Capital returns, productivity and accumulation in micro and small enterprises: Evidence from Peruvian panel data

This paper investigates the returns to capital, productivity and capital accumulation using a unique panel dataset for Peruvian micro and small enterprises (MSEs). Our analysis integrates recent empirical approaches that have focused on the returns to capital in MSEs into a dynamic perspective. To this end, we first analyze patterns of capital returns to test whether we can confirm recent findings of high returns at low levels of capital stock. This is indeed the case for small-scale activities with low capital stocks in Peru, thus contradicting perceptions of these activities constituting a stagnant subsistence segment of the urban economy. While some sectors appear to be less dynamic, quite a number of small-scale activities exhibit dynamics that resemble those found in more advanced economies. This is shown by our dynamic analyses of capital accumulation in MSEs. The analysis of firm growth suggests that small-scale entrepreneurs operate under severe constraints on credit markets and in risky business environments, which in turn explain why returns to capital are so high at low levels of capital.