Management practices and small firms’ productivity in emerging countries

Juan Carlos Salazar-Elena (Department of Development Economics, Universidad Autónoma de Madrid, Madrid, Spain)
José Guimón (Department of Development Economics, Universidad Autónoma de Madrid, Madrid, Spain)

Competitiveness Review

ISSN: 1059-5422

Article publication date: 15 July 2019

Abstract

Purpose

The purpose of this study is to explore the potential for increasing the productivity of small firms from emerging countries by enhancing their management practices.

Design/methodology/approach

The link between four types of management practices and labor productivity at the firm level is tested through a sample of 13,566 small firms from 15 emerging countries. Subsequently, the policy options available to upgrade management practices in such firms are analyzed through a systematic review of recent experiences in 12 emerging countries.

Findings

The econometric results confirm that the adoption of good management practices has a significant effect on labor productivity, especially when several management practices are combined. This effect is context-dependent, with a higher intensity in lower-middle income countries and in manufacturing firms. The paper also outlines the different components of successful policy programs to support the adoption of good management practices.

Research limitations/implications

On the one hand, the challenge of isolating the causal relationship between management practices and firm productivity affects the econometric part of this study. On the other hand, the analysis of policy experiences is purely explorative and does not attempt to evaluate impacts but rather to offer a general overview of policy options.

Practical implications

The paper provides practical guidance for policymakers from emerging countries in their efforts to support the adoption of good management practices by small firms.

Social implications

Improving management practices of small firms can contribute to a more inclusive development agenda by narrowing wage differentials between leading and laggard firms, while transforming informal businesses into formal ones.

Originality/value

The multi-method approach used in this study provides rich insights into the relationship between management practices and productivity of small firms in emerging countries.

Keywords

Citation

Salazar-Elena, J.C. and Guimón, J. (2019), "Management practices and small firms’ productivity in emerging countries", Competitiveness Review, Vol. 29 No. 4, pp. 356-374. https://doi.org/10.1108/CR-01-2019-0004

Publisher

:

Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited


1. Introduction

Small firms represent the largest share of value added and employment in most countries, yet they lag substantially behind larger firms in terms of labor productivity (OECD, 2015). Recent empirical research shows that since the year 2000, the gap between global frontier and laggard firms has widened, for productivity growth in the former has remained stable while productivity growth in the latter has slowed (Andrews et al., 2016). Evidence from emerging countries similarly suggests that productivity gaps between large and small firms have increased (Bolio et al., 2014). Part of the problem is that a large proportion of small firms in emerging countries are not implementing some management practices that are standard for medium or large firms.

Against this background, it becomes critical for governments in emerging countries to support the adoption of improved management practices by small firms, especially in traditional low value-added sectors of the economy (OECD, 2016a). Such policy approach makes sense from a growth perspective given the potential contribution of laggard firms to aggregate productivity growth. It also makes sense from a social inclusion perspective because it has the potential to reduce income inequalities by narrowing wage differentials between leading and laggard firms while transforming informal businesses into formal ones (Blackburn and Ram, 2006; OECD, 2016a; Smallbone et al., 2003). Thus, this research agenda links with recent debates on the need to address mounting inequalities in global distribution of income (Piketty, 2014).

The general objective of this paper is to explore the potential for increasing productivity in small enterprises from emerging countries by enhancing their management practices. We define small firms as those with less than 50 employees, including micro-firms of less than 10 employees. Our research relied on different methods and data sources, including econometric methods using cross-country firm-level data and a qualitative review of recent policy programs implemented across emerging countries.

The rest of the paper is structured as follows. The following section explains in further detail the contribution of this paper to the existing literature, while Section 3 presents the research questions and empirical methods. Section 4 proceeds by analyzing the results, which focus on

  • testing the significance of management practices to explain labor productivity in small firms from emerging countries; and

  • exploring the policy options available to upgrade management practices in such firms. Finally, Section 5 draws some conclusions.

2. Antecedents

Among the different factors that influence productivity (Brynjolfsson and Hitt, 2003; Syverson, 2011; Venturini, 2015), recent studies have corroborated the significance of management practices as explanatory factors both at the firm and country levels (Bartz et al., 2016; Bloom and Van Reenen, 2010; Bruhn et al., 2010). A key concern that motivates this paper is that small firms fall short of implementing even some of the most basic management practices, especially in emerging countries, and this hampers aggregate productivity substantially (Jardon, 2018; Nguyen et al., 2017; Sachitra and Chong, 2018). Possible causes for gaps in management practices among small firms are the lack of finance, lack of information and knowledge, lack of time and lack of basic infrastructure or equipment (Chandy, 2013; Simpson and Docherty, 2004). As explained in Beaver and Prince (2004), the management of small firms is more informal and often driven by survival and short-term operational needs, while larger firms adopt more formal, bureaucratic management practices driven by longer-term growth and business development objectives.

Some of the management practices typically addressed in the existing literature include strategic planning, human resources management, accounting, marketing, logistics, certification, quality control, use of ICT and business intelligence, among others (Bloom and Van Reenen, 2010; Hayton, 2015; Huselid, 1995; Peterson and Van Fleet, 2004). In this study, given the data available, we focus on the following four management practices: ownership of internationally recognized certifications (such as ISO 9000, ISO14000 or HACCP), ownership of a company website, in-house training of workers and auditing of financial statements.

Previous research has already linked these four management practices with firm productivity. First, several studies have suggested that adopting international certifications improves operating performance at the firm level (Flynn et al., 1995; Guasch et al., 2007; Naveh and Marcus, 2005; Rao et al., 1997; Singh, 2008). Second, managerial capabilities to adapt firms to ICT, such as the development and use of a business website, have also been found to be critical to firm’s performance in previous studies (Mozas-Moral et al., 2016; Zhang et al., 2011). Third, in-house training of employees has been linked to firm productivity (Bartel, 1994; Buick and Muthu, 1997; Knoke and Kalleberg, 1994), although some studies contend that training practices must be combined with specific business strategies if they are to enhance organizational performance (Ubeda-Garcia et al., 2014). Finally, Chen et al. (2011) finds that the quality of financial reporting positively affects performance of family-owned firms in emerging economies. Other studies have also found a link between the quality of financial reporting and the firm’s access to (and cost of) capital (Holthausen and Watts, 2001; Verdi, 2006). As in Chen et al. (2011), we measure the quality of financial reporting through the practice of certification of financial statements by an external auditor.

Given the influence of the adoption of good management practices on productivity, and considering the relatively low adoption of good practices in small firms, many governments of developing countries have implemented policy programs to address this. The main rationale for government-supported business management programs is that, without government help, small firms would underinvest in the implementation of new management practices, given the presence of market failures and institutional inefficiencies on both the demand and supply sides (Cravo and Piza, 2016; OECD, 2016b). On the demand side, small firms tend to suffer more than large firms do from “information failures” and “credit constraints”. Information failures refer to small firms having limited knowledge of the availability and potential benefits of business advisory services. For example, business owners with the most to gain from these services may understate their value because they do not realize how poorly their business is managed in the first place (McKenzie and Woodruff, 2014). Lack of financial resources and credit constraints are also well-reported causes for low investments in external support services by small enterprises. On the supply-side, consulting or training services adapted to the needs of small enterprises may not exist in the market or, even if they exist, private-sector consultants and training companies may perceive small firms as risky and uninteresting customers, given their limited assets and the cost of reaching to a large number of scattered enterprises (OECD, 2016b).

This paper aims to contribute to the existing literature by, first, obtaining comparable estimations of the effects of several management practices on labor productivity and assessing the combined effect of several practices. Second, the focus on emerging countries allows establishing a clear link between management practices and development economics, through the emphasis on inclusive productivity policies. Finally, the policy implications of the study are operationalized through a systematic review of recent international experiences, which provides a useful illustration of the different policy options and implementation challenges.

3. Research questions and methods

The general objective of this study consists in exploring how the adoption of good management practices contributes to enhancing the productivity of small enterprises from emerging countries. This general objective can be split into the following research questions:

Q1.

To what extent are management practices significant as drivers of productivity in small firms in emerging countries?

Q2.

What kind of policy options is available for upgrading management practices in small firms from emerging countries?

To address these research questions, we relied on different methods and data sources. In particular, for Q1, we followed a quantitative method using firm-level data while for Q2 we drew on a qualitative review of recent policy programs implemented across emerging countries.

3.1 Quantitative analysis

The study was conducted with micro-data from 13,566 small firms across 15 different countries and 33 industries drawn from the World Bank Enterprise Surveys[1]. The last surveys available for each country (as of June 2016) were used, in most cases corresponding to 2010-2015. Following OECD (2010), small firms are defined as independent, non-subsidiary firms with less than 50 employees. The use of the World Bank Enterprise Surveys allows us to address Q1 as this source provides the necessary data to calculate labor productivity at the firm level and to measure four types of management practices: ownership of internationally recognized quality certifications (such as ISO 9000, ISO14000 or HACCP), ownership of a company website, in-house training of workers and auditing of financial statements. As discussed in Section 2, the use of these indicators of management practices for empirical purposes is well-grounded in the existing literature.

