Abstract:
Studies of microbusinesses in poor countries find high marginal returns to capital but also lack of investments. This article analyses how segmentation in the capital and labour markets can act as an obstacle for high-ability entrepreneurs to invest in microbusinesses 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 lower 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, lack of skills and knowledge are the main constraints to microbusiness growth.
