Managerial Capital and Business Transformation in Low-Income Countries

Through an experimental intervention of providing business training and improved credit access to entrepreneurs, this project seeks to examine the dynamics of how managerial capital helps transform businesses from micro to small-sized enterprises and from small to medium-sized enterprises.

Private sector entrepreneurship holds the promise of economic opportunity and improved productivity, and policymakers extol the potential for entrepreneurship to stimulate economic and financial development in low-income countries. The rosy view of entrepreneurs as growth agents, however, overlooks critical challenges in entrepreneurship in low-income countries. The reality is that low-income countries tend to be dominated by millions of tiny businesses that do not grow into larger firms. In fact, the majority of entrepreneurs in low-income countries tend to be subsistence entrepreneurs who lack business skills, are focused on basic survival, and start firms because they cannot find jobs in the formal sector. As a result, the focus has shifted to identifying what does constrain entrepreneurs in low income countries. Particular attention has been given to financial capital, but after two decades of microfinance projects, the evidence suggests this is not the key constraint (at least not in isolation). Other forms of capital may be missing: one recent suggestion is “managerial capital”, defined as the skills associated with the management of customers, money, operations and people within businesses.

This research examines the dynamics of how managerial capital might help entrepreneurs in low-income countries to transform their businesses from micro- to small-sized enterprises and from small- to medium-sized enterprises. The project will use a more intense training intervention, provide training programs that focus on only one dimension of managerial capital per course, and combine training with improved access to credit. We use the randomized-controlled trial approach to construct a panel data set that allows us to explore our research questions in a causal manner.

The study consists of three phases: screening, access to skills, and access to credit information. In Phase One a sample of 4000 entrepreneurs will be randomly selected from the client database of our South African partner. These entrepreneurs will have previously completed a business health check diagnostic which we will use to select an initial sampling frame of 1,000 entrepreneurs. Next, these entrepreneurs will complete a screening tool created to identify ‘high growth potential’ firms (i.e. transformational entrepreneurs), which includes questions on education, years in operation, motivation, commitment, business plan, and growth strategy. Based on this screening tool, we will construct a final sampling frame consisting of 720 entrepreneurs who are running a micro or small enterprise in one of four locations across South Africa. A baseline survey will be conducted for all participants to measure entrepreneur characteristics and business characteristics. In Phase Two, participants will be exposed to a high quality training intervention – a mini-MBA training program provided in collaboration with London Business School, which combines online e-learning content with face-to-face classroom teaching. Participants will be randomly assigned in equal numbers to one of three groups that will receive Marketing and Sales training, Finance and Accounting training or no training (the control group). In Phase Three, all participants will be randomly assigned into one of two groups: 480 participants will be provided with access to information on a loan option for financing their business, and the remaining 240 participants will not receive any access to credit information (the control group). For the next two years, all participants will be tracked using monthly financial diaries and post-intervention surveys conducted every six months.