., 2016). By comparison, wage subsidies to larger firms in the durable manufacturing sector after the financial crisis had positive effects on employment in Mexico. The effect of the program comes from providing liquidity to firms instead of firing restrictions (Bruhn, _forthcoming_ ). While both vocational training and wage subsidies

> 8 This program was aimed at providing a non-monetary screening mechanism to firms in order to identify high-quality workers – without any subsidy to firms or workers.

10
to train workers on the job help in tackling youth unemployment, evidence from Uganda shows that wage subsidies are effective in increasing firm profits in the short-run as workers learn more firm-specific skills (Alfonsi et al., 2017).<sup>9</sup>

# **3.2.Interventions improving access to capital, assets, and finance**

While experimental evidence on finance programs for microentrepreneurs documents negative effects on firm outcomes (Grimm and Paffhausen, 2015), a recent meta-analysis on 16 studies finds positive effects of finance interventions for SMEs on capital investments, firm performance (output, sales, exports etc.) and employment. The meta-analysis, however, did not illustrate significant effects on profitability and wages. Although finance programs have a significant impact on SME productivity, these effects take several years to materialize (Kersten et al., 2017).

Awarding grants is the most widely used instrument in developing countries. It is effective in increasing innovation and other investment activities. The efficacy on other outcomes depends on its size and beneficiary characteristics. A majority of interventions that provide small cash grants of US$100-$200 to micro firms, such as those in Ghana had find null effect on profits among subsistence enterprises (e.g. Fafchamps et al. 2014; Karlan, et al. 2015), especially those owned by females. By comparison, the same grants provided to robust businesses had positive effects on firm profits (Fafchamps et al. 2014).<sup>10</sup> Larger grants of US$ 50,000 offered to growth oriented entrepreneurs through a business plan competition, such as the YouWin! in Nigeria is known to have been highly effective in raising the probability of either starting a new business or firm survival, sales, profits and innovation, by increasing access to both capital and labor (McKenzie, 2017). Business plan competitions in Ethiopia, Tanzania, and Zambia, which offered smaller grants of USD 1,000 also had positive effects on the probability of starting a business and firm performance. Winners were more likely to be self-employed six months after the competition than two runners-up in each committee. The experiment also documented large positive effects on firm size (Fafchamps and Quinn, 2017).

The effects of grants aimed at starting self-employed activities are larger for women relative to men but disappear in the longer run. In Uganda, the Youth Opportunities Program (YOP) was designed to help unemployed young adults become self-employed by forming groups and preparing proposals for grants (USD 7,500) on getting vocational training and starting their business. The program had large effects

> 9 Gains from wage subsidies on youth unemployment materialize quickly but fade out over time, while vocational training gains emerge slowly but are long-lasting, leading worker employment and earnings to rise above the firm trained workers. Skills of vocational training workers are certified and therefore can be demonstrated to potential employers. It appears that the vocational training model could be more effective in dealing with youth unemployment.

> 10 In-kind grants that support the payment for equipment and inventories generate larger benefits for female-led firms than cash grants in Ghana because they help address problems of self-control.

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considering that grants were invested in skill training, procuring tools and materials for the business. After four years from the disbursement, grants recipients were more than twice as likely to be involved in skilled trade relative to the control group, and increased business assets, work hours, hired employment, earnings, and consumption. It also improved record keeping, business registration and payment of taxes. Income gains were larger across women than across men, 73% versus 29% (Blattman et al., 2014).<sup>11</sup> Relative to grants, micro loans have a weaker or null effect on firm performance (Woodruff, 2018). While access to microloans at the community level in Ethiopia increased borrowing by about 25 percentage points, no effect was found on a majority of outcomes, including revenues, costs, and profits related to non-farm self-employment activities, as well as the probability of starting a business (Tarozzi et al., 2015). Randomized evaluations of the impact of microcredit in six countries (Bosnia, Ethiopia, India, Mexico, Morocco, and Mongolia), also highlight that the effects on extensive margins of business activity (ownership, start-ups and closures) were very modest, while those on intensive margins (investment, business size, and profits) although positive, were statistically insignificant in many cases (Banerjee, et al., 2015). Several reasons can be attributed for the modest or null effects of micro loans: low take-up rates of loan products within target groups, modest take-up rate differential between treated and control groups, presence of close substitutes for the offered financial support, heterogeneous effects across borrowers, presence of spillover or general equilibrium effects, missing effect on inframarginal borrowers (e.g., on those who borrowed before the studies started) in addition to marginal borrowers.

The differences in the effectiveness of grants and loans could also be due to the terms of the loan contract that prevent firms to take high-risk and improve return on investments. Innovation in financial institutions could potentially make loans more effective, for instance by matching lending models to borrowers’ cash flows needs. Delaying the initial payment, for instance, could give borrowers a chance to make larger longterm investments, and hence improve firm performance in both short- and long-run (Fischer 2013; Field et al. 2013). It is possible that production risk can deter firms from taking loans. However, the pricing of this risk has to be correct, or that the target group has to be sophisticated enough to understand the risks. In a field experiment in Malawi, the demand for loans that aimed to finance the adoption of a new crop technology was found to be lower when combined with insurance that partially or fully forgave the loan in case of poor rainfall. Farmers in Malawi perhaps perceived that insurance costs were drastically larger than potential benefits (Giné and Yang, 2009).

