Determinants and Dynamics of Business Aspirations: Evidence from Small-scale Entrepreneurs in an Emerging Market

Abstract

Small-scale entrepreneurs are ubiquitous in emerging market economies, yet very few graduate to become larger businesses. We ask whether such entrepreneurs even aspire to grow, and if so, on which dimensions of the business? What factors influence these aspirations, how realistic are they, and do entrepreneurs dynamically update them based on realized outcomes? Using a unique panel data set of small-scale retailers in Indonesia, we show that the average business has strong short- and long-term aspirations for growth in shop size, number of employees, number of customers, and sales. Yet, more than half of the businesses report no aspirations for growth in the next 12 months, and 16 percent fail to imagine an ideal business over the long-term. Entrepreneurs with low profits, business skills, and agency beliefs, as well as those who are older, female, and less educated have significantly lower aspirations. Analysis from a year later shows that most entrepreneurs fail to set realistic aspirations at baseline, but significantly adjust their aspirations to realistic levels with realized outcomes. The analysis also shows baseline aspirations are a strong predictor of measures of business expansion and innovation, as well as performance outcomes a year later.

Keywords: Aspirations, adaptive learning, micro-enterprises, innovation, small business growth, firm performance

JEL Classification: O12; L26; M20; O17; M50