Microenterprise High Marginal Returns to Capital
Severe credit constraints prevent microenterprises and small firms in developing nations from obtaining small amounts of working capital, despite exceptionally high returns on small capital investments.
Picture this
Imagine a street food vendor who lacks twenty dollars to purchase an insulated cooler, forcing them to sell warm drinks at a discount; a small cash grant allows them to buy the cooler and immediately double their profits relative to the tiny investment.
What the evidence says
Grants of $100–$200 to Sri Lankan microenterprises increased capital stock and generated an implied real return to capital of 5 percent per month (60 percent annually); directed lending to Indian medium-sized firms yielded an annual return on capital close to 90 percent.
- Who
- Microenterprises in Sri Lanka receiving $100–$200 grants, and medium-sized manufacturing firms ($140,000–$640,000 capital stock) in India.
- How
- Randomized Controlled Trial (RCT) distributing cash grants in Sri Lanka, and quasi-experimental evaluation of directed credit policy changes in India.
What to do
Implement targeted micro-grant programs and direct credit allocations to cash-constrained small enterprises to unlock high-return capital investments.
From the source
"They found this increased capital stock and firm profits, with an implied real return to capital of five percent per month."
533 firm management AEA2010.pdf
Tagged
Nearby findings
- Size-Dependent Credit Constraints and High Marginal Returns to CapitalFinance & microfinance
- Informal Credit Market ExclusionFinance & microfinance
- Microenterprise Capital Grant Induced Debt DisplacementFinance & microfinance
- Differential Binding Constraints Across Financial Product MarketsFinance & microfinance