Schumpeterian Growth for Micro Enterprises in Developing Countries
Schumpeterian Growth for Micro Enterprises in Developing Countries: Evidence from Phone Card Wholesalers in Mongolia
Abstract: Since Development economics was established as a field, economists have been interested in the factors that transform subsistence sector into capital one. Much of the current development literature on small and micro enterprises (SMEs) is focused on how subsistence entrepreneurs, or small enterprise owners, expand their businesses and which factors affect this transformation. This study examines the cost structure of SMEs and evaluates the impact of a cost-reducing technology on business expansion and customer welfare. Specifically, using data collected from a field survey, combined with data collected by server computers at a telecommunication company, I examine the entry behavior of prepaid phone card wholesalers into new markets in Ulaanbaatar, Mongolia, and estimate the cost function. I further evaluate the impact of a cost-reducing technology and calculate the benefit of this technology for SMEs. The result shows that cost distribution determines SME entry behavior, and the introduction of a cost-reducing technology led to reduced costs for wholesalers and permitted them to expand their business and make product available in an expanded market. The wholesalers’ benefit (due to reduced travel costs) is estimated to be 16% of their monthly sales. This implies that technology improvement can transform subsistence entrepreneurs into larger businesses in a non-agricultural sector in developing countries. Additionally, this study, one of only a few that connect entrepreneurship with development, shows microeconomic evidence of Schumpeterian growth.