Releasing Constraints to Growth or Pushing on a String? The Impact of Credit, Training, Business Associations and Taxes on the Performance of Mexican Micro-firms

This paper uses a detailed micro-firm data set with a panel dimension from Mexico to examine how several dimensions of the business environment, such as access to credit, training, business associations, government taxation, etc. affect micro-firm performance.The paper:

• Conceives of these dimensions as treatments;
• Argues that:
  • Low participation in treatments can be seen as evidence of supply bottle necks that limit access to financing, human capital and information;
  • Releasing these constraints would permit firms to approach the steady state size dictated by their intrinsic entrepreneurial ability;
  • For many firms, the steady state size is very small and thus there is little demand for these treatments;
  • In one approach, increasing the supply of treatments would improve business performance;
  • In the other, it would amount to pushing on a string and have little impact;
  • Both imply self-selection into the treatments, which imparts serious bias to estimates.
• Looks at the payment of taxes as a treatment with distinct selection issues.

To minimize the potential bias arising from self-selection, the paper employs:

• Two different techniques;
• Three different sets of conditioning variables.

The paper concludes that:

• Treatments increase the profit levels of micro-firms;
• Access to credit and paying government taxes are significantly related to an increase in the likelihood of firm survival;
• There is a negative treatment effect on growth, suggesting that treated firms are closer to their steady state sizes.