Do Interventions Targeted at Micro-Entrepreneurs …

1 DISCUSSION PAPER SERIESF orschungsinstitut zur Zukunft der ArbeitInstitute for the Study of Labor Do Interventions Targeted at Micro-Entrepreneurs and Small and Medium-Sized Firms Create Jobs?A Systematic Review of the Evidence forLow and Middle Income CountriesIZA DP No. 8193 May 2014 Michael GrimmAnna Luisa Paffhausen Do Interventions Targeted at Micro-Entrepreneurs and Small and Medium-Sized Firms Create Jobs? A Systematic Review of the Evidence for Low and Middle Income Countries Michael Grimm University of Passau, Erasmus University Rotterdam and IZA Anna Luisa Paffhausen University of Passau Discussion Paper No. 8193 May 2014 IZA Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 E-mail: Any opinions expressed here are those of the author(s) and not those of IZA.

2 Research published in this series may include views on policy, but the institute itself takes no institutional policy positions. The IZA research network is committed to the IZA Guiding Principles of Research Integrity. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program.

3 IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. IZA Discussion Paper No. 8193 May 2014 ABSTRACT Do Interventions Targeted at Micro-Entrepreneurs and Small and Medium-Sized Firms Create Jobs? A Systematic Review of the Evidence for Low and Middle Income Countries* Worldwide 600 million jobs are needed over the next 15 years to keep employment rates at their current level.

4 Governments, non-governmental organizations and donors spend on Targeted programs and broader policies to enhance employment creation and the creation of new firms. Because most employment in low and middle income countries is in micro , small and medium-sized enterprises, these firms are especially Targeted by such Interventions . Despite these efforts, not much is known about which of these Interventions are really effective and under which conditions particular Interventions work. This systematic review synthesizes the existing evidence on the impact of these programs. Overall the review shows that creating employment is a very complex challenge.

5 Many conditions have to be met before Interventions in favor of individual enterprises do not only improve business practices and performance but also lead to additional jobs. A striking finding is that the study design matters for the impacts found; randomized controlled trials find systematically smaller effects than quasi-experimental studies. A significant shortcoming of the literature is that almost nothing is known about long term effects and cost effectiveness. JEL Classification: D22, G21, J21, O10 Keywords: employment, active labor market policy, firm creation, micro , small and medium sized firms, impact evaluations, systematic review Corresponding author: Michael Grimm University of Passau Innstrasse 29 94032 Passau Germany E-mail: * Financial support from the KfW - Development Bank is gratefully acknowledged.

6 We thank in particular Eva Terberger, Christian Sch nhofen, Martin Dorschel, Jochen Kluve, Peter Knorringa and Ruerd Ruben for valuable suggestions and comments. Moreover, we thank participants at the WIDER conference on Inclusive Growth in Africa held in September 2013 in Helsinki, at the IZA/World Bank Conference on Employment and Development held in August 2013 in Bonn and at special seminars at the Operations Evaluation Department of the Dutch Ministry of Foreign Affairs and the German Federal Ministry of Economic Cooperation and Development for helpful comments. Excellent research assistance has been provided by Stephan H ller, Erwin Winkler, Georg Seidl and Hendrik Kampert.

7 2 1. Introduction Creating new jobs and in particular good jobs , jobs in high productivity sectors and offering decent working conditions, is one of the major challenges most low and middle income countries face. According to the 2013 World Development Report on jobs, worldwide 600 million jobs are needed over the next 15 years to keep employment rates at their current level (World Bank, 2012). Governments, non-governmental organizations and donors spend large amounts of money for Targeted programs and broader policies to enhance employment creation and the creation of new firms. Because most employment in low- and middle income countries is in micro , small and medium-sized enterprises (MSMEs) (see Ayyagari et al.)

8 , 2011), these firms are often Targeted by such Interventions . Typical Interventions include the provision of finance and financial services, entrepreneurship training, business support services, wage subsidies and measures that transform the business environment for these firms. Despite these efforts, not much is known about which of these Interventions are really effective, or, more importantly, under which conditions particular Interventions work. With the trend to conduct rigorous impact evaluations of development Interventions , many researchers have started to look more closely at programs and policies that are Targeted at MSMEs. This systematic review synthesizes the existing evidence on the impact of these programs and extracts the main lessons.

9 The review reveals several factors and design features likely to increase the probability of Interventions aimed at enhancing employment being successful. However, the review also still reveals important knowledge gaps. This stands in sharp contrast to the high number of programs and projects that claim to know how to create jobs and on which considerable funds are being spent. We focus on the following five policy areas: (i) access to finance, (ii) entrepreneurship training, (iii) business development services, (iv) wage subsidies, and (v) improvements to the business environment ( registration procedures). There are many other Interventions and policies that may have employment effects such as improvements in energy supply, road construction or trade and exchange rate policies, but given that such policies are typically not Targeted it is hard to find a counterfactual and to establish causal evidence.

10 Therefore such Interventions and policies are not considered in this review. Our work builds on a few earlier reviews which however have not focused specifically on employment creation in MSMEs in developing countries or considered only a sub-set of the policies we focus on. McKenzie and Woodruff (2014) review the quality and findings from business training and entrepreneurship evaluations. They focus in particular on statistical power, measurement issues and attrition. Across the reviewed studies, they find only modest impacts on survivorship but stronger impacts on business creation. Bruhn and McKenzie (2013) review the rigorous evidence on entry regulation and formalization of microenterprises.