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Informational barriers to market access

Summary:
Informational barriers to market access: Experimental evidence from Liberian firms Access to large buyers who buy inputs of high quality or in significant quantities – multinationals, governments, bigger firms in other countries – Is increasingly believed to facilitate firm growth and job creation (Hoekman and Sanfilippo 2018, Alfaro-Urena et al. 2018, Verhoogen 2020, Atkin et al. 2015). In the policy world, this belief manifests itself both in the spread of market access initiatives such as export promotion agencies and in ‘buy local’ and other public procurement rules intended to steer contracts towards small- and medium-sized or domestic firms (Lederman et al. 2010, Agarwal et al. 2019, Best et al. 2016).1 However, the ability to market products appears to

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Informational barriers to market access: Experimental evidence from Liberian firms

Access to large buyers who buy inputs of high quality or in significant quantities – multinationals, governments, bigger firms in other countries – Is increasingly believed to facilitate firm growth and job creation (Hoekman and Sanfilippo 2018, Alfaro-Urena et al. 2018, Verhoogen 2020, Atkin et al. 2015). In the policy world, this belief manifests itself both in the spread of market access initiatives such as export promotion agencies and in ‘buy local’ and other public procurement rules intended to steer contracts towards small- and medium-sized or domestic firms (Lederman et al. 2010, Agarwal et al. 2019, Best et al. 2016).1 However, the ability to market products appears to vary substantially even across quite similar firms that enjoy similar physical and ‘formal’ access to growth-conducive buyers. This suggests that overlooked categories of access barriers may bind for many firms.

The literature on information frictions points towards one such category (Jensen 2007, Allen 2014, Startz 2021, Atkin et al. 2017b, Steinwender 2018). Three recent studies all show evidence that many randomly (or as-good-as-randomly) chosen small and medium-sized enterprises in developing countries – firms that especially struggle to access large buyers in today’s global economy – can successfully supply such buyers (Ferraz et al. 2016, Atkin et al. 2017a, Carrillo et al. 2019, Atkin et al. 2014). But most large buyers procure goods and services through complex procedures that can be very difficult to navigate for new suppliers. Reducing the complexities and ‘supplier participation costs’ embedded in input procurement procedures – or even (conditionally) randomly allocating government contracts, as is done in Ecuador (Carrillo et al. 2019) – may thus be good public (and/or buyer) policy. However, such buyer-side policies are limited in scope. After all, most contracts are, and will continue to be, allocated in business-as-usual markets in which successful suppliers win contracts through their ability to market and appeal to buyers.

The results from the studies in Brazil, Ecuador, and Egypt discussed above are nevertheless astounding. One reason is that the benefits they document for the randomly chosen contract winners put a lower bound on the size of the pure marketing barriers which latently productive but stagnant firms in developing countries must overcome to increase sales. The large estimated benefits point to a remarkable degree of arbitrariness in which particular latently productive firms succeed. A second reason is even more important from a policy perspective. These papers’ findings point towards a potentially impactful, low-cost way to level the playing field: teach ‘outsider-firms’ how to market their products to large buyers.

Suppose that sharing marketing knowledge with suppliers that struggle to sell to large buyers in effect reallocates contracts from ‘insider’ to ‘outsider’ firms. If buyers aren’t fooled by effective marketing (into buying substandard goods and services), and treated suppliers also aren’t fooled (into pursuing contracts that they do not benefit from), then such information sharing may increase allocative efficiency.

In our new study (Hjort et al. 2021), we take a first step towards investigating this intriguing hypothesis by asking if informational barriers to accessing the large buyer market in fact ‘bind’ for Liberian firms. Inspired also by research documenting how complex application procedures and knowledge barriers constrain qualified-but-underrepresented individuals’ educational, labour market, and social assistance choices, we conducted an experiment with small and medium-sized firms in Liberia to explore whether purely informational barriers to accessing large buyer markets exclude firms from growth-conducive value chains. 

We partnered with a non-profit organisation to experimentally enhance firms’ ability to market their products to large buyers. Firms in the treatment group were given a voucher to attend a seven day-long winning-contracts training for free. Run by the non-profit, the training exclusively teaches firms how to bid on contracts from corporations, government entities, and other buyers that procure inputs through formal tender procedures.

Reduced informational barriers to selling goods and services

The results of the experiment show that firms that learn how to market their products to large buyers a year later bid on and win more and better contracts. Firms in the treatment group that take the training (i) supply more buyers, (ii) win more contracts also through other means than formal tenders, (iii) triple their probability of supplying international buyers, and (iv) win much larger contracts. This appears to improve bottom-line performance: trained firms earn about $10,000 in revenue from contracts over the course of six months above and beyond a control group mean of about $5,000.

We find that informational barriers to market access ‘bind’ for about a quartile of firms. We use baseline characteristics to predict how bidding activity responds to the treatment and use this prediction to categorise firms. We compare treated firms of each responsiveness category to control group firms of the same type. Figure 1 shows that the impact of contract-winning knowledge on measures of bids and contracts won is large in magnitude and statistically significant (only) for top-quartile firms. This pattern also holds for other measures of firm performance such as the number of new buyers, the quality of contracts won, and contract revenues. 

Figure 1 Heterogenous impact of contract-winning knowledge one year out

Informational barriers to market access

Since the quartile of firms that are most constrained by own marketing knowledge in large part drive the average treatment effects, it is not surprising that these firms’ estimated response is large. A year after learning how to sell goods and services to large buyers, they are, for example, 70% more likely to win a formal tender and earn about $12,000 or 75% more in revenue from formal contracts over a six-month period.

Long-term effect of reduced informational barriers 

We show that the benefits of reduced informational barriers to accessing large buyer markets persist over time. The quartile of suppliers that win more and better contracts a year after the training continue to benefit three years after the training. They continue to win desirable contracts, pointing toward improved allocative efficiency. Most notably, they show signs of improved growth performance. Figure 2 shows that top-quartile firms employ more workers and are more likely to operate three years after the week-long training.

Figure 2 Heterogenous impact of contract-winning knowledge two years out

Informational barriers to market access  

Conclusion

Why are some firms better able to access desirable markets than others? The existing literature considers infrastructure, tariffs, and other traditional market access barriers whose impact in large part depends on a firm’s location and type (e.g. its sector, size, or production capabilities). The literature on information frictions points towards additional, overlooked categories of access barriers. And indeed, the results from our study show that providing pure ‘marketing knowledge’ allows a segment of small and medium-sized firms in Liberia to hire more workers and continue to operate three years after the intervention. Our results suggest that simply reducing informational market access barriers can even the playing field – enabling disadvantaged firms to succeed – and may help improve overall allocative efficiency as well. 

References

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Hjort, J, V Iyer and G De Rochambeau (2021), “Informational Barriers to Market Access: Experimental Evidence from Liberia”, NBER Working Paper No. 27662.

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Endnotes

1 A policy goal of the Government of Liberia, for example, is to steer public procurement contracts towards smaller, domestic firms. In 2014, they passed the “Small Business Empowerment Act”, which mandates all government entities to allocate at least 25% of their total procurement budget to Liberian-owned small and medium-sized firms. However, very few government entities are in compliance with the law.

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