Higher firm productivity leads to higher profitability

This page provides an overview of evidence on the relationship between firms’ productivity and turnover or profitability. The available evidence is organised by different types of interventions, as listed below:

  • Value Chain Development Interventions – including sustainability certification.
  • Small and Medium Enterprise Interventions
  • Business Management Training
  • Cluster Development
  • Technology and Innovation

 

1) Value Chain Development Interventions – including sustainability certification

Oseni et. al (2014) in a study based on data from the Nigerian General Household Survey Panel find that a 10 percent increase in agricultural productivity lowers the likelihood of being poor by 2.5 to 3 percent. The centrality of productivity increases to profit increases for poor producers is also highlighted in a broad literature review of value chain interventions by Seville, Buxton and Vorley (2011). Many studies find that participation in formal value chains tends to provide greater income security, but not necessarily higher incomes. When higher incomes do occur, it is often the result of higher yields.

Jones and Gibbon (2011)(buy online) 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. Using repeated household surveys of smallholders from locations both eligible and not eligible for organic certification, the authors establish a positive and significant welfare impact from the scheme. Households that have been eligible to participate in the scheme are found to be 100 per cent wealthier than non-eligible households (controlling for endogenous programme placement, village heterogeneity and household characteristics). These income increases are not attributable to the price premium for organic cocoa exports alone; indeed, 77% is due to increased productivity driven by improved post-harvest practices. The study also considers spill-over effects. It appears that low-cost post-harvest processing diffused throughout the communities where the scheme operated, with an average 40% increase in non-eligible farmers starting to process their cocoa beans to at least a semi-fermented standard.

Ruben and Zuniga (2011)(buy online) studied the impacts of different sustainability certification schemes in  Nicaragua: Using propensity score matching 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. For more evidence on the link between sustainability certification and increases in income, click here.

A number donor-commissioned assessments of value chain development programmes showing impacts on income increases can also be found on the  DCED Value Chains Database. For example, an evaluation of the Netherlands-funded Strategic Alliance for Agricultural Development in Africa (SAADA) programme (Berenschot and Wageningen UR, 2010) studied the impacts of the programme in 7 countries based on monitoring data, case studies by the evaluators and qualitative stakeholder interviews. The programme included activities to enhance soil fertility management and agribusiness cluster development. Between 2006 and 2009, 375,000 households increased their incomes by an average of more than 30%, following average production increases of more than 50%.

 

2) Small and Medium Enterprise Development Interventions

Management Training

A research paper by Bloom et al. (2012) estimates the impact of providing 4 months of intensive management consulting services to medium-sized Indian textile manufacturers. Productivity improved by 17% within the first year, as judged by increased quality and efficiency and reduced inventory. Based on these changes, the authors estimate that the average firm’s annual profitability increased by about $325,000. Whilst firms were reluctant to provide internal accounts, they indicated before training began that profits were often in the range of $0.5m to $2m per year.

Cluster Development

Merima Ali and Jack Peerlings (2011) – Value Added of Cluster Membership for Micro Enterprises of the Hand Loom Sector in Ethiopia – investigate impact of ‘clustering’ – which may result in economies of scale – on the profit of micro enterprises in the hand-loom sector in Ethiopia. Using propensity score matching to control 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%. Profits are higher in urban than in rural clusters, also suggesting benefits of clustering. The authors conclude that the more concentrated clusters are, the higher the profits are likely to be.

3) Technology and Innovation

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 between 100 and 200%