Can capital grants help microenterprises reach the productivity level of SMEs? Evidence from an experiment in Sri Lanka

Using data from a randomized control trial in Sri Lanka, this paper explores whether cash and in-kind grants helped microenterprises approach the productivity level of SMEs. The paper first estimates production functions and subsequently treatment effects on TFP levels. Most significantly, more able and more risk-averse owners benefit from the larger in-kind grant. Also, the larger in-kind grants allowed for increases in productivity to the least productive firms. The paper then uses data from a representative sample of formal firms to put the TFP levels and treatment effects in the microenterprises into perspective. The results suggest that the least productive firms where able to catch up with the average microenterprise and formal SMEs, while a gap remains with large firms. This finding encourages a positive view of the potential for productivity growth in microenterprises. JEL classification: L25, O12, O14, O17, O33