Show Me the Data: Small and Medium Enterprises and Those Elusive Jobs

For people the world over, their job is one of the most important things in their life. The World Values Survey conducted in 30 USAID host countries in 2010-14 found that 90% of people in those countries considered work “very important” or “rather important” in their life. Especially for the poor, employment is the main way to increase the level or stability of their income. Now where is one to find these elusive jobs? In developing countries, like most OECD countries, small and medium enterprises (SMEs) employ more of the private labor force of the manufacturing and services sectors than do larger firms. Young start-up firms also have higher churn in employment and contribute the most net employment in developed and developing economies alike.¹

So then the question becomes, what interventions increase sales revenue, profits and employment of SMEs, via increased investment, innovation or exports? You guessed it: the answer is again, “It depends.” A recent systematic review by the Campbell Collaboration of the evidence on supporting SMEs in developing countries found that, on average, donors and governments’ support for SMEs do modestly improve their sales revenue, employment, labor productivity and investments. Subsidized lending and management consulting can sometimes increase employment; market linkages, tax simplifications and export promotion can increase production, exports and/or profit; and innovation can sometimes increase sales and profits.

When we look more closely at specific interventions, though, the record is more mixed. One popular intervention is subsidized lending or matching grants. A 2008 study of Sri Lankan small firms² found no conclusive differences in value addition between those who received subsidized loans and those who took loans without subsidy. Similarly, a study of Ethiopian construction firms found that matching grants had no impact on their employment.³ In Brazil, however, a subsidized credit card lending program increased employment for businesses, especially small firms.⁴

Other interventions aim to build capacity of SMEs. In Mexico, research found that tailored management consulting increased productivity immediately and employment by the firm three years later. In Colombia, standardized business training enlarged business networks and start-up rates for some participants but had no impact on firm revenue or employment. In contrast, one study in Egypt linking micro and small firms to foreign buyers found increased quality and efficiency in all production (whether for export or the domestic market) and increased profits.

Reducing direct or indirect costs of formalization also has mixed impact. A study of a tax simplification reform in Vietnam found that becoming a registered firm led to an increase in profits and investments for manufacturing firms but did not increase labor productivity and actually decreased use of casual labor.⁵ A similar reform in Brazil did increase employment as well as profits for formalized firms.⁶ A related Bangladeshi study providing information on the lowered costs of registration found no change in likelihood of formalization.⁷ A final study in Sri Lanka found that most informal micro and small firms don’t want to formalize, but “policy efforts that lead to relatively modest increases in the net benefits of formalizing would induce a sizeable share of informal firms to formalize.”⁸

As for innovation, conditional matching grants and loans for research and development in Colombia increased labor productivity through product diversification but not employment.⁹ On the other hand, a similar program in Chile increased employment, sales and exports through technological upgrading and process innovations.¹⁰ Innovation programs in Peru boosting technological application by micro and small enterprises in specific sectors increased their sales and profits by 21-26%.¹¹

Programs supporting SMEs in marketing exports in Peru and Colombia have also seen positive results in the diversity of export products and markets and in total exports.¹² In Tunisia, however, an export promotion grant boosted firms’ exports but not their total sales and employment.¹³

One factor that might explain the range of impacts across all approaches to supporting SMEs is that not all SMEs are equal. The Campbell systematic review found a concave relationship between firm size and firm performance from programs, meaning programs often benefit the smallest and largest firms more. While we have work to do in finding more effective interventions, we also need to target firms that will benefit from varied interventions, likely firms with constrained growth (such as women-owned ones) depending on the market instead of a broad swathe of SMEs. Focus on deeper impact could be worth the effort, even if it means foregoing “reaching” a larger number of firms with unclear efficacy. The quality or “fidelity” of implementation for different approaches is also important for impact: if a program can target effectively with a high-quality intervention, my expectation would be for it to improve SME revenue and employment by the high end of the above impact findings—around 25%.

There is still much to explore and test in this area, including what individual interventions work in different contexts to ensure sales and profits lead to jobs, since kitchen-sink packages combine all the individual interventions above and more are popular. These package interventions are also more expensive, so it would behoove funders to understand if individual interventions can be more efficient. Another question that will help us get a bigger bang for the buck is to understand what kind of firm is most likely to benefit from interventions, rather than having programs just skim the cream among enterprises.

Perhaps you, dear reader, might be a pioneer in joining innovation and learning on these new horizons for SME development and show us the data.

Click here for an overview of evidence on microenterprise development.

References

¹ World Bank. http://www.enterprisesurveys.org/~/media/GIAWB/EnterpriseSurveys/Documents/ResearchPapers/SMEs-age-and-jobs.pdf

² Aivazian and Santor (2008)

³ Rijkers et al, 2010.

⁴ Machado et al, 2011.

⁵ Rand and Torm, 2012

⁶ Fajnzylber et al, 2011.

⁷ De Giorgi and Rahman (2013)

⁸ de Mel et al. (2012)

⁹ Crespi et al, 2011.

¹⁰ Benavente et al, 2007.

¹¹ Jamarillo and Diaz, 2011.

¹² Volpe & Carballo, 2008 and 2010.

¹³ Gourdon et al, 2011.