> 11 Nonetheless, these effects were temporary, given that nine years after the program, the treated and control groups converged in employment, earnings and consumption, due to sharply diminishing returns to capital observed in the treatment group (Blattman et al., 2019).

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There is little evidence, especially on developing countries, on the effectiveness of other instruments for supporting access to finance such as early-stage equity investment, vouchers, inducement awards, fiscal incentives and loan guarantees. These instruments are rapidly diffusing in developing countries. Yet the evidence on their effectiveness, mostly from advanced countries, is not conclusive. Vouchers stimulate demand as they combine relatively small awards with less complex application procedures and low administration costs. In advanced economies, vouchers have been initially effective at changing behavior, but with mixed sustained effects. The sketchy evidence on non-market incentives, such as inducement instruments and recognition awards, is not conclusive, but suggests that they are unlikely to work well if businesses are financially or technically constrained from making the needed investments. Fiscal incentives, such as tax breaks, have a positive impact on intermediate outcomes (e.g. R&D investment, launch of new product, etc.), especially in the long run, and mixed effects on productivity, whereas loan guarantees have weak positive effects on both intermediate outcomes (e.g. R&D spending) and performance measures (e.g. sales and productivity) (Cirera, et al., 2020). Developing countries should experiment with these instruments in order to test their effectiveness, however, systematic practices in terms of targeting, selection, and monitoring and evaluation framework should also be followed to allow for a rigorous impact evaluation.

# **3.3.Interventions improving access to intermediate inputs**

Improved access to intermediate inputs can happen either by removing international barriers to trade, or by encouraging the production of better quality inputs domestically through improvements in the network of local suppliers. Supplier development program (SDP), which is usually perceived as a demand-side intervention for small producers, could be equally important for improving the performance of buyer firms. Through these programs, governments can simply gather and disseminate information and linkages opportunities, given that firms could be unfamiliar with all available intermediate inputs produced by local suppliers, and therefore prefer relying on their trusted foreign suppliers, due to large search costs. SDP involves a more active role of policy makers, through matchmaking, i.e. organizing fairs, missions and conferences to bring together buyers and suppliers, and by providing economic incentives to promote training and technology transfers from buyer to supplier firms, such as subsidies and/or tax exemptions. There are not many evaluations available of SDPs. The SDP in Chile, implemented during 2003-2008, aimed at improving the vertical linkages between large firm customers and their small suppliers.<sup>12</sup> Using

> 12 The government subsidized both large firms’ projects aimed at improving the management of their targeted small suppliers, and all activities that complement the project, such as training, technical assistance, and technology transfer.

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firm-level data, the program was found to have increased the sales and ability to export of large buyer firms since two years after the enrollment to the program (Arráiz, et al., 2013).

The little experimental evidence that exists on pure subsidy on inputs or rationing of inputs as instruments for improving access to intermediate inputs do not seem to have enhanced firm performance. In fact, in Ghana electricity rationing led to significant productivity losses (Abeberese et al., 2017).<sup>13</sup> Improved access to electronic and digital services could also boost firm performance, but there are large gaps in realizing the potential benefits. For example, in developing countries, small trading activities are generally based on self-employment, and retail firms could spend substantial time and costs on sourcing from wholesale market. In a field experiment in Bogota, retailers were randomly provided an electronic centralized distribution service to aggregate orders. These orders were then delivered to them directly from farmers. The services decreased the time and the costs of travel, as well as the purchase prices of the targeted products for the treated retailers. In fact, there were also spillover effects in the sense that untreated firms in treated blocks also reduced their prices of the same products. Nevertheless, treated retailers saw a decline in total sales because of a drop in sales from other products (Iacovone and McKenzie, 2019).<sup>14</sup> This evidence suggests that even though more efficient service delivery model is desirable, it takes more than partial adoption to make it successful. More exploration is needed to understand the larger scale effects of improved access to intermediate digital services, especially in the context of COVID-19.

# **3.4.Interventions improving firm capabilities**<sup>**15**</sup>

There is huge heterogeneity in business training programs, because the content of training program and the selection of participants, relative to other firm interventions (e.g. finance programs), vary largely across different training interventions.<sup>16</sup> Therefore, comparison of evidence on the effectiveness of firm training programs should also consider “who” participates in the program, as well as “what” type of training is offered and “how” the training is delivered. With these caveats in mind, an excellent survey by McKenzie and Woodruff (2014) find that in general, business training programs have weak positive effects on survivorship of existing male-owned firms, negative or no effect on female-led ones. They have slightly stronger effects on new business start-ups, but it merely hastens entry of firms that would have entered anyway. While training programs improved the implementation of some of the business practices learned

> 13 There could be social benefits of electrification though because it operates as a labor-saving technology shock to home production. In rural communities in South Africa, electrification has led to an increase in female labor supply (Dinkelman, 2011). 14 Consequently, the usage of this service decreased over time so that the provider of electronic service was forced to shut down. 15 There is not much evidence on instruments for enhancing firm capabilities relating to technology adoption and innovation, especially from African countries. See Cirera et al. (2020) for extensive evidence on these instruments. 16 McKenzie and Woodruff (2014) summarize the effectiveness of business training programs across 16 evaluation studies, four of which are from Sub-Saharan Africa. In general, very few studies evaluate the effectiveness of business training programs in SubSaharan Africa.

