Small firms in developing countries are commonly engaged in highly technical and capital intensive industries. These industries are subject to three well-established inefficiencies: a lack of technical knowledge, under-provision of employee training, and an inability to exploit economies of scale. Information and behavioural barriers are likely to be critical in inhibiting firm owners from investing optimally in worker technical training and exploiting potential economies of scale across firms. Building on a pilot study funded by a PEDL Graduate Student Exploratory Grantv (click here to see its project page), the research team intends to conduct the randomized evaluation of an intervention targeting the production process of small metalworking firms in Kampala, Uganda. This intervention will be implemented by Makerere University in Uganda and will: (i) provide technical training designed to increase productivity of workers and (ii) offer those firms access to shared, large-scale capital.
The first phase of the study aims to address a significant gap in the literature by studying the experimental impact of providing technical training to workers on both firm outcomes (productivity, profits, and job creation) and worker outcomes (wages, turnover). The researchers focus on a single industry—metal fabrication—which allows for careful measurement of productivity. Since they target the training to employees (rather than owners) they will be able to study: i) how labour market and managerial frictions inhibit investments in training and ii) how labour market outcomes differ for the newly trained employees. The second phase of the study will measure the impact of shared capital. Specifically, it will provide a novel direct test of the differential impact of providing SMEs with shared machinery relative to individual machinery. They will randomly assign firms to one of either one of two capital treatments (shared or individual) or the control. This will allow them to evaluate the viability of interventions that leverage the economies of scale in metalworking to overcome the credit constraints faced by SMEs.
Low productivity in firms is a major constraint to growth in developing countries, a challenge which is especially relevant to small firms. Despite relatively low productivity, small firms form a large share of the economic activity in most developing economies, including in Uganda. Entrepreneurs who lead small firms in developing countries face a complex and well-documented set of constraints that limit their ability to grow. Hence, findings from this study will inform policymakers on three key constraints that—while broadly applicable across industries—are particularly relevant to small firms in capital-intensive industries: i) knowledge constraints with regards to the production process, ii) market failures that lead to under-investment in employee training, and iii) a lack of economies of scale for efficient use of capital.
