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«CSAE Working Paper WPS/2014-34 Aspire* Marcel Fafchamps Simon Quinn Stanford University, BREAD and NBER University of Oxford March 2015 Abstract We ...»

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Using data from a business plan competition that we organized in three African countries, we have shown that a large transfer of funds to motivated aspiring entrepreneurs significantly increases the likelihood that they start a business within six months of the competition — and, therefore, increases expected sales and expected profits. Results are robust to the inclusion of controls for performance on the judging committee, and to the inclusion of judging committee fixed effects. As expected, we find that winners have higher personal wealth. We find no effect on wage employment and earnings.

A few simple ‘back-of-envelope’ calculations help to understand the magnitude of our estimates.

Our main result is that winners were 33 percentage points more likely than the runners-up to start their own business; with 40 prizes distributed, this implies that we caused the birth of 13 new businesses. Using a point estimate of two permanent employees on average per winner, we created about 80 new wage jobs. Finally, we estimate an effect on monthly profits of about US$150. If we make the simplifying benchmark assumption that this effect is sustainable, our estimates imply an annual profit of 80% on initial investment.25 Were we investors, rather than academics, we could have doubled our US$40,000 within about seven months — by using a business plan competition That is, US$150 per month × 12 months = US$1800 per year, caused by an initial grant of US$1000. This assumption of sustainability appears reasonable in many microenterprise contexts: see De Mel, McKenzie, and Woodruff (2012) and Fafchamps, McKenzie, Quinn, and Woodruff (2014).

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to pick high-potential entrepreneurs.26 Of course, this kind of equity contract would require substantial monitoring; this remains an important topic for future research.

In sum, our findings imply that access to start-up capital constitutes a sizeable barrier to entry into entrepreneurship for the kind of young motivated individual most likely to succeed in business. We do not see our findings as implying that credit should be extended to these individuals. As the work of Field, Pande, Papp, and Rigol (2013) and Banerjee, Duflo, Glennerster, and Kinnan (2014) indicates, access to credit without grace period often fails to have the intended effect on small business investment. Our results suggest that promoting start-up investments by young motivated people can be achieved through grants. Combining our results with these earlier contributions suggests that start-up investment may also be fostered through equity investment of the kind offered by venture capital firms — given that such form of finance does require immediate repayment, and is contingent on success (Fischer, 2013).

Similarly, we do not claim that our findings suggest finance should be offered indiscriminately to all young individuals who express a desire to start a business. From the work of De Mel, McKenzie, and Woodruff (2008, 2012) and Fafchamps, McKenzie, Quinn, and Woodruff (2014), we know that grants to microenterprises do not always lead to investment and firm growth: many small firms refrain from investing, possibly because they wish their enterprise to remain at a level that they can manage and control, possibly because there are other, more urgent uses for available funds. Selecting the right grant recipients is thus essential in order to achieve the desired effect on enterprise development. Our experiment shows that this can be accomplished, at relatively low cost, by running business competitions with the participation of the local business community.

That is, US$1000 ÷ US$150 per month ≈ 7 months. This uses the very conservative assumption that the real interest rate is zero; of course, with a positive interest rate, compounding would shorten this time and would increase our estimated returns.

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References BANERJEE, A., AND E. DUFLO (2011): Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. PublicAffairs.

BANERJEE, A., E. DUFLO, R. GLENNERSTER, AND C. KINNAN (2014): “The Miracle of Micronance? Evidence from a Randomized Evaluation,” American Economic Journal: Applied.

BJORVATN, K., A. CAPPELEN, L. H. SEKEI, SØRENSEN, AND B. TUNGODDEN (2015): “Teaching Through Television: Experimental Evidence on Entreprenurship Education in Tanzania,” NHH Discussion Paper 3 2015.

BLATTMAN, C., N. FIALA, AND S. MARTINEZ (2014): “Generating Skilled Self-Employment in Developing Countries: Experimental Evidence from Uganda,” The Quarterly Journal of Economics, 129(2), 697–752.

BLATTMAN, C., J. JAMISON, E. GREEN, AND J. ANNAN (2014): “The Returns to Cash and Microenterprise Support Among the Ultra-Poor: A Field Experiment,” Working Paper.

DE MEL, S., D. MCKENZIE, AND C. WOODRUFF (2008): “Returns to Capital in Microenterprises: Evidence from a Field Experiment,” The Quarterly Journal of Economics, 123(4), 1329– 1372.

(2012): “One-time Transfers of Cash or Capital have Long-Lasting Effects on Microenterprises in Sri Lanka,” Science, 335(6071), 962–966.

DINH, H., V. PALMADE, V. CHANDRA, AND F. COSSAR (2012): Light Manufacturing in Africa:

Targeted Policies to Enhance Private Investment and Create Jobs. World Bank Publications.

FAFCHAMPS, M., D. MCKENZIE, S. QUINN, AND C. WOODRUFF (2012): “Using PDA Consistency Checks to Increase the Precision of Profits and Sales Measurement in Panels,” Journal of Development Economics, 98(1), 51–57.

(2014): “Microenterprise Growth and the Flypaper Effect: Evidence from a Randomized Experiment in Ghana,” Journal of Development Economics, 106, 211–226.

FAFCHAMPS, M., AND S. QUINN (2014): “Networks and Manufacturing Firms in Africa: Results from a Randomized Field Experiment,” CSAE Working Paper 2014-25.

FAFCHAMPS, M., AND C. WOODRUFF (2014): “Identifying Gazelles: Expert Panels vs Surveys as a Means to Identify Firms with Rapid Growth Potential,” Working Paper.

FIELD, E., R. PANDE, J. PAPP, AND N. RIGOL (2013): “Does the Classic Microfinance Model Discourage Entrepreneurship Among the Poor? Experimental Evidence from India,” The American Economic Review, 103(6), 2196–2226.

FISCHER, G. (2013): “Contract Structure, Risk-Sharing, and Investment Choice,” Econometrica, 81(3), 883–939.

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FRANKLIN, S. (2014): “Location, Search Costs and Youth Unemployment: The Impact of a Randomized Transport Subsidy in Urban Ethiopia,” Working paper.

HAUSHOFER, J., AND J. SHAPIRO (2014): “Household Response to Income Changes: Evidence from an Unconditional Cash Trasnfer Program in Kenya,” Working paper.

KLINGER, B., AND M. SCHÜNDELN (2011): “Can Entrepreneurial Activity be Taught? QuasiExperimental Evidence from Central America,” World Development, 39(9), 1592–1610.

MCKENZIE, D., AND C. WOODRUFF (2008): “Experimental Evidence on Returns to Capital and Access to Finance in Mexico,” The World Bank Economic Review, 22(3), 457–482.

–  –  –

The Centre for the Study of African Economies (University of Oxford, UK) is interested in learning about the growth of new business ideas in Zambia. We are running a business ideas competition for aspiring young entrepreneurs, and we want you to apply!

Who: Applications are open to any aspiring entrepreneur aged 18 – 25, male or female.

(Note that you may be required to provide proof of your age.) What: In July and August, we will be running a competition to reward aspiring entrepreneurs. You can win the chance to present and explain your idea to a group of Zambian business leaders. Those with the best project win US$1,000!

How: Apply online at www.csae.ox.ac.uk/aspire/zambia. There is no application cost.

When: It’s with immediate effect and applications close on 22 July at 6pm.

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