Small enterprises: little do we know

Inclusive Economy18 Dec 2014Francisco Capos

There is limited knowledge about what does and what does not work to boost SME growth and create jobs. We need to keep searching for better answers.

By some estimates, 11 million youth will be entering the labour market in Sub-Saharan Africa each year for the next decade. It is not clear whether these young people will be able to find decent jobs. As a result, countries across Sub-Saharan Africa are seeking to boost employment, especially by supporting micro, small and medium-sized enterprises (MSMEs).

Unfortunately, there is limited knowledge about how to grow MSMEs and create jobs. While setting up the right infrastructure, regulations, capacity building programmes, finance and linkages seems critical, differing problem statements lead to questions like: ‘What kind of infrastructure is needed?’ ‘Which regulations are priorities?’ ‘Which firms are constrained in development skills?’ To date, evidence has shown that some regulatory reforms and capacity development programmes are ineffective in generating growth. Moreover, there is minimal to no evidence that entrepreneurship programmes result in job creation. There is a need to keep searching for better answers.

I will argue here for sustained efforts in generating rigorous knowledge on MSME development and employment. This will require better coordination between operational and research teams in developing targeted solutions to specific problems. While development researchers and practitioners are very interested in identifying what works, the learning process needs to be more supportive in order to increase the likelihood of focusing work on what is most relevant.

In my opinion, the key elements to making progress towards this goal are as follows:

  1. We need to understand how growth may happen differently for specific target groups, including for suppliers in value chains, new entrepreneurs, and women entrepreneurs
  2. Development partners (donors, researchers and champion governments) should commit to supporting a work programme that extends beyond a project or grant cycle. Some impact evaluation work in Africa suggests that the funding cycles for impact evaluation are short and independent of previous cycles. To evolve from there, a core set of interested parties should commit to a research programme lasting one or two decades that is not dependent on being replenished every few years. Such a coordinated effort would assist donors, governments and researchers in building on previous work and sequencing efforts to find solutions to particular problems. Grant managers leading this process would use well-organized joint randomized control trials (RCT) registries and regular literature reviews to set future research agendas.
  3. We need to build early consensus about what we know and what we do not know, and establish an understanding among all relevant involved parties about priorities for learning within and across funding cycles. For instance, on gender and entrepreneurship, most of the underlying constraints that have been identified as potentially contributing to gender gaps in firm performance have not been rigorously tested, jointly or separately. Moreover, constraints often cited as potential explanations for differences between men and women on strategic decision-making are not well documented in the African context. This includes differences in time preferences and attitudes towards risk. Whatever the topic, preparing the groundwork for prioritizing future research in a coordinated manner is critical.
  4. Be open to new solutions. This requires listing, identifying, and funding through experiments promising ideas.
  5. Consider evaluating interventions that run counter to the researcher’s beliefs about what can be effective. This is especially relevant for ‘big solutions’, on which a significant share of the development work (and money) is concentrated. For example, having the best economic researchers rigorously assessing the impacts of microfinance has been critical in avoiding misconceptions about the instrument and directing it to what it is really seeking to achieve.
  6. Incorporate counterfactual analysis in areas identified as critical to development, but where RCTs are difficult to implement. This includes industrial policy strategies, for instance. The World Bank is currently leading impact evaluations of infrastructure projects, special economic zones (SEZs), and spatial enclave cluster programmes. Also, support small ‘e’ evaluations about ways of improving the efficiency of an intervention or about different models of delivery.
  7. Finally, prepare joint reports across initiatives, including meta-analysis reviews and cost-benefit analyses incorporating the results from the various studies.

A significant effort is already underway through initiatives like the Global Innovation Fund, which “scales up successes and follows through with transformative ideas until they realize their impact potential”, and the World Bank’s Private Sector Development Policy Innovation Lab, which is “looking for researchers and operational staff with innovative ideas for how governments can better foster SME growth and entrepreneurship in low-income countries with the goals of increasing productivity and job creation”. We need to expand this process even further, through coordination across initiatives and time, to address the big, unanswered questions, such as how to boost MSME employment.