PSD Blog - The World Bank Group

The Curious Indian Entrepreneur

I attended a session from yesterday's Entrepreneurship and Growth Conference on "Indian Entrepreneurial Success in the United States, Canada, and the United Kingdom". RAND corporation's Krishna B Kumar attempted to explain the extraordinary successes of Indian expatriate entrepreneurs in these three countries, arguing that much can be attributed to observable differences such as education, family ties, and choice of sector.

In the United States, the typical Indian entrepreneur has an average business income that is substantially higher than the national average and is higher than any other immigrant group. Net annual income in the United States is 60 percent higher than the overall average. Meanwhile, in Canada and the UK, Indian entrepreneurs make similar incomes as other immigrants, but employ more employees than almost any other ethnic group.

What explains these differences? The authors attribute around 50 percent of this success to higher rates of education. For example, in the United States 68 percent of Indians have college degrees, which is twice the rate for whites. This is also true for Canada, where immigrants are largely admitted on a points based system that rewards higher education.

World Bank Events Shout-Out

The World Bank and IFC are featuring several excellent events this week that are well-worth attending.

On Thursday and Friday, a Conference on Entrepreneurship and Growth will be held in at the World Bank's main headquarters. Topics range from "Promoting Business Formalization and Growth" to "Firm Dynamics and Size". Dozens of speakers will be featured, from both inside and outside the Bank.

Next, Infoshop will be hosting a discussion this Thursday with Robert Skidelsky, who has just finished his latest book, Keynes: The return of the master. I am especially fond of Skidelsky, and look forward to hearing his thoughts on how Keynesianism is back with a vengeance as a result of the financial crisis. The conversation begins at 12:30pm EST.

All events are open to the public. If you are not in the Washington area or are unable to attend, fear not! I will be Tweeting highlights from each event as they unfold. (If you missed this morning's conference on achieving scale in entrepreneurship, you can view a summary on Twitter).

How relevant is the location of informal businesses for policy?

A distinction is often made between informal firms operating within, versus outside, household premises. In some sense, the former represent the quintessential informal firms beset with a number of problems, such as low efficiency, etc. Policies aimed at bringing informal firms into the fold of the formal sector could therefore be expected to have a bigger impact when targeted toward informal firms operating within, rather than outside, the household.

A survey of informal firms in Ivory Coast, Madagascar and Mauritius conducted by Enterprise Surveys provides some support to this idea. The survey shows that 81 percent of the firms in Ivory Coast, 72 percent in Madagascar and 49 percent in Mauritius operate within household premises. The figures below show the percentage of firms that report various benefits from registering. Overall, a larger percentage of firms located within household premises expect the various benefits from registration. These preliminary findings suggest that understanding the types of informal firms that operate within and outside household premises could be an interesting area for future research.

 

Small businesses and the case for safe savings

Writing in this blog last July, Anushka Thewarapperuma penned a favorable review of a new book by Daryl Collins and Jonathan Morduch on how people living on less than $2/day manage their financial lives. The authors discovered that the world's poor are quite good at managing their finances:

The poorest people on earth engage in the sort of sophisticated money management that would make Chuck Schwab proud.

Thewarapperuma ended her post by noting that Collins "will be coming out soon with a pilot study using the same methodology of financial diaries, this time for small businesses."

Flash-forward to today, and Collins is back with her new study, commissioned by FinMark Trust, which gathers cash flow and qualitative information for small businesses in South Africa. The report, which surveyes 26 businesses in Langa and Nyanga townships across a range of industries, makes some initial conclusions about the financial services and training needs of these small enterprises, including:

Improving Credit in Armenia

The 2006 and 2007 Doing Business reports both found that Armenia has been reforming in the area of credit. Armenian lenders can now rely on a credit registry when deciding on loan applications. But have these reforms really had an impact?

The recently-released enterprise surveys country note on Running a Business in Armenia shows that these reforms have indeed resulted in improved access to credit, which in turn is making it easier for Armenian firms to operate efficiently.

