Business at Home?
Work from home is often considered a pseudonym for shirking work. However, a reform in Singapore that allows budding entrepreneurs to set up their business at home has shown significant positive results. Jian Zhang is one of the authors of the research paper ‘Workplace Flexibility and Entrepreneurship’.
ISBInsight: What prompted you to undertake this research?
Jian Zhang: Encouraging entrepreneurship is acknowledged by everyone as an important way of boosting development and growth. Many entrepreneurship enabling factors hence receive a lot of attention from policymakers. However, what gets ignored often is the fact that removing barriers to entrepreneurship is equally important. Simple aspects like where to set up the business, the cost and effort of finalising the location and the commute to work are overlooked. The ‘Home Office Scheme’ by the Government of Singapore provided an excellent opportunity to assess what happens to entrepreneurship and the new businesses that are set up at home.
What were your most significant findings?
We found that not only did business creation get a boost through the scheme but that these businesses also had a higher survivorship rate. The entrepreneurs also went on to create second ventures that were even bigger.
What were some of the common characteristics of the entrepreneurs and businesses in this scheme?
We found that entrepreneurs in the scheme resided in public housing or conducted business in industries that required high starting capital. These features indicate that this scheme brings more benefits to would-be entrepreneurs with financial constraints. The other characteristic of the entrepreneurs was that novice or first-time entrepreneurs tended to dominate.
There was also a ‘U shaped’ trend in the demographics, in that there were more very young and slightly older entrepreneurs than middle-aged ones. This may perhaps indicate that on the one hand, young, motivated and risk-tolerant entrepreneurs were interested in setting up businesses under the scheme. On the other hand, older entrepreneurs also wished to put their experience to use in their own ventures.
The type of businesses was set up in sectors that needed high upfront capital expenditure, were low-risk industries and were of relatively small size.
Business creation gets a boost through the Home Office Scheme of the Government of Singapore. These businesses also had a higher survivorship rate. The entrepreneurs went on to create second ventures that were even bigger.
So it seems that this reform is not encouraging frivolous entrepreneurship at low risk?
That is correct. It is true that one would expect that such a scheme would reduce the cost of experimentation and enable entrepreneurs to work on an idea with fewer concerns about possibly negative consequences. This lowers the cost of failure and could encourage frivolity. Moreover, work from home in the corporate world is usually associated with shirking.
In this particular case though, the scheme seems to be working as intended, which is evident from the high survivorship rate and the fact that it creates serial entrepreneurs. Schemes to encourage entrepreneurship are routinely introduced by many governments, which create short term spikes in business creation. However, long-term sustainable impact is seen only through the quality of the business. Going by the research findings, reforms like this scheme are clearly not just a short-term endeavour.
As the definition of work itself changes, should such schemes be introduced in other countries?
Clearly, in a digital and interconnected world where many jobs can be done from anywhere, a home office offers distinct advantages. The business owner saves on set-up costs, commuting expenses and some overheads while continuing to participate in household production and duties towards the family. More importantly, this higher entry into self-employment is achieved without significantly lowering the average quality of the pool.
What are the policy implications of your research findings for other countries?
Some countries have laws that either do not allow running a business from home or have districts or city zones that are exclusively and strictly residential. Other countries, as a practice, include clauses prohibiting any commercial activity in residential tenancy agreements. Our research and the success of the Home Office Scheme suggest that such restrictions and laws should be removed in order to encourage business creation and boost growth.
A home office offers distinct advantages. The business owner saves on set-up costs, commuting expenses and some overheads while continuing to participate in household production and duties towards the family.
Additionally, such schemes are particularly relevant for small, high cost, and high GDP cities like New York, Mumbai or London. It is prohibitively expensive to buy or rent property for setting up a business in these cities and if the nature of the business requires physical presence in the heart of the city, most entrepreneurs would just give up on the idea due to lack of capital. In such cases, allowing for the business to be set up in existing residences would support growth.
