Business Practices in Small Firms in Developing Countries

NBER Working Paper No. 21505

Issued in August 2015

NBER Program(s):Development Economics, Productivity, Innovation, and Entrepreneurship



Management has a large effect on the productivity of large firms. But does management matter in micro and small firms, where the majority of the labor force in developing countries works? We develop 26 questions that measure business practices in marketing, stock-keeping, record-keeping, and financial planning. These questions have been administered in surveys in Bangladesh, Chile, Ghana, Kenya, Mexico, Nigeria and Sri Lanka. We show that variation in business practices explains as much of the variation in outcomes – sales, profits and labor productivity and TFP – in microenterprises as in larger enterprises. Panel data from three countries indicate that better business practices predict higher survival rates and faster sales growth. The effect of business practices is robust to including numerous measures of the owner’s human capital. We find that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices. Competition has less robust effects.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w21505

Published: David McKenzie & Christopher Woodruff, 2017. "Business Practices in Small Firms in Developing Countries," Management Science, vol 63(9), pages 2967-2981. citation courtesy of

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