Both prepaid sales and sales on credit nearly doubled in recent years, from 15 to 16 percent in 2005 to 30 percent in 2009. Furthermore, the figure below shows that the value of collateral (expressed as a percentage of the loan amount) necessary to secure a loan has decreased substantially across all sectors of the economy.

 

Sometimes simple really is best

Editor's Note: Alan Johnson is a Senior Private Sector Advisor in the World Bank's Investment Climate Advisory Services Group

I’m always interested in situations where tools that are aimed at developing countries are applied to their high income counterparts. A recent post in the New York Times’ small business blog provides an excellent example. The author, Scott Shane, refers to the 2008 World Bank Group Entrepreneurship Survey, which gathers internationally comparable data on business creation, and applies it to the United States.

The results of the survey show that, after accounting for differences in per capita income, countries with easier and less expensive procedures for registering new businesses have higher rates of new business creation. This conclusion is reached by examining the relationship between the number of new business registrations (entry rate density) and the “ease of starting a business” indicator in the Doing Business report.

Informal Sector Comparison: Manufacturing vs Services

I have been comparing the differences between manufacturing and services firms in the informal or unregistered sector. There is a rich literature on how and why these firms differ, but it is based on firms in the formal or registered sector. It’s a moot point whether differences between manufacturing and service firms in the formal sector also hold for the informal sector. For example, differences in scale economies between service and manufacturing firms are known to be important for the formal sector, but this is not immediately obvious when comparing these firms in the informal sector.

“Unwilling” Entrepreneurs

The common perception of the informal sector is that unregistered businesses are not as efficient as registered or formal businesses. One proposed reason for this is that, by not being registered, informal businesses face severe hardships in accessing finance, markets, public services and government programs. Hence, the usual policy response to informality is simple: try and encourage informal businesses to register.

However, another problem in regards to informal firms may be the underlying motivation for starting the business in the first place. There are many informal businesses that are started not because the owner sees a good business opportunity, but because he or she cannot find a satisfactory job (“unwilling” entrepreneurs). A survey of informal firms conducted by Enterprise Surveys shows that 46 percent of informal firms in Ivory Coast, 39 percent in Madagascar and 31 percent in Mauritius were started because the (largest) owner could not find alternative employment opportunities.

Access to finance: Mexico edition

The World Bank has released its latest Finance and PSD Impact Newsletter. The paper looks at the impact of large-scale bank expansion in Mexico, evaluating the effects of increased access to finance for low-income borrowers.

The authors analyze the expansion of Banco Aztecta in 2002. The bank opened over 800 new branches inside the consumer goods retail stores of its parent company, Grupo Elektra. These new outlets catered primarily to low and middle income clients. The authors find a clear correlation between the bank's expansion and income growth among lower income groups.

The key findings to the report include:

1. Bank openings increased the proportion of working age adults who own informal business by 7.6 percent
2. The opening led to a higher proportion of women working as wage-earners
3. As a result of the expansion, female incomes increased by 9 percent and male incomes rose by 5 percent

The authors also note what the bank openings did not achieve: no effects on the establishment of formal businesses, and no increases in female-owned informal businesses.

Men benefit from greater financial access by starting more informal businesses; women seem to find more work, and earn higher wages. With respect to women, it would be interesting to know if these findings are the result of women borrowing less, or because they are using their borrowings to fund other (non-business) activities.

Belarusian Business Reform: Less Time with the Taxman

Has the regulatory burden for Belarusian businesses decreased?  According to a new World Bank Country Note on Running a Business in Belarus, progress has indeed been made over time. For example, the number of visits or required meetings with tax officials has significantly decreased from 2005 to 2008: from 3.2 to just 1 visit per year. Also, the percentage of firms reporting incidence of bribes with these tax officials decreased as well.

Comparing the firm-level data obtained in Belarus to similar Enterprise Survey data in 28 other Eastern Europe and Central Asia (ECA) countries yields two interesting statistics as discussed in the Note:

1. Belarusian firms have the highest proportion of government or state ownership in private firms, on average 10 percent.
2. Belarus stands out in the region as having high percentages of female participation in both firm ownership (53%) and in the labor force