Studies of microbusiness in poor countries find high marginal returns to capital but also lack of investments. This paper analyses how segmentation in the capital and labour markets can act as obstacles for high-ability entrepreneurs to investment in microbusiness and also explain high marginal returns to capital. Using a household survey purposively designed for assessing barriers to microbusiness growth, we find that segmentation leads to inefficient allocation of entrepreneurial talent, labour and capital. This, in turn, leads to lower wages and smaller and less profitable businesses for low castes and lower economic growth of the local economy. The study covers a range of barriers to doing business and finds that in addition to market segmentation, access to capital and lack of skills and knowledge are the main constraints to microbusiness growth.

Working paper version:

Espen Villanger

Deputy Director, Research Director