It is widely recognized that entrepreneurship is of critical importance to industrial development. Despite this importance we know little about the skills of business owners and managers in developing countries. In the WIDER Working Paper ‘The Role of Training in Fostering Cluster-Based Micro and Small Enterprises Development’ Tetsushi Sonobe and Keijiro Otsuka look at industrial clusters of small and micro businesses in Asia and sub-Saharan Africa and assess whether management training can improve the managerial and innovative capacities of managers and owners.
An industrial cluster is the localization of firms producing similar and related products. These clusters often form as businesses move together in order for firms to survive in a business environment. However these clusters often perform poorly because their own managerial and innovative capacities are inadequate. Sonobe and Otsuka show this to be the case in a comparative case study of the garment industries in Bangladesh and Ethiopia. In both countries the government supported the development of this specific industry.
However in Ethiopia the focus of the support was on supplying land and finance, whereas in Bangladesh there was a strong focus on training managers in production skills, management skills, international procurement, and marketing. The Bangladesh garment industry currently employs over 4 million people and ranks amongst the world’s largest producers of garment items. Conversely, in Ethiopia the performance of the garment industry has been very poor, despite strong government support. Sonobe and Otsuka suggest that this difference in performance is due, at least in part, to the fact that the Ethiopian government attached only a secondary importance to promoting the skills of managers in the garment industry.
This comparison suggests that the managerial and innovative skills are crucial if an industry is to develop. Sonobe and Otsuka argue that the cost of funding training programmes designed to improve these skills would be outweighed by the benefits such improvements would lead to. Therefore support by governments and aid funding for entrepreneurship should focus on these training programmes. To demonstrate this they look at the effect management training has had on a number of industrial clusters based in Asia and sub-Saharan Africa.
Sonobe and Otsuka suggest that the many owners of Micro and Small Enterprises (MSEs) are ignorant of basic management practices, and that a key reason for this is that the market in management training suffers from asymmetries of information and free-rider problems. Owners are often not aware of where to go to for the knowledge they require, and even if they do they may not have the ability to judge the value of the knowledge. It is also the case that new management practices will be quickly imitated by other businesses, so owners may be unwilling to pay for training as they would prefer a free ride. Furthermore managers may simply be unaware of the value of management training.
Sonobe and Otsuka argue that these problems can be overcome. If organizations with good reputations such as international institutions or NGOs provide the training then the problem of judging value becomes less acute. The free-rider problem could be solved by government or international support for management training programmes and public awareness campaigns could help make owners aware of the value of such programmes.
Sonobe and Otsuka posit that these solutions will only be worthwhile if the benefits of the training outweigh the cost of setting up the necessary programmes. Sonobe and Otsuka point out that it is difficult to measure the benefits of training due to spill-over effects and a lack of knowledge about how long it takes for the training to have its full impact, and suggest that these problems have not been addressed by many existing studies.
In eight of the African and Asian industrial clusters studied by Sonobe and Otsuka they, in cooperation with the World Bank and the Japan International Cooperation Agency, conducted pilot programmes, run since 2007, which provide management training programmes to owners free of charge. The aim of the pilot programmes was to discover whether management training had a positive effect on firms in developing countries. In five of these cases owners were assigned to treatment and control groups at random, and these five can therefore be considered randomized controlled experiments. To test whether the management improved after the training they used a management score based on observations and interviews with owners.
Sonobe and Otsuka found that the free training had a positive and statistically significant effect on the management score. In the case where enough firms collapsed during the study period to make it possible to measure the influence of the management training on firm exit, it was found to have a positive and significant effect on firm survival. In three of the cases owners indicated that they were more willing to pay for management training after the programme than they had been previously. In both of the cases where the amount of value added by the training was measured, the benefits significantly outweighed the costs. Sonobe and Otsuka argue that these results point towards the conclusions that those who are interested in promoting development in general, and private sector development in particular, in the global south should strongly consider funding management training.
Sonobe and Otsuka finish by suggesting that while managerial and innovative capacities are important, development also requires an increase in financial and infrastructure capacity. They suggest that management training should be provided before, for example, offering low-interest credits. This would allow promising entrepreneurs to be identified, and increase the likelihood of the loans being repaid.
This report by James Stewart summarizes WIDER Working Paper no. 2012/99 'The Role of Training in Fostering Cluster-Based Micro and Small Enterprises Development' by Tetsushi Sonobe and Keijiro Otsuka.