SBE-5: Small Firms in LMICs Overview
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Questions and Answers

What percentage of businesses worldwide are classified as Micro, small and medium enterprise (MSMEs)?

  • 90% (correct)
  • 70%
  • 60%
  • 80%

    • What percentage of national income do formal firms account for?

  • 20%
  • 40% (correct)
  • 50%
  • 30%

    • What percentage of jobs in LMICs are provided by informal firms?

  • 80%
  • 60%
  • 50%
  • 70% (correct)

    • What is the main reason unregistered firms operate in the cash economy?

    <p>To avoid paying taxes and social security contributions</p> Signup and view all the answers

    What challenges do unregistered firms typically face due to their lack of formal status?

    <p>Limited access to finance and technology</p> Signup and view all the answers

    What factor contributes to the difficulty in identifying unregistered firms?

    <p>Geographical dispersion</p> Signup and view all the answers

    What method is used to measure the size of unregistered firms?

    <p>Conducting surveys and analyzing indicators like labor force and electricity usage</p> Signup and view all the answers

    In the context of unregistered firms, what does 'romanticizing penniless entrepreneurs' refer to?

    <p>Engaging in unfair competition by not paying taxes or complying with regulations</p> Signup and view all the answers

    What is the main difference between 'opportunity' entrepreneurship and 'necessity' entrepreneurship?

    <p>Opportunity entrepreneurs start businesses out of choice, while necessity entrepreneurs are pushed into starting a business</p> Signup and view all the answers

    Which type of businesses are considered 'execution-driven' according to the text?

    <p>Businesses that exit the formal sector due to high taxes and stringent regulations</p> Signup and view all the answers

    What role do 'exit-driven' firms play in the context of formal and informal sectors?

    <p>They exit the formal sector due to unfavorable conditions like high taxes and corruption</p> Signup and view all the answers

    How do unregistered firms contribute to economic welfare, as mentioned in the text?

    <p>By providing jobs and livelihoods, especially to marginalized groups</p> Signup and view all the answers

    Which stage of economic development is characterized by competition through low-cost efficiencies and high rates of self-employment?

    <p>Factor-driven stage</p> Signup and view all the answers

    Which factor is more prevalent in the efficiency-driven stage of economic development?

    <p>Skilled labor</p> Signup and view all the answers

    In which economic development stage do entrepreneurs have more opportunities and greater returns according to the text?

    <p>Innovation-driven stage</p> Signup and view all the answers

    What type of firms create the most jobs according to the text?

    <p>Small firms - most new jobs, highest employment and sales growth rate</p> Signup and view all the answers

    Which sector negatively impacts the growth rate of employment of formal SMEs, especially in countries with less favorable business environments?

    <p>Informal sector</p> Signup and view all the answers

    What does the text suggest plays a more crucial role in the growth of firms in developing countries?

    <p>Government regulations and institutional variations</p> Signup and view all the answers

    In the context of size and age, what does the text imply about surviving firms?

    <p>They grow consistently as they age</p> Signup and view all the answers

    What factor is highlighted as more influential for firm growth in developing countries than firm-level factors?

    <p>Institutional variations</p> Signup and view all the answers

    What aspect of unregistered firms does the text suggest is pivotal for their growth?

    <p>Institutional regulations</p> Signup and view all the answers

    Based on the information provided, what is the primary determinant for growth in developing country firms?

    <p>'Size-labor productivity' gap</p> Signup and view all the answers

    What is a significant issue faced by firms in developing countries, as mentioned in the text?

    <p>Limited access to skilled workers and innovation</p> Signup and view all the answers

    How does the economic crisis affect microenterprises, as stated in the text?

    <p>Results in a higher number of microenterprises</p> Signup and view all the answers

    What factor contributes to firms being deemed too small to be attractive for banks?

    <p>Size of the firms</p> Signup and view all the answers

    Why do unregistered firms face challenges due to their lack of formal status?

    <p>They lack collateral</p> Signup and view all the answers

    What is a key factor contributing to the limited access to information, technology, and equipment for firms in developing countries?

