Microenterprise Contribution to Economic Growth through Forward Linkages with Large Firms in Peru

AMAP microREPORT #136. By Nagarajan, Geetha; Leegwater, Anthony; Shaw, Arthur,  IRIS Center at the University of Maryland, for USAID. September 2008

This microREPORT presents the results of micro-level research conducted in Peru by surveying medium and large enterprises to examine if MEs contribute to economic growth through forward linkages with medium and large (LEs) firms.  The study examines the growth effects of forward linkages, measured through changes in LEs' sales, employment, and investment, by analyzing LEs that outsource to MEs and those LEs that do not. Two distinct, but related, data sets are used for the analysis.  They include: (i) all Poverty Alleviation and Reduction Project (PRA) clients that provided quantitative information on incremental changes in sales, employment, and investment over time, and (ii) in-depth interviews of a sub-sample of LEs drawn from the larger PRA population to gather detailed information on the reasons underlying the choice to outsource or not to outsource to MEs. Analysis of the population of PRA clients, ceteris paribus, shows that outsourcing to MEs does not significantly promote growth in sales, employment and investment for LEs.  While agricultural firms and larger firms exhibit significantly faster sales growth than non-agricultural and smaller firms, outsourcing may not be essential for such fast-growing firms. 

In general, the results may only indicate that outsourcing allows LE firms to do at least as well as their non-outsourcing counterparts. In-depth interviews with a sample of LEs, however, show that a higher proportion of outsourcing LEs report increases in sales, employment and overall business growth scores compared to non-outsourcers.  Within the agricultural and non-agricultural sectors, the trend seems essentially the same, with outsourcers besting non-outsourcers.  Across sectors, but within the same outsourcing (or non-outsourcing) category, agricultural LEs appear to perform marginally better than non-agricultural firms.  Many outsourcing firms respond that, without outsourcing to MEs, they would not exist as a business, highlighting the critical importance of MEs to these outsourcing LEs. It is clear that agricultural firms perform better than non-agricultural firms.  But ambiguity exists as to whether outsourcing to MEs contributes to the observed differential performance.  More research is required to address the issue in detail to elucidate the role of outsourcing to MEs on LE performance.  It is important to obtain clear results needed to derive solid programming implications.

Available for download at http://www.microlinks.org/ev_en.php?ID=32621_201&ID2=DO_TOPIC