Firms increase productivity as a result of a conducive business environment
Improvements of the business environment may encourage firms to change their behaviour in ways which increase their productivity. Some studies confirm a positive correlation between firm productivity and investment climate indicators, such as infrastructure and red tape.
- Escribano and Guash (2005), studying firm productivity in Guatemala, Honduras and Nicaragua, find that the investment climate accounts for over 30% of total factor productivity. The two most significant factors in the investment climate are found to be ‘red tape, corruption and crime’ and ‘infrastructure’, accounting respectively for about 12% and 9% of productivity.
- A systematic cross-country review of infrastructural investments by Knox, Daccache and Hess (2013) examined 110 road investment projects in roads, electricity and irrigation, and found that 90% had a significant, positive correlation with agricultural productivity.
- A systematic review of 20 studies of land property right interventions on farming households in Latin America, Africa and Asia (Lawry et al. 2014) finds that freehold titling has positive impacts on farm productivity and income, most likely due to increased investment as a result of perceived tenure security. The effects are particularly strong in Asia and Latin America, where title is the dominant means for securing land rights.
Land certification in Ethiopia was found to have a positive effect on productivity across households, in particular for female-headed households (Bezabih, 2015).
A study of land titling in rural Vietnam (Newham, Tarp and van den Broeck, 2015) found that obtaining a land title leads to higher yields.
Firms increase productivity following business management training
Business management training typically aims to encourage firm owners to introduce more efficient business practices, that allow them to become more productive and profitable. There is evidence to confirm this relationship, although the effects tend to be rather small. A meta-analysis by McKenzie (2020) of studies published between 2104 and 2020 suggests that training increases profits and sales on average by 5 to 10 percent. However, impacts of this magnitude are too small for most experiments to detect statistically.
A few evaluations however demonstrate statistically strong, long-term effects (see also the literature review by McKenzie and Woodruff, 2012):
- Bloom et al. (2012) have produced one of the strongest studies statistically: They evaluated the effects of four months of intensive consulting on management practices to randomly chosen medium-sized textile producers in India. Improvements in management practices (see here) led to increases in productivity by 17% within the first year, due to improved quality and efficiency and reduced inventory. As a result, the authors estimate that the average firm’s annual profitability increased by about $325,000.
For evidence on changes in business practices, some of which can be seen as a proxy for productivity improvements (e.g. investment in new technology), follow this link here.
Other statistically-robust studies find gender-differentiated effects of management training on profits. This suggests women may face additional binding constraints to business growth, such as limited access to finance.
- De Mel, McKenzie and Woodruff (2012) find that business management training in Sri Lanka only had positive effects on the profits of female entrepreneurs when combined with a grant.
- Berge et al. (2012) find that training of micro-finance clients in Tanzania increased profits by 20-30% overall, but that it had no significant effect on female clients.
Farmers increase productivity following agricultural value chain development interventions
Farmer training and related activities
Agricultural value chain interventions to improve the productivity of farmers may include, for example, encouraging collaboration between farmers to achieve economies of scale or providing training in business management and production methods.
Both academic research and evaluations of donor programmes demonstrate that the adoption of new practices by farmers following donor interventions can lead to increases in productivity.
- Davies et al. (2011) conducted a longitudinal impact evaluation with quasi-experimental methods of the FAO Farmer Field School project in Kenya, Tanzania and Uganda between 1999 and 2008. Training programs taught farmers about new methods, breeds, inputs, and crop or livestock management techniques. Crop productivity per acre increased by about 80% in Kenya and 23% in Tanzania. There was no significant effect overall in Uganda, but there was a significant impact on the productivity of female farmers. The impact on crop productivity in all three countries was particularly strong amongst women, and producers with limited literacy.
- The Netherlands-funded Strategic Alliance for Agricultural Development in Africa (SAADA) programme aimed to improve support to farmers on aspects such as soil fertility via agribusiness clusters in 7 countries. Between 2006-2009, 375,000 households were found to have increased their production by more than 50% on average (Berenschot and Wageningen UR, 2010).
There is also evidence that participation in formal value chains and increased productivity lead to higher revenues, or at least, greater income security.
- A literature review of value chain interventions by Seville, Buxton and Vorley (2011) finds that participation in formal value chains tends to provide greater income security, but not necessarily higher incomes. When farmers do increase their revenues, it is typically the result of higher yields.