The quality of management can affect the production function of firms either by improving the marginal productivity of their inputs, or by increasing the amount and quality of resources that the firm can achieve (Bruhn et al., 2010). We take this approach to model the production function of the small enterprise Qi = f(Li, Ki), where the output of the i-th firm, qi depends on the amount of capital Ki and labor Li, to test the hypothesis that total factor productivity, Ai, depends on a set (vector) of managerial practices, mi (described in previous section), among other factors (S) such as industry, financial access, internationalization and location. The model is presented below:

(1) Qi=AiLiαKi1-α
where Ai = h(mi, S)

Assuming a linear form for h(·), we test the hypothesis that differences in the total factor productivity (TFP) of the firm, Ai (measured as the natural logarithm of firm sales) can be explained by differences in management practices (i.e. differences in vector Mi). As we lack data on capital intensity, our study restricts to the analysis of labor productivity. A least squares dummy variable model is estimated, controlling for country and industry fixed effects.

As it is well known, inferring the causal structure of firms’ productivity on the basis of incomplete historical information is very problematic (March and Sutton, 1997). In particular, our production function equation might be subject to simultaneity problems, because the level of observed input variables might depend on unobserved variables considered by entrepreneurs in the choice of input levels, as originally discussed in Marschak and Andrews (1944). We deal with this problem in two ways. The first one is directly related with the aim of our study as some of these unobserved variables might be related to management practices (Aguirregabiria, 2009). We suggest four different proxies to construct a fixed effects model for managerial practices, which become the independent variables of interest in our model. Second, we transform this least squares dummy variable model in an instrumental variable model (assuming the endogeneity of the labor input and output) and using lagged input as instrument, as it is suggested in specialized literature (Griliches and Mairesse, 1997; Levinsohn and Petrin, 2003).

Using the structure explained above, and taking natural logarithms, we transform the function proposed in equation (1) into the following equation system:

(2) qi=α0+α1li+j=1Jγjmij+k=1Kβkxik+εi
(3) li=π0+π1lgli+j=1Jγjmij+k=1Kβkxik+vi
where qi is the natural logarithm of sales; li is the natural logarithm of the number of employees; lgli is the 3-year lag of li; mij, for j = 1,…, J, is the set of dummy variables for managerial practices; xik, for k = 1,…, K, is a set of control variables including characteristics of the firm such as industry, location (country), exports or perception of financial barriers; εi and vi are assumed to be iid perturbations; and the Greek letters are parameters to be estimated by the model.

This same equation structure is used to test alternative combinations of the management practices studied. First, we test the significance of each of the management practices, as represented in the system of equations 2 and 3. Second, we test the relevance of the accumulation of management practices (going from zero to four). Finally, to test the context-dependence of the relation between performance and management practices, the model is tested on different subsets, partitioning the sample in upper- and lower-middle countries and in manufactures and service firms.

3.2 Qualitative analysis

To provide an overview of policy options for upgrading management practices in small firms from emerging countries (Q2), we explored the scope and delivery methods used across a sample of 16 recent programs across 12 of countries from Latin America (6) and Asia (6). Although this sample is not representative of all programs, it helps illustrate some common approaches with regard to the different design and implementation options available such as which firms to target, how to select participants, the scope of support services, delivery methods and governance and funding arrangements. The focus is on business management programs addressed to small firms, i.e. non-financial services that help firms develop their business, including through information, training and specialist external advice (Bellini, 2006).

The 16 programs were taken from a recent report providing an inventory and short description of business management programs compiled by the OECD (OECD, 2017). Most of these programs were launched during the 2000s and all remain active today (either in their original form or in a revised version). Our contribution consists in a secondary policy analysis (or meta-analysis; Edler et al., 2008), with the aim of aggregating and synthesizing the findings from multiple individual program descriptions performed by the OECD. This analysis was also complemented with a review of other research studies dealing with policy programs to promote the adoption of management practices in small firms.

