Summary of the proposed research programme

Programme Overview

Private Enterprise Development in Low Income Countries (PEDL) is a joint research initiative of CEPR and DFID. Over the period 2011-6 it will pursue a research agenda focusing on private-sector development. It starts from the need to develop a better understanding of what determines the strength of market forces driving efficiency in LICs. Existing research suggests that the private sector in these countries faces a multitude of constraints. These constraints interact with one another. For example, the strategic interaction of firms with market power will be affected by the regulatory regime governing both new entrants and incumbent firms. What is needed is research which allows us to understand how these constraints interact.

In late 2011 the Programme will launch a competitive research grants programme, a mixture of Major Research Grants and smaller ‘Exploratory Grants’. Grants will be awarded on a competitive basis, with applications solicited from researchers throughout the world. Since the number of grants and their amounts are significant, the Programme will devote significant resources to the evaluation, selection and oversight of these grants.

In 2012 the Programme will undertake a range of other activities aimed at building a research community in private enterprise development in low-income countries:

  • Research workshops
  • A working paper series reporting on the research carried out under the auspices of the Initiative
  • Training workshops
  • Open events, at which the results of the Programme research will be presented and discussed with policymakers and practitioners

Given the centrality of data in decision-making, the PEDL Programme will welcome proposals which include gathering data. The researchers must, however, justify why the data are needed and what their value added is. They must also show that they are not duplicating other data gathering efforts. All data gathered with project funding will be subject to ESRC public use guidelines.

Programme Objective

The goal of the research programme is to influence policy in LICs. Policy impact requires dialogue between researchers and policymakers. Communication can be through individual meetings, conferences and workshops, or through written documents, but must start at the beginning of the research project and continue until the final results of the research are available. The responsibility for outreach to policymakers will fall on both the funded researchers and CEPR. Researchers will be responsible for developing a Policy Impact Plan (PIP), which must be included as part of the research proposal, and the quality and feasibility of the PIP will be one of the criteria used to evaluate the proposal. The PIP will define a plan for outreach to the members of the policy community and private sector most directly interested in the research (which will depend on the country and the thematic focus). Funded researchers will be expected to have regular briefings with local stakeholders, which will be scheduled to take advantage of visits by the research team to the country. Where necessary, CEPR, using links with the local DFID office, will assist PIs in making these contacts. In addition, the project will prepare regular policy briefs (at least one each year of the project) for distribution to these key stakeholders.

Research Themes and cross cutting issues

It is impossible for large numbers of people to be lifted out of poverty without sustained growth, and impossible to have sustained growth without a vibrant private sector. A simple decomposition of the underlying components of growth indicates that increases in income stem either from improvements in productivity of existing firms or from the reallocation of output shares from low-productivity to high-productivity firms. An important part of the reallocation process involves exit of low-productivity firms and entry of high-productivity firms. Entry plays a particularly important role in this dynamic because new entrants often bring new technologies. But perhaps more critically, new entrants pressure incumbents to improve productivity, and force inefficient incumbents to exit. In the United States and Europe, the data suggest that the direct effect of entry explains only around one-quarter of productivity growth ‑ most productivity growth comes from improvements in incumbent firms. Of course, the pressure from entrants must be at least partially responsible for driving the improvements in productivity among incumbents. There are no comparably comprehensive studies of productivity dynamics in LICs, but some recent evidence suggests that markets in these countries exert much less pressure on incumbent firms.

The Programme will pursue a range of approaches that promise to produce credible research results that will be useful for policy-making, supporting research related to private enterprises of all sizes, initially focused on four themes:

  • Modelling market frictions in LICs using newly available data: We need a much more detailed understanding of the impact of constraints to enterprise development in LICs. Recently developed empirical methods and new datasets offer the prospect of deeper insights. Economists have recently found ways of using these detailed data to build structural models of the strategic interactions between firms in a specific market. These methods are particularly appropriate for analysing the behaviour of large firms. To date, these methods have been applied largely to high-income countries, but better data are now becoming more widely available for LICs. PEDL will encourage researchers to extend this "structural" approach to markets in LICs in order to measure the effect of frictions in these markets.
  • Understanding how constraints interact using micro-founded macro models: Constraints on enterprise growth are most often analysed one at a time, but firms often face constraints which come in bundles. We need an approach that allows us to understand how constraints interact, and how constraints on one industry have knock-on effects on other industries. Recent work with micro-founded macro models opens up the possibility of a much more detailed understanding of these interactions and knock-on effects. To date, this approach has been use to explore the role of financial constraints. We will apply the technique to understand the effect of other constraints, such as the regulation of firm entry, labour markets and other aspects of the investment climate on growth dynamics and income distribution in LICs.
  • The dynamics of SMEs: Informality and entrepreneurship: Research on firms in LICs is challenging because firm-level data sets undercount the informal firms, microenterprises that operate outside the regulatory structure of the state and account for a third to a half of all economic activity. There is now, however, an opportunity to gain a broader understanding of firm dynamics in LICs by combining firm census data with household-based survey data, which capture more informal firms than do census data. We will encourage projects which combine existing data sets in ways that allow an analysis of the role of the informal sector in enterprise dynamics, and the nature of entrepreneurship in LICs. We will particularly encourage projects which identify innovative and cost-effective ways to gather new data to fill in gaps in the existing data sets.
  • The role of export-oriented industries in driving growth: In many LICs the dynamic, growing sectors are export-oriented and the evidence suggests that exporters and MNCs play a role which is disproportionate to their share in output. Trade economists have examined the effects of exports on productivity, but firm-level research that combines the tools of industrial organization and trade is still rare. We will encourage research in this area, since it has great potential.

PEDL will give particular encouragement to proposals which address three cross cutting issues:

  • Fragile and conflict affected states: The importance of the interaction between growth and conflict provides a very compelling case for supporting research in this area. A critical bottleneck to research on firms in conflict-ridden areas is the availability of data. But if researchers are able to overcome this issue, there is tremendous potential for research on private enterprise development in conflict-ridden states.
  • Gender: For proposals for research on issues that operate at the level of the enterprise, PEDL will encourage proposals which take into account differences in gender.
  • Climate, environment and social compliance: Environmental and social compliance may have implications for productivity and growth dynamics in LICs. In the first instance, it may increase production costs, making firms less competitive, but may encourage firms to focus more carefully on productivity improvement. This interaction is an example of how we will encourage research which incorporates environmental and social compliance.