Financial inclusion is lauded as an important tool in the fight against poverty. One perceived benefit of financial inclusion is that it enables recipients to launch and grow income-generating microenterprises. Yet, impact studies of one of the most widely recognized methods of connecting the poor to credit- microfinance- suggest that the success of microloans in achieving enterprise growth is, on average, relatively small. More broadly, the failure of most microenterprises to grow into larger and more sustainable businesses has posed a major puzzle to the field of development economics.
In order to understand the relationship between the provision of microfinance and the heterogeneity in microenterprise growth - and to understand constraints on microenterprise transition to SME status - this project will combine a microfinance field experiment that yielded large growth results with detailed data on business histories and individual characteristics of business owners. This National Science Foundation grant will enable the study of microenterprise growth by implementing a research design that exploits exogenous variation introduced by (1) a liquidity crisis in the Indian microcredit sector, and experimental variation in (2) initial microenterprise size.
At the end of 2010, this client population faced a very significant liquidity crisis related to a sector-wide microfinance regulatory regime change. This change was sparked by a series of microfinance client distress accounts in South India. This liquidity crisis spread from South India to microfinance clients through the rest of the country.
The variation in microenterprise size was created by a field experiment conducted on microcredit loan clients in Kolkata, India between 2006 and 2007: control clients were required to begin repayment immediately in accordance with the standard contract, while treatment clients received a two-month grace period. Field et al. (forthcoming) show that clients experienced long-run heterogeneity in business size, with higher growth among treatment clients relative to the control group. The current study will resurvey all 845 clients in the experimental intervention to generate a seven-year longitudinal dataset.
The timing of this survey will allow the examination of whether and how business size dampens the impact of a liquidity crisis on subsequent business growth. Because the study population faced a significant aggregate liquidity crisis during this time period, this study will investigate how enterprise size influences ability to deal with financial shocks. Additionally, the original tracking data show that, over the past six years, a significant fraction of sample microenterprises witnessed substantial growth in capital value. Thus, in addition to examining the long-run impacts of the Field et al (forthcoming) intervention, and whether the aforementioned liquidity crisis differentially impacted business according to their initial size, the survey expansion will analyze the determinants of business growth from microenterprise towards SME status.
Lastly, this survey will have managerial and ownership information that will allow the comparison of business performance by gender. This evidence will complement previous research comparing male versus female entrepreneurial performance, and further it by examining whether intra-household division of enterprises (across genders) is itself endogenous. If yes, this would be an important caveat on any research that compares female- and male-owned businesses in order to isolate the impact of owner gender on business growth.
The results and conclusions of this study on constraints to microenterprise expansion will be relevant for India, but also other countries with similar socioeconomic profiles. With South Asia poised to enter a new regulatory regime, this work will also have significant implications for microfinance regulation in the region. The findings will help identify whether and how contract flexibility should be regulated, how much emphasis should be placed on client screening, and the role of interest rate subsidies. Finally, the results are also relevant for policy that seeks to increase the status of women, as it provides evidence on approaches that serve that goal, and will contribute to the current debate in academic literature on this topic.