4. Results

4.1 Management practices as drivers of productivity in small firms (Q1)

As mentioned in Section 3.1, the analysis is based on a sample of 13,566 small firms across 15 emerging countries and focusses on measuring the impact on labor productivity of four types of management practices: ownership of internationally recognized quality certifications, ownership of a company website, in-house training of workers and auditing of financial statements. Table I shows the distribution of the sample by country and descriptive statistics regarding the use of each of the four management practices. The sample has a geographical focus on the BRIC countries and other selected emerging economies from Asia and Latin America[2]. The distribution of the sample by industry is provided in Table II.

Following the model developed in Section 3.1, we estimate in this section the coefficients of equations (2) and (3) using Two Stage Least Squares Instrumental Variables. Table III describes the variables used in the econometric model.

The results, presented in Table IV, show significant evidence of the impact of the four management practices on labor productivity, not only individually (Model 1 in Table IV) but also cumulatively when the firm embraces several management practices simultaneously (Model 2 in Table IV). In particular, each of the four management practices is positively related to labor productivity, but there are also cumulative effects shown by higher coefficients when more management practices are deployed at the same time. Consistently with Lazear (2004) and Hayton (2015), this result suggests that labor productivity at the firm level is more effectively enhanced when several good management practices are combined, but possibly with decreasing marginal returns.[3] The results of the model, therefore, show that differences in management practices explain differences in firm-level productivity in small enterprises for our sample of emerging economies. The Wu–Hausman test indicates that there is no significant endogeneity among our input and output measures.

Regarding the control variables, as expected, firm size, participation in international markets through exports and perceived obstacles in access to finance are all relevant in explaining firm-level labor productivity. An interesting result is that management practices proved to be at least as relevant as the perceived obstacles in access to finance, a result that is consistent with Beck et al. (2015). To simplify Table IV, results for the 48 dummy variables capturing country and industry effects are not reported. A graphic summary of results is presented in Figure 1.

Although the coefficients associated to the different management practices analyzed show different values (for example, the coefficient of the training activities are significantly positive but lower than the coefficients of the rest of the practices), it would be too risky to say that some practices are less efficient than others, among other reasons because there is a large heterogeneity in the way they are implemented in each company. In this sense, we will avoid any comparison between specific practices. Our findings only show that the companies that carry out these practices have a significantly higher productivity.

Finally, although our results point to a relevant general relationship between management practices and productive performance, the specialized literature shows that it would be reasonable to expect this relationship to be context-dependent. As an illustration, some authors have detected that the introduction of certain management practices seems more complex in services sectors, given that many of them have been developed with manufacturing processes in mind (Huq and Stolen, 1998). It is possible that this bias in design explains why some authors detect that certain management practices tend to deliver better results in manufacturing than in services, from the point of view of performance (Frohlich and Westbrook, 2002).

Another important source of differences in results delivered by the introduction of new management practices may come from the level of development of economic activity in the company's environment. In a less developed economy, the introduction of new management practices by a company could make a greater difference. This is one of the relevant assumptions behind research on the diffusion of new technologies in backward economies as the greater the gap with the leading economies, the greater the opportunities related to imitation and learning (Cimoli and Porcile, 2013).

In Table V, we present the results of the model proposed in this paper, but dividing the sample by sector of activity as well as by groups of countries according to their level of development (income per capita). We can see that our results are consistent with the arguments developed above: the relation between management practices and performance is context-dependent being more intense in lower-middle income countries and in manufacturing firms.

4.2 Policy options for upgrading management practices in small firms (Q2)

Findings from Section 4.1 support policy intervention to upgrade small firms’ management practices, given their significant influence on labor productivity in emerging countries. This section turns to examine the policy options available for that purpose. As explained in Section 3.2, this part of the study was based on a systematic review of a sample of 16 recent programs across 12 countries from Latin America and Asia (Table VI).

Considering the scope of these policy programs, most provide both training and business advisory services while a smaller share (19 per cent) also offer subsidies for the acquisition of equipment, such as computers or software (see Table VI). With regard to eligibility criteria, most programs in the sample target all small firms irrespective of industry, but a few have a sectoral approach, either focusing on one industry (e.g. Innovative Solutions for Food Retailers, Uruguay) or on a set of priority sectors (e.g. Set-Up Program, Philippines; PIP Program, Mexico). Notice also that half of the programs in the sample were targeted to groups (or clusters) of firms with similar needs, rather than to individual firms. This approach has some advantages such as increased economies of scale in program delivery (i.e. through stronger participation rates and the design of program contents addressing common challenges) and improved collaborative relationships among firms, which may last beyond the duration of the program. As illustrated by the case of the Prymeros project in Colombia, programs targeted to well-articulated communities of firms may indeed lead to faster rates of adoption of management practices (in this case, e-commerce).

In some cases, these programs have sought to develop or introduce different management practices at the same time, while in other cases they have concentrated on one specific practice. The main advantages of focusing on one single management practice lie in stronger specialization by program managers and easier implementation. However, as discussed in Section 4.1, a wider-ranging approach to the development of management skills and practices has potentially stronger effects on productivity. Considering our sample, it can be observed that the majority of programs embraced several types of management practices simultaneously, although some focused on one particular practice such as quality control (e.g. FOCAL, Chile) or e-commerce (e.g. Prymeros, Colombia). It was not possible to clearly link these policy programs to the four management practices addressed in Section 4.1 as some of these programs cover other types of management practices and, as mentioned earlier, most programs target several practices simultaneously.

After deciding the target population and thematic focus, the selection of participants is normally based on an open call for proposals. A frequent challenge is the possible lack of information or interest by target firms. For example, small business managers are often reluctant to take external advice from the government and may be skeptical of the government’s real intentions (Simpson and Docherty, 2004; Wren and Storey, 2002). Therefore, outreach efforts may be necessary at the onset of the intervention so that the targeted companies become aware of the program and interested in participating. Awareness-raising initiatives can be organized through email and social media communications, conferences and workshops and even field visits to individual firms, as in the case of Mexico’s INADEM program. Another potential constraint is that small firms may lack the minimum requirements to participate in the program. This was a challenge, for example, in Colombia’s Prymeros program as many small businesses in the country lacked computers and internet connection to adopt e-commerce strategies. These risks should be assessed at an early stage so that, if necessary, alternative preparatory interventions can be launched beforehand.

With regard to delivery methods, the program’s services can be provided directly by public agencies or indirectly via subsidized private-sector consultants, who can be chosen by business owners directly or by program managers to ensure their qualifications and their compliance with the program’s operational guidelines (Wren and Storey, 2002). In our sample, most of the programs (62.5 per cent) relied on pre-selected or certified external consultants to provide training and services to participating firms, and around one-third formed alliances with chambers of commerce or industry associations for this purpose. This approach has the advantage of stimulating the development of a market for business development services, thus avoiding the risk of crowding out private-sector suppliers (UNIDO and OECD, 2004). However, the lack of qualified private-sector consultants can be a challenge when business management programs rely on external consultants for service delivery, especially in emerging countries. For example, in the case of Bonopyme in Peru, it was reported that the paucity of qualified consultants prevented in some cases the success of these interventions. To address this problem, it is important to allocate resources since the onset of the intervention to build and expand the capacities of external service providers (OECD, 2016b; Shapira et al., 2015).

Some programs to upgrade management practices have aspired to become one-stop shops acting as a gateway to professional private-sector advisers. In this case, the objective has been to integrate under a user-friendly platform what is already available in the market from private consultants, industry associations, chambers of commerce and nongovernmental organizations, with the government acting as an honest broker and co-financer. One possible way to organize the process is through the use of public vouchers, which business owners can redeem to procure business advisory services in the market, as shown by Peru’s Bonopyme scheme. Another alternative is to offer tax deductions to businesses that invest in qualifying activities to upgrade management practices. This last approach was used, for example, by Singapore’s Productivity and Innovation Scheme+ for SMEs.

In the implementation phase, programs to enhance small firms’ management practices can be delivered through classroom-based activities, one-on-one coaching or even online in some circumstances. Looking into our sample, we find that many programs had established a website for information purposes, but only a relatively small share (31 per cent) used online tools to deliver services such as the diagnosis of business needs or the provision of online training modules. The use of ICT to deliver business advisory services increases the potential for programs to reach larger numbers of firms and reduces the marginal cost of delivery per firm. New promising platforms have been developed along those lines, such as the Business Bridge Initiative[4], which offers access to high-quality business education at low cost on a global scale (Chandy, 2013). Several international organizations have also developed online platforms to provide management training for small firms[5]. However, face-to-face delivery remains necessary for more advanced advisory services and for reaching micro firms in peripheral areas that may lack the infrastructure to benefit from distance learning programs, such as internet access (Shapira et al., 2015; Simpson and Docherty, 2004).

