Business Practices in Small Firms in Developing Countries

Abstract

Management has a large effect on the productivity of medium and large firms. But does management matter in micro and small firms, where the majority of the labor force in developing countries works? We develop 26 questions that measure business practices in marketing, stock-keeping, record-keeping, and financial planning. These questions have been administered in surveys in Bangladesh, Chile, Ghana, Kenya, Mexico, Nigeria, and Sri Lanka. We show that variation in business practices explains as much of the variation in outcomes—sales, profits, and labor productivity and total factor productivity—in microenterprises as in larger enterprises. Panel data from three countries indicate that better business practices predict higher survival rates and faster sales growth. The association of business practices with firm outcomes is robust to including numerous measures of the owner’s human capital. We find that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2016.2492 . This paper was accepted by Toby Stuart, entrepreneurship and innovation.