Sumit Agarwal is Professor of Finance at the National University of Singapore. Tien Foo Sing is faculty at the Institute of Real Estate Studies (IRES), National University of Singapore, Changcheng Song is faculty at Department of Economics, National University of Singapore and Jian Zhang is faculty at the School of Business at Hong Kong Baptist University.
About the Research:
Agarwal, S., Sing, T.F., Song, C. and Zhang, J., 2018. Workplace Flexibility and Entrepreneurship. Georgetown McDonough School of Business Research Paper. Available at SSRN: http://dx.doi.org/10.2139/ssrn.3136792
Culture Drives Technology Adoption in Indian Banks
There are wide differences in the use of credit scores reported by credit bureaus between private and public sector banks. Organisational culture seems to be one of the contributing factors to such technology adoption. Prachi Mishra is one of the authors of the research paper ‘The Relationship Dilemma: Organizational Culture and the Adoption of Credit Scoring Technology in Indian Banking’.
ISBInsight: What observation about Indian banks prompted your research?
Prachi Mishra: Enabling legislation for credit bureaus and scoring was introduced in India in late 2007. This period of 10+ years is long enough for an easy-to-adopt technology like credit scores to become widely used. But this is not what we observed in reality. Moreover, the adoption seems to be skewed, both in terms of the type of loans for which scores are used and types of banks that use them.
What do your findings suggest?
At its core, our analysis shows clearly that Public Sector Banks (PSBs) lag New Private Banks (NPBs) in the usage of credit scores by a wide margin. Within this, PSBs seem to be using credit scores almost as much as NPBs for new loans but not for existing relationships or loans. Importantly, what this suggests is that PSBs are not technology-averse per se but seem to be using credit bureau data very selectively.
To validate the role culture plays in this difference, we also looked at Old Private Banks (OPBs) that share some of the same heritage and lineage, if not the same ownership patterns as PSBs. Here too, we find similar patterns in credit score usage.
Public sector banks lag new private banks in the usage of credit scores by a wide margin.
Clearly, then it is not the case that PSBs do not want to adopt the technology. However, did you notice any patterns within PSB credit score usage?
To our surprise, we found a distinct ‘U-shaped’ trend in PSB credit score usage. What we saw is that PSBs tend to call for credit scores more often for customers that are either of low credit quality or, puzzlingly, even high credit quality, but less so for those ‘in-betweens’. This seems to imply that PSB personnel are more inclined towards enquiring about customers for whom they have distinct prior beliefs. They enquire less where the credit quality information is ambiguous, which is where less discretion and greater objectivity is most needed.
Does collateral make any difference in score enquiry? Loan officers may feel that calling for scores may not be warranted for loans with adequate security.
Our data and findings clearly show that there is no perceptible difference between collateralised and non-collateralised loans as far as credit score inquiries are concerned. So to answer your question, it is not that PSB officers ask for scores less where collateral is available. In any case, with the poor state of collateral enforcement in India, even collateralised loans need to be sensitive to the borrower’s repayment capacity.
In light of all this, why is the use of credit scores important?
First, in India, the cost and effort involved in calling for the credit score are next to negligible, which means there is little to no reason for not asking for the credit score. Second, the use of credit scores is a good indicator, though not the only one, of the organisational willingness to adopt the technology. Third, our analysis shows that delinquency rates for loans where the score is checked are distinctly lower. Moreover, and more starkly, we saw that even on loans for which the enquiry returned a null report i.e., the score for that particular borrower was not available, the delinquency rates were lower. This clearly shows the utility of credit scores as one of the predictors of delinquency rates. They are informative about credit risk.
If an objective, affordable and easy to use measure for evaluating loan applications are available, it ought to be universally used. When a loan or credit officer does not call for scores that are easily available, practically free and provide clear value, the act of not enquiring conveys information. The act may either reflect active intent or passive incompetence, though we cannot conclusively say for sure one way or the other.
