How connecting firms to markets can promote economic development

This podcast is the second of a series in collaboration with J-PAL, covering their policy insights which highlight evidence on important topics in development. Read “Market access: Connecting firms and entrepreneurs to markets to spur business and job growth,” on J-PAL's website.

The World Bank estimates that approximately 90% of all jobs come from private sector firms - understanding why firms aren’t growing and are often small and unproductive is essential for solving development problems. Micro studies suggest there are large productivity differences between firms in low and high-income countries. Macro research suggests these differences may explain a significant share of the differences in the GDP per capita between these countries.

What is the current evidence on programmes and interventions to boost firm growth?

Many studies on boosting firm growth in low- and middle-income countries have been focused on microcredit provision, business training and raising workers’ skills. The results have been mixed and lasting long-term effects have often been elusive. These results indicate that an important constraint may be coming from the demand side. 

‘Firms may be small because they serve small markets. They are not going to be able to justify the investments in modern technologies.’

Why can improved market access generate firm growth and raise productivity?

First, the size of firms in low and middle-income countries may be due to the small markets they have access to, meaning they are unable to justify investments in modern technologies such as specialised machines, marketing skills or R&D. Therefore, to make any supply side intervention successful, there needs to be complementary demand side policies. For example, a microcredit loan will have limited success in leading to firm expansion if there simply does not exist a sufficiently large customer base. Policies that can expand the consumer base can help raise the profitability of firm investments. Secondly, greater market access may raise the flow of knowledge and ideas between buyers and suppliers leading to productivity gains.  

Many policies targeted at expanding market access are focused on lowering the costs of firms reaching other markets.

‘This additional trade will lead some firms to expand and some to shrink alongside the size of the pie growing as now less stuff is being wasted as goods and services [move] across space.’

Evaluating market access interventions

David Atkin is the policy lead for J-Pal’s policy brief that reviews 15 studies on market access. They explore programmes that reduce frictions preventing trade such as infrastructure projects or tariff policies. These are typical market integration policies, for which there are limited randomised evaluations to study their effectiveness but there is a large body of empirical work.   

They also examine initiatives that try and lower matching or informational frictions (e.g. firms may struggle to find buyers, or even know they can sell their products abroad).  These programmes include ones that provide marketing training to firms, training on how to sell abroad, link firms with other larger firms, or provide training on how to use online platforms. RCTs have been more commonplace for these interventions and hence there is some evidence indicating what policies are successful at promoting market access and improvements in firm outcomes. 

There is an important distinction between programmes which firms may already know about and only choose to engage with if their cost is lowered (via subsidies), and those firms do not know about. The expected gains from programmes that are already known about are likely smaller than those for which they did not know existed

Why may trade be a powerful tool for firm growth?

It is natural for firms to focus on trading with nearby markets as it is costly to trade far away. However, there may be significant benefits for firms of entering export markets. Export markets are simply larger, providing expansion opportunities for firms that may be constrained by domestic demand. Moreover, especially in the context of poorer countries selling to richer ones, there exists a significant opportunity for learning and knowledge acquisition through interactions with more sophisticated buyers. Research shows that demand from export markets seems to have large positive effects on firm performance. 

Programmes may be more effective if focused on large firms. David Atkin refers to studies in Vietnam and Colombia where training initiatives that encourage exporting have minimal effects on export activities and that any observed positive impact came through larger firms (J-PAL 2024). Smaller firms can still benefit, however as they are often intermediaries for these larger firms. 

Do marketing interventions have the potential to spur firm growth?

RCTs on marketing interventions have been implemented in South Africa, Nigeria and Liberia and have shown generally positive results for firm outcomes. 

Digital platforms initially offered considerable promise due to their low access costs. However, this also poses a challenge for small firms to stand out amidst the large number of sellers on these platforms. Early research suggests there are limited benefits for small firms.  

Does increased market access have spillovers?

Foreign consumers may demand more advanced products which can encourage learnings for firms in low- and middle-income countries. Foreign consumers may also demand better enforcement of laws and regulations in the firms where they buy products from. This can lead to improvements, for example, in the treatment of female workers or working conditions in low- and middle-income countries. One study in Bangladesh finds that a multi-national firm was able to enforce labour laws which the government could not do (Boudreau 2024). 

There are still many unanswered questions about market access

There are important questions to consider with regards to how to design market access interventions, such as: 

• Which types of organisations are best at implementation?
• Which firms should be targeted? 
• How should online platforms be used?
• What role should the government play, in particular with regards to government procurement systems?
• How to leverage these programmes to have positive effects on marginalised groups? 
• How to ensure interventions are boosting productivity rather than firms simply stealing business from other firms?

Finally, there is significant work to be done exploring the role of multinationals. Private sector supply chains can play a central role in spreading knowledge and bringing about improvements in market access in the first place. 

References

Abdul Latif Jameel Poverty Action Lab (J-PAL) (2024), “Market access: Connecting firms and entrepreneurs to markets to spur business and job growth,” J-PAL Policy Insights. Last modified September 2024.

Boudreau, L (2024), “Multinational enforcement of labor law: Experimental evidence on strengthening occupational safety and health (OSH) committees,” Econometrica, 92(4): 1269–1308. Research Paper | J-PAL Evaluation Summary.

Kim, Y R, Y Todo, D Shimamoto, and P Matous (2018), “Are seminars on export promotion effective? Evidence from a randomised controlled trial,” The World Economy, 41(11): 2954–2982. Research Paper.

Iacovone, L, D McKenzie, and R Meager (2023), “Bayesian impact evaluation with informative priors: An application to a Colombian management and export improvement program,” World Bank Policy Research Working Paper No. 10274. Research Paper.