David Mckenzie of the Bank writes:
The modal firm size in most developing countries is one worker, consisting of only the owner of the firm. Amongst the firms that do hire additional workers, most hire fewer than ten. In Nigeria survey data indicate that 99.6 percent of firms have fewer than 10 workers. This is in sharp contrast to the United States, where the modal manufacturing firm has 45 workers. Are there constrained entrepreneurs in developing countries with the ability to grow a firm beyond this ten worker threshold? If so, this raises the questions of whether such individuals can be identified in advance, and of whether public policy can help them overcome these constraints to firm growth.
In an attempt to figure out if policy can help grow firms in developing countries, Mackenzie evaluated a program in Nigeria that awarded 1,200 winners about $50,000 each (out of an initial application pool of 24,000; the top 6000 applicants were in the study). See a summary here. And the paper is available here.
………. winning this competition has large positive impacts on both applicants looking to start new firms as well as those aiming to expand existing firms. Three years after applying, new firm applicant winners were 37 percentage points more likely than the control group to be operating a business and 23 percentage points more likely to have a firm with 10 or more workers, while existing firm winners were 20 percentage points more likely to have survived, and 21 percentage points more likely to have a firm with 10 or more workers. Together the 1,200 winners are estimated to have generated 7,000 more jobs than the control group, are innovating more, and are earning higher sales and profits.
Two quick thoughts. First, this is a really cool finding that should get African central bankers excited about how the financial sector can be put to use in boosting mass employment. Second, it is a caution against the odd idea prevalent in development programs of trying to turn poor people into entrepreneurs (see below). The best solution to poverty is jobs. Entrepreneurship is a risk that shouldn’t be imposed on people with already super slim margins of error in terms of income security. As Mckenzie rightly observes:
The results of this evaluation show that a business plan competition can be successful in identifying entrepreneurs with the potential to use the large amounts of capital offered as prizes, and that these individuals appear to be otherwise constrained from realizing this potential. The prize money generates employment and firm growth that would not have otherwise happened. However, the results also highlight the difficulties of picking winners. Conditional on reaching the semi-finalist stage, neither the scores for the business plans, nor individual and business characteristics have much predictive power for predicting which firms will grow faster or benefit most from the program. This remains an area for active research, but also highlights the inherent riskiness of entrepreneurial activity.