Developing economies often have high numbers of low-capital enterprises that manufacture similar products and are located in close proximity to one another. While industrial clusters of very small firms provide some economic benefits, such as reducing input costs, firms operating in these clusters often operate inefficiently, use limited capital, do not consolidate or differentiate, and fail to grow significantly. Though various factors constrain the growth of small firms, several prominent impediments to growth are a lack of access to physical and human capital and access to markets.
A body of research indicates that these factors matter, and that alleviating constraints increases the productivity and profitability of small businesses. For example, in randomized controlled trials in Sri Lanka and Mexico, capital grants to small enterprises were very effective in boosting profits. The marginal return to capital in these studies ranged from 60% to 250%, with larger effects on more capital-constrained businesses. (McKenzie and Woodruff, 2008 ; de Mel et al., 2008). Even 5 years post-grant, treated Sri Lankan businesses had significantly higher profits relative to control groups and were more likely to have survived (de Mel et all., 2012).
Lack of necessary skills may also limit small business growth. Impact evaluations testing the effects of teaching business skills to entrepreneurs have generally shown moderate changes in adoption of business practices but uncertain effects on business outcomes (Karlan and Valdivia, 2010 ; Drexler et. al., 2011 ; McKenzie and Woodruff, 2012). The effects of non-business skills training have been more positive, with experiments showing large increases in participant wages after a variety of practical job skills trainings (Attanasio et al., 2011; Card et al., 2011)
Access to markets is another limiting factor for small businesses. Kenyan manufacturers we interviewed repeatedly referenced finding new customers as a main concern, expressed high levels of interest in marketing programs, and reported producing well below capacity. Evidence from other countries shows that enhanced market access drives improved quality and better performance for small businesses.
Though results from this research offer the promise of increased innovation, scale and success for small businesses, the translation of research into feasible and practical models for creating benefits has lagged behind. In particular, it is necessary to understand the appropriate combinations of support to small-scale entrepreneurs to maximize benefits and how to package and deliver that support in a financially sustainable manner that permits scale – this requires further experimentation.
To augment prior research we will evaluate the services offered by WorkShop – a social enterprise launching in Nairobi that is currently being incubated within the Busara Center for Behavioral Economics. WorkShop offers several services related to the constraints faced by small producers:
• Capital: WorkShop offers producers access to quality, industrial grade tools
• Human capital: WorkShop offers training (on design, production best practices and business management)
• Marketing: in addition to marketing training, WorkShop brands and markets products produced by independent producers