Delinquency rates for loans where the score is checked are distinctly lower. Moreover, and more starkly, we saw that even on loans for which the score for that particular borrower was not available, the delinquency rates were lower.
What are the key takeaways from this research for policymakers and bank management?
This is a paper that promotes technology adoption. Measures such as credit scores should be encouraged from a policy point of view because new technology is clearly leading to better outcomes.
From the organisational perspective, we need to ask what incentive does the loan officer have for moving away from legacy practices. Unlike the usage of credit scores, this obviously cannot be legislated. But there are lessons here for how banks can mandate better due diligence in credit assessment.
Prachi Mishra is with the International Monetary Fund in Washington, DC, USA. Nagpurnanand Prabhala is faculty at the Robert H. Smith School of Business, University of Maryland. Raghuram G Rajan is faculty at the Booth School of Business, University of Chicago.
About the Research:
Mishra, P., Prabhala, N. and Rajan, R.G., 2018. The Relationship Dilemma: Organizational Culture and the Adoption of Credit Scoring Technology in Indian Banking. Asian Bureau of Finance and Economic Research Annual Conference.
E-Commerce and Worker Wages
E-Commerce growth is usually associated with a decline in the growth of local offline businesses. What exactly is the impact? Who is most affected? Manpreet Singh is one of the authors of the research paper ‘The Dark Side of Technological Progress? Impact of E-Commerce on Employees at Brick-and-Mortar Retailers’.
ISBInsight: What prompted you to undertake this research?
Manpreet Singh: The impact of e-commerce growth on sales of local retail has received a lot of attention from many quarters. The relationship is somewhat understood. At the beginning of 2017, e-commerce sales accounted for 8.3% of total retail sales in the U.S., compared to 3.8% in 2010. This growth has come, to a large extent, at the cost of local retail business. What we hitherto did not know conclusively is how wages and employment are being affected by this shift. That motivated us to think about this topic.
In essence, what do you find is the impact of e-commerce on employment?
We use the staggered roll-out of a major e-commerce retailer’s fulfilment centres as a proxy for local e-commerce presence. More such centres are an important way for e-commerce companies to speed up deliveries as well as tailor product choice to local tastes.
Using a payroll dataset for 2.6 million retail workers, we find that the labour income of retail workers in US counties with fulfilment centres, on average, decreased by 2.4% after the establishment of the centres. The revenues of the evaluated sample local retail businesses decreased by 2.8% on average.
Labour income of retail workers in US counties with fulfilment centres, on average, decreased by 2.4% after the establishment of the centres.
So it appears there is a 1:1 relationship between sales loss and decline in employment. Would that be a correct inference?
Not exactly. The 2.4% decline derives from a reduction in the number of hours worked and not necessarily from a headcount reduction. Moreover, the reduction in income is also skewed towards hourly wage workers rather than salaried employees.
What other specific trends do you see within your dataset in terms of the type and size of businesses and the categories of workers impacted?
In terms of impact, all kinds of local retail businesses are affected whether it is organised retail chains or local stores. Within the workers, we see a ‘U-shape’ trend – the very young and old workers are worst affected in terms of wage reduction. This is intuitive since the former are high-productivity but low-experience while the latter are low-productivity but high-experience.
The very young and the old workers are worst affected in terms of wage reduction.
Interestingly, we see a distinct trend for the sales losses being higher for large, organised retail store chains after the fulfilment centre opens. But wage reduction is relatively lower when compared with smaller stores. This could be a result of wage protection clauses in the employment contracts, union strength or deeper pockets of these chains.
Apart from reduction in sales, does the opening of fulfilment centres lead to all-out store closures?
To some extent, yes. As would be expected, smaller stores suffered exits or closures more often than larger stores. Among organised retail chains, the relatively younger stores suffered a higher rate of exits or closures when compared with the ones that had been established earlier.
What are the implications of your findings for emerging markets and smaller economies?
