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

Abstract

We study how the quality of local business environments help explain growth outcomes of micro and small enterprise microfinance clients by drawing on long-term nationwide administrative data and a policy shock in Cambodia. The staggered launch of Special Economic Zones, which we link to positive shocks to the business environment on both the demand side and supply side, leads to significantly increased employment in MSEs located in these SEZs, compared to enterprises in contextually similar districts but that are unexposed to an SEZ. Key channels explaining the improved growth outcomes include expanded access to external markets for the enterprises’ goods and services, more dynamic labour environments, and improved credit terms and conditions. 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 significantly benefit from opportunities provided by local business environments and that governments and lenders can play active roles in facilitating improved outcomes for their MSEs.

Keywords: enterprise growth, microfinance, business environments, policy shock

JEL Classification: D22, G21, O12, R1