Micro-entrepreneurs —those who own and run businesses with less than five employees— are by far the most common type of entrepreneurs in the world, and form a large part of the informal economy in low-income countries. Yet their business practices are poorly understood, and their performance is often poor. Nevertheless, conditional on a set of environmental constraints, some micro-entrepreneurs seem to not only perform better than others, but also have a greater ability to scale their businesses. It is this reality that this study seeks to investigate.
The research team hypothesizes that innovation in marketing practices plays a large role in explaining why some micro-entrepreneurs manage to achieve scale while other micro firms cannot escape the subsistence trap. Further, they argue that entrepreneurs’ ability to innovate is a function of both their human capital and the initial product variety that they offer. Finally, they claim that human capital --in the context of subsistence level micro-entrepreneurs, who typically have poor numerical skills and high levels of illiteracy— can be improved through the imitation of simple rules of thumb from more successful peers or “positive deviants".
The researchers will test their theory through a field experiment on a sample of 500 micro food retailers in a large slum in Cairo, Egypt, in which they randomize on both human capital and product variety. They manipulate human capital by exposing a randomly selected subgroup (two thirds) of the sample to a video that features successful micro-entrepreneurs describing simple rules of thumb they use to become more innovative. Additionally, half of this group will be given the opportunity (also by random selection) to broaden their initial product variety. Specifically, this subset will be offered a menu of products from which they can choose two according to their preference. The team will then give them their second choice product without charge and observe if doing so induces the entrepreneurs to innovate with their pricing decisions and product variety by choosing to buy their first choice subsequent to the intervention.
The team will measure the impact of the intervention on both intermediate (i.e. innovation, measured in terms of changes in pricing and product variety in the grocery store context) and final (i.e. revenues, profits) outcomes. The results from this study will have policy implications for both the micro-enterprise training sector and the micro-finance sector. Evidence of the importance of innovation in marketing practices for scaling businesses in a specific sector should inspire the design of more tailored, community- and industry-specific training programs. The study should also help raise the importance of targeted micro-finance to promote innovative behaviour (e.g. channel micro-finance to promote innovation in product variety) and tailored micro-finance programs that help address industry-specific challenges.
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