Training Entrepreneurs: Issue 3

There is a wide range of business and management practices that most firms benefit from adopting. For small firms, these include separating household and business accounts, keeping basic records, monitoring inventory, offering discounts and promotions to attract customers, and budgeting and planning. As firms grow, it is also desirable to have human resource practices that reward good employees and improve or remove less productive employees; processes for quality control and basic lean manufacturing; and practices to set and communicate production targets and monitor performance towards these targets. Systematic measurement of these types of practices across a range of countries and firm types documents that firms using better management practices are more productive and grow faster (Bloom and van Reenen 2010, McKenzie and Woodruff 2017).

Despite the potential benefits, many firms fail to adopt better business and management practices. Business training and consulting programmes are a popular approach to improving business practices. McKenzie (2021) notes that, although numbers are fragmentary and incomplete, at least US$1 billion is spent annually training at least 4-to-5 million potential and existing entrepreneurs in developing countries. This raises the questions of whether this money is well spent, and whether the efficacy of these training programmes can be improved.

A review of early randomised evaluations of entrepreneurship training programmes found the evidence for their effectiveness to be underwhelming (McKenzie and Woodruff 2013). Most of these evaluations found that training leads to some improvement in business practices, but failed to find statistically significant effects on business profits or sales. While this was interpreted by some as showing that business training does not work, many of these studies used relatively small samples and therefore lacked the statistical power necessary to rule out sizable positive (or negative) impacts of training. Additional evaluations and a wave of experimentation with new approaches to training stimulated by this first review have produced a somewhat more positive picture. McKenzie (2021) uses a more formal meta-analysis and finds that traditional training programmes have a modest but significant effect on profits and sales of firms assigned to receive training. Given the costs of typical programmes, in many cases, firms earn enough within two years to recoup the full cost of training. We might still worry that the effects McKenzie finds are an upper bound on the effects of training programmes usually implemented as policy. Researchers often select the best providers and are careful to make sure that the intervention is implemented carefully, implying that small-scale experiments may not replicate in larger rollouts (Berge et al. 2012, Vivalt 2019). Moreover, with few exceptions (e.g. McKenzie and Puerto 2021), the returns estimated from evaluations are almost always private rather than social returns, as the experiments are not designed to measure spillovers to non-sample firms. Nevertheless, the finding of positive private returns would be a first step to understanding which types of training programmes might provide positive social investments.

How should training be done to ensure it is effective and scalable? There is enormous heterogeneity in the types of entrepreneurs and firms, and different approaches are likely to be needed for different firm types. At one end, many microfinance organisations and governments interested in poverty alleviation aim to help poor people set up firms that can provide them with a basic livelihood, or help subsistence firm owners earn slightly more in their businesses. Next, there is a range of established small existing businesses that want to increase profits. A separate category are high-growth start-ups aiming to grow rapidly and potentially attract outside funding. Finally, there are small and medium enterprises that governments aim to help to improve productivity and increase employment. The right approach to building entrepreneurial skills is likely to differ across these different types of firms; even for a given firm type, there is considerable heterogeneity in the length and content of training programmes.

This Lit aims to summarise the growing evidence base for these different approaches. For each approach, it discusses what a typical programme aims to do, describes a prototypical study using this approach, and then aims to summarise what we know about the effectiveness of such an approach to entrepreneurial training, and where gaps remain. As a living document, we hope that over time these gaps will be filled as newer studies are completed and the evidence-base grows.

References

Bloom, N and J van Reenen (2010), “Why do management practices differ across firms and countries?”, Journal of Economic Perspectives, 24(1): 203-224.

Berge, L-I O, K Bjorvatn, K Juniwaty and B Tungodden (2012), “Business training in Tanzania: From research-driven experiment to local implementation”, Journal of African Economies, 21(5): 808-827.

McKenzie, D and C Woodruff (2013), “What are we learning from business training and entrepreneurship evaluations around the developing world?”, The World Bank Research Observer, 29(1): 48–82.

McKenzie, D and C Woodruff (2017), “Business practices in small firms in developing countries”, Management Science, 63(9): 2967-2981.

McKenzie, D (2021), “Small Business Training to Improve Management Practices in Developing Countries: Re-assessing the evidence for “training doesn’t work””, Oxford Review of Economic Policy, 37(2): 276-301.

McKenzie, D and W Puerto (2021), “Growing Markets through Business Training for Female Entrepreneurs: A Market-Level Randomized Experiment in Kenya”, American Economic Journal: Applied Economics, 13(2): 297-332.

Vivalt, E (2019), “How much can we generalize from impact evaluations?”, Journal of the European Economic Association, 18(6): 3045-89.