    <p>Inefficient banking systems</p> Signup and view all the answers

    What are the two possible effects of corruption on a firm's performance?

    <p>Higher chances of entry and lower capital productivity</p> Signup and view all the answers

    How does corruption impact a firm's operational decisions according to the text?

    <p>Results in inefficient resource utilization</p> Signup and view all the answers

    What is the primary consequence of higher bribery costs due to corruption?

    <p>Lower profitability</p> Signup and view all the answers

    How does corruption affect the innovation potential of a firm?

    <p>Lowers investment in innovation</p> Signup and view all the answers

    Which outcome arises from the 'sanding the wheels' effect of corruption?

    <p>Lower capital productivity</p> Signup and view all the answers

    According to Gindling et al. (2020), what is the relationship between labor market regulation and the earnings of social entrepreneurs compared to wage/salaried employees?

    <p>Higher labor market regulation leads to lower earnings for social entrepreneurs</p> Signup and view all the answers

    In what type of countries do low-skilled self-employed individuals earn more than high-skilled self-employed, according to the text?

    <p>Low-income countries</p> Signup and view all the answers

    How do higher trade regulations such as tariffs and quotas impact the income of self-employed individuals?

    <p>Higher trade regulations lead to decreased income for self-employed individuals</p> Signup and view all the answers

    What are the consequences of higher business regulations on the earnings of self-employed individuals by necessity?

    <p>Higher business regulations lead to lower earnings for self-employed by necessity</p> Signup and view all the answers

    What is the impact of a higher rule of law and property rights on the earnings of self-employed individuals by necessity?

    <p>Higher rule of law and property rights lead to lower earnings for self-employed by necessity</p> Signup and view all the answers

    How do changes in the regulatory environment primarily affect the earnings of social entrepreneurs who are women?

    <p>Changes lead to increased earnings for women social entrepreneurs</p> Signup and view all the answers

    What is one of the key factors hindering firms' productivity and expansion in low middle income countries?

    <p>Bureaucracy and informality</p> Signup and view all the answers

    Why is export activity important for firms seeking financing in these countries?

    <p>It signals to lenders the quality of the project</p> Signup and view all the answers

    How does financial development impact job creation and productivity according to the text?

    <p>It increases job creation, productivity, and social mobility</p> Signup and view all the answers

    What region has the highest percentage of the finance gap for formal companies in low middle income countries?

    <p>East Asia and Pacific</p> Signup and view all the answers

    Why is the size of a company considered a hindrance to financing according to the text?

    <p>Small companies lack sufficient collateral for financing</p> Signup and view all the answers

    According to McKenzie and Woodruff (2017), what is the main benefit of implementing better business practices in small firms in developing countries?

    <p>Enhanced productivity and sales</p> Signup and view all the answers

    What group of individuals are more likely to own small firms in developing countries with better business practices, based on the findings of McKenzie and Woodruff (2017)?

    <p>Children of entrepreneurs</p> Signup and view all the answers

    How do improved business practices impact the survival rates of small firms in developing countries according to the research by McKenzie and Woodruff (2017)?

    <p>Higher rates of survival and growth</p> Signup and view all the answers

    What were the key areas of focus under business practices in the study by McKenzie and Woodruff (2017)?

    <p>Marketing, record keeping, financial planning, buying, and stock control</p> Signup and view all the answers

    Based on the research by McKenzie and Woodruff (2017), why do small firms in developing countries benefit from better business practices?

    <p>To achieve higher productivity and profitability</p> Signup and view all the answers

    What is a common challenge faced by female entrepreneurs in terms of financing?

    <p>Constrained access to financing</p> Signup and view all the answers

    How do microenterprises run by women typically perform compared to their male counterparts?

    <p>They underperform compared to male counterparts</p> Signup and view all the answers

    What is a consequence of female entrepreneurs boosting household income?

    <p>Improved outcomes for children</p> Signup and view all the answers

    What is a potential challenge faced by microenterprises due to intertwined business and family lives?