This is something that needs to be assessed on a case-to-case basis. One of the reasons for the trend we see in our research is that large economies like the US are characterised by high wages and as a result, higher degrees of automation. This may not necessarily be true for smaller, emerging economies and hence ‘net’ wage reduction may not be as pronounced. On the other hand, many smaller countries may see an even higher rate of employment or wage reduction since they do not have very strict labour laws.
So is the growth of e-commerce sales and fulfilment centres a net bad for the local economy?
This is not necessarily true for various reasons. First because e-commerce growth helps to increase choice, widen product variety, and reduce consumer prices. Second, the local fulfilment centres also generate employment. Wages at these centres are typically slightly higher and they offer formal benefits. Third, some regular consumption categories remain beyond the execution capability of e-commerce. These are bulky, low-margin, and non-standardised products that people need on a day-to-day basis.
Besides these factors, anecdotally, we also know of local fulfilment centres helping to encourage entrepreneurship by providing budding local entrepreneurs with a platform for their products that extends their market reach. In this regard, we have to acknowledge that the majority of sales for one of the largest e-commerce companies comes from the third party category, many of whom are small local entrepreneurs and businesses.
What are the policy implications of your research findings?
E-commerce growth is a reality. Even after all these years in the US, it constitutes just around 8-9% of total sales. Continuing growth is a given. However, it is not just e-commerce that is threatening employment worldwide but also factors like automation. Policy makers need to focus specifically on older, low productivity workers who cannot easily reskill if there is a loss of employment or reduction in wages.
Policymakers need to focus specifically on older, low productivity workers who cannot easily reskill if there is a loss of employment or reduction in wages.
Sudheer Chava, Alexander Oettl, Manpreet Singh and Linghang Zeng are faculty at the Scheller College of Business, Georgia Institute of Technology, Atlanta, US.
About the Research:
Chava, Sudheer, Oettl, Alexander, Singh, Manpreet and Linghang Zeng, 2018. The Dark Side of Technological Progress? Impact of E-Commerce on Employees at Brick-and-Mortar Retailers. Georgia Tech Scheller College of Business Research Paper.
Roads for credit access?
Making infrastructure available improves productivity. Does private financing respond adequately to these productivity changes by tapping the new lending opportunities? And if so, what impact does this have on the economic well-being of the newly connected? S. Lakshmi Naaraayanan is one of the authors of the research paper ‘Roads and Loans’.
ISBInsight: It is widely accepted that improving access to unconnected areas improves economic opportunities. But is building roads alone enough?
S Lakshmi Naaraayanan: Building roads and connecting villages is clearly important from the perspective of economic opportunities. Roads help crop patterns to change from subsistence cereal farming to more profitable market-based crops. They allow surplus agricultural labourers to commute to nearby towns to access more productive jobs. Our observations from studying a large rural road-building initiative in India suggest that infrastructure availability needs to be complemented by financing opportunities for the full benefits to be realised by the newly connected population. By itself, building roads does not lead to growth or improvements in economic opportunities. The multiplicative effects would not be available with roads alone.
What prompted your research?
Our research was prompted by the widely known fact that from a public policy perspective, access to finance was not truly democratised, especially in rural areas. Informal lending is often the first port of call. We have tried to ask and address the question of whether private financing really responds to productivity changes. And if so, what is the impact of the flow of financing as productive opportunities improve?
The importance of this question is obvious given that most emerging markets are still largely poor and rural. Some 3.5 billion people worldwide live in rural areas. The question is also relevant from the perspective of income inequality.
Why focus on private lenders?
Compared to public sector banks (PSBs), private banks do not typically lend in rural areas due to their limited networks and lack of experience. Moreover, apart from capital constraints, PSBs may be influenced by other factors relating to capture by elites. We chose to specifically focus on private banks for these reasons. Private lenders are purely profit motivated, which removes distortions and leads to more sensible lending decisions towards truly productive opportunities.
What are the important findings from your research on borrowing and lending practices?