It is important to acknowledge how different delivery methods are often combined within the same program either simultaneously or throughout its different stages. For example, business owners may first receive a diagnosis of their needs, then some general training, followed by one-on-one advice and implementation of recommendations to improve management with the support of expert consultants (Wren and Storey, 2002). In particular, 44 per cent of the programs in our sample were structured around a sequential process whereby all participants initially received a first round of basic support (for example, a diagnosis of their business development needs along with occasionally some basic advice), but only those who showed interest and growth potential could move to the next stage where more intense training and consulting support was offered.

Another important delivery option concerns whether (and to what extent) to price the support services offered by the program. Some authors have criticized the emphasis on cost-recovery in government-supported business management programs as unrealistic and causing less-than-optimal outcomes (Bateman, 2000), whereas others have argued that charging participants with a fee can act as a quality control mechanism by filtering only those companies willing to chip in the program with their own resources (Mole, 2002). Applying a cost-recovery model to the program, whereby a proportion of the program costs are covered by participants will reduce the program’s administrative costs and possibly increases its lifespan. Cost-recovery can also be made incremental by asking participants to pay a greater share of the costs as they move to the next more intensive stage of business support or by making the program more and more a paying one as its value is shown to participants over the years. Nonetheless, there are often limits to the cost-recovery model and a degree of government support should always be expected, especially in the context of emerging economies (Bateman, 2000).

Finally, there are also various options with regard to the governance and funding structures to run the program. The program management office can be located within the existing administrative structure of a ministry or regional government. Alternatively, a more autonomous agency can be established to run the program, such as the business support centers that were set up in Central and Eastern European countries during the transition from a planned economy to a market economy (Bateman, 2000). The governance of the program will benefit from partnerships with different institutions, such as chambers of commerce and business associations. The establishment of an advisory board including private-sector representatives can also be useful, in particular to ensure that the program responds to existing business needs (Shapira et al., 2015). The program also needs to establish a realistic funding structure combining national resources with resources from international donors and public–private partnerships (for example, with multinationals that operate in the country and want to contribute to the upgrading of their local suppliers).

To summarize, Table VII presents an outline of the main design options in policy programs to upgrade small firms’ management practices, classified into the different dimensions discussed above.

5. Concluding remarks

This paper has explored the potential for increasing productivity growth in small firms from emerging countries by enhancing their management practices. In particular, the empirical results presented in Section 4.1 point to a clear relationship between a set of four management practices and labor productivity in small firms, and to a synergistic effect when several of these management practices are combined, although the intensity of such relationship is influenced by the context of the firm. This helps justify the importance of policy programs aimed at supporting the adoption of good management practices by small firms in emerging countries. Beyond the recent global trend to focus on technology-based startups, policy interventions that support the adoption by laggard firms of more basic management practices remain crucial.

To feed this policy agenda, Section 4.2 has provided an overview of the different policy options available, including which firms to target, how to select participants, the scope of support services, delivery methods and governance and funding arrangements. The analysis of recent international experiences is useful to illustrate different design and implementation approaches.

In any case, each individual country would need to design its own policy framework based on a diagnosis of the most pressing needs of its small firms and on a realistic assessment of the institutional capacities of the government to address them. For example, the kind of local initiatives and institutional reforms required to foster SME productivity are different in urban and rural areas (Vázquez-Barquero and Rodríguez-Cohard, 2016). Moreover, as discussed in Henry et al. (2003), for business support policies to be coherent, they need to ensure wide access and to provide secure funding for programs, including early stage awareness-building, pre-program screening and evaluation. It is also worth emphasizing that such kind of policies to upgrade management practices need to be combined with broader policies to improve small firms’ access to finance, infrastructures (e.g. electricity and internet access), business regulations and the overall skills and education of the population (World Bank, 2014).

Despite these general insights, the evidence presented in this paper will need to be complemented with further research to better assess the impact of different policy options, following recent studies on the impact of SME support programs in developing countries (Cancino et al., 2015; López-Acevedo and Tan, 2010).

Figures

The effects of management practices on labor productivity

Figure 1.

