Behavioral economics

I found this cool post at Marginal Economics over the weekend. It describes the Busara Centre of Behavioral Economics and what they offer development economics researchers through experiments in their lab. Now I'm just mailing this idea to myself: we need a lab like this for firm-level research in South Africa. Surveys are expensive and time consuming and we may also learn a lot about firms and entrepreneurs in an experimental setup.I know that Prof Wim Naudé at MsM has been thinking about this too.

Does anyone out there know more about firm-level research and the ways that experiments have been used to examine questions related to entrepreneurship, risk-return, deciding to export or to hire more people?

Industrial policy - identifying causal effects

Following up on the industrial policy story, I have come across an excellent blog post that sets the bar for research in this field. John van Reenen writes on the VoxEU blog about a recent CEPR paper by himself and co-authors (Criscuolo et al. 2012) on industrial policy in the U.K.

To evaluate the impact of providing incentives or subsidies to firms is difficult, since such programmes might finance activities that the firm would have undertaken anyway. In addition, looking at what happened to recipients relative to non-recipients, does not tell you what would have happened in the absence of government support. In their paper  they try to identify the causal impact of a ‘Regional Selective Assistance’-programme in the U.K. This programme offers investment subsidies to firms in depressed areas on condition they “create or safeguard employment”. The beauty is that they are able to examine every grant and manufacturing plant over a 20-year period and the experimental variation comes from EU-wide rules changes about state aid laws.

Their find that the scheme was successful at increasing investment.

 Manufacturing employment rose and these jobs seemed to come from lower unemployment rather than being “stolen” from unaffected regions and firms. A 10% investment subsidy causes about a 7% increase in employment, with about half of this arising from growth in existing plants and half from higher net entry.

Government grants to smaller firms (fewer than 150 workers) were effective in increasing investment and employment, but money given to larger firms had effectively zero effect. An explanation is that grants help remove the financial constraints faced by smaller firms, whereas larger firms have deeper pockets.

A possible downside of the scheme was lower aggregate productivity as the grants tended to go to less productive firms and had no impact on improving their productivity.

In South Africa, research like this is limited by the availability of data. Work by myself and Marianne Matthee (forthcoming in JEFS) found that access to finance matters for productivity:

Firms that indicate that access to finance is a constraint to their operations are typically small and less established. They are not able to allow their clients to pay after delivery and they have to pay for their purchases before or on delivery. These firms also hold a smaller stock of inventory. The firms that are constrained by access to finance are less likely to own a generator or use own transport to make shipments. These firms are also less likely to pay for security or to provide formal training. They have lower capacity utilisation and are unlikely to be exporters or to introduce new products in response to competition. All this indicate that they may be more vulnerable to shocks and competition as well as being weaker contributors to employment creation and growth.

The SBP also produces interesting SME research, but at the moment there is still too much talk about industrial policy, subsidies, incentives and the importance of SMEs and too little analysis.

SMMEs - more research needed

This week I came across  a number of mentions of the importance of small business and entrepreneurship for economic growth, employment creation etc. At the ERSA workshop policymakers (Treasury, dti) presented it as received wisdom that SME's create the jobs. There was also a discussion to and fro on Twitter:

RT @IvoVegter Don't "call for" an entrepreneurial revolution. Change laws. Lower taxes. Cut red tape. Make business failure less disastrous.
— Chris Hart (@chrishartZA) January 23, 2012

 
And finally, Grant Thornton released the results of their Q4 International Business Report. The survey shows that over-regulation is a key constraint to business expansion in South Africa. 

Academics, of course, would like to know more. The 2010 Grant Thornton report indicates that 350 firms are surveyed and they are mostly medium to large (100-399 workers). My questions are what kind of regulation is limiting growth? Is it ownership regulations, labour regulations, tax regulations, environmental regulations? Are the impacts different for smaller and larger firms, younger and older ones? Are there differences between exporters and non-exporters? Complying with regulations, or not having to comply with them, is often closely linked to paying bribes to corrupt officials, but the report makes no mention of whether firms also consider corruption when they are asked about regulations. What are the costs of regulation in terms of money and time and what do firms do to minimise them?

The last study that was able to answer these type of questions was Neil Rankin's 2006 paper: The regulatory environment and SMMEs. He described data from the 2003 World Bank Investment Climate Assessment (ICA) survey and provided a comprehensive analysis. He concludes that: 

Labour regulations are the most commonly mentioned regulatory constraint to growth. Exporting firms and those with a higher proportion of unskilled workers are more likely to mention labour regulations as a constraint than other types of firms. The response to labour market regulations differs by firm size. Larger firms are more likely to outsource or sub-contract whilst smaller firms are more likely to do nothing. It is unlikely that this is because they are not constrained by these regulations but rather because they lack the resources to respond.

Rankin also finds that small firms face higher costs in tax compliance, which is particularly worrying considering this week's reports that South African firms face high effective tax rates (2nd highest among the biggest 60 economies according to Mike Schussler's analysis).


The piont is that we need to know more about SME's, what obstacles they face and whether they generate growth and create employment. Following Neil's 2006 paper, using 2003 data, only the 2007 ICA survey contains enough information for detailed analysis, but that is rather dated already. What has happened since the global recession started in 2008? Now if only someone like Grant Thornton would involve a couple of academics in the next round of the survey...