Small and Medium Enterprises (SMEs) play an important role in income and employment generation in local economies, and SMEs account for a large share of businesses in low and income countries (LMICs). SMEs in LMICs are concentrated in activities which are described as unorganized or unregistered, or non-institutional. These SMEs have limited access to financial services from formal financial institutions, in particular, firms lack access to credits to meet their working and investment capital needs. Business owners often lack appropriate business and management training and face a shortage of skilled workers due to frictions in local labor markets. These constraints, which may not be mutually exclusive, can impede firm growth. The rich literature on SMEs has largely focused on financial capital or formal business training. This project fills an important gap in the literature by addressing these constraints simultaneously: the first component will combine access to credit and entrepreneurship training, the second component addresses local labor market friction by matching trained entrepreneurs with skilled workers through an apprenticeship program. These interventions are designed to increase firm growth and generate employment in the local economy.
We will implement a cluster randomized control trial (RCT) in the light engineering sector (LE) in Bangladesh. We will collaborate with BRAC and embed a randomized field experiment within BRAC’s newly funded large scale program, Pro-poor Growth of Rural Enterprises through Sustainable Skills-development (PROGRESS). PROGRESS seeks to develop a dynamic and competitive micro and cottage enterprises in the LE sector. This sector provides critical support to manufacturing, agricultural and construction industries by producing and repairing a wide range of products. The LE sector constitutes thousands of SMEs, employing more than 2 million workers and accounting for nearly 2% of the country’s GDP. This sector has emerged as a potential cost cutting sector by producing at least 50 percent of substitutes for imported items in several industries. Our findings will be highly policy relevant to the SMEs in the LE sector and also the broader Bangladeshi economy.
Training entrepreneurs and workers in the LE sector will potentially boost employment and firm growth for SMEs in Bangladesh. Through business training, business owners/managers can acquire networks, access informal mentoring, transfer technology, develop commercial entities, and acquire new and better management techniques. Existing data show that firms in the LE sector employ 2 to 5 workers, business owners and workers rely on limited training, and firms lack access to credit. This project seeks to provide new evidence on the impact of combining financial capital and business training on firm growth and employment generation in the local economy.
We will also examine the effectiveness of a novel sector-based training program on unemployed youth. Empirical evidence on the effectiveness of youth training programs and the impact of additional workers on SMEs is mixed. Job training programs may be ineffective due to skill mismatch between workers and the required skills in a sector or industry. To ensure demand for the skills that workers will develop, we propose an apprenticeship program that will match young workers to a randomly selected subset of LE firms in our entrepreneurship training program. Young workers in the job training program will be randomly offered a four-month apprenticeship program in trained LE firms to develop their vocational and non-cognitive skills. We will evaluate the effect of the apprenticeship program on firm growth through access to skilled workforce and workers’ skills and earnings.
This proposed project seeks to answer the following research questions:
1. What is the impact of combining access to financial capital and profitable information through formal and informal training on firm growth?
2. What is the role of local labor market frictions on firm growth?
3. What is the relative importance of financial capital and knowledge and labor market frictions?
4. What is the role of an apprenticeship program on workers’ labor market outcomes?
The field experiment will be implemented in 42 of the 64 districts across Bangladesh, which represent approximately 1200 market clusters for LE firms. Randomization will be conducted at the market cluster level. Among these clusters, the project will target 3000 LE firms and 5000 potential workers to be trained in rural and semi-urban areas where most LE firms are located. This project will use BRAC’s existing infrastructure and presence in the field to implement the project activities. This collaboration with BRAC will also provide us with access to other related documents and datasets which will be important to understand the socio-economic circumstances under which the proposed intervention will be most beneficial for SMEs. Firm and workers level surveys will be conducted to understand the productivity of workers and growth of firms.
The project will include three rounds of firm level and workers level surveys, including a baseline survey. We will measure the non-cognitive skills and conduct several experimental games such as risk-taking behaviour for workers and entrepreneurs. In addition, there will be several rounds of short phone surveys to understand the productivity of the firms and workers. The resulting database will contain a range of firm level characteristics, including employment, working conditions, production, cost and profits. The database will also contain workers’ socio-economic and demographic variables, including detailed information about the respondent’s personal characteristics, educational background, employment situation, health status, social and family relationship, income and expenditure, social network as well as their cognitive and non-cognitive skills. This dataset will be one of the largest matched firm and worker level panel surveys in Bangladesh or any other LMIC. The information from these surveys will shed light on both the demand side and supply side of the labor market in an LMIC and the matching process in the informal sector in an LMIC.
The project will involve active collaboration between BRAC and academics from LMICs and high income countries. It will also foster collaboration between a number of universities and research divisions of BRAC. The proposed project provides an opportunity for policy-relevant research since the main program, PROGRESS, will be carried out by BRAC with funding support from European Union. The funding requested for this project will only be used for firm and worker surveys and experimental games. Results of this study would inform policies related to entrepreneurship training in the informal sector and policies that will increase the effectiveness of business loans. In addition, results of this study would also inform labor and educational policies in LMICs, especially policies on job training programs and vocational education.