The most important finding is that roads enabled materially increased access to finance. Over 50% more villagers received loans, and the average amount lent to them was about 50-60% higher when compared with villages that were not eligible for the road-building programme. The lender we studied lends to 5.1% of villagers living in unconnected villages. This coverage jumps to about 7.8-9.5% for connected villages. Total loan disbursement, net of repayment, shows a similarly significant jump of about 20-40%.
Next, and more importantly, we also see that the credit growth is more on account of productive loans. These are loans taken out for small and micro business expansions, asset acquisition, working capital needs and such. Moreover, there is some evidence of lower loan amounts granted for consumption uses such as those taken out to finance marriage and festival expenses. Our results suggest that when road connectivity improves, credit gets reallocated from consumption uses to productive uses. There is also additional academic research that clearly shows multiplicative effects such as cultivation of hybrid varieties of crops, increased school enrolment, and other such benefits.
Roads enabled materially increased access to finance. And when road connectivity improves, credit gets reallocated from consumption uses to productive uses.
Does this credit growth end up benefiting the richer, land owning class who exploit connectivity, thus exacerbating inequality?
Our data shows that lower caste borrowers, borrowers without collateral, and borrowers with at least basic levels of education seem to benefit more from the improved credit access. This comes from socio-economic mobility and the creation of more opportunities within the village, facilitated by inclusion within formal financing channels. What is also important is that none of this is due to any government mandate or rule. We are looking at private sector lenders.
Is this credit growth more supply driven, in that lenders are now able to reach a new market, or is it more demand driven?
That is an important question. Let us look at the supply story. A connected village will certainly have more customers for the bank. However, banking correspondents have equal access to both connected and unconnected villages. So connectivity should not lead to such large divergences in credit growth between the two. Besides this, we see no significant statistical or economic differences in terms offered to similar borrowers in connected and unconnected villages. That implies that the bank does not have any specific preferences. Moreover, if the loan growth was supply-driven then we ought to see more or at least comparable growth in consumption loans, which is not the case.
This rules out the argument that supply growth is the main driver. Coming to the demand story, we see that the nodal branch created as a result of connectivity, leads to greater demand for loans from villagers who come to the branch based on word of mouth. This shows that conditional on reaching eligible and productive borrowers, credit growth increases.
What are the implications of your research for policy measures vis-a-vis financial inclusion?
It is widely acknowledged and proven by other research papers that lack of road access is a big impediment to financial inclusion. Our research findings show that improved road access through schemes like Pradhan Mantri Gram Sadak Yojana (PMGSY) can be complemented well by schemes such as Pradhan Mantri Jan Dhan Yojana (PMJDY) for truly multiplicative effects. However, it is important to match the timings of access to both roads and financing in order for these effects to be realised.
Improved road access through schemes like the Pradhan Mantri Gram Sadak Yojana can be complemented well by schemes such as the Jan Dhan Yojana for truly multiplicative effects.
How can banks use these research findings?
A new, expanded, and hitherto untapped market is a clear tangible benefit. Additionally, we show that productive loan growth, which is what banks would want to encourage, is clearly much higher in connected villages as compared to unproductive or consumption loans. What is even more stark is that default rates on these loans is as low as 0.4%, which is possibly driven by the fact that the motivation for wilful default is reduced since there is only one lender in town. The research findings point towards what could be a clear win-win with financial inclusion and reduced income inequality on the one hand, a commercial opportunity for new loans that are not riskier or any less profitable on the other.
Sumit Agarwal is faculty at Georgetown University. Abhiroop Mukherjee is faculty at Hong Kong University of Science and Technology and S. Lakshmi Naaraayanan is a PhD student at Hong Kong University of Science and Technology.
About the Research:
Agarwal, S., Mukherjee, A. and Naaraayanan, S.L., 2018. Roads and Loans. Available at SSRN: http://dx.doi.org/10.2139/ssrn.3103001
Ujval Nanavati is a Chartered Accountant, Chartered Financial Analyst, and an alumnus of ISB’s Post-graduate Programme in Management. He works as an independent writer and research analyst.