Dale Fickett

Context – Entrepreneurship for Development

The body of research covering SME’s role in promoting global development outcomes is

limited. For example, only 43 articles, of 7,482 published during 1990 – 2006 in “leading

management journals,” addressed entrepreneurship in emerging economies.i However,

development economists and practitioners are generally agreed on the following: a)

Approaches which engage the poor within the private sector offer a promising method for

harnessing competitive markets to achieve poverty alleviation outcomes; b) one such

approach is the establishment and growth of SMEs which engage the poor; and c) SMEs in

these contexts face a range of constraints as they grow and compete.ii In sum, the research

and practitioner community has established that some SME growth supports economies,

creates jobs, addresses gender disparities and alleviates poverty. These outcomes are most

often enabled when entrepreneurs deploy capital to seize exponential production

increases.iii The challenge is identifying the conditions in which the growth of

transformational SMEs catalyzes development outcomes; and enabling the policy and

practices which support competitive ecosystems that help those in most need.

ABC Bank – New Product Study

This “pro-poor” SME growth is often constricted by a combination of internal and/or

external barriers. Access to finance, access to the right talent and skill sets, access to

markets, and regulatory constraints – can each play a role in limiting the venture’s rate of

growth and ultimate scale achieved.iv When introduced, ABC’s new Accounts Receivable

product will provide a new avenue to access finance, but it may, or may not, catalyze

incremental SME growth which drives development outcomes for targeted beneficiaries. A

randomized control trial (RCT) provides the most robust evaluation possible to establish the

causality between the product introduction and development outcomes, as it establishes

the counterfactual (i.e. what would have happened had the loan not been issued), and thus

minimizing the assumptions required to draw ex post conclusions.)

Planning: To conduct the intended study several planning activities help focus efforts. First,

it is important to establish the key project stakeholders; exactly what they are looking to

understand; and whether current or previous RCTs have gained the required insight. v

“Viability of the product,” may indicate establishing the anticipated market penetration rate

for commercial purposes, or seeking to establish the extent of poverty alleviating impact.

Second, it is important to establish precise target beneficiaries and the desired goal. With a

poverty impact goal, ABC Bank may be as specific as, “Seek to maximize the marginal

income increases (MII) for those currently earning <$2.00/day PPP.” Third, given the

stakeholders agreed goal, a needs assessment framework (see figure 1) is used to establish

Needs Input Outputs Outcome Outcome Goal

People in poor

rural areas lack

income generating

opportunities.

There are credit-

worthy SMEs that

need loans to

increase

production and

returns.

ABC Bank provides

SME loans to

collateralize

Accounts

Receivable.

Flexible repayment

terms allow for use

as working capital,

and enable fixed

asset investments.

Fixed asset

investments

increase

production and

profitability.

These investments

sometimes create

work for the poor,

but may decrease

work available.

SMEs create work

that was not

previously

available.

Existing employees

and local low-wage

laborers are able

to do the work

created.

Low-wage earners

take new jobs or

take opportunities

for more hours/

greater wages.

They start earning

more income, and

continue to do the

work over time.

Increased

household income,

improved

economic choices,

and better levels

of health and

education.

Variables to Measure:

Number and value

of loans written.

SME investments

made.

SME days / hours

of new work

created.

MII for those who

were living on less

than $2/day.

Figure 1 – Illustrative Needs Assessment Framework

Dale Fickett

the causal links to be tested through the evaluation – testing whether the new product will

spur contributions towards the desired goal. Fourth, to gain clarity regarding other (perhaps

more cost-effective) potential interventions, a list of alternatives may be developed. The Theory of

Changevi techniques may be applied to illuminate other pathways to achieve the desired

goal. Alternatives to the new product may be developed narrowly, such as other products ABC Bank

may introduce; or it may defined so broadly as to include other stakeholder interventions, such as

government sponsored conditional cash transfer (CCT) programs. Lastly, a working hypothesis is

captured and refined through the planning process to describe the anticipated effect of the

product introduction, such as, “Those SMEs that receive the product and which operate within

industry sectors with the greatest labor density, will create the most additive work and the greatest

marginal income increases for those living on less than $2 PPP per day PPP.

Design: Building upon the planning stage decisions and the presumed needs assessment

logic in figure 1, the RCT design would include the following characteristics:

1. The SME entity, as treatment recipient, to serve as the unit of randomization;

2. A simple lottery is the method of randomization amongst screened participants, with

screening provided by standard loan origination proceduresvii;

3. Stratification by industry sector may be considered to ensure adequate participation

to investigate the dimension of the hypothesis related to labor density;

4. Threats to the design include: non-borrower survey participation, positive spillovers

due to increased local demand for non-borrowers’ offerings, negative spillovers as

labor rates increase, crossovers where non-borrowers access ad hoc credit from

cash-flush borrowers, and data quality issues, especially related to establishing

employees’ pre-existing income levels;

5. Optimal sample size (N) will be based upon ABC Bank’s position regarding minimum

effect size, and balancing the statistical significance of the findings (e.g. power [κ];

significance level [α]) with the cost of extending the sample size of the pilot; and

6. Variables to Measure (see figure 1), as one implementation consideration, will be

gathered by enumerators from borrowers and non-borrower SME owner/operators

and all employees at SME work sites, at the time of project initiation, and over the

two years during which production gains are expected to be realized. Data accuracy

will be established through techniques such as random re-surveys; and enticements

for non-borrowers will be utilized, such as preferential treatment in future lending.viii

Stakeholder Engagement: Ongoing collaboration with ABC Bank and other program

stakeholders (e.g. independent donors) improves focus, enables the decision-making

required during the planning activities, establishes consensus on design, ensures data

collection (e.g. origination, uptake, collections), establishes access to SME owners and

employees, and engenders support for post-study scale-ups and report dissemination.

Critical success factors related to stakeholder management include: early identification of

key constituencies; engagement with IPA SME Initiative funders and identification of

opportunities to leverage their capabilities to enhance program delivery; definition of

governance and preferred communications; identification of cross-initiative synergies or

dependenciesix; meaningful engagement with external stakeholders.

Benefits: ABC Bank, other researchers, policy makers, and development practitioners would

benefit from the establishment of a proven impact treatment, theory to explain the impact

achieved, pragmatic M&E enhancements to show how and why the product should be

scaled, and establishment of the intervention’s cost-effectiveness relative to other options.

Dale Fickett

i Bruton, G., Ahlstrom, D. and Obloj, K. (2008). “Entrepreneurship in Emerging Economies: Where Are We

Today and Where Should the Research Go in the Future.” Entrepreneurship Theory and Practice, 32(1), p. 1. ii Brennan, L. and Fickett, D. (2011) “Developmental Entrepreneurship in Sub-Saharan Africa: Assessing

Financial and Social Returns.” IIIS Discussion Paper Series, No. 386, November 2011, p. 17. Retrieved from:

http://www.tcd.ie/iiis/publications/discussion-papers.php iii Banerjee, A. & Duflo, E. (2011). Poor Economics, New York, NY: PublicAffairs.p. 219-234.

iv “About Small & Medium Enterprise.” (2012). Retrieved April 12, 2012, from http://www.poverty-

action.org/sme/why v Publications – Microfinance. (2012). Retrieved April 12, 2012, from http://www.poverty-

action.org/work/publications vi What is theory of change? (2012). Retrieved April 12, 2012 from

http://www.theoryofchange.org/about/what-is-theory-of-change/ vii

Screening recommendations ensure adherence to credit risk and other underwriting requirements at ABC

Bank and those of other Limited Partners committing capital, while also mitigating against selection bias and

ensuring a representative control group. viii

Figure 1 captures a sub-set of required data, with additional data sources including loan officers, SME

owners, and employees. Other design considerations include: budget, timeline, documentation of

assumptions, prerequisites to meet target beneficiaries’ needs. ix Over time, the portfolio of SME projects will collectively meet the challenge of identifying the conditions for

pro-poor growth, and enable required policy and industry practices. Project interaction across the SME

Initiative enables synergy, and efforts should dovetail with those of other research initiatives in meeting

broader IPA goals. For example, opportunities to leverage the network of affiliates and related assets should

be investigated (e.g. publication on social capital or microfinance).

Note: This document is being furnished to IPA as a part of the recruitment process it draws heavily from

information available through Innovations for Poverty Action (see www.poverty-action.org) and the Abdul Latif

Jameel Poverty Action Lab (see www.povertyactionlab.org).