Firms change behaviour when market failures have been addressed

This page outlines the evidence linking changes in firms’ behaviour to interventions to address market failures. The available evidence is organised by intervention type, as listed in the table of contents below.

Business development services include access to finance, technology, management training, and skills development for workers, among others. Section 1 focuses on programmes that provided direct subsidies to such activities; Section 2 looks at evidence from programmes that seek to upgrade value chains or develop whole market systems, often by creating economic incentives for market players to engage with each other in different ways and increasing the returns that poor individuals get for the product or service they contribute to a value chain.

Subsidising Business Development Services for Small and Medium Enterprises

The World Bank (2011) Impact Evaluation of Small and Medium Enterprise Development Programmes in Latin America and the Carribbean assesses the net effects of participation in SME programmes (e.g. technical assistance, cluster or technology development) in four Latin American countries (Chile, Colombia, Mexico and Peru). While the relevance of different programme types varies by country,  treatment groups are more likely to introduce new products or production methods and invested in R&D than control groups.

Several studies investigate the particular role of business management training for business practices (see also the DCED Synthesis note on “What do we know about the effectiveness of Business Management Training?”):

A number of these show positive changes in business practices after training a, although a caveat is that most studies only investigate short-term impacts (e.g. 1 year after training), meaning that the sustainability of results is unclear:

  • Bloom et al. (2012), evaluates the effects of four months of intensive management consulting to randomly chosen medium-sized textile producers in India. At the end of the consulting services, the authors find an increased adoption of the recommended practices of 38% (compared to 12% for the control firms). After one year, employment of these practices had dropped by only 3%.
  • Bruhn, Karlan and Schoar (2012) shows that subsidised consulting services for SMEs in Mexico, which comprised weekly meetings of 4 four hours over 1 year, lead to a 13% increase in marketing and a 7% increase in keeping of formal accounts.
  • Mano et.al. (2011) find that after a 3-week management training programme in a cluster of garage mechanics and metalwork enterprises in Kumasi, Ghana, the number of firms keeping records increased by 36% in the treatment group, as opposed to only 6% in the control group.
  • Bruhn and Zia (2013) find that young entrepreneurs who received business and financial literacy training in Bosnia and Herzegovina were 16.5% more likely to have implemented new production processes than those who did not.
  • An extensive literature review by McKenzie and Woodruff (2012) finds that, following attendance of training programmes, almost all firms start to implement some of the business practices which were recommended to them.

Some studies conclude that financial support may be needed in addition to management training, in order to trigger substantial improvements in firm practices.

  • A meta-regression analysis by Cho and Honorati (2013) of 37 entrepreneurship programmes in developing countries notes that finds that combining business management training with financial support leads to the largest changes in firms’ behaviour.

There is also some evidence that the effectiveness of business management training varies by gender.

  • A study by Giné and Mansuri (2012) of microfinance clients in Pakistan finds that training affected the business practices of men, but not women.
  • Valdivia (2011) finds that business training has an impact on business practices of female entrepreneurs in Lima, but only those with relatively larger firms. Similarly, Buvinic and Furst-Nichols (2014) that small loans or grants are not sufficient to grow women-owned subsistence firms, but tend to work if delivered to more successful female-owned MSMEs. Very poor women need a more intensive package of services in order to break out of subsistence production. There is also heterogeneity in what works, depending on the age of the woman: Skills training, job search assistance, internships, and wage subsidies seem to be most effective in enhancing young women’s employability and earnings.

Agricultural Market and Value Chain Development Interventions

Many market development programmes have achieved changes in the behaviour of partner companies and/or of economic actors in their value chains – for example by facilitating new commercial linkages:

  • A review by Practical Action (2008) of a project to develop the cattle market in Guruve District, Zimbabwe, shows positive changes in company and farmer practices. Before the project, many cattle in this region died prematurely from preventable diseases. Among other things, Practical Action helped to initiate new commercial relationships between farmers and suppliers of veterinary drugs. As a result, Practical Action estimates that around 20,000 farmers have increased their uptake of veterinary services.

Access to information, including through radio and other communication technologies, can also promote behavioural changes of economic actors.

  • FIT-SEMA (2004) interviewed 1111 individuals to assess the impact of the FIT SEMA Project of the ILO, which worked with Ugandan radio stations to establish small enterprise-focused programmes. As of 2004, 12 radio stations had started to broadcast at least one small business-focused programme due to FIT’s activities.

Sustainability standards in contract farming are also found to positively influence farmer investments and practices:

  • Ruben and Fort (2012) assess the impact of Fair Trade Certification by comparing 180 Fair Trade coffee producers and 180 non-FT farmers in Peru. FT farmers are found to be substantially more inclined to make investments, rent additional land and increase organic fertiliser use – all of which upgrade production quality.