Two better ways to improve outcomes of small businesses (in Togo and Nigeria)

Two recent and excellent studies offer some important insights into how best to help improve the outcomes of small business owners in developing countries. Both studies evaluate programs motivated by the perception that the traditional way business skills training programs operate could be improved. (For more on this idea, read McKenzie and Woodruff (2013).)

The first study compares two programs, implemented in Togo, against each other (and a comparison group). The “traditional training” simply teaches participants lessons in accounting, management, financial decision making, and marketing. The second training included insights from psychology and aims to not only teach business skills but also to instill a mindset of self-starting behavior and encouraging personal initiative. This strategy behind this second training program acknowledges that simply being trained with the necessary business skills is not sufficient in spurring high-growth small business growth. Entrepreneurship takes a particular penchant for risk, a market opportunity, and a little bit of luck — all things that are typically tough to come by in many developing countries. The impact evaluation of these programs, published in the journal Science, found that the psychology-based training program produced better outcomes compared to the traditional training program. Here a link to the World Bank write up of the study and the abstract of the full study:

Standard business training programs aim to boost the incomes of the millions of self-employed business owners in developing countries by teaching basic financial and marketing practices, yet the impacts of such programs are mixed. We tested whether a psychology-based personal initiative training approach, which teaches a proactive mindset and focuses on entrepreneurial behaviors, could have more success. A randomized controlled trial in Togo assigned microenterprise owners to a control group (n = 500), a leading business training program (n = 500), or a personal initiative training program (n = 500). Four follow-up surveys tracked outcomes for firms over 2 years and showed that personal initiative training increased firm profits by 30%, compared with a statistically insignificant 11% for traditional training. The training is cost-effective, paying for itself within 1 year.

In the second study, after a brief business skills training session, an organization in Nigeria funded a large-scale business plan competition. The winners of the competition, which included over 1,000 business owners from over 24,000 applicants, received a grant of about $50,000 on average. This study aims to answer the very basic but also provocative question, “what would happen if we just gave all the money used to organize and implement business training programs directly to entrepreneurs instead?”

Perhaps unsurprisingly, since I’m blogging about this study, the business plan contribution lead to very positive outcomes. Not only did firms that received a grant show more resiliency to economic ups and downs, but they also significantly expanded employment. A jaw-dropping stat comes from the American Economic Association write up: “Experimental winners were about twenty percentage points more likely to have ten or more workers than their counterparts — a result that is especially significant in Nigeria, where 99.6 percent of companies have fewer than ten employees”. Here is a link to the study, recently published in the American Economic Review, and the abstract:

Almost all firms in developing countries have fewer than ten workers, with a modal size of one. Are there potential high-growth entrepreneurs, and can public policy help identify them and facilitate their growth? A large-scale national business plan competition in Nigeria provides evidence on these questions. Random assignment of US$34 million in grants provided each winner with approximately US$50,000. Surveys tracking applicants over five years show that winning leads to greater firm entry, more survival, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having ten or more workers.

Not only are these studies well-executed, but they provide accessible lessons for lots of people working hard to improve outcomes of small businesses around the world. The first study shows that there are potentially huge gains to be realized from experimenting and iterating with the content of business skills training curriculum. The second study shows that reimagining how governments and development donors spend money on small business development can also lead to much needed benefits.

Both of these lessons are important considering that these programs tend to be relatively expensive. For example from 2002 to 2012, the World Bank invested $9 billion dollars across 93 business skills training programs around the world. These studies imply this money could have been spent much better. The good news is we can learn from these studies and do better in the future.