Six Ways to Support Small and Growing Businesses in Emerging Markets

Women selling yam flour and different goods in the city of Lagos, Nigeria. (Photo from iStock/agafapaperiapunta)

There is strong evidence that small and growing businesses are important engines of prosperity, accounting for a disproportionate amount of employment growth. Programs designed to help start and scale these businesses—which we define as commercially viable, with 5 to 250 employees, and potential and ambition for growth—have become popular among donors. Many major institutions, including the International Labor Organization, World Bank, and USAID, are supporting initiatives to help entrepreneurs expand their businesses through skills development, financing, mentorship, and market linkages.

Yet even large-scale, business-support programs frequently fail to undergo rigorous impact assessments and struggle to incorporate best practices from existing research into program design. Programs often decide between different models—for example, a light-touch classroom model that reaches a large group of entrepreneurs versus a higher-touch, consulting model that reaches only a few—based on hunches rather than evidence.

But what does the evidence—academic evidence, based on experimental studies—actually tell us about whether these programs help businesses grow? And what can the organizations that run these programs learn from it to design more effective interventions? The Aspen Network of Development Entrepreneurs (ANDE), a global network of organizations that support entrepreneurship in emerging markets, and the International Growth Centre at the London School of Economics, which promotes sustainable growth in developing countries by providing policy advice based on research, recently reviewed the literature on this topic and gathered the following six takeaways:

1. Among small firms, grants, equity, and other risk-tolerant capital structures drive more innovation than traditional loans. Capital is often a major constraint to business growth in emerging markets, which lack robust banking and credit systems. The explosive growth of the microcredit industry in the last several decades has partially filled this gap with loan products for micro and small businesses. But recent evidence suggests that the strict payment structures of these loans prevent businesses from using them for the higher-risk and longer-term investments that are essential for growth. A large body of research shows limited long-term effects of traditional microcredit loans on business performance, while one study found that simply introducing a two-month grace period into the loan repayment schedule led to businesses using the loans for riskier-but-higher-return investments. In contrast, businesses are more likely to use grants and equity, or quasi-equity products, for investments that correspond to greater overall growth. Randomized experiments on grants to microenterprises have shown sustained average monthly returns of 5-30 percent. In addition, a more recent assessment of $50,000 grants to start-ups found that the grants led to a 37 percentage point increase in the likelihood of business survival three years later, and a 23 percentage point increase in the likelihood of a business employing 10 or more workers.

2. Peer engagement among entrepreneurs is effective, both for program selection and for program support, but should follow the “tennis rule.” The common assumption that experts always know best, which underlies most business-support program structures, is not always true. Studies suggest that it is extremely hard for donors to select high-potential firms, and even experts reading full business plans struggle to predict business performance any better than predictions that use basic data on firm demographics and performance. In contrast, at least one experiment of microenterprises in India found that peer entrepreneurs are significantly better at predicting future firm success than predictions based on survey data alone. Beyond selecting businesses, business networks and other platforms that involve regularly exchanging information among entrepreneurs—such as monthly meetings among managers from diverse industries—are also effective at disseminating best practices and ultimately driving growth; one rigorous study found sales increases of 8-10 percent from participating in a peer knowledge-sharing network. But the structure of this engagement matters a lot: In the same way that it is best to practice tennis with someone who is a little bit better than you if you want to improve your game, studies show that entrepreneurs get the most value out of peers whose businesses have similar characteristics but higher overall performance than their own (while not being direct competitors).

3. Standard classroom training might cost less than individualized support but is generally less effective. The need for low-cost, scalable solutions has made standardized classroom training models a particularly popular way to provide business training. However, a wide body of research shows that many of the most widespread programs using this model do not actually lead to businesses changing their practices to spur growth. In contrast, individualized consulting services, while expensive, have shown much more robust effects. One study in India found that larger firms increased productivity by 11 percent following management consulting, recouping the relatively high cost of consulting services in less than a year. When thinking about cost-effectiveness, it is tempting to focus on the cost side, but it is worth keeping in mind that cheap interventions that don’t produce results are ultimately less cost-effective than more expensive ones that show real impact.

4. Mentorship can be helpful, but different mentorship structures achieve different outcomes. Available evidence suggests that mentorship can help entrepreneurs change their practices and accelerate business growth. But not all mentorship programs are alike, and different types of mentors can affect entrepreneurs differently. A study in Uganda found that a program with international mentors made entrepreneurs more likely to significantly “pivot” their overall business strategy, while a study in Kenya showed that local mentors helped drive a 20 percent increase in firm profits during the mentorship period (although businesses did not sustain this growth beyond the mentorship period).

5. It’s important not to ignore the demand side. Most business support programs naturally focus on the supply side of the market, since business capacity is directly under the firms’ control and can be influenced by one-time interventions. However, a wide range of studies show that easing constraints on the demand side can be a powerful pathway to growth. This can include direct market linkage facilitation with international buyers, government contracts, or connections to multinational corporate supply chains, which have all shown particular promise as avenues for accelerating the growth of small businesses. For example, one program connecting Egyptian carpet makers to European buyers led to an increase in product quality and revenue per hour, even without any significant capital investment or additional formal training.

6. We need more evidence, in particular around different business segments. While the existing academic evidence on supporting small and growing businesses gives us a strong starting point for designing more effective programs, important research gaps remain. Most of the current evidence is based on programs that focus on microenterprises or large firms, and does not allow for more-nuanced targeting of different support structures for different business segments, in particular around the so-called “missing middle”—those too large for microenterprise-focused programming but not yet large enough to access a range of market support services on their own. A recent report from the Collaborative for Frontier Finance provides a more-thorough segmentation approach, and future research can be much more applicable to practitioners by explicitly incorporating this sort of segmentation.

Programs designed to support small and growing businesses undoubtedly have good intentions, but rigorous experiments show that not all programs actually lead to business growth. While there are still gaps in our knowledge of what works, current research gives us an excellent starting point for designing evidence-based programs to help entrepreneurs fulfill their potential, create jobs, and ultimately spur economic growth.

Read more stories by Matthew Guttentag.