This section briefly discusses a few other themes that arise in the literature on microenterprises in developing countries.
Access to financial services other than credit
Many people in developing countries lack access to reliable ways to save. Dupas and Robinson (2013) offer zero-interest bank accounts to microentrepreneurs in Kenya and find that for women but not men, bank accounts increase savings and investment (as well as personal expenditures).
Uncertainty can be a major deterrent to firm investment (Bloom, 2009). In developing countries, macroeconomic and political instability are major risks to firms, including microenterprises. Groh and McKenzie (2016) study Egypt from 2011 to 2013, the tumultuous period after the “Arab Spring” movement. Many firm owners in this context want to delay investments until the turmoil is over. The researchers worked with a microfinance institution and enrolled in their study existing clients who were at a decision point about whether or not to renew their loans. The randomized intervention entailed offering insurance against macroeconomic/political risk through a product called the economic protection plan, or EPP. EPP was an add-on to a standard 12 month loan from the MFI: In case of an economic/political shock to the business, EPP pays out 16.7% of loan value; in the case of two shocks, the payment becomes 25% of the loan value. Events that qualified as a shock were the stock exchange being suspended for more than five days, a curfew being imposed for more than five days, a specified increase in inflation, and a specified increase in fuel prices.
Among the 1,481 clients in the treatment group (those offered EPP), 67% renewed their loan and 37% purchased EPP. Loan renewal was not significantly different between the treatment and control groups, so EPP did not make borrowing more attractive, despite the fact that half of the treated group who took up the loan chose to purchase the EPP add-on. The study finds no significant effects on investments, either major physical capital investment or working capital investment such as inventory.[1] The authors argue that basis risk is unlikely to be the explanation, as past shocks seem to matter for firm performance. The insurance payout is large and the firms have a relationship with the MFI so trust in the payout should be high. The firms also seem to understand the product. Thus the authors interpret the null result as indicating that economic and political risk were not deterring these firms from investing, contrary to the hypothesis.
Inter-firm relationships
Several studies examine peer effects and interlinkages among firms. Firm owners’ interactions with peers seem to facilitate their adoption of business practices related to formalization and banking (Fafchamps and Quinn, 2018), and to influence their firm’s performance (Fajnzylber et al., 2009). While geographical clustering could facilitate knowledge spillovers and is associated with higher profits (Ali and Peerlings, 2011), some studies find that geographic clustering is not enough; business connections are also needed for firm networks to translate into knowledge flows and innovation (Gebreeyesus and Mohnen, 2013). These benefits might not be as large for microenterprises, however. Small firms do not benefit, at least not as much, from formal and informal meetings between owners (Cai and Szeidl, 2018; Fafchamps and Quinn, 2018). Microenterprises also do not seem to interact with each other enough for there to be spillover effects on other firms, in the case that one firm receives an inspection visit to verify that it is registered (de Andrade et al., 2013).
[1] A puzzling finding is that the treatment group experienced a 13% decrease in revenue but no significant effect on profits, suggesting that some component of costs decreased.
