Finance & PSD Impact FEBRUARY 2017 The Lessons from DECFP Impact Evaluations ISSUE 41 Our latest note looks at how different types of business training programs can offer different pathways to SME profits. Pathways to Profits: Identifying Separate Channels of Business Growth through Business Training Stephen Anderson, Rajesh Chandy, and Bilal Zia Business training programs are popular policy businesses may benefit more from finance training as tools to foster growth among small entrepreneurs, yet these are the businesses with the operational size and their causal impacts are often weak, and the scale that can identify and benefit more from cost mechanisms by which such trainings can succeed to savings. improve outcomes are poorly understood. We address these shortcomings by studying a Data and Study Design comprehensive business training program that Our study utilizes a sample of 852 small spanned 10 weeks of client engagement, and businesses in the Cape Town area of South Africa distinguishing between two separate types of business through a randomized controlled trial. The study trainings - finance and marketing - in order to identify design comprises two treatment arms, with 266 mechanisms of impact. We distinguish between a businesses randomly assigned to finance training and “growth” focus in marketing training which 270 businesses to marketing training. A third group of emphasizes sales and revenue expansion, and an 316 businesses, the control arm, did not receive any “efficiency” focus in the finance training which training but was surveyed in the same manner as the emphasizes cost savings. treatment groups at baseline and follow-ups. The study measured outcomes at two intervals after the Research Hypotheses trainings, at six months (midline) and again at twelve Our research design allows us to test the months (endline). following four hypotheses: 1. Business owners with higher ‘marketing’ Results managerial capital will increase firm profits by The results show that businesses in either implementing more growth focused policies. training program increased their profits significantly 2. Business owners with higher ‘financial’ when compared to the control group at endline, as managerial capital will increase firm profits by shown in Figure 1. In contrast to previous literature, implementing more efficiency focused policies. the magnitude of these effects is quite large, with profit 3. Business owners with higher ‘marketing’ improvements in the range of 41-61 percent over the managerial capital will increase firm profits to a control group. These effects are substantively greater extent when these owners also have important as well – the increase in monthly profits in narrow prior exposure to different business either training group is within the salary range of a contexts. full-time employee in a regular job with a large South 4. Business owners with higher ‘financial’ African corporate, such as KFC or Shoprite. managerial capital will increase firm profits to a Despite these parallel improvements due to greater extent when these owners are also marketing and finance training, the mechanisms or operating more established firms. pathways of impact are markedly different. As Figure Hypotheses 1 and 2 relate to primary 1 further illustrates, the marketing training shifted firm pathways of impact related to the content of each owners’ focus onto business growth as seen in the training program, while hypotheses 3 and 4 refer to significant increases in sales and costs. These firms heterogeneous effects. Specifically, we predict that also expanded by hiring more employees. Further, entrepreneurs who have previously not been exposed Figure 2 shows that businesses assigned to marketing to different business environments may benefit more training were more likely to implement practices from marketing training as it offers them content that connected to top-line business growth (e.g. market was previously unknown through experience. research, marketing tactics, and sales tactics). Similarly, we predict that larger, more established Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) In contrast, finance training tended to shift a improvement in their output-input ratio (a marker for firm owner’s focus towards greater efficiency in the efficiency). These firms were also significantly more business through more finance/accounting activities likely to conduct practices focused on enhancing that economized on costs to boost profits. Specifically, business efficiency (e.g. financial tracking, financial Figure 1 shows that the profit gains for these analyzing, financial planning), as shown in Figure 2. businesses did not correspond to an increase in sales or costs, rather our results show a significant Figure 1: Business Outcomes 20000 *** ** Coefficient Values 15000 10000 ** Marketing Group ** 5000 Finance Group 0 Profits Sales Total Costs -5000 Outcomes Figure 2: Business Practices Aggreggate Scores *** 0.16 0.14 Coefficient Values 0.12 *** 0.1 0.08 ** Marketing Group 0.06 Finance Group 0.04 0.02 0 Marketing Business Finance Business Practices Practices Furthermore, the study results show that our hypotheses on heterogeneous treatment effects hold: marketing training was significantly more effective for businesses with lower prior business exposure, whereas finance training was significantly more effective for larger, more established businesses. Policy Implications The growth and prosperity of small businesses is vital for economic wellbeing and for generating jobs for a young and rapidly growing labor force in emerging market economies. Our findings show that managerial capital, delivered comprehensively and addressing the appropriate constraints, can help in these causes. Specifically, different types of businesses may benefit from different types of skills training, which can help shape and target future programs. For further reading see: Anderson, Stephen, Rajesh Chandy, and Bilal Zia. (2016) “Pathways to Profits: Identifying Separate Channels of Firm Growth through Business Training” World Bank Policy Research Working Paper no. 7774 Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact