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Better Business Practices Lead to Higher Rates of Productivity

guy_pfeffermann_webBecause in most developing economies they are the predominant form of economic activity, from its beginnings GBSN has paid particular attention to what causes very small firms to grow. We worked for three years with Nigeria’s Enterprise Development Center, a remarkable institution, in creating a super-effective Certificate in Entrepreneurial Management. Later GBSN partnered with Goldman Sachs in their ambitious 10,000 Women program, which included the creation and/or strengthening of entrepreneurship education institutions across the developing world.

While these efforts succeeded in enabling owners to grow their small businesses, no systematic research had been undertaken which might show whether and how better management might lead to growth. It is only a few years ago that a team of economists began to investigate the links between quality of management and development outcomes such as productivity and employment growth.* Not only did the surveys show a clear relationship between quality of management and various countries’ levels of prosperity, but an experiment providing intensive management training in Indian textile factories conducted over several years shows that better business practices are a driver of productivity. This will come as a surprise to business school faculty, but hard worldwide evidence was lacking.

This research was focused on large companies located mostly in fairly advanced economies. We still didn’t know whether the findings apply to small firms in developing countries. Fortunately, David McKenzie of the World Bank and Christopher Woodruff of the University of Warwick published a paper in August which addresses this gap: “Business Practices in Small Firms in Developing Countries”. The research draws on over 20,000 observations in very small firms (averaging 2.3 paid employees) in Bangladesh, Chile, Ghana, Kenya, Mexico, Nigeria and Sri Lanka.

It turns out that what is true for large firms is so for tiny ones: the quality of management practices explains as much of variations in sales, profits, labor and overall productivity as they do in larger firms. Better business practices are also associated with higher rates of firm survival. Marketing and record keeping are particularly important.

Disappointingly, one of the findings is that business training has no perceptible impact on the growth of small firms (this is not the case for larger firms). This is consistent with earlier research, but the authors show that the culprit is the ineffectiveness of the training programs for small firms. The authors conclude that the relatively short training courses which small firm owners received do not lead to much of a change in business practices; there is evidence of longer courses having a positive impact. I assume that low quality and relevance is another reason for unchanged behavior.

How to craft and dispense affordable, relevant and effective content that will help business owners to grow their tiny firms remains one of the greatest challenges to more inclusive business education.

* See Nicholas Bloom, Christos Genakos, Raffaella Sadun, and John Van Reenen, “Management Practices Across Firms and Countries”, Academy of Management Perspectives, February 2012; and Nicholas Bloom, Benn Eifert, Aprajit Mahajan, David McKenzie and John Roberts, “Does management Matter? Evidence from India”, Journal of Economic Literature, August 2012.

Guy Pfeffermann is the Founder & CEO of the Global Business School Network