Social capital and small informal business productivity: the mediating roles of financing and customer relationships

How does an entrepreneur’s social capital improve small informal business productivity? Although studies have investigated this relationship, we still know little about the underlying theoretical mechanisms driving these findings. Using a unique Zambian Business Survey of 1971 entrepreneurs administered by the World Bank, we find an entrepreneur’s social capital facilitates small business productivity through the mediating channels of firm financing (i.e., credit from suppliers, credit to customers, loans from friends and family) and customer relationships (i.e., more customers). Our findings, thus, identify specific mechanisms that channel social capital toward an informal business’ productivity, which prior studies have overlooked. Plain English Summary Small informal businesses are more productive when they build relationships with customers, extend credit to customers, and receive credit from suppliers and friends and family. Using a unique survey of 1,971 Zambian entrepreneurs administered by the World Bank, we observe that belonging to a business or social association enables these businesses to extend credit, receive credit, and build relationships. Our findings provide more specific mechanisms that channel social capital toward an informal business’ productivity, which prior studies have overlooked. Thus, our main policy recommendation is that entrepreneurs, especially from informal businesses and developing contexts, should focus on networking to foster customer and professional relationships and enhance access to capital, which can help foster firm productivity.