Empirical Evidence on the Importance
of Managerial Capital
Miriam Bruhn
(based on work with Dean Karlan and Antoinette Schoar)
DIME-FPD Global Conference and Workshop on Development Impact
Evaluation in Finance and Private Sector
June 6, 2011
Motivation: What Constrains Firm Growth?
• Small and medium size enterprises (SMEs) in developing
countries seem to grow slower than equivalent firms in
the developed world


Less transition from small to large firms
Documented high returns of small firms suggest they are suboptimally small (i.e. constrained from growing)
• Need to understand bottlenecks that prevent SMEs from
growing


Focus has been on access to finance
In the past, comparatively little attention has been paid to the role of
managerial (human) capital and management skills

But there are several new and ongoing studies in this area
Why Is Managerial Capital Important?
 Managerial capital can affect the productivity of firms

Improving managerial capital can lead to higher production with
the same amount of inputs (for example, by maintaining
machinery or identifying better marketing or pricing strategies)
 Better managerial capital can also improve decisions
on the amount and type of inputs a firm buys or rents

Increasing managerial capital can improve the way in which
firms use their financing, increasing the impact of access to
finance
Cross-Country Evidence on Management Skills
 Management education, as well as management
practices tend to be of lower quality in developing
countries than in developed countries


In a survey, firms in lower income countries were more likely
than firms in higher income countries to say that locally
educated MBAs were inadequately prepared (Chaudry, 2003)
Firms from non-Organization for Economic Cooperation and
Development (OECD) countries score significantly below firms
from OECD countries on a measure of management practices
(Bloom and Van Reenen, 2010)
Impact Evaluation Questions
• Does lack of managerial capital impede the growth of
small and medium size businesses in emerging markets?
• Can a lack of managerial knowledge be alleviated by
providing training or consulting services?
• Several recent and rigorous impact evaluations aim to
answer these questions by
•
•
Offering business training or consulting services to a randomly
selected group of firms (e.g. among firms interested in participating)
Later comparing business practices and performance to the firms
that were randomly selected to not be offered training/consulting
Overview of Existing and Ongoing Impact Evaluations
• Many completed and ongoing impact evaluations focus
on micro firms/self-employed, often providing classroom based business training in collaboration with a
microfinance institution
•
Peru: Karlan and Validivia (2010), Pakistan: Gine and Mansuri
(2011), and others
• Relatively fewer studies focus on small, medium, or large
firms
• Also, relatively few studies provide individualized
consulting rather than class-room type training
Impact Evaluation in Puebla, Mexico
• Conducted a randomized impact evaluation of a program
that provided management consulting services to micro,
small and medium size businesses


The program was implemented with IPPC, a training institute of the
state of Puebla
The provision of services was highly subsidized, so firms paid only
between 10%-25% of the actual costs, depending on firm size
• Firms were paired with one of 9 local consulting firms


Consultants met with businesses for at least 4 hours a week for a one
year period from January to December 2008
Consultants were asked to (1) diagnose the problems that prevented
the firms from growing, (2) suggest solutions that would help to solve
the problems and (3) assist firms in implementing the solutions
Defining the Study Sample
• IPPC advertised the program widely within Puebla
to attract eligible firms
•

Only firms formally registered with the tax authority were
eligible to participate in the program
The program was designed to include funding for
•
•
•
•
100 micro firms (<=10 employees),
40 small firms (11-50 employees)
10 medium-sized firms (51-250 employees)
Interested firms had to apply to IPPC and sign a letter of
interest to participate in the program and to be considered
for the subsidy
•
This letter also explained that selection into the program was
random, so that not all interested firm would receive a spot
Research Design and Take-Up (Challenges)
• 433 firms signed the letter of interest, saying they would
participate in the program if offered a spot
• Randomly selected 149 firms to be offered a spot in the
program (treatment group), the remaining 284 firms
serve as the control group
•
Out of these 149 firms , only 79 firms (53%) ended up
participating in the program
•
•
The others said they had changed their mind or did not have
sufficient funds to pay their share of the consulting anymore
For the research design, it is crucial that the remaining spots in
the program cannot be filled with control group firms
• IPPC recruited firms outside the study to fill the spots
Data Collection
• Baseline Survey

Conducted in Oct-Dec 2007 after firms signed letter of interest but
before they were assigned to treatment and control groups
• First follow-up Survey