The effects of management practices on labor productivity

Adoption of management practices by small firms in selected emerging economies (% of firms)

Countries Quality certification Website Training Audited financial statements Sample size (#)
BRIC
Brazil 7.9 52.3 29.9 13.6 832
China 41.9 60.7 75.7 61.2 981
India 29.2 36.4 30.2 77.0 4787
Russia 6.8 57.1 37.8 12.2 1,908
Other Latin America
Argentina 15.5 76.7 54.3 63.9 407
Chile 15.2 60.2 36.5 37.5 389
Colombia 15.1 58.7 55.6 50.7 509
Mexico 8.6 45.1 37.6 32.0 532
Peru 10.0 47.7 54.1 20.3 390
Uruguay 7.5 44.7 37.3 38.2 228
Other South Asia
Indonesia 1.8 9.6 2.5 6.8 719
Malaysia 10.2 15.5 23.0 18.8 452
Philippines 14.9 29.5 20.0 87.3 529
Thailand 9.0 34.0 31.3 91.0 368
Vietnam 6.0 38.9 18.9 19.4 535
Total 18.5 43.2 35.0 49.1 13,566

Source: Authors’ elaboration based on World Bank Enterprise Surveys

Distribution of the sample by industry

Industry No. of firms (%)
Manufacturing
Food 1,256 9.3
Tobacco products 57 0.4
Textiles 729 5.4
Garments 837 6.2
Tanning and leather 129 1.0
Wood 241 1.8
Paper and paper products 124 0.9
Recorded media 175 1.3
Coke and refined petroleum 19 0.1
Chemicals 850 6.3
Plastics and rubber 975 7.2
Nonmetallic mineral products 702 5.2
Basic metals 367 2.7
Fabricated metal products 881 6.5
Machinery and equipment 914 6.7
Office machinery 3 0.0
Electronics 455 3.4
Communication equipment 4 0.0
Precision instruments 67 0.5
Motor vehicles 400 2.9
Other transport equipment 6 0.0
Furniture 280 2.1
Recycling 15 0.1
Construction 427 3.1
Services
Services of motor vehicles 344 2.5
Wholesale 1,021 7.5
Retail 1,136 8.4
Hotel and restaurants: section H 349 2.6
Transport (60-62) 359 2.6
Supporting transport activities 51 0.4
Post and telecommunications 46 0.3
IT 347 2.6
Total 13,566 100.0

Source: Authors’ elaboration based on World Bank Enterprise Surveys

Description of variables included in the econometric model

Variable Description Mean SD Minimum Maximum
Sales Natural logarithm of sales 12.698 1.562 3.19 21.65
Internationally quality certification The firm has an internationally recognized quality certification (e.g. ISO 9000, 9002 14000 or HACP) 0.185 0.388 0 1
Website The firm has its own website 0.432 0.495 0 1
Training The firm has formal training programs for its employees 0.350 0.477 0 1
Audited financial statements The firm has its annual financial statements checked and certified by an external auditor 0.491 0.500 0 1
No. of employees Natural logarithm of the number of employees 2.807 0.619 0 3.91
Exports The firms sells in international markets 0.089 0.284 0 1
Major obstacles accessing finance The firm perceives major obstacles in accessing finance 0.190 0.392 0 1
Manager’s experience The top manager has more than 10 years of experience 0.595 0.491 0 1

The relationship between management practices and labor productivity

Explanatory variables Model 1 Model 2
Coef. p-value Coef. p-value
Management practices  
Quality certification 0.262 0.000
Website 0.277 0.000
Training 0.091 0.040
Audited financial statements 0.245 0.000
Number of simultaneous management practices        
1 0.254 0.000
2 0.449 0.000
3 0.727 0.000
4 0.725 0.000
Control variables        
Size (no. of employees) 0.884 0.000 0.917 0.000
Exports 0.404 0.000 0.410 0.000
Major obstacles accessing finance −0.107 0.000 −0.111 0.000
Manager’s experience 0.144 0.000 0.139 0.000
Cons. 10.399 0.000 10.283 0.000
Obs 13,566 13,566
R-squared 0.3819 0.3823
Wu–Hausman endog. test (Pr>F) 0.4964 0.6051
Notes:

The dependent variable is the natural logarithm of sales. The sample consists of companies with less than 50 employees. Models are estimated using Two Stage Least Squares Instrumental Variables method and include unreported industry (NACE, two-digit level) and country fixed effects

The relationship between management practices and labor productivity, by income groups and sector

