Easy Doesn't Do It: Initial Conditions, Early Strategy Selection, and Small Firm Performance
55 Pages Posted: 13 Feb 2024
Date Written: January 23, 2024
Abstract
This paper analyzes the impact of initial conditions on firm strategy selection and performance amongst small firms in emerging markets. Leveraging a proprietary dataset from a minibus taxi financier in South Africa, I estimate the impact of lower than expected fuel prices in the first three months of operation on a critical strategic choice: asset utilization. Firms receiving this fuel shock are likelier to operate fewer days, drive fewer kilometers, and work fewer hours. This pattern persists long after the firm’s founding and is linked to worse loan repayment. This result challenges the assumption that small marginal firms always benefit from easier founding conditions. Qualitative and survey evidence suggest that firms determine their profitability frontier early in their lifecycle, and lower cost pressure might induce them to adopt less profitable strategies. The results suggest incentivizing small firms to adopt more profitable strategies early on might positively influence their long-term survival.
Keywords: Entrepreneurship, Emerging Markets, Strategy Selection, Firm Performance
JEL Classification: D22, M13, O17
Suggested Citation: Suggested Citation