Conducted in March-May 2009
Re-interviewed 88% of the firms interviewed at baseline
17 firms had closed and the rest declined to participate in the
interview
• In-depth case-studies of 8 firms
•
Conducted in June 2009
Sample Characteristics
• Industry distribution of firms
– Manufacturing sector: 30%
– Commerce and trade: 25%
– Services sector: 45%
• Firm characteristics at baseline:
• Median firm has about 6 full-time employees (average = 14)
• Median monthly sales of USD 9,500 (average = 63,000)
• Median monthly profits of USD 2,200 (average = 12,000)
Examples of Firms in the Study
El Mundo de las Mascotas
• Pet and toy store
• Run by father and son
• 8 employees (in 3 branches)
Front entrance
The entrepreneur in his office
Fumigaciones Sigo
• Pest control services
• Sole proprietorship
• 4 employees
Water distribution truck
Main office
Transporte y Renta de Pipas Palacios
• Water transportation
• Sole proprietorship
• 6 employees
Balance of Characteristics Across
Treatment and Control Groups
 Since the treatment and control groups were randomly
selected, their background characteristics are the same
on average, making the control group a valid comparison
group…
Variable
Treatment Control
Age of principal decision maker
42.56
42.88
Male principal decision maker dummy
0.72
0.72
Years of schooling of principal decision maker
15.59
15.94
Full-time employees
14.68
13.93
Note: Significance levels: *10 percent, **5 percent, ***1 percent.
Balance of Business Performance Variables Across
Treatment and Control Groups
 …BUT the business performance variables look less similar on
average
Variable
Treatment Control
Last month's sales (1000s USD)
86.04
56.71
Last month's sales (1000s MXP), 1% trimmed
45.11
51.06
Profits (sales minus costs, 1000s MXP)
14.10
-3.85
Profits (sales minus costs, 1000s MXP), 1% trimmed
10.44
10.90
Profits (profit margin and sales, 1000s MXP)
12.51
13.05
Profits (profit margin and sales, 1000s MXP), 1% trimmed
9.97
10.71
Productivity residual
0.07
-0.04
Productivity residual 1% trimmed
0.04
-0.01
Return on assets (ROA)
-0.03
0.15
Return on assets (ROA) 1% trimmed
0.11
0.10
Note: Significance levels: *10 percent, **5 percent, ***1 percent.
 These variables have very large variance and the averages are
influenced by outliers

Trimming outliers makes the averages more similar
Topics that Firms Worked on with Their Consultants
(from 8 Case Studies)
Topic
# of firms that covered this topic
Define mission and vision statements
6
Accounting and record keeping (training and/or new software)
5
Clarify organizational structure, clearly assign responsibilities
5
Sales strategy and advertising (marketing)
4
Strategically select location and number of sales points
2
Quality control
2
Access to credit or alternative financing solutions
2
Human resources management and hiring practices
2
Mediate family problems in family firms
1
Pricing strategy
1
Reduce costs (negotiate with suppliers, find alternative suppliers)
1
Figure out with products are most profitable and focus on these
1
Team work and communications training for employees
1
Leadership training for firm owners
1
Impact on Business Practices
 Compared to control firms, treatment firms at
follow-up (after 1 year of consulting)



Were 7% more likely to keep formal accounts (93 vs. 86%
of firms)
Were 13% more likely to have launched a new marketing
campaign during the past year (57 vs. 44% of firms)
Had principal decision makers with higher measured
entrepreneurial spirit
Impact on Business Performance
 Results suggest that the consulting improved
business performance for firms in the treatment
group
Productivity was significantly higher in treatment than in
control group after one year of the program
 Sales and profits improved by more than 70% each (but
results are sensitive to trimming outliers)
 Results are only statically significant at the 10% level,
likely because of the noise in the data


Also, not all firms answered the questions about sales and profits,
reducing the sample size
Impact on Business Outcomes
Impact on Employment
 Find no statistically significant increase in
employment
Maybe employment takes more time to change
 We are only measuring effects after one year of the
program


We tried to conduct a second follow-up survey after two years
(one year after the first follow-up), but the response rate was low
Cost-Benefit?
 The hourly cost of consulting varied with firm size,
but was USD 60 on average


USD 60 x 4 hours x 52 weeks = USD 12,480 per firm for one
year of consulting
This is the total cost, of which firms only paid 10-25%
 The program increased monthly profits by about
70% = USD 6,000 compared to profits in control
group (USD 8,600)

Annualized, this corresponds to USD 72,000

Caution: Do not know for how much time the monthly profit
increase will persist
Conclusions
 Suggestive results that providing management consulting
can improves sales and profits for small firms
 This confirms the hypothesis that managerial capital can be
a limiting factor in the growth of firms in developing
countries

It also shows that this managerial capital can be transmitted via
consulting services
 Open question: the benefits appear to be greater than the
cost – why don’t more firms use consulting services?
Possible reasons


Lack of information about the benefits
Lack of available funds to pay for the services (financing constraints)
Impact Evaluation Lessons Learned
 A larger sample size is needed to detect more statistically
significant effects on sales and profits, because


These outcomes are very noise
Take-up rates of the program may be low, diluting the effect (a
large sample allows for detecting smaller effects)
 Need to find a way of increasing response rates to sales
and profits questions
 Would be good to collect more rounds of data, but in this
case many firms did not want o participate in the
additional survey