Human and Financial Capital for Microenterprise Development: Evidence from a Field and Lab Experiment

Microenterprises constitute an important source of employment, and developing such enterprises is a key policy concern in most countries. But what is the most efficient tool for microenterprise development? We study this question in a developing country context (Tanzania), where microenterprises are the source of employment for more than half of the labor force, and report from a field experiment that jointly investigated the importance of a human capital intervention (business training) and a financial capital intervention (business grant). Using data from three survey rounds, a lab experiment and administrative records of the microfinance institution, we present evidence on business performance, management practices, happiness, business knowledge, and non-cognitive abilities. Our study demonstrates strong effects of the combination of the two interventions on male entrepreneurs, while the effects on female entrepreneurs are much more muted. The results suggest that long-term finance is an important constraint for microfinance entrepreneurs, but that business training is essential to transform financial capital into productive investments. Our study also points to the need for more comprehensive measures to promote the businesses of female entrepreneurs. ______________________ *Berge: NHH Norwegian School of Economics, Bergen, and Chr. Michelsen Institute, Bergen e‐mail: [email protected]. Bjorvatn: NHH Norwegian School of Economics, Bergen, e‐ mail: [email protected]. Tungodden: NHH Norwegian School of Economics, Bergen and Chr. Michelsen Institute, Bergen, e‐mail: [email protected]. We would like to thank Ingvild Almås, Fred Finnan, Rune Jansen Hagen, Linda Helgesson Sekei, Vegard Iversen, Sturla F. Kvamsdal, Edward Miguel, Erik Ø. Sørensen, Russell Toth, Jakob Svensson, and Vera L. te Velde for very useful comments and suggestions. The paper is part of a larger joint project between the research groups in development economics and experimental economics at the Department of Economics, NHH Norwegian School of Economics and the research centre Equality, Social Organization, and Performance (ESOP) at the Department of Economics, University of Oslo. We have also received financial support from Sparebanken Vest and the Research Council of Norway. We warmly acknowledge the support of Promotion of Rural Initiatives and Development Enterprises (PRIDE, Tanzania), Research on Poverty Alleviation (REPOA, Tanzania), and University of Dar es Salaam Entrepreneurship