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Preparing fertile ground: how does the quality of business environments affect MSE growth?
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Journal Article
Preparing fertile ground: how does the quality of business environments affect MSE growth?
2024
Overview
We study how the quality of local business environments helps explain growth outcomes of micro- and small enterprise microfinance clients by drawing on long-term nationwide administrative data and a policy shock in Cambodia. The staggered launch of special economic zones, which we link to positive shocks to the business environment on both the demand and supply side, leads to significantly increased employment in micro- and small enterprises (MSEs) located in these special economic zones (SEZs), compared to enterprises in contextually similar districts that are unexposed to an SEZ. Key channels explaining the improved growth outcomes include expanded access to external markets for the enterprises’ goods and services, more dynamic labor environments, and improved credit terms and conditions. To broaden the relevance of our findings, we combine data from prominent empirical studies on microfinance and demonstrate how related business conditions identified in the enterprise growth literature help explain differences in client business outcomes found in their results. Policy implications are that a smaller but influential segment of microfinance borrowers significantly benefit from opportunities provided by improved local business environments and that governments and lenders can play active roles in facilitating the necessary improvements for such MSEs.Plain English SummaryFinancial access may not be fulfilling its real potential in low-income settings, unless coupled with the right opportunities in the business environment for micro- and small enterprises. We use Cambodia’s special economic zones as a policy shock to study how the quality of local business environments help explain micro- and small enterprise microfinance clients’ growth. We find that the SEZs generate large increases in employment for microfinance borrowers for both micro- and small enterprises. These increases are concentrated in locations where SEZs expand access to local markets and where there are more dynamic labor environments. The SEZs also lead the microfinance lender to improve credit terms, which contribute notably to improved enterprise outcomes. To broaden the relevance of our findings, we demonstrate how related sub-national business environment factors help explain different borrower outcomes found in extant studies that measure microfinance impacts. Policy implications are that an important subset of microfinance borrowers is able to seize opportunities provided by local business environments, and that national and subnational governments can play active roles in facilitating such improved business environments for micro and small enterprises.
Publisher
Springer Nature B.V
Subject
