Business Practices in Small Firms in Developing Countries

Tuesday, 6 December, 2016
Abstract: 
Management has a large effect on the productivity of medium and large firms. But does management matter in micro and small firms, where the majority of the labor force in developing countries works? McKenzie and Woodruff (2015) develop 26 questions that measure business practices in marketing, stockkeeping, record-keeping, and financial planning. These questions have been administered in surveys in Bangladesh, Chile, Ghana, Kenya, Mexico, Nigeria and Sri Lanka. The authors show that variation in business practices explains as much of the variation in outcomes – sales, profits and labor productivity and TFP – in microenterprises as in larger enterprises. Panel data from three countries indicate that better business practices predict higher survival rates and faster sales growth. The association of business practices with firm outcomes is robust to including numerous measures of the owner’s human capital. They find that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices.