Microenterprise sectors are a dominant feature in urban areas of low- and middle-income countries. As much as a third of the labor force in these economies is self-employed. Those involved in retail trade—street vendors and owners of small shops and restaurants—are a plurality of small scale enterprises. These vendors earn their living using their own labor and small amounts of capital. They generally lack access to loans from formal financial institutions, relying on their own savings and perhaps informal loans from family members or friends. Surveys indicate that the lack of access to finance is one of their most often mentioned complaints.
This study uses data from the Mexican National Survey of Microenterprises (ENAMIN) to estimate returns to capital. A randomized experiment was designed to generate data which allow a consistent measure of returns to capital in microenterprises. Data was collected from a panel of microenterprises in the city of Leon, in Mexico over a period of five quarters. The baseline survey was carried out in November 2005. After the first through fourth rounds of the survey, treatments were administered in the form of either cash or equipment to randomly selected enterprises in the sample. The treatments generate shocks to capital stock which are random, uncorrelated with either the ability of the enterprise owner or the prospects for the business.
An unbiased estimate of returns to capital has important policy implications in several areas. First, the returns from investment determine the interest rates which borrowers are willing to pay to microlending organizations. Higher returns imply a higher likelihood of developing financially sustainable microlenders. Second, if returns are low below some investment threshold, then these low returns may act as an entry barrier, preventing high ability entrepreneurs without access to capital from entering. If, on the other hand, returns to capital are high at very low levels of investment, then capital-constrained entrepreneurs should be able to enter and grow to a desired size by reinvesting profits earned in the enterprise. In that case, capital constraints will have short term costs, but fewer long term effects on outcomes. High returns at low very low capital stock levels suggest that credit constraints will not lead to poverty traps.