The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico

We test whether managerial human capital has a first order effect on the performance and growth of small enterprises in emerging markets. In a randomized control trial inPuebla, Mexico, we randomly assigned 150 out of 432 small and medium size enterprises to receive subsidized consulting services, while the remaining 267 enterprises served as a control group that did not receive any subsidized training. Treatment enterprises were matched with one of nine local consulting firms and met with their consultants once a week for four hours over a one year period. Results from a follow-up survey, conducted after the intervention, show that the consulting services had a large impact on the performance of the enterprises in the treatment group: monthly sales went up by about 80 percent; similarly, profits and productivity increased by 120 percent compared to the control group. We also see a significant increase in the entrepreneurial spirit index for the treatment group, a set of questions designed to illicit the SME owners’ confidence in their ability to manage their business and deal with any future difficulties. However, we do not find any significant increase in the number of workers employed in the treatment group.

That is the abstract of the paper "The Impact of Consulting Services on Small and Medium Enterprises: Evidence from a Randomized Trial in Mexico" by Bruhn, Karlan, and Scoar (February 2012). 

From the conclusions:

Our results suggest that lack of managerial skills constitutes a significant constraint to firm growth and the ability of micro, small, and medium enterprises to withstand economic shocks. The effects of the study are large. On average we find an increase in sales and profits of 80 and 120 percent, respectively, for the treatment group compared to the control group. However, we believe that the magnitude of the impact is not unreasonable given that many enterprises in the sample had not received any formal management training prior to our intervention. The sales and productivity improvements seem to be brought about primarily by improvements in marketing and financial controls. Consultants also appear to have helped enterprises to set clear goals and define a strategy for how to achieve these goals.

In contrast, we do not see any significant impact on employment generation or the number of employees. 

HT: Marcus Dejardin. 

Why SMEs don't go public?

This is an interesting paper (by Caccavaio et al) on SMEs in Italy. The authors claim in the concluding remarks:

It is well known that the size of Italian firms is small if compared with the size of firms operating in other industrialized countries. This study confirms the intuition that the Italian economic system does not provide firms with the right incentives to grow: more precisely, this study suggests that Italian entrepreneurs keep their firms small in order to rationally respond to a set of distortive incentives provided by legislation (for example, about labor market and unions), regulation (for example, about accounting standards and tax procedures), and industrial policies.

Some robust findings:

1. Both the firms and the institutional investors recognize the importance of being listed on regulated markets to favor investments and to improve international visibility; however, both recognize that listing is costly.

2. Institutional investors think that the major obstacles to the access of SMEs to regulated markets are:  

i. The fear of entrepreneurs of losing total control over firms;  

ii. The willingness of entrepreneurs of retaining informal managerial practices; 

iii. The lack of financial literacy; 

iv. Both the firms and the institutional investors think that there is no need of having many SME-dedicated markets;  

3. Both the firms and the institutional investors claim that the Italian economic system lacks stability in terms of regulation, thus making long term strategies difficult to be implemented.

In Latin America we have so much in common with countries like Italy and Spain that it seems these results apply also to the SMEs in the LA region. 

Basic managerial training and productivity

The vast majority of micro and small enterprises (MSEs) in developing countries are located in industrial clusters, and the majority of such clusters have yet to see their growth take off. The performance of MSE clusters is especially low in Sub-Saharan Africa. While existing studies often attribute the poor performance to factors outside firms, problems within firms are seldom scrutinized. In fact, entrepreneurs in these clusters are unfamiliar with standard business practices. Based on a randomized experiment in Ghana, this study demonstrates that basic-level management training improves business practices and performance.

That is the abstract of the paper "How Can Micro and Small Enterprises in Sub-Saharan Africa Become More Productive? The Impacts of Experimental Basic Managerial Training" by Mano et al. It was published in World Development. Draft. 

Small and medium enterprises in Latin America

Confidence grows . . .