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Business Practices in Small Firms in Developing Countries

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  • David McKenzie
  • Christopher Woodruff

Abstract

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.

Suggested Citation

  • David McKenzie & Christopher Woodruff, 2015. "Business Practices in Small Firms in Developing Countries," NBER Working Papers 21505, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21505
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    References listed on IDEAS

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    1. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2005. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 151-184, February.
    2. David McKenzie, 2017. "Identifying and Spurring High-Growth Entrepreneurship: Experimental Evidence from a Business Plan Competition," American Economic Review, American Economic Association, vol. 107(8), pages 2278-2307, August.
    3. Nicholas Bloom & Benn Eifert & Aprajit Mahajan & David McKenzie & John Roberts, 2013. "Does Management Matter? Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 128(1), pages 1-51.
    4. Nicholas Bloom & John Van Reenen, 2007. "Measuring and Explaining Management Practices Across Firms and Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 122(4), pages 1351-1408.
    5. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2014. "Business training and female enterprise start-up, growth, and dynamics: Experimental evidence from Sri Lanka," Journal of Development Economics, Elsevier, vol. 106(C), pages 199-210.
    6. Gabriela Calderón & Jesse M.Cunha ; & Giacomo De Giorgi, 2013. "Business Literacy and Development: Evidence from a Randomized Controlled Trial in Rural Mexico," Working Papers 2013-24, Banco de México.
    7. David McKenzie & Christopher Woodruff, 2014. "What Are We Learning from Business Training and Entrepreneurship Evaluations around the Developing World?," World Bank Research Observer, World Bank Group, vol. 29(1), pages 48-82.
    8. Marcel Fafchamps & Christopher Woodruff, 2017. "Identifying Gazelles: Expert Panels vs. Surveys as a Means to Identify Firms with Rapid Growth Potential," World Bank Economic Review, World Bank Group, vol. 31(3), pages 670-686.
    9. repec:oup:wbecrv:v:30:y:2017:i:supplement_1:p:s86-s96. is not listed on IDEAS
    10. Claudia Martínez A. & Esteban Puentes & Jaime Ruiz-Tagle, 2013. "Micro-Entrepreneurship Training and Asset Transfers: Short Term Impacts on the Poor," Working Papers wp380, University of Chile, Department of Economics.
    11. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
    12. Gabriela Calderon & Leonardo Iacovone & Laura Juarez, 2017. "Opportunity versus Necessity: Understanding the Heterogeneity of Female Micro-Entrepreneurs," World Bank Economic Review, World Bank Group, vol. 30(Supplemen), pages 86-96.
    13. Taylor, Frederick Winslow, 1911. "The Principles of Scientific Management," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number taylor1911.
    14. Chang-Tai Hsieh & Benjamin A. Olken, 2014. "The Missing "Missing Middle"," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 89-108, Summer.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Measuring Business Practices in Small Firms
      by David McKenzie in Development Impact on 2015-10-05 18:20:00

    Citations

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    Cited by:

    1. Naudé, Wim, 2017. "Entrepreneurship, Education and the Fourth Industrial Revolution in Africa," IZA Discussion Papers 10855, Institute for the Study of Labor (IZA).
    2. Muhammad Khan, "undated". "The Health Burden of Dust Pollution in the Textile Industry of Faisalabad, Pakistan," Working papers 120, The South Asian Network for Development and Environmental Economics.
    3. McKenzie, David & Puerto, Olga Susana, 2017. "Growing Markets through Business Training for Female Entrepreneurs: A Market-Level Randomized Experiment in Kenya," IZA Discussion Papers 10615, Institute for the Study of Labor (IZA).
    4. Mayra Buvinic & Megan O’Donnell, 2017. "Gender Matters in Economic Empowerment Interventions: A Research Review," Working Papers id:11926, eSocialSciences.
    5. Beam, Emily A. & Hyman, Joshua & Theoharides, Caroline, 2017. "The Relative Returns to Education, Experience, and Attractiveness for Young Workers," IZA Discussion Papers 10537, Institute for the Study of Labor (IZA).
    6. Atonu Rabbani, 2017. "Can Leaders Promote Better Health Behavior? Learning from a Sanitation and Hygiene Communication Experiment in Rural Bangladesh," Working Papers id:11904, eSocialSciences.
    7. repec:eee:socmed:v:220:y:2019:i:c:p:292-300 is not listed on IDEAS
    8. repec:iza:izawol:journl:y:2018:n:429 is not listed on IDEAS
    9. Lucia Foster & Patrice Norman, 2015. "The Annual Survey of Entrepreneurs: An Introduction," Working Papers 15-40r, Center for Economic Studies, U.S. Census Bureau.
    10. repec:cen:wpaper:15-40 is not listed on IDEAS
    11. Macchiavello, Rocco & Menzel, Andreas & Rabbani, Atonu & Woodruff, Christopher, 2015. "Challenges of Change: An Experiment Training Women to Manage in the Bangladeshi Garment Sector," Economic Research Papers 269725, University of Warwick - Department of Economics.
    12. David McKenzie, 2017. "Identifying and Spurring High-Growth Entrepreneurship: Experimental Evidence from a Business Plan Competition," American Economic Review, American Economic Association, vol. 107(8), pages 2278-2307, August.
    13. repec:gam:jscscx:v:7:y:2018:i:12:p:248-:d:185515 is not listed on IDEAS
    14. Dhaniel Ilyas, 2017. "Preliminary Finding of Small and Micro Firms Resilience in Indonesia," LPEM FEBUI Working Papers 201715, LPEM, Faculty of Economics and Business, University of Indonesia, revised Dec 2017.

    More about this item

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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