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Preparing fertile ground: how does the quality of business environments affect MSE growth?

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  • Jonathan Fu

    (University of Zurich)

  • Annette Krauss

    (University of Zurich)

Abstract

We study how the quality of local business environments helps explain growth outcomes of micro- and small enterprise microfinance clients by drawing on long-term nationwide administrative data and a policy shock in Cambodia. The staggered launch of special economic zones, which we link to positive shocks to the business environment on both the demand and supply side, leads to significantly increased employment in micro- and small enterprises (MSEs) located in these special economic zones (SEZs), compared to enterprises in contextually similar districts that are unexposed to an SEZ. Key channels explaining the improved growth outcomes include expanded access to external markets for the enterprises’ goods and services, more dynamic labor environments, and improved credit terms and conditions. To broaden the relevance of our findings, we combine data from prominent empirical studies on microfinance and demonstrate how related business conditions identified in the enterprise growth literature help explain differences in client business outcomes found in their results. Policy implications are that a smaller but influential segment of microfinance borrowers significantly benefit from opportunities provided by improved local business environments and that governments and lenders can play active roles in facilitating the necessary improvements for such MSEs.

Suggested Citation

  • Jonathan Fu & Annette Krauss, 2024. "Preparing fertile ground: how does the quality of business environments affect MSE growth?," Small Business Economics, Springer, vol. 63(1), pages 51-103, June.
    • Handle: RePEc:kap:sbusec:v:63:y:2024:i:1:d:10.1007_s11187-023-00804-z
    DOI: 10.1007/s11187-023-00804-z
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    More about this item

    Keywords

    Enterprise growth; Microfinance; Business environments; Policy shock;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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