Publication: Barriers to Entry and Returns to Capital in Informal Activities: Evidence from Sub-Saharan Africa
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2011-05
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2011-05
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This paper investigates the patterns of capital entry barriers and capital returns in informal Micro and Small Enterprises (MSE's) using a unique micro data set seven West-African countries. The author's findings support the view of a heterogeneous informal sector that is not primarily host to subsistence activities. While an assessment of initial investment identifies some informal activities with negligible entry barriers, a notable cost of entry is associated to most activities. The authors find very heterogeneous patterns of capital returns in informal MSE's. At very low levels of capital, marginal returns are extremely high- often exceeding 70 percent per month. Above a capital stock of 150 international dollars, marginal returns are found to be relatively low at around 4 to 7 percent monthly. The authors provide some evidence that the high returns at low capital stocks reflect high risks. At the same time, most MSE's appear to be severely capital constrained.
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“Grimm, Michael; Kruger, Jens; Lay, Jann. 2011. Barriers to Entry and Returns to Capital in Informal Activities: Evidence from Sub-Saharan Africa. © World Bank. http://hdl.handle.net/10986/27365 License: CC BY 3.0 IGO.”
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Publication Credit-Constrained in Risky Activities?(World Bank, Washington, DC, 2012-05)Micro and Small Enterprises (MSEs) in developing countries are typically considered to be severely credit constrained. Additionally, high business risks may partly explain why capital stocks of MSEs remain low. This article analyzes the determinants of capital stocks of MSEs in poor economies focusing on credit constraints and risk. The analysis is based on a unique, albeit cross sectional but backward looking, micro data set on MSEs covering the economic capitals of seven West-African countries. The main result is that capital market imperfections indeed seem to explain an important part of the variation in capital stocks in the early lifetime of MSEs. Furthermore, the analyses show that risk plays a key role for capital accumulation. Risk-averse individuals seem to adjust their initially low capital stocks upwards when enterprises grow older. 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The heterogeneity in capital returns hints at large inefficiencies in allocating capital across informal firms.Publication Unlocking Potential(World Bank, Washington, DC, 2011-11)In the past two decades, research on the informal sector has emphasized the heterogeneity of this part of the economy, example in terms of entry costs, firm size, and access to credit, forward- and backward linkages as well as human and physical capital endowments. Yet, not much research has investigated the causes of this heterogeneity and the implied inefficiencies. This is true in particular for Sub-Saharan Africa, where informality dominates urban labor markets. Understanding these causes and the implied inefficiencies is however necessary to design policy interventions that are able to remove the most binding constraints for informal entrepreneurs. This note summarizes the main findings and policy conclusions from a research project that analyzes the quantitative importance of various constraints to informal enterprises in West Africa and Madagascar.Publication Constrained Gazelles(World Bank, Washington, DC, 2012-03)The informal sector is typically characterized as being very heterogeneous and possibly composed of two clearly distinct segments, sometimes called the lower and upper tier. However, empirical evidence shows that even among lower tier entrepreneur's profitability can be quite high. The authors combine these findings and develop an innovative approach to identify what is called constrained gazelles, next to the well-known survivalists in the lower tier and growth-oriented top-performers in the upper tier. The sample of informal entrepreneurs in seven West-African countries allows linking the relative size of these three groups to the structural and macroeconomic environment in these countries.Publication Is the Informal Sector Constrained from the Demand Side?(World Bank, Washington, DC, 2011-01)Employing a unique dataset that covers households from six West African capitals, this paper provides new evidence on the demand for informal sector products and services. Authors first investigate whether demand linkages exist between formal and informal products and distribution channels. In a second step, authors estimate demand elasticity's based on Engel curves. Authors find strong demand-side linkages between the formal and informal sector, with the exception that informal goods are hardly bought through formal distribution channels. The estimated demand elasticity's tend to show that rising incomes are associated with a lower propensity to consume informal sector goods and to use informal distribution channels.
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