faiVLive: Week of February 20, 2020
This webinar featured guest speaker David McKenzie, Lead Economist in the Finance and Private Sector Development Unit at the World Bank’s Development Research Group, in conversation with Tim Ogden, Managing Director of the Financial Access Initiative at NYU.
Tim and David’s conversation focuses on the “big mystery” at the heart of the debate about training programs for micro, small, and medium enterprises (MSMEs). On one hand, we know that keeping a small business afloat in a constrained environment is extremely difficult and complex. We’ve also found that the types of skills taught in training programs—basic budgeting, marketing, record keeping, financial and inventory management—do matter for small firm profitability and growth. These facts should in theory create scope for huge business improvements as a result of training programs. So what’s the conundrum? These improvements are generally not detected in the research: David’s meta-analysis of 15 rigorous studies found no statistically significant impact of training on profitability or sales.
While certainly disappointing to proponents of SME trainings, these findings aren’t necessarily lethal. The lack of significance may reflect both small sample sizes and the relatively light “dosage” of the average training. The most frequent type of training studied was 5 to 6 days in a classroom setting, with a cost (when not free or subsidized) of around $300. As a result of such a training, David argues, we might realistically hope to see profits rise by perhaps 5% annually, which for businesses of this size is extremely hard to detect, let alone attribute directly to the training.
The good news is that with the right expectations in place, the literature shows several promising avenues and opportunities for SME training programs, which David and Tim discuss in turn:
Developing an “Entrepreneurial Mindset”: One study in Togo which is now being replicated in several other countries showed that programs that focus on cultivating an entrepreneurial approach—how to learn from past errors, and be proactive in attacking problems, for instance— allow business-owners to gain confidence that making investments in their skills and businesses is worthwhile. Evaluations of programs that teach personal initiative spurred a 30% increase in profit, compared to a 10% increase from more traditional trainings that cover a range of basic business skills, but having high quality trainers is likely required to produce these positive outcomes.
Teaching “Rules of Thumb”: In the Dominican Republic, one study found that teaching broadly accurate principles or heuristics (like the advice to keep household finances in a physically separate place from business finances) was more effective than a standard business training, especially for low-skill, subsistence-level, micro-enterprises. This finding also points to the conclusion that while different types of training may be better suited for different types of businesses, in many cases the audiences for a specific training are quite heterogeneous.
Kaizen Style Problem-Solving: The Kaizen approach, popularized by Toyota, advocates for problem solving-based learning and was found to be effective in a study in Tanzania. While general rules of thumb training may not be effective for the typically heterogeneous audience at SME business training sessions, rules of thumb for problem solving could be.
Seeing “Others Like Me” Succeed: A study with a very large sample size in Kenya found that training customized for female entrepreneurs was significantly more effective than traditional training. The training included examples of how other female entrepreneurs overcame limiting societal expectations to inspire trainees to do the same. In general, programs customized for specific populations (whether from vulnerable populations, or from a specific country) that include examples of successful role models from those specific populations have a large potential for impact.
Peer Group Networks and Mentoring: Mentorship programs outside of the traditional classroom setting have been found in a study in Kenya to have some positive impact on profitability, but this impact was limited in duration to the period of the mentorship. They are typically not high value-for-money for entrepreneurs who need to learn more basic management skills, though may be more valuable for firms needing to learn specialized tech skills.
Consultant-based Training: In India, Colombia, Mexico, and Nigeria, one-on-one consulting has been shown to have large, sustained impacts on profits. Scaling this approach successfully depends on retaining high quality consultants, and is constrained by the relatively high cost of this mode.
Digital Training: Training for SMEs can be digitized in several ways. First, training can be incorporated into mass media (for example through soap operas), which allows it to reach a wide audience but has shown limited effectiveness in what viewers actually learn. Second, business owners can receive advice via SMS. Texts can be impactful, but only if they incorporate a high level of customization at an industry or individual level. Third, virtual training programs, which are not found to be as effective as an in-person training with high-quality trainers, but still better than no training at all. In general, digitized training programs have limited impacts, but could be seen as effective relative to their cost and scalability.
This webinar is the first in our new SME Insight Community series in collaboration with the Mastercard Center for Inclusive Growth. This initiative seeks to better align the priorities of researchers and practitioners, so that researchers can better answer questions that are meaningful to practitioners, and practitioners can better use the insights emerging from the research.
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