    <p>Conflict between business and family priorities</p> Signup and view all the answers

    How do MSMEs contribute to environmental sustainability according to the text?

    <p>By operating in local supply chains</p> Signup and view all the answers

    What is a potential consequence of environmental regulations in HICs leading to industrial relocation?

    <p>More pollution in LMICs by formal businesses from HICs</p> Signup and view all the answers

    Study Notes

    Micro, Small, and Medium Enterprise (MSMEs)

    • 90% of businesses and >50% of employment worldwide
    • Formal (registered) firms with 5+ employees and informal entrepreneurs
    • Formal firms contribute to 40% of national income
    • Informal firms contribute to 36% of GDP in LICs and 7 out of 10 jobs in LMICs

    Entrepreneurship and Economic Development

    • Entrepreneurship is crucial for poverty and economic development
    • It promotes employment, innovation, women empowerment, welfare, and structural transformation
    • Unregistered firms (informal economy) engage in legal activities but hide from authorities for:
      • Monetary reasons (avoiding taxes)
      • Regulatory reasons (avoiding bureaucracy)
      • Institutional reasons (corruption, weak rule of law)

    Challenges of Unregistered Firms

    • Limited access to finance, government programs, physical infrastructure, modern technology, and innovation
    • Low skilled and less productive workers
    • Difficult to measure their size and impact on the market

    Measuring Informal Economy

    • Surveys and indicators (labor force, electricity) are used to measure the size of the informal economy
    • "Multiple indicator-multiple cause" models are used to understand market fluctuations and economic development

    Informal Markets and Entrepreneurship

    • Two types of entrepreneurship: opportunity (choice) and necessity (pushed into it)
    • Informal markets provide jobs and livelihoods to those who would otherwise be unemployed
    • Enabling women to better balance work and family responsibilities
    • A "steppingstone" to more serious jobs or new industries

    Stages of Economic Development

      1. Factor-driven: land, commodities, non-agricultural self-employment
      1. Efficiency-driven: infrastructure, skilled labor, larger firms, less entrepreneurs
      1. Innovation-driven: growing service sector, new information technologies

    Firms and Job Creation

    • Small firms create the most jobs, with the highest employment and sales growth rate
    • Large firms have higher productivity growth
    • Negative role of informal sector on the growth rate of employment of formal SMEs

    Growing Firms

    • Firms that survive start small and grow as they age
    • Size-age gap: growth depends on institutional/government variations or regulations
    • Size-labor productivity gap: country-level factors are more important than firm-level factors

    Firms' Performance

    • Lack of skilled workers, product/process innovation, credit, and infrastructure
    • Socio-political instability, corruption, and lack of collateral
    • Economic crisis leads to higher unemployment and more microenterprises

    Corruption and Firms' Performance

    • Corruption can have both positive and negative effects on the economy and firms' performance
    • Indirect effect on firms' operational decisions: inefficient use of resources and lower productivity

    Regulatory Environment

    • Higher labor market regulation leads to higher earnings for self-employed by choice
    • Higher rule of law and property rights lead to lower earnings for self-employed by necessity

    Credit Risk

    • 65 million firms (40% of formal MSMEs in LMICs) face a finance gap
    • Information asymmetry, bureaucracy, informality, and lack of collateral hinder firms' productivity and expansion

    Business Practices

    • Better business practices lead to better outcomes: higher productivity, sales, profits, and rates of survival and business growth
    • Female entrepreneurship boosts household income and increases women's share in income, leading to economic autonomy and better outcomes for children

    Environmental Sustainability

    • Informal economy has an ecological footprint
    • MSMEs operate in local supply chains, leading to lower pollution
    • Environmental regulations in LMICs can lead to non-compliance and hidden activity, resulting in more pollution

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    Description

    This quiz provides an overview of micro, small, and medium enterprises (MSMEs) in low- and middle-income countries (LMICs), covering topics such as entrepreneurship, poverty alleviation, economic development, employment, innovation, and women empowerment. It discusses the significance of formal and informal firms, their contributions to national income, GDP, and job creation.

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