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Business Practices in Small Firms in Developing Countries

42 Pages Posted: 20 Apr 2016  

David J. McKenzie

World Bank - Development Research Group (DECRG); IZA Institute of Labor Economics

Christopher Woodruff

University of Warwick; Centre for Economic Policy Research (CEPR)

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Date Written: August 27, 2015

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? This study developed 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. This paper shows that variation in business practices explains as much of the variation in outcomes ? sales, profits, and labor productivity and total factor productivity ? 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 many measures of the owner?s human capital. The analysis finds that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices. Competition has less robust effects.

Keywords: Microenterprises, Cottage Industry

Suggested Citation

McKenzie, David J. and Woodruff, Christopher, Business Practices in Small Firms in Developing Countries (August 27, 2015). World Bank Policy Research Working Paper No. 7405. Available at SSRN: https://ssrn.com/abstract=2652534

David John McKenzie (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Christopher Woodruff

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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