CONSTRAINED POTENTIAL: A CHARACTERIZATION OF MEXICAN MICROENTERPRISES

Abstract

Firm-level data spanning from 1994 to 2012 is used to investigate the apparent stagnation of Mexican microenterprises. The existence and nature of constraints are studied by estimating the empirical probability of a business’s success. A performance index is defined based on firm levels of capital stock and monthly profits. The predicted values are used to classify all microenterprises into one of three categories: upper, middle, or lower segment. Overall, the study identifies evidence of constrained productivity and capital misallocation, as well as the plausibility of cost-effective interventions. Specifically, microenterprises from the middle segment face substantial external constraints and their total share increased from 16 to 22 percent over time. The monthly marginal returns average 30 percent across lower-segment firms and 1 percent across those in the upper segment. Finally, the differences in monthly profits among segments are explored using the Oaxaca-Blinder decomposition method.