What works in training entrepreneurs?

Around half of the labour force in a typical low-income country city runs an enterprise. The overwhelming majority of these business owners are entrepreneurs with a lack of alternative opportunities (Schoar 2010). The failure of firms to grow and generate wage employment creates the need for entry into self-employment on a mass scale. Each missing department store creates several hundred entrepreneurs. Most entrepreneurs have no formal training on running a business when the start their enterprise. They learn as they go. Seeing an opportunity to generate income and job, aid agencies and governments spend more than US$1 billion annually on entrepreneurship training. Does this training work? In the first VoxDevLit volume, Training Entrepreneurs (McKenzie et al. 2020), we review research on ways to train entrepreneurs. 

Given the diverse reasons for starting enterprises, it is unlikely that a single model will be appropriate for all enterprises. Indeed, the research divides most easily by size and type of enterprise. The most compelling evidence relates to the training of small-scale subsistence enterprises, for whom the chief goal should be to increase the income and sustainability of the business, even if only marginally. Successful training programmes may push enterprises to a one-time increase in the level of profits or sales, without changing the enterprises’ growth dynamics. This presents a challenge because the low cost of delivering training to any single enterprise implies that very small changes in monthly profits will provide a reasonable return on the investment in training. The challenge is further compounded by the difficulty researchers – or indeed, the entrepreneurs themselves – have in measuring profits and by the high variation in profits. McKenzie (2020) carries out a formal meta-analysis and finds small but statistically significant changes in profits following training.

Subsistence enterprises create few steady wage jobs. For this, we need to understand how to stimulate more dynamic growth of larger enterprises run by more aspirational entrepreneurs. There is much less research on effective training for high-potential start-ups and small, dynamic businesses. However, helping these firms grow may be important for the overall dynamism of the private sector. Eslava et al. (2019) show that differences in firm growth in the US and Colombia are largely explained by differences in firm growth in the top decile. Understanding the role of selection and training of firms with the potential to scale is challenging because larger firms are much less common. There is some compelling evidence on the effectiveness of Kaizan-based training methods for small and medium-sized enterprises and, more recently, interesting work on the impact of accelerators and incubators. The review points to these as areas where more research is needed to understand what works, and why. 

Our review is modular in design. Each section can be read as a standalone document, covering one aspect of the literature on entrepreneurship training. Our intention is to highlight both what we have learned and the open questions. 

We summarise the state of knowledge in each section as follows:

• Traditional entrepreneurship training has modest but (across studies) significant effects on improving business practices and business outcomes for microenterprises. There is a lot of heterogeneity in both samples and results, so there is less guidance on which groups benefit most from traditional training.
• Personal initiative and heuristic training can work well for subsistence entrepreneurs, although the quality of the trainers appears to matter a lot. It seems doubtful that medium-sized business owners lack drive and initiative.
• Kaizen offers promise for smaller manufacturing firms above the subsistence level, although there are still fewer studies of this approach, and it has not been benchmarked against other training programmes.
• Consulting appears to work, leading to improvements for both medium/large firms, and also for smaller firms with an average of 14 workers. However, consulting is expensive, and it is less clear how to scale such programmes. A group-based consulting approach offers potential.
• Evidence on the effectiveness of incubators and accelerators in developing countries is still scarce, and it is unclear how much the training component matters, and which other non-monetary services have meaningful impacts.
• Mentoring of subsistence firms does not appear to offer additional value beyond the cheaper in-person traditional training. Mentoring may work better as a substitute for training, particularly with more advanced firms looking to innovate, but evidence is limited. 
• Matching firms with well-performing peers also offers promising results, although the impacts depend on the type of peer and only certain information will diffuse this way.
• There is a need for further experimentation with alternative delivery methods, particularly online training, while television edutainment and SMS messages have not shown detectable impacts.

The review highlights the role of research in generating innovation in approaches to training entrepreneurs. This is clearest in the area of training subsistence microentrepreneurs, where most of the research to date has been focused. An early assessment (McKenzie and Woodruff 2013) found that the evidence for the effectiveness of standard microenterprise training programmes was inconclusive but somewhat underwhelming. This resulted in efforts to innovate on both content and delivery methods. The growing interest in personal initiative training is one promising outcome of this push to innovate. 

This VoxDevLit review will be updated as new information becomes available. Our hope is that by facilitating a dialogue between governments, practitioners, and researchers, the reviews will  generate new research that will helps fill the knowledge gaps. And as editors, we welcome input from anyone on areas that we are missing, or where the review needs improving. 

References

Eslava, M, J Haltiwanger, and A Pinzon, (2019), “Job creation in Colombia vs the U.S.: “Up or Out Dynamics” Meets “the Life Cycle of Plants”, NBER Working Paper 25550.

McKenzie, D (2020), “Small Business Training to Improve Management Practices in Developing Countries: Re-assessing the Evidence for “Training Doesn’t Work”, Oxford Review of Economic Policy, forthcoming.

McKenzie, D, and C Woodruff (2013), “What are we learning from business training and entrepreneurship evaluations around the developing world?”, The World Bank Research Observer 29(1): 48–82.

McKenzie, D, C Woodruff, K Bjorvatn, M Bruhn, J Cai, J Gonzalez- Uribe, S Quinn, T Sonobe, and M Valdivia (2020), “Training Entrepreneurs” VoxDevLit 1(1).

Schoar, A, (2010), “The Divide between Subsistence and Transformational Entrepreneurship”, in J Lerner and S Stern (eds), Innovation Policy and the Economy, Volume 10, University of Chicago Press, pp. 57–71.