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(by about 5-10%), very few studies found that these improvements in skills translated into positive effects on sales and profitability. This combination of small changes in business practices and low statistical power means that few studies find effects of training on sales or profitability, although a few studies find some positive short-term effects. By comparison, one-on-one consulting provided to larger firms can improve the performance of firms. Some of the reasons for limited impact of training programs include, short-time horizon of evaluations, and that the monitoring and evaluation surveys have high attrition rate such that the impact, especially on control group is not well measured. There may also be spillover effects on untreated control group of firms. There is also difficulty of measuring firm outcomes, such as revenues and profits, since firms in developing countries often do not keep records and are reluctant to share this information, which in turn might subject to changes in reporting following the business training.

# **_3.4.1 Content of training: What to train on?_**

There is a wide variety of technical skills training programs. Marketing and financial practices training programs are most common of these. In South Africa, experimental evidence on 852 (primarily micro) firms suggest that both training programs can increase firm profits. Twelve months after the program, treated firms with marketing training tended to have larger size (sales and employment) because they implemented better market research tactics, advertising, and were inclined to adjust to customer needs. By comparison, treated firms with finance training experienced larger changes in firm efficiency. These firms were more likely to adopt financial practices aimed at separating business and personal finances, keeping and analyzing business records, managing budgets more efficiently, and assessing working capital needs, implying a larger increase in output-input ratio relative to the other groups (Anderson et al., 2018). These results suggest that marketing training effects were larger for firms with less initial exposure to different market contexts, while the finance training effects were greater for firms with initially more established business. This evidence could potentially be important when designing firm support programs in the time of COVID-19. For example, marketing training could be critical during the crisis phase, however, firms will need to undergo capabilities training to enhance efficiency during the recovery and restructuring phase.

Management capabilities are seen as one avenue for enhancing firm productivity. An experiment with textile firms in India provides a proof-of-concept that intensive individualized consulting can deliver lasting improvements in the practices of badly managed firms, where management practices improved, on average, by 38 percent in a twelve-month period, resulting in productivity improvements by 17 percent (Bloom et al., 2013). Although this intervention improved management and firm performance, it came at a huge cost of approximately $75,000 per treated firm. This high cost is likely to be prohibitive for many SMEs to finance themselves, and for governments seeking to scale this up for assisting a large number of firms. In another experiment, Bruhn et al. (2018) show that using local consultants can also improve business 15
practices and performance and is less costly (US$12,000 per firm) than hiring internationally renowned consulting firms as in Bloom et al. (2013). Iacovone et al. (2019) tested two alternative approaches to improving management among firms producing auto parts in Colombia. The first uses intensive and expensive one-on-one consulting, while the second draws on agricultural extension approaches to provide consulting to small groups of firms at approximately one-third of the cost of the individual consulting services. Their results show that both approaches lead to improvements in management practices of a similar magnitude (8-10 percentage points), so that the new group-based approach dominates on a costbenefit basis. This points to the potential of group-based approaches as a pathway to scaling up management improvements.

Learning the best practices of the successful local peers could be very important for business growth, especially during times of COVID-19 when there is no clear recipe for success. Instead of offering an expensive formal training or in-depth counselling, a program simply provided a handbook of local business practices to randomly selected small urban retail shop in Indonesia (Dalton et al., 2019). This handbook highlighted the linkage between business practices and firm performance based on the peers’ experience, along with the guidelines for the implementation. For some treated firms, this was complemented with either a documentary video, or a light-touch consulting on-site visits, or both. While the handbook alone had no effect on the adoption of business practices, however, when complemented with documentary video, short visits or both it generated improvements in record-keeping. In particular, treated firms with on-site visits had positive significant effect on other business practices as well. Such improvements translated into an increase in revenues and profits, mainly through efficiency gains.

Other management skills training evidence comes from Kaizen management, which aims at reducing waste materials and activities. In Kenya, business training of firms based on Kaizen practices generated a stronger positive effects on value added and profits, rather than on sales. Training also had positive effects on the firm’s practices in record keeping and analysis (Mano et al., 2014). In Tanzania, an RCT on 113 manufacturing firms that evaluated entrepreneurship training program on quality control and production management, in line with _Kaizen_ management and lean production, in addition to typical topics, such as marketing and record keeping, found large improvements in management practices among the treated group. The treated firms also had positive and significant effects on business performance (i.e. sales revenues and value added), especially for group that went through both classroom and on-site training (Higuchi et al., 2019).

In less sophisticated environment, however, business training programs may not be successful. For firms to implement complex training programs, they have to have the right mind-set and exposure. This is especially relevant for micro firms in low-income countries. In these situations, personal initiative skills 16
training has been found to be more effective than traditional business training. In Uganda, personal initiative training (PIT) program found positive effects on outcomes relating to personal initiative skills in problem solving and product/marketing, as well as on economic performance in terms of sales, the number of employees and survival rate (Glaub et al., 2014). An RCT on microenterprises in Togo that randomly provided PIT or a traditional business training found that both training programs had positive effects on adoption of standard business practices, entrepreneurial mindset, use of capital and labor inputs, innovation and product diversification. However, the magnitudes of these effects were larger for the PIT group. This explains why firms treated with PIT led to a drastic increase in sales and profits, whereas those receiving traditional business training did not experience any significant effect (Campos et al., 2017). By comparison, in Addis Ababa (Ethiopia) both training programs did not generate any impact on psychological outcomes, and consequently on firm performance outcomes, including profits, probably because of trainers’ limited exposure to business world. Indeed, there is a statistically significant association between trainees’ psychological outcomes and the trainer having an entrepreneurship history (Alibhai, et al., 2019).