Organic, Fair Trade and other sustainability certification
A particular body of evidence investigates the effects of sustainability certification schemes which tend to involve farmer training in cultivation techniques as well as a premium price. Overall, studies suggest that certification often (but not always) has modest to large productivity and income effects. All but one of the studies listed below have used propensity score matching to adjust for selection bias, to make sure that any differences between certified and non-certified farmers are indeed due to certification and not to other features.
- Bolwig (2009) evaluate the impact of organic certification in Uganda and find that it contributes to higher farm revenues. Another study (not using propensity score matching) has similar results: Jones and Gibbon (2011) use repeated household surveys to examine the impact of an organic contract farming scheme operated by Esco (U) Ltd in Western Uganda, which provided incentives for the production of organic and high-quality cocoa. The authors find that households that have been eligible to participate in the scheme are 100% wealthier than non-eligible households (controlling for endogenous programme placement, village heterogeneity and household characteristics). Alongside the price premium, 77% of these income increases are attributable to increased productivity driven by improved post-harvest practices.
- Chiputwa et al. (2014) compare the effects of UTZ certification, UTZ and Fairtrade, and UTZ and Organic certification of farmers in three central Ugandan villages. They find that Fairtrade certification increases per capita consumption expenditures by 30% compared to non-certified household; the effects of both UTZ and Organic certification are statistically insignificant.
- Ruben and Zuniga (2011) studied the impacts of different sustainability certification schemes in Nicaragua: They compare the impact of Fairtrade, Rainforest Alliance, and Starbucks CAFE. They showed that Fairtrade farmers receive better prices but that Rainforest Alliance and Starbucks CAFE lead to higher yields and quality performance.
- Kamau et al. (2010) find that UTZ certification supported by the NGO Solidaridad in Kenya’s coffee sector had a positive impact on prices received, coffee incomes as well as incomes from other crops and off-farm activities.
- Jena et al. (2012) evaluate impacts of Fairtrade certification in Ethiopia. They showed that certification contributes to higher incomes among coffee farmers. Ruben and Fort (2012) did not find any significant income gains of Fairtrade certification in Peru, although certified households were able to accumulate more wealth, possibly due to lower price risk. Arnould, Plastina, and Ball (2009) looked at Fairtrade impacts in Peru, Guatemala, and Nicaragua. While they find positive price effects, impacts on household welfare were small and uneven across the three countries.
- An Evaluation of the Sustainable Trade Initiative (IDH) (2014), a public-private coalition promoting the adoption of sustainability standards, finds that even though certified farmers were able to get higher yields and prices, they are likely to have only modest or no net income benefits due to higher input costs. Similarly, a study of the effects of voluntary sustainability standards in Ethiopia’s coffee sector (Minten et al., 2015) finds that organic and fair-trade premiums are small and only one third of them is being passed on to farmers, leading to up to only USD 20 in additional incomes a year.
Firms increase profits as a result of cluster development
Operating in clusters may allow firms to benefit from economies of scale and thereby increase revenues. Indeed, there is empirical evidence that clusters increase business income.
- Ali and Peerlings (2011) investigate the impact of clustering on the profit of micro enterprises in the hand-loom sector in Ethiopia. Controlling for selection bias, the study compares the performance of clustered micro enterprises with that of multiple control groups of dispersed ones. The authors find that, in urban areas, clustered micro enterprises have a monthly average profit about 100% more than the average of dispersed micro enterprises. In rural areas, the difference in monthly average profit is 50%. The authors conclude that the more concentrated clusters are, the higher the profits are likely to be.
Firms/farmers increase productivity due to innovative technology
Innovative technologies for farmers or businesses have been proven to increase their productivity.
- Since 1991, non-profit social enterprise KickStart has sold more than 287,000 human-powered irrigation pumps at low cost to farmers in Burkina Faso, Mali, Tanzania, Kenya and other countries. According to the World Bank, the resultant improvements in productivity increase annual household incomes by 100-200%. Kickstart itself reports an average income increase of 400%.
- Crespi and Zuniga (2010) use micro data from innovation surveys to examine the determinants of technological innovation and its impact on firm labour productivity in six Latin American countries (Argentina, Chile, Colombia, Costa Rica, Panama, and Uruguay). Introducing technological innovation is found to be correlated with, on average, a 100% increase in labour productivity.