The abstract of a study for the World Bank by economist David J. McKenzie reads
Almost all firms in developing countries have fewer than 10 workers, with the modal firm consisting of just the owner. Are there potential high-growth entrepreneurs with the ability to grow their firms beyond this size? And, if so, can public policy help alleviate the constraints that prevent these entrepreneurs from doing so? A large-scale national business plan competition in Nigeria is used to help provide evidence on these two questions. The competition was launched with much fanfare, and attracted almost 24,000 entrants. Random assignment was used to select some of the winners from a pool of semi-finalists, with US$36 million in randomly allocated grant funding providing each winner with an average of almost US$50,000. Surveys tracking applicants over three years show that winning the business plan competition leads to greater firm entry, higher survival of existing businesses, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having 10 or more workers. These effects appear to occur largely through the grants enabling firms to purchase more capital and hire more labor.
Pointer ultimately from Tyler Cowen. My cynical thoughts:
1. How does one keep corruption out of such a program?
2. Does this imply that there is an unexploited profit opportunity in lending to would-be entrepreneurs in underdeveloped countries? Note that the money the firms received seems to have been in the form of grants, not loans.
Having just begun a read of the “program:”
“1. How does one keep corruption out of such a program?”
Well, not completely perhaps: but by by-passing the state and making direct **private** grants, that “cost” is reduced (the good does not become hostage to the perfect).
#2 there may not be “profit” opportunities, but there are political opportunities. Consider what happened to “micro credit (Grameen, e.g.).
What we are seeing here is one facet of the attempts of the World Bank to shift from use of States to justify its programs to other approaches in the private sectors.
Governments will always take control of any program which distributes money. The program cited by the World Bank may be too new for this result.
The US program of government loans to environmental companies like Solyndra has been a disaster. Handing out money in Nigeria cannot work. Nigeria has a corrupt government having total control.
If the money is not stolen up front, the successful businesses will be expropriated through required political contributions or worse.
These grants are really quite large. In terms of the size of the grant to per capita income this is like giving out ~$400,000 grants to US citizens. To make this a large scale program (offerred to 1% of the population) you are talking 7-8% of GDP. What happens when you have to start paying for something that big?
Is it really a surprise that a grant this large lead to medium term success? How bad would you have to be at business to turn a $400,000 gift in the US into bankruptcy in less than 3 years?
Just another pro-inequality program.