# **_3.4.2 Selection and screening for training: Who to train?_**

McKenzie and Woodruff (2014) highlight several alternative strategies to identify participants for a business training program. Many studies focus on a selected sample of firms, such as clients of microfinance organizations or banks, firms in a particular industry or industrial cluster, and individuals who are invited to apply for training following a competition, or an entrepreneurship course. This makes it difficult to generalize the results. More recently, some interventions draw a representative sample of firms and then offer training to a random sub-sample of it. Moreover, the majority of studies focus on existing microbusinesses that typically have some experience and are located in urban areas, while there is a certain heterogeneity in terms of gender, education and experience. Very few studies include different groups to compare effects separately.

The background of targeted participants matters for the outcome and success of training programs. The increased adoption of the recommended management practices (such as records keeping and analyses, visiting customers) among metalwork firms in Ghana could be attributed to the fact that they were listed in National Association of Garages (a signal for motivation), and that they were starting from nearly zero. This field experiment also showed that the effects are heterogeneous based on the education level: more educated participants gained less in performance than the other participants, although they were more likely to use the management practices in the first place (Mano et al., 2012). Likewise, the RCT experimenting the impact of marketing versus finance training in South Africa found that while the marketing training program had larger effects on firms with less initial exposure to different market contexts, the finance training program had a higher impact on firms with initially more established business (Anderson et al., 17
2018). In Tanzania, more-experienced female-owned firms had positive effects on revenues due to the inclass and on-site business training program, while less-experienced firms observed a decline in revenue following the basic in-class training (Bardasi et al., 2017).

Finally, when focusing on gender issues, a majority of studies show that even when traditional business programs have a positive impact on male-owned firms, there are no significant effects on female-owned businesses. In Togo, the RCT comparing traditional business training and PIT on microenterprises that stratified firms by gender (and sector) found that PIT led to an increase in profits and sales for female-led firms compared with a statistically insignificant effect for traditional training (Campos et al., 2017).

# **_3.4.3 Modality of training: How to train?_**

Most often trainings are delivered in-classroom style, however, mentorship is found to be more effective in improving firm performance. Investigating the effects of two types of modalities for training, formal classes and mentorship from a successful local entrepreneur, an RCT on 787 young female-owned microenterprises in Kenya suggests that classroom-based programs led to short-run changes in business practices, without any impact on profitability. By comparison, mentoring programs generated large positive effects on profits, which faded out when mentor-mentee matches dissolved. These profit gains occurred mainly through reductions in costs – arising from suppliers switching – rather than increases in sales, changes in product quality or more profitable changes in product mix (Brooks et al., 2018). The null effects of PIT in Addis Ababa may also be attributed to poor quality of mentorship delivered due to lower entrepreneurial experience among trainers (Alibhai et al., 2019). The marginal impact of mentorship was, however, less significant in Kenya when female-owned firms were provided both classroom-based training and mentoring intervention of the ILO’s Gender and Enterprise Together program. Firms assigned to training were more likely to survive and increased sales and profits, especially in the medium-run, without any difference due to mentoring (McKenzie and Puerto, 2017). It appears that the returns to mentorship depends on the type of training programs, but no matter what, mentorship does not fail to deliver positive outcome.

When both in-class programs and individual visits are offered in a training program, the marginal positive effect of individual on-site visits on firm performance is highly significant. A business training program targeting small female-owned firms in Tanzania offered an in-class section to improve managerial and technical skills, and the enhanced version, which was supplemented with individual visits from business coaches and other services personalized to their specific needs. While no significant impact of basic training was found, on-site visits pushed firms to adopt new business practices. More experienced firms had positive effects on firm performance outcomes, such as revenues and profits, from both versions of the training, especially from the enhanced version with on-site visits (Bardasi et al., 2017).

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# **4. Do firm support interventions improve the demand-side linkages?**

One reason why firms do not upgrade their capabilities is that they do not immediately foresee an opportunity to realize the potential value of making these investments. Interventions on the demand size can help firms understand the importance of enhancing their efficiency and improving the quality of their products. However, there has been little experimental evidence on interventions aimed at enhancing firm market size of existing of new businesses, which we describe in this section.

# **4.1.Access to sophisticated customers: Large domestic buyers and multinationals**

A well-known example of demand-side intervention is the SDP that strengthens the vertical linkages between large (exporting) firms and small (domestic) suppliers. To the best of our knowledge, the only SDP that has been evaluated using non-experimental methods is that of Chile, which was driven by trade agreements that forced Chilean exporters and potential suppliers to adapt to international production standards. The SDP in Chile established commercial linkages between small producers of intermediate inputs and their possible large manufacturing customers (potentially) involved in export activities, to guarantee the quality of products and services along the whole supply chain. The program had positive effects on sales, wages, employment, and survival probability of small suppliers one year after the treatment (Arráiz, et al., 2013).<sup>17</sup> Another instrument used for creating demand linkages is through a subsidies program. In Malawi, Farm Inputs Subsidy Program (FISP) affected fertilizer sales among private retailers, however, the larger-sized firms selling FISP fertilizers drastically increased their sales, at the expense of the small firms that were excluded from the program participation (Kaiyatsa et al., 2017).

