54001 Finance & PSD Impact APRIL 2009 The Lessons from DECRG-FP Impact Evaluations ISSUE 4 The fourth in our impact series follows up on our first impact note, which presented the puzzling finding that the average female-owned microenterprise in Sri Lanka had no gain in profit from grants. This note presents the results of new research designed to understand why. Why is more capital not enough to grow female businesses? David McKenzie A striking finding from a recent field women, both earn less return than experiment in Sri Lanka is that giving small comparable men. grants of $100 and $200 to male-owned microenterprises increased monthly profits by Female-dominated industries often have 9 percent, but giving the same amounts to a low optimal size and low returns female-owned microenterprises resulted in no We find that differences in the industries change at all in profits. men and women work in account for some of These results challenge one of the central the difference in returns. Thus, owners of premises of the microfinance movement, bicycle repair shops (who are all males) invest which is that women are poorer and more and earn more than owners of retail shops credit-constrained, and so should benefit (mixed male and female), who invest and earn more from increased access to finance. It is more than those who make lace products, or thus important to understand why the returns simple food like string hoppers (all females). to women are so low, and what types of Thus one reason for the low return to policies may offer hope in raising the incomes capital for many women is that they work in of female businesses. female-dominated industries which appear to offer little prospects for growth. The optimal The much lower returns to women aren't size of businesses appears to be much smaller the result of differences between male and in many female-dominated industries, so that female business owners in education, once the basic subsistence business is entrepreneurial ability, risk aversion, or established, additional capital will have low reasons for going into business. returns. We would expect poor, high ability, However, this is not the whole story, since individuals to benefit most from additional even in the relatively mixed industries, women capital in their business since they should be still earn lower returns to the grants than men. the most credit-constrained. If anything, female microenterprise owners in Sri Lanka More empowered women appear to earn come from slightly wealthier households than higher returns male owners, and have more education. A second factor may be differences in However, they have slightly lower ability as bargaining power and capture. An intriguing measured by Digitspan recall tests and less finding of the work is that when women were self-assessed entrepreneurial ability. given $100 grants, little of the money ended Even after controlling for the differences up in the business, but when women received between men and women in these $200 grants, as much or more of it ended up dimensions, we still find the large gender in the business as when men received grants. difference in returns to capital persists. So But when they do invest the larger amounts, while poorer, more able, women have higher the returns are zero or negative. returns to the grants than richer, less able, Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) A standard unitary household model in with higher prospects for growth, while which the household acts together to greater empowerment for women might also maximize income can not explain these be needed. An ongoing experiment in Sri results. Instead, one explanation may be that Lanka is investigating whether business business decisions are made by women training helps in this regard. assuming that some of the income and assets of the business will be captured by other 2. The focus of microfinance on household members. empowerment might help, but needs to be A key insight of the paper is that small, shown to work. liquid assets such as inventories might be Sometimes microfinance is directly argued more easily captured by a spouse than larger, to empower women, by giving them income- less liquid assets, such as equipment. As a earning opportunities. Our work suggests that result, women might underinvest in there are limits to how much income can be inventories, and overinvest in equipment, earned this way. Another aspect of using the equipment as a way of protecting microfinance is to explicitly include messages assets from capture as well as for the business. and activities to increase empowerment As support for this speculation, the authors among women. show that more empowered women invest If it worked, greater empowerment may more of the treatment in inventories, and earn lead women to invest money more efficiently, higher profits from the treatment. without having to worry about the threat of income and assets being captured by other These gender differences in returns do not household members. However, to date there appear to be unique to Sri Lanka. is little in the way of serious evidence to show Non-experimental evidence also shows that empowerment sessions in microfinance that women have much lower returns to groups do have this impact. capital than men in Mexico and Brazil, with the Brazilian data also suggesting a strong role 3. More impact evaluation of policies to for industry in explaining the gender help female-owned enterprises grow is differences. Ongoing work by the authors is needed. attempting to replicate the experiment in NGOs, Microfinance Organizations, and Ghana, with a larger sample size allowing International Organizations worldwide more detailed examination of the factors promote a number of different policies which determine the choice of industry to designed to promote female entrepreneurship. work in. Examples include mentoring schemes, vocational training into non-traditional Policy Implications occupations, different lending products, 1. More finance alone might not be value-chain work, etc. However, there is little enough to raise the incomes of many evidence for the efficacy of any of these female-owned businesses. policies, making it difficult to know what Business training and information may be works, and why. needed to get women to work in industries For further reading see: De Mel, Suresh, David McKenzie and Christopher Woodruff, forthcoming, "Are Women More Credit Constrained? Experimental Evidence on Gender and Microenterprise Returns", American Economic Journal: Applied Economics. Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact Impact Note 1: Which Microenterprises have high returns to capital? ­ David McKenzie Impact Note 2: Does Business Registration Reform increase entrepreneurial activity? ­ Miriam Bruhn Impact Note 3: The Promise of Index Insurance ­ Xavier Gine