The Effect of Rural Electrification on Firm Creation - New Evidence from Ghana

Billions of dollars are spent each year on electrification infrastructure projects in the hope to benefit the 770 million people who still lack access to electricity. However, the evidence to date on the effects of such projects is mixed. In this paper, I study the effect of rural electrification on firm creation in Ghana by focusing on the effect on female-owned microenterprises. I combine firm census data covering over 638,000 firms (including informal and rural establishments) with electricity access and geo-spatial data. I address the endogeneity of the grid expansion using an instrumental variable approach. The instrument is the distance to a hypothetical grid connecting historical regional capitals, border towns, and main hydropower plants. I find that a 10% increase in district-level electrification leads to the creation of 152 female-owned firms, which corresponds to a 37% increase. I show that this effect is largely driven by two channels: i) a reduction in home production activities by women and ii) a lowering of required startup capital for microenterprises. The findings of this paper are consistent with previous literature, showing large effects of electrification particularly for women.