Given the evidence of spillovers from working with foreign firms, programs aimed at promoting such linkages can also boost firm performance (see Bloom et al., 2019 for the US; Alfaro-Urena et al., 2019 for Costa Rica). These studies find that suppliers of multinationals enhance their performance, in terms of productivity, employment and sales. In Costa Rica, the “Productive Linkages” program provided information to foreign firms on the quality and availability of domestic firms to supply to multinationals. Suppliers to multinationals experienced large increases in sales at extensive and intensive margins, i.e. both the number of customers and sales per customer mainly by expanding product scope, upgrading product quality and improving managerial practices and reputation.

> 17 As opposed to the SDP, local content regulations that force producers to purchase a minimum percentage of intermediate inputs from domestic suppliers have generally been unsuccessful because they could be easily eluded, through accounting practices and statistics, and were not solving the information asymmetry and supplier ability constraints. Instead, they create further market inefficiencies due to forced use of high-cost and low-quality domestic inputs (Steenbergen and Sutton, 2017; Steenbergen and Spray, 2018).

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In developing countries, although export promotion programs (EPP) have been associated with superior firm performance, these effects may last only temporarily, unless complemented with quality upgrading. Quasi-experimental evidence from Tunisia suggests that EPP which provided matching grants to firms during 2000-2010 enhanced the performance of incumbent exporters than encouraging new ones (Cadot et al., 2015). However, three years after the intervention the effect tapered off, likely due to missing improvements in product quality that could have reinforced competitiveness more permanently. An RCT that provided Egyptian rug producers with the opportunity to export to high-income markets led to increased profits of treatment firms by 16%-26% relative to control firms.<sup>18</sup> This heightened performance was associated with an increase in prices and a decline in quantity of both output and inputs, thereby suggesting quality upgrading (Atkin et al., 2017). Learning-by-exporting, i.e. efficiency gains from exporting, in this experiment occurred through knowledge transfer from intermediaries to producers.

# **4.2.Access to business networks**

Business associations aimed to encourage interactions between owner-managers can generate positive effects on firm performance. However, there is not much experimental evidence available on the impact of business networks and learning from peers. In China, an experimental business association randomly chose 1,500 owner-managers of young and small firms to become a part of meeting groups with ten managers each. By encouraging managers to self-organize monthly meetings for enhancing business interactions, the experiment was able to achieve positive and persistent effects of meetings on sales, profits, employment, fixed assets and intermediate inputs. It was also successful in improving intermediate outcomes, such as number of clients, number of suppliers, borrowing, management score and innovation. The experiment also had positive effects of learning from peers and establishing direct partnership (Cai and Szdeil, 2018). Likewise, the benefits of group consulting training among auto-parts producers in Colombia have also been attributed to peer-to-peer learning (Iacovone et al., 2019) as in the case of China (Cai and Szdeil, 2018).

# **4.3.Public procurement**

Public procurement can be instrumental for firm performance. However, microeconomic evidence on the impact of these interventions is quite scant. This is perhaps because government contracts are not randomly assigned and hence it is difficult to isolate the impact of the intervention. Public procurement programs address credit market imperfections through a “demand pull” mechanism, where the government acts as lead buyer. Evidence, mostly from advanced economies, shows these programs help create new firms and new intellectual property, but effects on employment are mixed and restricted to the short term. Analysis

> 18 Orders were secured by a partnership with a U.S. based NGO and an Egyptian intermediary.

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of firm-level data from 19 Sub-Saharan African countries suggest that a 10 percentage points increase in the share of output sold to the government is associated with a 4 percentage points increase in firm productivity. Public procurement also increases a firm’s capital intensity, ability to pay higher wages, and introduce new products (Hoekman and Sanfilippo, 2018). In Brazil, winning a government contract had a positive impact on firm-level employment growth, which was persistent well beyond the expiration date of the contract. Firm growth mainly occurred because winners were more likely to win more contracts in the future, entered more valuable auctions, expanded in more markets and increased the number of products sold (Ferraz et al., 2015).

# **5. Knowledge gaps in current firm support programs**

# **5.1. Design**

There are four types of knowledge gaps in the available evidence on the design of firm support programs. _Breadth of instruments covered._ Although there are many instruments available to help address both supply and demand-side constraints, most often interventions have experimented with one or two instruments. For example, interventions enabling access to finance have most often focused on grants or loans. There is little evidence on the impact of lines of credit, partial credit guarantees, early-stage financing instruments, fiscal incentives or vouchers, inducement awards etc. This is because either the intervention itself is not frequently used or more critically because the interventions are constrained by weak empirical foundations, poorly articulated logical frameworks, and largely absent monitoring and evaluation systems (including impact evaluations and cost-benefit analyses). Likewise, interventions to upgrade firm capabilities frequently use different types of training programs, however, there is no systematic evidence on the impact of export promotion programs, technology upgrading and so on.

_Evidence on interventions addressing multiple constraints._ Firms face several constraints simultaneously on both supply and demand side, however, most interventions address a single constraint, such as access to finance, or firm capability needs. This could partially explain why many firm support programs, such as entrepreneurial skills trainings, have not been as effective in improving firm outcomes. One of the reasons why researchers shy away from addressing multiple constraints is that it is complicated to single out the impact of one intervention versus the other. Nonetheless, there have been some studies that have made attempts in this direction, which we will discuss briefly in the following section.

