Literature review: the impact of advisory services & export promotion on SME performance

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1 Pioneering Real-time Impact Monitoring and Evaluation Literature review: the impact of advisory services & export promotion on SME performance POLICY BRIEF July 2014 SMEs & economic development Private sector development (PSD) plays an integral part in the international development strategy of many governments and development agencies. Typical PSD activities are technical and financial support to firms as well as indirect support through institutional frameworks. Most advisory service interventions target small and medium sized enterprises (SMEs), which typically have employees, rather than larger ones. An important rationale for supporting these smaller firms is the assumption these have more growth potential and are more constrained by access to advisory services than are larger firms. The macro-economic literature in this field shows mixed evidence about the role of the SME sector in economic development. Ayyagari et al. (2011) suggested that in most low-and-middle-incomecountries, small and mature firms are the largest contributors to employment creation whereas large, young firms contribute most to productivity growth. Page and Söderbom (2012) show that small and large firms in Ethiopia have similar employment effects, while Sandefur (2010) demonstrates that in the period , small firms in Ghana created more jobs than larger firms. Moreover, the micro-economic literature, which focuses on the impact of business support services on SME-level rather than on macro-level, provides mixed evidence on which types of firms benefit most from advisory services. Economic theory suggests that subsidized advisory services should be provided to firms that are constrained in their growth through lack of such support, reasons for this constraint being that advisory services are either not available or not affordable. It was, however, noted by McKenzie and Woodruff (2014) that there is little evidence to date to say who such firms are, especially among the smallest firms. An emerging literature on the impact of consulting for relatively large SMEs finds that this The Dutch Ministry of Foreign Trade & Development Cooperation and its PSDimplementing organizations CBI & PUM wish to better understand the impact of their business training/advice and export promotion activities on the performance of SMEs in developing countries. As part of a larger study to address this question, LEI Wageningen and Erasmus University Rotterdam have conducted a literature review to provide an overview of academic studies that consider the impact of similar programs. In this review, the following questions are addressed: What is the impact of business advisory services & export promotion on SME knowledge, processes & performance? Which SMEs benefit most from business advisory services and export promotion? Which elements of these business advisory services & export promotion programs are most effective? What is the subsequent impact of improved SME performance on sustainable economic development? Furthermore, this study gives an overview of the indicators and measurement methods that are used in the literature, and provides suggestions on how these can be applied by CBI and PUM to assess the success of their programs.

2 support has substantial impacts on firm outcomes (Bloom 2013, Bruhn 2012). This raises the question whether larger firms are better equipped to make effective use of knowledge, for example because they have the financial resources needed to implement advice. There is a growing literature about the impact of advisory services & export promotion There are a growing number of studies on the effectiveness of advisory services for small and medium enterprises. However, the interventions, types of SMEs, study context and impact indicators used in the studies are very diverse. This heterogeneity is one of the main reasons why it is difficult to provide conclusive evidence on the critical factors determining the success of the advisory services. For example, there are variations in the length of the interventions studied in the literature, ranging from two-day training sessions to consulting tracks lasting several months. Moreover, as this variation in intervention-length coincides with a great diversity in intervention focus, SME types and a range of other contextual factors, no clear conclusions about the relationship between the length of the intervention and the impacts on business practices can be drawn. However, recent literature on the impact of consulting services to individual companies (Bloom 2013, Bruhn 2012) shows substantial impacts on business practices and outcomes, which raises the question whether intensive training and advice trajectories are a more effective way to support SMEs than shorter interventions. Most studies pertain to business support that is provided for free or nearly for free. It is often assumed that SME s are not capable of paying market prices for advisory services. Various studies discuss theoretical reasons why firms might not purchase advisory services at market prices and why government intervention would therefore be justified. McKenzie and Woodruff (2014) summarized these key arguments. Firstly, it might be that entrepreneurs do not adequately understand the potential value of advisory services and are hence not willing to pay market prices. Moreover, the entrepreneurs might be unwilling to take the risk that the advice does not pay off, especially when they are not familiar with the potential benefits of such services. Secondly, SMEs may not have the cash to pay for these services because banks are reluctant to provide them with loans. Thirdly, limited availability of locally and privately supplied advisory services could play a role. Furthermore, whereas the supported SMEs might indeed benefit from advisory services, the relevant question from a macro-economic perspective is whether the gains for the supported firms outweigh the potential losses for the non-supported firms. The only study that briefly touches upon this issue is Berge (2010) who finds that business training results in entrepreneurs discussing more business matters with their friends - which suggests that there might be some knowledge spillover to non-supported firms. Overall, however, very little is known about these spillover effects.

