The Returns to Scale: Stimulating Productivity in Firm Clusters in Uganda
2012 Three men carry a large piece of furniture on a bicycle during travel in Kabale, Uganda | John Green
Study Context
Firms in low- and middle-income countries are both less productive and smaller than in high-income countries (Hsieh and Klenow, 2014). In industries with economies of scale, small firm size may itself be a driver of low productivity by hindering technology adoption and mechanization. In Uganda, furniture making is one such industry that has a high potential to benefit from increased scale.
Study Design
In partnership with a local social enterprise, we tested the viability of a new asset financing product designed to help small firms gain access to large machines through a “rent-to-own” model. Loans were offered to individual entrepreneurs, but the firm owners were also encouraged to share their machines with other businesses in the cluster through the rental market.
The intervention was piloted with carpenters in three urban areas in central Uganda in spring 2021. This pilot intervention randomly allocates furniture making firms to be part of (i) business clubs, (ii) business clubs with the opportunity to rent machines, and, (iii) a control group. This intervention aims to overcome the small scale of operations by fostering cooperation among entrepreneurs in clusters of firms.
Results and Policy Lessons
The main results are that demand for the larger machines offered by the social enterprise – such as thickness planers – was relatively low. Surveys run in the pilot areas show that this was mainly because (i) the rental market for large machines is already well developed, and (ii) complementary investments – such as access to electricity or larger premises – would be needed for firms to take on such machines. Demand for smaller machines such as compressors was instead high.
This study produced three main policy implications: (i) the rental market is quite effective at enabling access to large machines for small firms in this context; (ii) constraints related to access to electricity and space are substantial, and limit investment in large machines; (iii) promising asset financing interventions should focus on smaller machines that take less space and electricity and that are used more intensively by each firm, as these machines are typically less available in the rental market but still relatively expensive.
Read the full paper and watch affiliated professor, Vittorio Bassi, introduce the study:
