A key question in the study of SMEs in low-income countries is what policies can help more dynamic entrepreneurs start and grow their businesses. However, recent studies that have attempted to alleviate financial constraints through the provision of microcredit, or human capital constraints through training programs, have shown limited impact. Novel work suggests that more personalized mentorship may have significant benefits for entrepreneurs. Following this wave, in this project considers an innovative new microfinance product, based on the principles of equity financing, in which promising potential entrepreneurs in Bangladesh are provided with capital, training and mentorship to help them become online freelancers. The researchers will work with potential micro entrepreneurs who have passed the screening stage for our online freelancing project.
The project considers an innovative new microfinance product, based on the principles of equity financing, in which promising potential entrepreneurs are provided with capital, training and mentorship to help them become online freelancers. This provides a unique opportunity to study the incentive effects of profit-sharing between entrepreneurs and mentors. We hypothesis that entrepreneurial mentorship is more effective when mentors are incentivized directly by the productivity of their mentees: when they have ‘skin in the game’. We target Bangladeshi college graduates of rural areas to finance the relatively high initial cost of an online freelancing training program, using different microfinance contract structures that we randomly assign. We are implementing the field experiment with Creative IT Institute, a global leader in training young and poor individuals to become online freelancers and with a significant presence in Bangladesh and with Gana Unnayan Kendra (GUK), a local NGO is located in Gaibandha.
RESEARCH SUMMARY:
In this project, we aim to understand the locational, organizational and technical constraints of carrying out an IT training program in rural Gaibandha, Bangladesh with different microfinance contract structures to help students finance the training. Through this program, individuals with at least a high school degree and some minimum IT skills receive training to become successful online freelancers through online market places such as Upwork and Freelancer.com which allow clients – usually from higher-income countries – to hire freelancers from developing countries, to complete technical, as well as non-technical tasks. We provide financing for the costly training program in a more flexible ‘equity-like’ manner that shares in risk and reward and provides incentives for mentors to exert more effort in helping students develop, due to their having more ‘skin in the game’.
The main goal of this project is to train high school and college graduates in rural Gaibandha, a region not very well connected with urban labor market centers in Bangladesh, to become successful online freelancers.
We finance the relatively high initial cost of an online freelancing training program using different microfinance contract structures and test their relative effectiveness. In the first wave of the project, we have implemented two groups:
An “up-front” group (UF): who are not be offered any form of financing, but are offered the package of initial training and mentorship for a fixed up-front cost.
Debt treatment group (DT): who are offered a zero-interest, fixed-repayment loan to finance the total cost of the program, which includes initial training and mentorship (with the mentor being paid a fixed fee for their work).
In the baseline survey we carried out an incentivized elicitation of the ‘take-up’ of the UF and DT contract, as we varied the cost for the former and the payment duration for the latter. Specifically, we offered a UF contract of 4,000 BDT, 6,000 BDT and 8,000 BDT. As expected, the demand for the training is downward sloping with respect to cost. From this sample, there appears to be a take-up rate of 87.3 % when the training program at an upfront cost of 4,000 BDT, while it is 50.8% when the cost is 8,000 BDT.
For the debt/loan arm, we offered a 0% interest rate loan repayment scheme for the repayment of the 8,000 BDT course fee. We varied the duration of the payment period – 6 months, 9 months and 12 months. Participants were told that for any of these contracts, they would have to pay 800 BDT (i.e., 10% of the cost) in the beginning and the rest would need to be paid in equal installments for the duration of the repayment period. We find that the take-up rate for the debt contract varied from 76.2% to 98.4%, when the repayment period is varied from 6 to 12 months. This indicates that participants have important liquidity constraints that would inhibit advance skill acquisition, in the form of enrollment in the online freelancing training program.
The training program is being conducted by Creative IT, which is a leader in providing IT training in Bangladesh, with a specific focus on developing young individuals to become online freelancers. The premises for the training program was provided by Gana Unnayan Kendra, one of the largest NGOs operating in northern Bangladesh.
The project has progressed well, albeit slower than initially anticipated, largely due to the unfamiliarity with online freelancing in Gaibandha.
0 Comments