3 Studies tend to find positive effects of advice & business training on business practices, but there are methodological challenges to finding impact in business performance The majority of studies find positive short-term effects of interventions on business practices, such as improved bookkeeping practices. However, fewer studies find positive effects on business performance. McKenzie & Woodruff (2014) ascribed this finding in part to heterogeneous and small samples and in part to the fact that these effects might manifest only after the study measurements, which typically only follow the SMEs for one or two years after the interventions. Studies that do find significant effects include Calderon et al. (2011), who finds a 24% increase in weekly profits and 20% increase in weekly revenues, both significant at the 10% level. However, given the fact that at the moment of the second survey they had an attrition of 26%, and 50% of the enterprises that could be contacted had closed down, there is good reason for caution in interpreting this estimate of the impact. Glaub et al. (2012) found a positive effect of training on sales after one year. Berge et al. (2011) considered the impact of business training in Tanzania and found that approximately 6 months after the training, the profits and sales of the targeted SMEs had increased with 24 and 29%, respectively. However, they found that two years later, these effects have mostly disappeared. Valdivia (2012) finds a 20% increase for the treatment group that received both training and intensive one-on-one technical assistance, but no significant increase from the training alone. De Mel et al. (2012) found that a combination of training and grants resulted in increased profits, whereas Giné and Ghazala (2011) found that a similar Review methodology The review builds on an inventory of studies that were retrieved by a systematic search of research data-bases. One such study (Grimm and Paffhausen, 2014) reviewed the literature on the impact of employment creation programs for SMEs. Another review (Piza et al, forthcoming) considered the literature on the impact of business support services for SMEs. McKenzie and Woodruff (2014) reviewed the literature on business trainings and entrepreneurship programs. We complemented this search with studies on export promotion interventions. The primary selection criteria for this study were (i) intervention type; i.e., advisory services and/or export promotion to SMEs and (ii) methodological quality; i.e., limited risk of selection bias through the use of either (quasi)experimental designs or statistical controls such as a difference-in-difference model. In the first stage of the article selection process, 124 studies were collected (see Appendix 1). Of these, 63 were assessed to be relevant in terms of topic. Subsequently, of this sub-sample, 43 were assessed as applying a methodology of sufficient standard. Of these 43 articles, 29 were subsequently identified as impact studies and categorized according to key dimensions: population, intervention, impacts and methodology. combination did not result in increased performance. Two studies that consider individualized consulting interventions found substantial effects on financial performance. Bruhn et al. (2012) noted that both sales and profits approximately doubled for the group receiving long-term, individualized consulting support. Bloom et al. (2013) found that a consulting intervention among textile firms in India resulted in a 17% increase in productivity equivalent to an increase in average profit per firm of approximately $300,000.

4 Export promotion is effective in raising SME exports, but studies have a weaker design Volpe, Martinicus and Carballo (2008) studied the effects of export promotion interventions in Peru and found that these were associated with increased exports, both in terms of value (17%), number of products (10%) and number of markets (8%). Gil et al. (2007) applied an econometric model to estimate the effect of Spanish regional trade offices on exports and found that the presence of a regional trade office was associated with 75% higher exports. Tan (2009) used panel data to estimate the effects of government-funded trade promotion activities in Chile and found that SMEs making use of these programs have on average 5% higher exports (expressed as a percentage of their sales). Wilkinson and Brouthers (2006) used cross-sectional data to evaluate the effects of trade shows and trade missions on export and satisfaction with export operations. They found that trade shows were associated with a significant increase of 18% in the satisfaction score but that trade missions did not significantly improve this score. It should be noted that these observational studies have trouble reflecting on the changes without the export promotion and they cannot discount a certain selection bias when comparing firms or regions. For example, regions that already have stronger export and trade sectors may be more likely to invest in foreign trade offices, which could lead to an overestimation of the effects of trade promotion activities. The wide range of indicators used to measure the impact of SME support programs constrains benchmarking Although most studies measure the effects of interventions with common performance indicators, there is much heterogeneity in the types of proxies used to measure the effects on immediate and intermediate outcomes (i.e., the knowledge and practices of the entrepreneur). Table 1 below provides an overview of the indicators used in the studies included in this review. Harmonisation of these indicators would facilitate benchmarking. Research team: Job Harms a, Giel Ton b, Karen Maas a This document is an output from research funded by CBI & PUM Netherlands. The views and opinions expressed in this document are those of the authors and do not necessarily reflect the views of CBI & PUM Netherlands. We thank Howard White, Yvonne Prins, Cesar Freund, Robert-Jan Scheer, Jos Walenkamp & Marhijn Visser for useful comments. We are also grateful to Fédes van Rijn and Marjelle Vermeuelen for their valuable contributions. A=Erasmus School of Economics, Erasmus University B=LEI, Wageningen University

5 TABLE 1: IMPACT STUDIES USED IN REVIEW Alvarez, E. "Sources of export success in small-and medium-sized enterprises: the impact of public programs." International Business Review13.3 (2004): Bah, El-hadj, Josef C. Brada, and Taner Yigit. "With a little help from our friends: The effect of USAID assistance on SME growth in a transition economy." Journal of Comparative Economics 39.2 (2011): Bennett, Robert. "SME policy support in Britain since the 1990s: what have we learnt?" Environment and planning. C, Government & policy 26.2 (2008): 375. Berge, Lars Ivar Oppedal, Kjetil Bjorvatn, and Bertil Tungodden. "Human and financial capital for microenterprise development: Evidence from a field and lab experiment." CMI Working Paper (2011). Berge, Lars Ivar Oppedal, Kjetil Bjorvatn, and Bertil Tungodden. Human and financial capital for microenterprise development: Short-term and long-term evidence from a field experiment in Tanzania. Working Paper, Berge, L. I. O., Bjorvatn, K., Juniwaty, K. S., & Tungodden, B. (2012). Business Training in Tanzania: From Research-driven Experiment to Local Implementation. Journal of African Economies, 21(5), Bloom, Nicholas, et al. "Does management matter? Evidence from India." The Quarterly Journal of Economics (2013): Bruhn, Miriam, and Bilal Zia. "Stimulating managerial capital in emerging markets: the impact of business and financial literacy for young entrepreneurs." World Bank Policy Research Working Paper Series, Vol(2011). Bruhn, Miriam, Dean S. Karlan, and Antoinette Schoar. "The impact of consulting services on small and medium enterprises: Evidence from a randomized trial in Mexico." (2012). Calderon, Gabriela, Jesse M. Cunha, and Giacomo De Giorgi. Business Literacy and Development: Evidence from a Randomized Controlled Trial in Rural Mexico. No. w National Bureau of Economic Research, De Mel, S., McKenzie, D. J., & Woodruff, C. (2009). Measuring microenterprise profits: Must we ask how the sausage is made?. Journal of Development Economics, 88(1), De Mel, Suresh, David McKenzie, and Christopher Woodruff. The demand for, and consequences of, formalization among informal firms in Sri Lanka. No. w National Bureau of Economic Research, IMPACT INDICATORS wages, employment, sales employment (short-term & longterm) employment, sales discussion of business practices, business knowledge, risk aversion, total loan balance sales, profit, investment, marketing, record-keeping business training attendance, business knowledge, happiness, self-reported benefit of training production, output (fabric units), stock rotation, productivity, frequency of quality defects employees, profits, business and financial knowledge, business investments, business survival, business practices (separate accounts), sales business practices various, entrepreneurial spirit index, employment, productivity, profit, sales revenue, self-reported profits, number of clients record keeping, stock control, capital stock, sales, profit, marketing, revenue, financial planning registering firm with chamber of commerce

