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Barriers to entry and returns to capital in informal activities : evidence from Sub-Saharan Africa

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  • Grimm, Michael
  • Kruger, Jens
  • Lay, Jann

Abstract

This paper investigates the patterns of capital entry barriers and capital returns in informal Micro and Small Enterprises (MSE's) using a unique micro data set seven West-African countries. The author's findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated to most activities. The authors find very heterogeneous patterns of capital returns in informal MSE's. At very low levels of capital, marginal returns are extremely high- often exceeding 70 percent per month. Above a capital stock of 150 international dollars, marginal returns are found to be relatively low at around 4 to 7 percent monthly. The authors provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSE's appear to be severely capital constrained.

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File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2013/05/24/000442464_20130524102916/Rendered/PDF/779270WP0P11510PUBLIC00ReturnsWAEMU.pdf
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Bibliographic Info

Paper provided by The World Bank in its series Social Protection Discussion Papers with number 77927.

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Date of creation: 01 May 2011
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Handle: RePEc:wbk:hdnspu:77927

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Keywords: Economic Theory&Research; Debt Markets; Investment and Investment Climate; Economic Growth; Banking Law;

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  1. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 274-98, April.
  2. Dan Bernhardt & Huw Lloyd-Ellis, 1993. "Enterprise, Inequality and Economic Development," Working Papers, Queen's University, Department of Economics 893, Queen's University, Department of Economics.
  3. Christopher Udry & Santosh Anagol, 2006. "The Return to Capital in Ghana," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 388-393, May.
  4. Paul Collier & Stefan Dercon & Marcel Fafchamps, 2000. "Credit Constraints in Manufacturing Enterprises in Africa," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2000-24, University of Oxford, Department of Economics.
  5. Henley, Andrew & Arabsheibani, G. Reza & Carneiro, Francisco G., 2006. "On defining and measuring the informal sector," Policy Research Working Paper Series, The World Bank 3866, The World Bank.
  6. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2007. "Returns to capital in microenterprises : evidence from a field experiment," Policy Research Working Paper Series, The World Bank 4230, The World Bank.
  7. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  8. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers, Brown University, Department of Economics 2013-12, Brown University, Department of Economics.
  9. Tybout, James R, 1983. "Credit Rationing and Investment Behavior in a Developing Country," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 598-607, November.
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