A better way to train small business owners: using psychology to teach personal initiative
Billions of US dollars have been spent—by governments, microfinance organizations, and NGOs—on training the owners of small businesses. Traditional programs typically aim to teach practices such as record-keeping, stock control, and simple marketing. But while these do seem to improve the performance of small businesses, most result in little real change, making the impact hard to detect.
So, when in late 2012 we were approached to design the impact evaluation of a training program to be offered in Togo under a World Bank loan program, we proposed that the program they had planned—the International Finance Corporation’s (IFC)Business Edge program—be tested against an alternative.
The alternative approach came from partnering with psychologist Michael Frese, who had been working on a personal initiative training program to develop behavior associated with a proactive, entrepreneurial mindset, rather than on teaching basic business skills. The idea is to coach small business owners in ways to innovate and differentiate themselves from other businesses, both to anticipate problems and to constantly look for new opportunities to take up so they can overcome obstacles and be self-starting.
Working with Michael, his Ph.D. student, Mona Mensmann, and World Bank colleagues Francisco Campos, Leonardo Iacovone, and Hillary Johnson, we conducted a randomized controlled trial that tested these two approaches, their findings released in Science magazine.
Context, and Random Assignment
The World Bank project launched a communication campaign in Lomé, the capital city of Togo, looking for businesses from the informal sector interested in improving and growing their businesses. More than 3,200 businesses applied; these were screened and reduced to a sample of 1,500 businesses; in the last quarter of 2013, these were then given a baseline survey.
The businesses came from a broad mix of industries (27% manufacturing, 48% commerce, 25% services), the owners were almost equally split in terms of gender (with 53% female), and most were earning a mean average of US$200 per month in profit. Their firms had a mean average of three employees, and a median of two.
These firms were then randomly assigned into three groups, each of 500 firms:
- A control group, the owners of which did not receive any business training.
- A traditional business training group, which received the Business Edge training program, which focused on four core topics: accounting and financial management, human resource management, marketing, and formalization.
- The personal initiative training group, which was offered a new program that was focused on teaching them a mindset of self-starting, proactive behavior.
To understand the difference between the two training programs take, for example, the topic of business finance. Traditional approaches to business finance explicitly teach owners to keep business records, explain what the different types of lending products are that banks offer, and discuss how to apply for a loan.
In contrast, personal initiative training teaches business owners to identify and approach unusual sources for money, not just banks (self-starting behavior); to “boot-strap”
or get themselves out of a bad situation without much help to avoid relying on external funds in the long-term (future-oriented behavior); and to cope with adversity by developing plans B and C in the face of financial problems (persistent behavior).
Both training courses were implemented for a total of 36 hours in three, half-day sessions per week in April 2014, followed by a trainer visiting the business once a month over the next 4 months to reinforce the concepts. The cost of providing each training course was approximately US$750 per participant, but it was offered at a highly-subsidized rate of around US$10.
Take-up rates were high, with 84% of those invited participating in each group.
What was the impact of these training programs on business growth?
We collected four rounds of follow-up surveys between September 2014 and September 2016, enabling us to track the outcomes of these businesses for 2 years and 5 months after training. Survey attrition rates were low, averaging 9%.
Using random assignments we could then compare how similar businesses performed over time when the owners of them were invited to either of the training programs, compared to being in the control group.
Figure 1 shows one finding: personal initiative training increased firms’ profits by 30% compared to the less significant 11% for traditional training, with the difference between the two also statistically significant. Our research shows this 30% increase in profits was not driven by a few successful firms, but occurs across the distribution. Firms taking part in personal initiative training have also had a 17% increase in monthly sales compared to the control group.
Figure 1: Personal Initiative training raised monthly profits more than traditional training. The vertical lines represent 95% confidence intervals. Estimates are average effects over all four rounds of post-training surveys.
The increase in monthly profits equates to US$60 more per month, enough to pay back the cost of offering the training program within a year. A lower assurance of return on investment is 82%, with an estimated 10-year return ranging from 140% to 393%, depending on how long these benefits last.
How does personal initiative training spur greater firm growth?
We explored a number of different mechanisms to help us understand why this new training program outperformed the traditional approach:
- The traditional approach led to an increase in the use of standard business practices, such as accounting, marketing, and stock control. However, even without explicitly teaching these practices, businessmen and women who received personal initiative training adopted almost as many of these practices anyway.
- Personal initiative training results in a much larger increase in personal initiativethan traditional training, which we measure using a seven-item scale of agreement—with questions like “I actively attack problems” and “whenever something goes wrong, I search immediately for solutions”—as well as with questions that are coded, based on answers to open-ended questions of what changes the owner has made in the business and how they got the idea for this change and went about implementing it.
- Those business owners who were receiving personal initiative training undertook more innovation, introduced more new products, and were more likely to diversify into a new product line, than those in traditional training.
- After personal initiative training, business owners borrowed more and made larger investments.
All these taken together help account for the better performance of the personal initiative training. And, while a number of traditional training programs have not worked well for women (which was also the case for the traditional training tested here), we found the personal initiative approach worked equally well for male and female business owners.
These results highlight the promise of improving the standard approach to training entrepreneurs by using insights from psychology. Based on them, personal initiative training has already been incorporated into new training programs in Ethiopia, Jamaica, and Mexico. We are looking forward to seeing whether it develops more successful entrepreneurs in these other settings, too.
Note, this post orignially appeared on The World Bank.