The additionality impact of a matching grant programme for small firms: experimental evidence from Yemen

ABSTRACT

Matching grants are one of the most common types of private sector development programmes used in developing countries. But government subsidies to private firms can be controversial. A key question is that of additionality: do these programmes get firms to undertake innovative activities that they would not otherwise do, or merely subsidise activities that would take place anyway? Randomised controlled trials (RCTs) can provide the counterfactual needed to answer this question, but efforts to experiment with matching grant programmes have often failed. This article uses an RCT of a matching grant programme for firms in Yemen to demonstrate the feasibility of conducting experiments with well-designed programmes, and to measure the additionality impact. In the first year, the matching grant is found to have led to more product innovation, firms upgrading their accounting systems, marketing more, making more capital investments and being more likely to report their sales grew.

KEYWORDS:

• Matching grant
• additionality
• firm subsidy
• fragile states
• spurring innovation

Acknowledgements

The authors thank the editor and an anonymous referee for helpful comments, Sami Sofan for his work supporting this project, and Mohamed Raouda for research assistance.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Compared with Lebanon, Egypt, Saudi Arabia and Syria – see Yemen Investment Climate Assessment Update, World Bank, 2011.

2. Firms could also apply for subsidies to hire interns, with some firms applying only for these internship subsidies, some applying for the BDS grants and some applying for both. About 20% of the firms in our treatment group also applied for interns. We discuss the impact of the internship programme on youth employment in McKenzie, Assaf, and Cusolito (2016).

3. Data from a World Bank Latin American and the Caribbean overview available at http://go.worldbank.org/OVDGTHSWY0.

4. See Biggs (1999), Phillips (2001, 2002), Castillo et al. (2011), Crespi, Maffioli, and Melendez (2011), Gourdon et al. (2011) and Lopez-Acevedo and Tan (2011).

5. In some cases, particularly for very small firms or start-ups, direct payments were made to vendors for the balance of the costs once the firm provided evidence of payment of 50%.

6. See, for example, de Mel, McKenzie, and Woodruff (2008) in Sri Lanka and Blattman, Fiala, and Martinez (2014) in Uganda for the use of self-reported firm outcomes in grant interventions, and the set of papers reviewed by McKenzie and Woodruff (2014) for the use of self-reported firm outcomes in business training interventions. Recall error is likely to be less of a problem for the types of binary measures used for most of our measures (did you do action X or not?) than for monetary totals. Since the survey firm was different from the grant implementor, and the survey was presented in just understanding how firms had done over the past year of a difficult economy, we believe this mitigates against ‘pleasing the grantor’ bias.

7. This was asked as a binary question, about whether they had made such an investment or not, so we do not know the amount of investment made.

Additional information

Funding

The authors thank the Umbrella Facility for Gender Equality (UFGE) Trust Fund for supporting this work.

Notes on contributors

David McKenzie

David McKenzie is Lead Economist in the World Bank’s Development Research Group. He received his B.Com.(Hons)/B.A. from the University of Auckland, New Zealand, and his PhD in Economics from Yale University. Prior to joining the World Bank, he spent 4 years as Assistant Professor of Economics at Stanford University. His research covers migration, firm development, and methodological work on surveys and experiments in developing countries. He has published more than 100 articles and is currently on the editorial boards of the Journal of Development Economics, the World Bank Economic Review, and Migration Studies. He is also a co-founder and regular contributor to the Development Impact blog.

Nabila Assaf

Nabila Assaf is Senior Private Sector Development Specialist at the World Bank where she designs and leads projects in the development of small enterprises, exports and competitiveness in both the Middle East and Central Asia regions. She has a particular interest in development in fragile and conflict contexts, having led development projects in Yemen and Palestine as well as being involved in projects in conflict areas in East Asia and Africa. She holds a Master of Science in Industrial Engineering from the University of Washington.

Ana Paula Cusolito

Ana Paula Cusolito is Senior Economist working at the Trade & Competitiveness Global Practice of the World Bank Group. During her career, Ana has conducted analytical work on the sources of aggregate productivity growth in developing countries, innovation finance and investment readiness, the role of technology adoption as a source of comparative advantage in trade, and the impact of trade liberalization on vertical and horizontal innovation. She has experience working mainly in the Europe & Central Asia, Latin America, and Middle-East & North Africa regions. Before working at World Bank, she worked at the Central American Department of the Inter-American Development Bank, as a Country Economist for Costa Rica, as well as for the government of Argentina. Ana has a PhD in Economics from Universitat Pompeu Fabra.