6 De Mel, Suresh, David McKenzie, and Christopher Woodruff. "Business training and female enterprise start-up, growth, and dynamics: experimental evidence from Sri Lanka." Journal of Development Economics 106 (2014): Drexler, Alejandro, Greg Fischer, and Antoinette Schoar. "Keeping it simple: Financial literacy and rules of thumb." American Economic Journal: Applied Economics 6.2 (2014): Eshetu, T., Mengistu Ketema, and B. Kassa. "Economic Impact of Support Service Program on Micro and Small Enterprises: The Case of Dire Dawa Administration, Ethiopia." AGRIS on-line Papers in Economics and Informatics 5.1 (2013). Field, Erica, Seema Jayachandran, and Rohini Pande. "Do traditional institutions constrain female entrepreneurship? A field experiment on business training in India." The American Economic Review (2010): Gil, Salvador, Rafael Llorca, and José A. Martínez Serrano. "Measuring the impact of regional export promotion: The Spanish case*." Papers in Regional Science 87.1 (2008): Giné, Xavier, and Ghazala Mansuri. "Money or Ideas? A Field Experiment on Constraintsto Entrepreneurship in Rural Pakistan." A Field Experiment on Constraintsto Entrepreneurship in Rural Pakistan (June 1, 2014). World Bank Policy Research Working Paper 6959 (2014). Klinger, Bailey, and Matthias Schündeln. "Can entrepreneurial activity be taught? Quasi-experimental evidence from Central America." World Development 39.9 (2011): Kogsters, Sarah. "Public business advice in the founding process: an empirical evaluation of subjective and economic effects." Environment and Planning C: Government and Policy 29 (2011): Lederman, Daniel, Marcelo Olarreaga, and Lucy Payton. "Export promotion agencies: Do they work?." Journal of Development Economics 91.2 (2010): Lopez-Acevedo, Gladys, and Monica Tinajero-Bravo. "Evaluating Enterprise Support Programs Using Panel Firm Data." Evalating Small and Medium Enterprise Support Programs in Latin America: The World Bank (2010). Mano, Yukichi, et al. "How can micro and small enterprises in Sub- Saharan Africa become more productive? The impacts of experimental basic managerial training." World Development 40.3 (2012): Robson, Paul JA, and Robert J. Bennett. "SME growth: the relationship with business advice and external collaboration." Small Business Economics15.3 (2000): Robson, Paul JA, and Robert J. Bennett. "Paying fees for government business advice: an assessment of Business Link experience." Applied Economics 42.1 (2010): sales, profit, business practices (marketing, stock control, financial planning, recordkeeping), capital stock (inventory & raw materials) business and financial practices, business and financial practices, sales, sales sales, monthly, employment, capital assets, business income, savings, talk business, loans export from foreign countries to Spanish regions loans, business operations, business practices, sales, business knowledge business start-up, expansion of business capital, employment, credit rating export value fixed assets, sales, foreign sales, employment, value added, wages, technological transfers payments, worked hours, gross production value added, record analysis, visiting customers, profit, record keeping, sales revenue revenue, profit per employee, employment business practices, innovation, training for employees, employment, skill, sales and marketing

7 Tan, Hong, and Gladys Lopez Acevedo. Evaluating training programs for small and medium enterprises: lessons from Mexico. Vol World Bank Publications, Tan, Hong. "Evaluating SME support programs in Chile using panel firm data." (2009). Volpe Martincus, Christian, and Jerónimo Carballo. "Is export promotion effective in developing countries? Firm-level evidence on the intensive and the extensive margins of exports." Journal of International Economics 76.1 (2008): Wilkinson, Timothy, and Lance Eliot Brouthers. "Trade promotion and SME export performance." International Business Review 15.3 (2006): capacity utilization, investment in worker training, adopt quality practices (no. of certifications & implementation of int. standards), productivity growth productivity, wages, exports as % of sales, sales, labour turnover, output export: no. of products, exports: no. of destination countries, export value firm satisfaction with export performance, firm satisfaction with export performance ADDITIONAL REFERENCES Ayyagari, Meghana, A. Demirgüc-Kunt, and Vojislav Maksimovic. "Small vs. Young Firms Across the World." Policy Research Working Paper 5631 (2011). Beck T, Demirguc-Kunt A, Levine R (2005) SMEs, growth, and poverty: Cross-country evidence. Journal of Economic Growth. 10(3): Grimm, Michael, and Anna Luisa Paffhausen. "Do Interventions Targeted at Micro-Entrepreneurs and Small and Medium-Sized Firms Create Jobs? A Systematic Review of the Evidence for Low and Middle Income Countries." (2014). McKenzie, David, and Christopher Woodruff. "What are we learning from business training and entrepreneurship evaluations around the developing world?." The World Bank Research Observer 29.1 (2014): Page, John, and Måns Söderbom. Is small beautiful? Small Enterprise, aid and employment in Africa. No. 2012/94. WIDER Working Paper, 2012 Sandefur, Justin. "On the evolution of the firm size distribution in an African economy." The Centre for the Study of African Economies, Oxford University, Working Paper 5 (2010): 2010.