Measuring human capital for small enterprises

Transcription

1 Measuring human capital for small enterprises Leonardo Iacovone 1 Introduction The importance of human capital as a key determinant of entrepreneurial success, and propensity to pursue entrepreneurial activities, has become a topic very much debated in the literature (Bates 1985, 1990; Schoar 2009). Do entrepreneurs equipped with higher human capital more likely to be successful? What human capital matters for entrepreneurial success? Is it possible to use human capital to distinguish between subsistence versus transformational entrepreneurs? Human capital is a potential key determinant of gender gap in business performance. For example, difference in education and experience might explain the fact that female entrepreneurs concentrate in specific sectors while men are present in all the sectors of the economy. Typically these sectors include retail, garments, hotels and restaurants (see for example Bardasi et al, 2011). Going back to the work of Becker (1964) relevant human capital can be divided into two different types: generic human capital and specific human capital. The former, identifies skills, knowledge and capabilities that are valuable for solving different types of problems and are not specific to defined tasks. The main variables to capture this type of human capital are related either to investment in education (years of schooling, education attainment), or outcomes of these investments to better capture cognitive capacities (measures of IQ). Alternatively, some researchers have also used general work experience (age, years of experience) or parent background (parents education). Specific human 1 Senior Economist, Finance and Private Sector Development. The views, findings, interpretations, and conclusions expressed in this note are entirely those of the author. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. 1 H u m a n C a p i t a l

2 capital instead refers to task specific or activity specific relevant investments, which can be either industry specific (number of years of experience in a certain industry), or activityspecific (number of years of experience as entrepreneur). Alternatively, some researchers have pointed to the importance of entrepreneurial specific parental background (either one of the parents being an entrepreneur). More recently, various studies have suggested that the relevant concept of entrepreneurial human capital should take into account other types of attributes and measures, which are bundled generally under non-cognitive skill category. Given the potential importance of these variables in explaining gender gaps in business performance, we discuss these variables related to non-cognitive business related skills (see Measuring non-cognitive Business-related skills for small enterprise module). Finally, a last set of relevant indicators correlated to entrepreneurial success and certainly part of the subset of entrepreneurial specific human capital are related more broadly to managerial capacities. More in general managerial skills related to how to find customers, scan the market and identify good opportunities, negotiation skills, capacity to evaluate risk. Similarly, other researchers have suggested that financial literacy is another type of skill that matters for entrepreneurial success (Bruhn et al 2010; Drexler et al 2010). A key challenge when measuring entrepreneurial human capital is to distinguish between outcomes versus investments. A related challenge is to distinguish between task-specific and non-taskspecific human capital. Good practice questions 1. Generic human capital 1.1 Generic human capital of the individual How many years of formal education have you had? Highest level of education completed Current age Experience: At what age you started working? (use jointly with current age) 2 H u m a n C a p i t a l

3 1.2 Digispan recall test INTERVIEWER: Start with the card with 3 numbers marked on it, listed as card number 3. Tell the enterprise owner the following: Show the card I am now going to show you a card with several numbers written on it. I will show you the card for 10 seconds. I will then wait 10 seconds, and ask you to repeat the numbers back to me. For example, if I showed you this card: [INTERVIEWER: pull out card with three digits on it and show it to the owner.] Then you would look at this card, remember the numbers, and after 10 seconds repeat back to me Okay, let's start with a card with 4 numbers on it. a. 4 numbers b. 5 numbers c. 6 numbers d. 7 numbers e. 8 numbers f. 9 numbers g. 10 numbers h. 11 numbers 1=correct (If 1 go to the next card) 2=wrong (If 2 go to next Question) 1.3 Parents education Highest level of education completed of father and mother 2. Specific human capital: and as entrepreneur Years of experience in the industry: When did you start working in this industry? 3 H u m a n C a p i t a l

4 Years of experience as entrepreneur: Is this your first company? a. If yes When did you set it up Year b. If no When did you start your first company? Parental specific experience: a. Did any of your parents owned a business? b. Did any of your parents worked in the same industry/activity? 3. Managerial literacy Marketing In the last three months you visited one of your competitor s businesses to see what prices they are charging? In the last three months you visited one of your competitor s businesses to see what products they have available for sale? In the last three months you asked your existing customers whether there are any other products they would like you to sell or produce? In the last three months you talked with a former customer to find out why they have stopped buying from your business? In the last three months you asked a supplier about which products are selling well in your industry? Do you price any of your goods or services at prices slightly less than a round number (e.g. pricing at 995 SLR instead of 1000 SLR, or 99 SLR instead of 100 SLR)? In the last three months have you used any special offer to attract customers? In the last six months, have you done any form of advertising? Do you normally make suggestions of other items that customers might want to buy? Buying and Stock Control In the last three months have you attempted to negotiate with a supplier for a lower price on raw materials or goods purchased? In the last three months, have you compared the prices or quality offered by alternate suppliers/sources of raw materials or purchased goods to the supplier/source you have? Do you keep goods to sell, or of raw materials to use in providing a service? You run out of stock of these inventories or raw materials once a month Yes=1 No=2 4 H u m a n C a p i t a l

5 or more frequent You run out of stock of these inventories or raw materials very infrequently, once every 6 months or so You never run out of stock of these inventories or raw materials you inspect/update information on your inventory levels daily you inspect/update information on your inventory levels weekly you inspect/update information on your inventory levels monthly you have a written record-keeping system which allows you to know how much stock you have on hand Record keeping you keep written business records you record every purchase and sale made by the business you able to use your records to see how much cash your business has on hand at any point in time you regularly use your records to know whether sales of a particular product are increasing or decreasing from one month to another you worked out the cost to you of each main product you sell you know which goods you make the most profit per item selling you have a written budget which tells you how much you have to pay each month for rent, electricity, equipment maintenance, transport, advertising, and other indirect costs of the business you have a written budget which tells you how much you have to pay each month for rent, electricity, equipment maintenance, transport, advertising, and other indirect costs of the business you sell any goods on credit to customers you have a written record of how much each customer owes you If you wanted to apply for a bank loan, and were asked to provide records to show that you have enough money left each month after paying business expenses to repay a loan, would your records allow you to document this to the bank? Financial planning you review monthly the financial strength/performance of your business and analyze/identify areas for improvement you review two or three times a year the financial strength/performance of your business and analyze/identify areas for improvement you review once a year or less frequent the financial strength/performance of your business and analyze/identify areas for improvement you have a target set for sales over the next year you compare monthly or more often actual performance to your target you compare two or three times a year actual performance to your target you compare once a year or less frequent actual performance to your 5 H u m a n C a p i t a l

6 target you made a budget of what costs facing your business are likely to be over the next year 4. Financial literacy [Optional] Let s assume that you deposited $100 rubles in a bank account for 5 years at 10% interest rate. The interest will be earned at the end of each year and will be added to the principal. How much money will you have in your account in 5 years if you do not withdraw either the principal or the interest? a. More than $150,000 b. Exactly $150,000 c. Less than $150,000 d. I cannot come up with even a rough number Imagine, than you deposited the money in a bank account at 8% interest rate, while the annual inflation rate was 10%. Do you think the money from your account can buy more or less, or the same amount of goods and services on average now as a year ago? a. More than a year ago b. The same c. Less than a year ago d. I cannot estimate it even roughly Let s assume that you saw a TV-set of the same model on sales in two different shops. The initial retail price of it was $1000rubles. One shop offered a discount of $150, while the other one offered a 10% discount. Which one is a better bargain a discount of $150 or 10%? a. A discount of $150 b. A 10 % discount c. I cannot estimate it even roughly d. No answer Let s assume that you took a bank credit of $1000 to be paid back during a year in equal monthly payments. The credit charge is $60. Give a rough estimate of the annual interest rate on your credit. a. 3 % b. 6% c. 9 % d. 12 % e. I cannot estimate it even roughly Wesley recently borrowed some money from a local moneylender. He wanted to buy some clothes for his children. What do you think about Wesley s loan? Read options aloud. a. It is a Productive loan=1 b. It is an Unproductive loan=2 c. Don t know=99 Lynda is preparing a budget for her business. Which of the following needs to be included in the budget? Read options aloud. a. Income only=1 b. Expenses only=2 c. Both income and expenses=3 George does plastering on tall buildings. It is a dangerous job and he is worried that if he gets 6 H u m a n C a p i t a l

7 injured his family s income will become inadequate to meet their needs. If George comes to you for advice what would you suggest? Do not read out options. a. Take up some other (different) work=1 b. Purchase health / life / accident insurance=2 c. Open bank account/ increase savings=3 d. Other=4, Specify References Becker, G. (1964). Human Capital. Columbia University Press, New York Bates, T. (1985). Entrepreneur Human Capital Endowments and Minority Business Viability, Journal of Human Resources, 20: Bates, T. (1990). Entrepreneur Human Capital Inputs and Small Business Longevity, Review of Economics and Statistics, 72: Bruhn, Miriam & Dean Karlan & Antoinette Schoar, "What Capital Is Missing in Developing Countries?," American Economic Review, 100(2): De Mel, Suresh and David McKenzie and Christopher Woodruff (2010). Who are the Microenterprise Owners? Evidence from Sri Lanka on Tokman versus De Soto, in International Differences in Entrepreneurship, University of Chicago Press: Drexler, Alejandro, Fischer, Greg and Schoar, Antoinette, Keeping it Simple: Financial Literacy and Rules of Thumb (September 2010). CEPR Discussion Paper No. DP7994. Lazear, E. P Entrepreneurship. Journal of Labor Economics 23 (4): Lerner, Josh and Antoinette Schoar (2010). International Differences in Entrepreneurship, National Bureau of Economic Research, University of Chicago Press 7 H u m a n C a p i t a l

8 Schoar, A. (2009). The Divide Between Subsistence and Transformational Entrepreneurship, NBER Working Paper. Ucbasaran, D., Westhead, P. and Wright, M (2008). Opportunity Identification and Pursuit: Does Entrepreneur Human Capital Matter? Small Business Economics, 30: Wagner, J. (2006). Are nascent entrepreneurs 'Jacks-of-all-trades'? A test of Lazear's theory of entrepreneurship with German data, Applied Economics 38(20): H u m a n C a p i t a l