Preparing fertile ground: How does the quality of local business environments affect the growth of MSEs?

Abstract

We study how the quality of local business environments helps explain growth outcomes of micro and small enterprise microfinance clients by drawing on long-term nationwide administrative data and a natural experiment in Cambodia. The staggered launch of Special Economic Zones, used as a positive shock, leads to significantly increased employment in MSEs located in these SEZs, compared to client enterprises in contextually similar districts but that are unexposed to an SEZ. This holds for both micro and small enterprises, albeit the effect is more pronounced for the latter. Moreover, business environment-level factors are found to be more predictive for MSE growth than individual- or business-level characteristics. To broaden the relevance of our findings, we combine data from prominent empirical studies on microfinance and demonstrate how related business conditions from the enterprise growth literature help explain differences in client business outcomes found in their results. Policy implications are that a key segment of microfinance borrowers can be responsive to opportunities provided by local business environments and that national and subnational governments can play active roles in facilitating improved business framework conditions for their MSEs.

Keywords: enterprise growth, microfinance, business environments, natural experiment

JEL Classification: D22, G21, O12, R1