_Depth of evidence on instruments experimented with._ Studies have most often found modest effects of support programs on performance of firms. This could be because although these programs are not designed to be beneficial for a particular type of firms, they may have heterogeneous effects by firm’s or 21
entrepreneurs’ age, education, experience, and gender. Recent evidence shows that even a large scale highway upgrade program, that cannot possibly select firms into treatment groups, had effects that vary by plant age (Grover, Maloney and O’Connell, 2020). More research is needed to explore the varied impact of policies and firm support programs by firm characteristics. This includes not only outward features such as age, size, sector and location but also innate characteristics such as productivity, export orientation, innovation, management capabilities. This information would be most useful in improving the design of firm support programs, including having better targeting and screening criterion.

_Market failure underlying interventions_ . Most support programs do not justify (or attempt to identify) the market failure behind the proposed intervention. When proposing business training for firm upgrading programs it is critical to understand why firms do not buy business development services (BDS) from the market. Is it because firms do not know about the potential benefits of BDS or do not have information on the existence of local BDS providers (information failure); or that they are financially constrained firms (credit constraints)? Do firms not invest in BDS because of the absence of BDS suppliers or because they offer low quality services (supply constraints)? In each of these cases, the intervention should be adjusted based on the market failure. For example, if the problem is information failure, an information session with local BDS providers could be enough. If firms are credit constrained, then a free training program potentially complemented with financial support would be needed. In the latter case, it would be important to support the development of local BDS capabilities, in addition to firm training programs.

# **5.2.Selection and targeting**

_Selecting firms with high growth potential_ . In firm support programs, identification of high growth potential firms is not always been effective (such as judges’ scores, researchers’ prediction models, and machine learning approaches). However, the business plan competition in Ghana seems to have been effective in selecting firms to generate a positive impact where small and established firms with a potential for rapid growth were identified by a panel of experts and surveys. One reason why expert evaluation is informative is that small firms in developing countries are highly heterogeneous and hence careful firm selection could be critical in making an intervention successful (Fafchamps and Woodruff, 2017).<sup>19</sup> By comparison, the business plan competition in Nigeria, YouWin!, found that scores from judges are not able to predict survival and other firm outcomes (employment, sales and profits) three years after entry (McKenzie, 2017),

> 19 Prior to the competition, entrepreneurs were surveyed on their characteristics, motivation and experiences, which was followed by an invitation to attend a three-day training to prepare business plans. Next, submitted business plans and oral presentations were assessed by a panel of successful entrepreneurs, consultants and business experts. Based on the quartile of the ranking, 70 of the 140 applicants randomly received a business training course. Both survey responses and expert panels’ decisions could predict firm growth, but the former explained a larger share of the variance in firm outcomes (revenues, profits, and employment). The impact of post-competition training did not have any significant effect on firm growth.

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whereas entrepreneurs’ characteristics through prediction models also do not have high predictive power. Lastly, machine learning approaches also did not outperform other methods in predicting the firm growth (McKenzie and Sansone, 2017).

The available evidence thus suggests that the ability to predict high growth on the basis of any set of measurable firm or entrepreneur characteristics—for example, business plans, demographics, intelligence, socio-emotional skills—remains very low. Moreover, many of the available criteria, for example, targeting based on previous success in business, may not be appropriate filters for public policy because they would direct public funds to those who are already better off, potentially perpetuating rather than addressing existing inequities (Grover, Medvedev and Olafsen, 2019). Thus, the current evidence does not provide much guidance on screening, selection and targeting of firms, beyond the fact that it is neither simple nor straightforward to target firms for support.

_Targeting informal firms._ A number of interventions focus entirely on a particular size category of firms (e.g. micro versus non-micro but small firms), and the available evidence allows us to indirectly infer that programs focusing on firm upgrading do not have significant effects on micro firms. However, there is big gap in our knowledge on the effect of such interventions on informal (versus formal firms). In particular, COVID-19 has brought to fore the challenges and importance of informal firms, which have been left out of interventions such as wage subsidies, tax deferral and subsidized credit schemes. Most often informal firms are seen as analogous to micro firms, but this is not necessarily the case. For instance, in India in the year 2009 there were over 201,000 informal plants with 10 or more employees (1% of total informal plant count), as compared to 85,500 formal plants (83% of total formal plant count). This example helps make two points: _One_ , although the non-micro plants are a small share of total informal plant population, they are substantial in terms of the total plant count even when compared with the formal sector. _Two_ , the informal sector is typically characterized as very heterogeneous in terms of performance and possibly composed of two clearly distinct segments, sometimes called the lower and upper tier of firms. Among upper tier entrepreneurs, profitability and productivity potential could perhaps be high and may benefit from firm support programs (especially those with 10 or more employees, sometimes called “de Soto” firms). Nevertheless, it is difficult to distinguish these from the “Parasitic” informal plants that ought to be formal but remain informal to take advantage of the lower operational costs. In spite of the normality of informality, less is known about the returns to capital or firm upgrading for these firms. Do informal firms crowd out formal firms in access to finance? Are informal firms constrained by demand linkages in the 23
same way as formal firms?<sup>20</sup> Many such questions pertaining to informal firms remain unanswered in the available evidence on firm support.

