Finance and Private Sector Development

Framework

The Framework

The Trade and Competitiveness (T&C) agenda in DIME is structured to test and identify effective ways of increasing firms’ productivity through both efficiency gains and shifts in the production frontier. Efficiency gains are understood as changes in the production process to help firms move closer to the efficient production frontier. The two assumptions underlying suboptimal allocation of inputs are: (1) market imperfections and/or behavioral biases—such as misperception of returns associated with a given business practice, lack of motivation to adopt better production process (Gibbons and Henderson 2012; Nguyen and Nguyen 2016); and (2) organizational barriers that prevent firms from adopting new technologies (Atkin et al., forthcoming at QJE) and using inputs optimally. In this light, adoption of new technology is key to firms’ (and economic) growth.

In this context, technology change encompasses any shock in the production process that leads to higher output given the inputs available. That shock could be caused by, for instance, better trained employees, use of better managerial practices, use of cheap credit lines in credit-constrained firms, and business registration to access public services that are only made available to formal firms. Technology change and, thus, productivity growth go hand in hand with technology adoption. 

Shifts in the production frontier occur only when factors of production are already used optimally, and could result from improvements in business regulations, innovation, and infrastructure. It is worth mentioning that interventions aimed at moving out the production frontier are more difficult to evaluate with randomized controlled trials for two main reasons. First, regulation policies usually involve changes in the current legislation and such decisions are usually taken at higher levels and are not necessarily theoretically grounded. Second, those policies are highly likely to have general equilibrium effects (spillovers). 

The T&C Program

Some Background

Even though the T&C agenda in DIME accommodates both efficiency gains and growth to increase firms’ productivity, the projects in the pipeline tend to be more concentrated on testing policies aimed at raising firms’ productivity through the former. It hasn’t always been like that.

In 2010, DIME and the T&C Impact Program (now called ComPEL) at IFC co-organized the first IE workshop that focused on interventions to improve firm capabilities, such as matching grants and training programs. Several training programs were rigorously evaluated since then, but, almost all evaluations found null effects on jobs creation and firm productivity (McKenzie and Woodruff 2012). Nine matching-grants programs could not even be evaluated, because very few firms took up the program (Campos et al. 2013). We learnt that supply-side interventions should pay closer attention to constraints on the demand side, which can hinder intervention participation and, thus, adoption of new technologies. 

Three years later, in 2012, DIME and the T&C Impact Program co-organized a second T&C IE workshop. The objective was geared towards generating rigorous evidence on how to help/nudge small informal firms to formalize their business. The prevalent view was that reducing business registration costs (formalization) and simplifying tax were necessary conditions to the growth of small firms. The overwhelming evidence suggested that most small firms do not want to formalize their business, even when registration costs are fully subsidized.

Even among firms that do formalize, the impact on performance indicators (for example, sales and revenues) are either small or null (Bruhn and McKenzie 2014). The evidence generated by the rigorous evaluations led to a change in IFC’s approach towards small informal firms. It no longer sees formalization as stepping stone for growth of informal firms. The challenge now is how to make informal firms more productive. 

Current Portfolio

Improvements in the investment climate are still central to the Bank’s agenda, but the projects in T&C are now looking towards better understanding issues that are under firms’ control and beyond firms’ control, to better attack the constraints firms face to grow.

A good example on how to better tackle intervention participation while targeting supply is that of our IE in Brazil. Medium-sized firms will be randomly split to receive information, information plus training, and a placebo intervention. As evidence shows that take-up of training programs is low, this IE aims at measuring participation incentives. One group will be offered 40 percent subsidy on training costs in addition to information, while the second will be offered 80 percent subsidy plus information. Unlike most training programs, the training will be provided at firm location and consultants will pay weekly visits to monitor the adoption of good practices. In addition to testing the impact of different subsidy rates on training take-up, this design will help the implementing institution (a regional development bank) identify how much firms are willing to pay for a training program, but also if firms misperceive the actual returns.

Another example of how we can face firm growth constraints, is of another training-oriented IE, this time in Georgia. In this case, the training will focus on e-commerce and be offered to a random sample of small firms. This is to ensure that they have the basic skills to compete in the market and gain access to markets. However, to also address demand constraints, half of the treatment firms will then be randomly assigned to receive additional step-by-step trainings on product branding, marketing, and various other online services. Access will be granted through a self-selection process, where firms will have to reach a specific goal at the end of each level (for example,. receive ten online orders), before continuing to the next step. This competition type process aims at increasing the odds for firms to access a broader consumer market. The idea is to develop some record on service quality and measure if firms are more likely to receive new customer orders. 

Overall, the current T&C portfolio accounts for 26 IEs, distributed across 22 countries—nine in the preparation phase, 11 ongoing, and six completed. The total estimated budget is $14 million, of which 25 percent is funded through i2i. Over half the program (16 IEs) evaluates World Bank projects, representing a total of $243.7 million in loans. In terms of outputs, the T&C teams have produced six reports, eight working papers, and two publications. 

Going Forward

The lessons generated so far have substantially shaped the current T&C Global Practice (GP) agenda. A more holistic approach has been put in place since the last IE workshop, held in Istanbul in May 2015. It has been maturing since then. The ComPEL and DIME teams are pushing projects that were selected for funding support (September 2015 call) to take into account some of the cross-cutting themes that were identified as major issues in previous IEs such as: (i) potential spillovers occurring in the market; (ii) low take-up rate of input-based interventions; and (iii) the importance of improving intervention targeting.

Those cross-cutting issues gained momentum in the T&C program and played a critical role in the selection of projects that will attend the next IE workshop in Mexico City between February 27 and March 2, 2017. Three priority areas were recently identified by the T&C GP as strategic for knowledge generation through rigorous impact evaluations:

(1) Firms’ access to markets and spillovers

(2) Identification and support to high-growth small and medium-sized enterprises (SMEs)

(3) Regulatory efficiency.

There is an increasing focus on how to improve firms’ linkages to both consumers and larger firms in the global value-chain. Interventions will then have to look carefully at both supply (for example, training and matching grants) and demand-side/or institutional constraints (for example, technology adoption and diffusion, access to markets—business-to-business and business-to-consumers, and regulatory environment) to (i) maximize the chances for intervention success at least on implementation grounds, and (ii) increase the odds of policy effectiveness.