Explanatory variables Lower-Middle Income Upper-Middle Income Manufactures Services
Coef. P>t Coef. P>t Coef. P > t Coef. P > t
Management practices                
Quality certification 0.315 0.000 0.098 0.193 0.263 0.000 0.060 0.635
Website 0.348 0.000 0.157 0.023 0.312 0.000 0.188 0.207
Training 0.057 0.239 0.020 0.815 0.088 0.021 0.107 0.464
Audited financial statements 0.296 0.000 0.096 0.142 0.231 0.000 0.203 0.000
Control variables                
No. of employees 0.718 0.006 1.405 0.000 0.985 0.000 0.935 0.270
Exports 0.410 0.000 0.317 0.000 0.381 0.000 0.467 0.000
Major obstacles accessing finance −0.116 0.008 −0.067 0.116 −0.121 0.000 −0.052 0.354
Manager’s experience 0.131 0.000 0.075 0.133 0.107 0.000 0.160 0.093
Cons. 10.0 0.000 9.0 0.000 10.1 0.000 10.1 0.000
Obs 6570 6996 9486 4080
R-squared 0.361 0.320 0.392 0.397
Wu–Hausman test (Pr>F) 0.199 0.323 0.850 0.892
Notes:

The dependent variable is the natural logarithm of sales. The sample consists of companies with less than 50 employees. Models are estimated using Two Stage Least Squares Instrumental Variables method and include unreported industry (NACE, two-digit level) and country fixed effects

Scope and delivery methods of selected programs in emerging countries

Scope of the program Delivery methods
Program name and country Training Business advisory services Purchase of equipment Sectoral focus Focus only on one type of management practice Online tools for diagnosis and training Sequential, multi-stage process Target network or cluster of firms Use of pre-selected/certified external consultants Involvement of Chambers of Commerce or Industry Associations
Bonopyme, Peru X X X X
Credit Linked Capital Subsidy for Technology Upgrading, India X X X
Group Development Projects, PROFO, Chile X X X X X
Innovative Solutions for Food Retailers, Uruguay X X X X X X X
iSPRINT Programme, Singapore X X X X
Lean Manufacturing MSMEs, India X X X
Local Entrepreneurship Programme, PEL, Chile X X X X X
PIP Programme, Mexico X X X X X
Programme for Credit Access and Comp., Argentina X X X X
Prymeros, Colombia X X X X X X X X
Quality Promotion Fund, FOCAL, Chile X X X X
Scheme+, Singapore X X X
SET-UP Programme, Philippines X X X X X X
SME General Support Programme, Turkey X X X X
SME Information and Advisory Centre, Malaysia X X X X
SME In-Service Training Consortiums Programme, Korea X X X X

Source: Authors’ elaboration building on OECD (2017)

Design options in programs supporting the upgrading of management practices

Dimension Options
Scope of the program Firm size (definition of small firms)
Individual firms vs networks/clusters
General vs sector-specific
Focus on one vs several management skills and practices
Selection of participants Outreach (field visits, workshops, conferences)
Call for proposals
Competitive process for higher value services after first round of basic training
Delivery methods Information/training/advisory services
Online/classroom-based/additional one-on-one follow-up
Sequential process with different types of support at each stage
Use of external trainers or consultants
Free services/matching grants/vouchers
Governance and funding Administrative structure and program management office
Alliances with supporting institutions
Funding structure

Source: Authors’ elaboration

Notes

1.

For further detail see: www.enterprisesurveys.org/

2.

A possible source of bias is that India represents about one third of our sample, but we tested the robustness of our results excluding Indian firms and did not find any significant difference.

3.

One of the first economists who analyzed the possibility of diminishing returns to management practices was Ronald H. Coase (1937), in his pioneering article in “The Nature of the Firm” (1937). This paper led to interesting theoretical discussions (for a brief summary see: Bolton and Scharfstein, 1998), as well as to empirical studies consistent with this hypothesis (Reynolds, Ratanakomut and Gander, 2000, Gonçalves and Barros, 2013; Hicklin et al., 2007). From our point of view, management practices bring the company closer to the optimal use of its assets. In this sense, assuming that fixed assets remain relatively stable over time, the incorporation of more management practices will not generate increases in productivity toward infinity, but rather their contribution will decrease as the company approaches the optimum.

5.

Examples include ILO’s “Start and Improve Your Business” program (www.ilo.org/empent/areas/start-and-improve-your-business/); UNCTAD’s “Empretec” program (http://empretec.unctad.org/); and IFC’s “Business Edge” (www.businessedgeworld.com) and “SME Toolkit” (www.smetoolkit.org) programs.

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Acknowledgements

Parts of this research were developed by the authors while working for the OECD project “Increasing productivity in traditional small enterprises: evidence and policy experiences” (2016). Thanks are due to Marco Marchese and Jonathan Potter from the OECD for initial guidance and comments to an earlier draft of this paper.

Corresponding author

José Guimón can be contacted at: jose.guimon@uam.es