# **5.3.Measurement of impact and implementation**

_Measuring impact over the long-run_ . Many of the firm support programs pertaining to access to finance or business training programs have found modest or null effects, however, only a few them follow firms over a longer period of time (e.g. Blattman et al., 2019). Meta-analysis of programs supporting smaller firms’ access to finance suggests that most of the effect come into play only in the longer run (Kersten et al., 2017). More research is required to understand the mechanisms behind the success of firm support programs since improved access to factors of production can determine short-term gains, like efficiency improvements, and/or long-term benefits, such as innovation activities. It is important to measure firm outcomes over several periods to see whether there are significant long-run effects, regardless of the presence of the shortrun effects.

_Spillover effects of programs_ . Success of programs should not only be measured by direct benefits. A majority of existing studies do not consider the spillover effects from the firm support program. There could be positive spillovers, when non-participants might indirectly learn from participants through interactions between owners, or worker mobility across them (e.g. Iacovone and McKenzie, 2019). Spillover effects might be also negative, when participants gain in terms of sales and profits at the expenses of nonparticipants, due to a market share reallocation between the two groups.

_Implementation challenges_ . There is a huge publication bias in this line of literature as only programs that are implemented, evaluated and have “interesting” results are published. There are many programs that do not take-off due to implementation challenges, and there is much to be learned from failed experiments as well. One such exception is the work by Campos et al. (2012) who document the lessons from seven matching grant programs offered in six African countries that could not complete an experimental evaluation. The authors find that the evaluations could not be implemented for several reasons including continued project delays, politicians not willing to allow random assignment, and low program take-up rates. In particular, overly stringent eligibility criteria to participate in firm support programs that do not take account of where value-added may be highest, and a lack of attention to detail in "last mile" issues, and the incentive structure for project implementation staff, and the way impact evaluations are funded explain the failure of randomization. Even where experiments have been successfully implemented and

> 20 A few interventions that exist on informal firms explore policies relating to formalization and registration reforms (e.g. Benhassine et al., 2018; Campos et al., 2018).

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evaluated, academic literature can potentially reflect more and offer guidance on the most common implementation challenges.

# **6. Addressing multiple constraints to firm growth**

# **6.1.Interventions alleviating multiple constraints on firms**

Recent interventions that attempted to jointly address constraints to skills and financial access have had modest impact on male-led firms. In Tanzania, an RCT conducted in collaboration with a national microfinance institution provides business training and grant to micro firms, with the objective of address constraints on human and financial capital (Berge et al., 2015).<sup>21</sup> In this experiment, while the training and grant alone did not have any impact, the combination of both interventions had positive effects on male entrepreneurs’ performance – in terms of sales, profits and happiness – in both short-run and long- run, through business expansion in more profitable sectors and improvements in business practices. Another experiment focusing solely on women-led firms in Tanzania introduced the “Business Women Connect” program to improve access to mobile saving. For 2,000 out of the 4,000 females, the program also offered business trainings, in addition to mobile saving program. The program had positive effects on savings – with larger magnitude when business training was also provided, perhaps because business training also led to an increase in management practices. However, it had no impact on investments, sales, profits, and business survival (Bastian, et al., 2018).

Similar experiments combining business training and financial access were conducted in Uganda (Fiala, 2018),<sup>22</sup> and in Sri Lanka and Pakistan among rural microfinance clients (De Mel et al., 2014; Giné and Mansuri, 2014). These studies find positive effects of training on business knowledge for both male and female entrepreneurs, however, it was only the male-led firms that benefited in terms of changes in business practices and higher household incomes.

The impact of interventions addressing multiple constraints is lower for micro firms (e.g. see Karlan et al., 2015 for an intervention on tailoring firms in Ghana)<sup>23</sup> and for female-led firms (e.g. see Berge et al., 2015 for Tanzania; De Mel et al., 2014 for Sri Lanka, and Giné and Mansuri, 2014 for Pakistan). Micro firms are

> 21 To investigate the relative importance of human capital and financial constraints, and their potential complementarity, clients were randomly assigned to four groups: business training only, business grant only, both training and grant, and untreated groups. Training consisted of 21 weekly sessions focusing on basic business concepts, management practices, and non-cognitive abilities, while the grant was given for potential long-term investments, given that loan repayment is usually requested within a very short time period.

> 22 They firstly randomly select about 1,500 small firms to receive a loan, a cash grant, or no funding. Then, business skill training was also randomly offered to some participants.

> 23 By randomly dividing firms in three treatment groups (Only-Capital, Only-Consulting, Capital-&-Consulting) and control group, they found that all three treatments had the intended effects, through business practices adoption and increased investments, only in the short run, but with insignificant or even negative impact on profits.

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usually non-transformative subsistence entrepreneurs and less likely to be motivated to continue investing in firm upgrading. In addition, micro-credit or a small grant provided to such firms cannot be expected to alleviate capital constraints in the long run. Women-led firms, on the other hand, face many more constraints over and above the usual market failures. More attention should be paid on the specific challenges, such as those relating to social norms, networks and household-level decision making (World Bank, 2019).<sup>24</sup> In general, it appears that firms in developing countries are more likely to have capabilities constraints rather than financial constraints **_._** The impact of access to finance is contingent on the instrument used, but improving firm capabilities seems to heighten the outcome of access to loans. In Uganda, the positive effects of access to discounted loans on profits for male-owned firms was compounded with training (Fiala, 2018). These results suggest that microenterprises can possibly benefit more from access to finance that has repayment requirements when combined with business skills training, because it pushes firms to invest more in productive investments. Experiments run in Sri Lanka and Pakistan (De Mel et al., 2014; Giné and Mansuri, 2014) suggest that access to larger loans did not alter the effects, indicating that existing microloans already met the demand for credit or that the stringent repayment structure did not give the opportunity to make long-term investments.

