Introduction

There is an increasing interest in understanding the role of micro enterprises in developing countries. First, they constitute the vast majority of firms in developing countries. For example, Li and Rama (2012) find that this group comprises 61 percent of firms in Chile; 83 percent in Turkey; 95 percent in South Africa; 85 percent in India and 84 percent in Pakistan. While certainly some of them will disappear, some others may transition into larger companies and will provide the foundation for a modern private sector. Second, they are also the most important source of employment: 72 percent of jobs are created in micro enterprises in developing countries. Third, they have relatively low productivity levels, and this is especially concerning given their large share of employment. In this line, Angelelli, Moudry and Llisterri (2006) calculate that, even though 77 percent of total employment is generated by micro and small enterprises in Latin America, they only contribute to 30– 60 percent of GDP.

The economic literature provides a long list of potential culprits for low levels of productivity of micro enterprises. A considerable proportion of previous studies have focused on the challenges that financial constraints can impose on small businesses: if firms are unable to borrow, they would be unable to finance optimal levels of capital (e.g., Banerjee, Duflo, Glennerster and Kinnan, 2013; de Mel, McKenzie and Woodruff, 2008; Evans and Jovanovic, 1989; Fafchamps, McKenzie, Quinn and Woodruff, 2014). Restuccia and Rogerson (2008) argue that policies that create other distortions in the input or output markets can lead to misallocation of resources and reductions in productivity. Low levels of human capital (at least, measured through formal schooling) has been another candidate to explain low levels of productivity in small firms in developing countries. De Soto (1989) argues that the regulatory framework in developing countries creates an unnecessary burden for businesses in developing countries and promote informality. More recently, another potentially constraining factor in micro enterprise development has gained attention: managerial capital (Bruhn, Karlan and Schoar, 2010). For example, Bloom and Reenen (2010) argue that persistent differences in firm productivity can be explained by management practices. The authors surveyed around six thousand firms in 17 countries and measure their practices in three broad areas: monitoring (e.g., production process tracking), targets (e.g., goal setting) and incentives (e.g., promotion workers with high performance).