# **6.2.A program proposal for addressing multiple constraints on firms in Malawi**

Some countries such as Singapore (e.g. SPRING program) have successfully experimented with tiered approaches to firm support based on meeting certain performance milestones. However, these programs have usually been implemented on a small scale and in strong institutional settings (such as Japan, Singapore), which raises questions about the broad replicability of such programs in countries with weaker implementation capacity. In this section, we propose a firm support program to sequentially address multiple constraints for firms, currently under implementation in Malawi through the Financial Inclusion <u>and Entrepreneurship Scaling</u> project of the World Bank (See **Figure 1** ).

_First stage (_ **_Changing the mindset_** _)_ . This initial stage provides a large number of firms with personal initiative skills training to orient their mindset towards seeking growth opportunities. This training will motivate entrepreneurs to take risks, by focusing on teaching a mindset of self-starting behavior, innovation, identifying and exploiting new opportunities, goal-setting, planning and feedback cycles, and overcoming obstacles. Mentors will be assigned to firms to make sure that the training will be implemented in businesses. For women participants, the content of the training will be customized to their specific

> 24 The report offers policy makers evidence-based guidance on designing programs to target multiple obstacles and improve the performance of women entrepreneurs.

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constraints as well. Firms that record substantial changes in their mindset and demonstrate higher personal initiative skills indicators such that they qualify as “transformative” rather than “subsistence” will graduate to the second stage.

_Second stage (_ **_Building firm capability_** _)._ This stage will upgrade firm capabilities through technical skill trainings. In particular, firms entering this stage will be selected for two alternative skill-training programs – one group will be trained to access financial markets, while the other group will be trained to access product markets. Firms that show improved capabilities from their respective training programs will graduate to the third and last stage of the program.

_Third stage (_ **_Market linkages and access to finance_** _)._ In the last stage, selected firms will be supported to establish linkages with their potential customers through network programs, as well as financial assistance (by provision of subsidized loans). Studies show that SDPs, business networks and export promotion programs that strengthen the buyer-supplier linkages are critical for firm performance. Finally, since firms in low-income developing countries are also financially constrained, a financial incentive will be the key for firms to participate and successfully complete the three-stage program.

**_Figure 1: Firm Capability Development Framework_** **<u>Financial Inclusion and Entrepreneurship Scaling Project</u>**

<!-- Start of picture text --> STAGE 3<br>Market Linkages<br>and Finance<br>STAGE 2<br>Building Firm Capacity<br>STAGE 1<br>Changing Mindset<br><!-- End of picture text --> Financial support by linking to component 1 activities, grants, and linkages to financial sector and markets Training programs in specific skills such as those that are valued in the market by buyers/financial markets: Screening for Stage 3 Psychology based personal initiative skills training; mentorship: Screening for Stage 2 27
# **7. Conclusion**

In this paper, we discuss the potential constraints that can prevent firms in developing countries from growing along an analytical framework based on a “firm performance” or “profitability” approach, as well as firm support interventions to address them. We review the existing experimental evidence on instruments that address constraints on both the supply and demand sides. The evidence suggests that: _One_ , there are huge knowledge gaps in experimental evidence on the success of instruments in alleviating firm constraints. A number of instruments, such as early-stage equity finance, incubators and accelerators, remain untested due to lack of a good results framework or monitoring and evaluation systems and so on. _Two,_ since firm support interventions are expensive, policy makers expect such programs to be designed more effectively in order to pursue their objectives. However, the evidence provides little guidance on the criterion for selection and screening of firms because instruments that are tested reveal little information on the heterogeneous impact by firm characteristics such as age, size, sector and location of firms. _Three,_ the measurement of the impact of support programs can be improved by looking into their long-term effects as well as indirect spillovers that they generate. _Four,_ given that there is already a huge publication bias in that only “interesting” results from experiments that are implemented get published, lessons from implementation are usually lost. Attempts should be made to document lessons from failed experiments, and published studies should also document the challenges faced in implementing experiments.

We highlight that one of the major knowledge gaps identified in our review is that only a few support programs address multiple constraints faced by firms. A majority of experiments that focus on a single constraint through a narrow set of instruments, such as financial grants or business skills training, are ineffective in raising the performance of firms that suffer from several simultaneous constraints. To this end, we propose a three-stage program design to sequentially address multiple constraints faced by firms. The _first stage_ aims at changing mindset, through offering a psychology-based personal initiative training. Firms graduating from this stage move to the _second stage_ , which builds the technical capabilities of firms to access either financial or product markets. Finally, firms that successfully complete this stage move to the _third stage_ , which will establish linkages with their potential customers, as well as offer financial assistance. This graduated approach to building firm capabilities and addressing demand and financial constraints is currently being implemented in Malawi through the <u>Financial Inclusion and Entrepreneurship Scaling project of the World Bank.</u> 28