Measuring human capital
for small enterprises
Leonardo Iacovone1
Introduction
The importance of human capital as a key determinant of entrepreneurial success, and
propensity to pursue entrepreneurial activities, has become a topic very much debated in
the literature (Bates 1985, 1990; Schoar 2009). Do entrepreneurs equipped with higher
human capital more likely to be successful? What human capital matters for
entrepreneurial success? Is it possible to use human capital to distinguish between
subsistence versus transformational entrepreneurs?
Human capital is a potential key determinant of gender gap in business performance. For
example, difference in education and experience might explain the fact that female
entrepreneurs concentrate in specific sectors while men are present in all the sectors of the
economy. Typically these sectors include retail, garments, hotels and restaurants (see for
example Bardasi et al, 2011).
Going back to the work of Becker (1964) relevant human capital can be divided into two
different types: generic human capital and specific human capital. The former, identifies
skills, knowledge and capabilities that are valuable for solving different types of problems
and are not specific to defined tasks. The main variables to capture this type of human
capital are related either to investment in education (years of schooling, education
attainment), or outcomes of these investments to better capture cognitive capacities
(measures of IQ). Alternatively, some researchers have also used general work experience
(age, years of experience) or parent background (parents’ education). Specific human
1
Senior Economist, Finance and Private Sector Development. The views, findings, interpretations, and conclusions
expressed in this note are entirely those of the author. They do not necessarily represent the view of the World Bank, its
Executive Directors, or the countries they represent.
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capital instead refers to task specific or activity specific relevant investments, which can be
either industry specific (number of years of experience in a certain industry), or activityspecific (number of years of experience as entrepreneur). Alternatively, some researchers
have pointed to the importance of entrepreneurial specific parental background (either one
of the parents being an entrepreneur).
More recently, various studies have suggested that the relevant concept of entrepreneurial
human capital should take into account other types of attributes and measures, which are
bundled generally under non-cognitive skill category. Given the potential importance of
these variables in explaining gender gaps in business performance, we discuss these
variables related to non-cognitive business related skills (see “Measuring non-cognitive
Business-related skills for small enterprise” module). Finally, a last set of relevant
indicators correlated to entrepreneurial success and certainly part of the subset of
“entrepreneurial specific human capital” are related more broadly to managerial capacities.
More in general managerial skills related to how to find customers, scan the market and
identify good opportunities, negotiation skills, capacity to evaluate risk. Similarly, other
researchers have suggested that financial literacy is another type of skill that matters for
entrepreneurial success (Bruhn et al 2010; Drexler et al 2010). A key challenge when
measuring entrepreneurial human capital is to distinguish between outcomes versus
investments. A related challenge is to distinguish between task-specific and non-taskspecific human capital.
Good practice questions
1. Generic human capital
1.1 Generic human capital of the individual
How many years of formal education have you had?
Highest level of education completed
Current age
Experience: At what age you started working? (use jointly with current age)
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1.2 Digispan recall test
INTERVIEWER: Start with the card with 3 numbers marked on it, listed as card
number 3. Tell the enterprise owner the following:
Show the card
I am now going to show you a card with several numbers written on it. I will show
you the card for 10 seconds. I will then wait 10 seconds, and ask you to repeat the
numbers back to me. For example, if I showed you this card:
[INTERVIEWER: pull out card with three digits on it and show it to the owner.]
Then you would look at this card, remember the numbers, and after 10 seconds
repeat back to me 7-5-2.
Okay, let's start with a card with 4 numbers on it.
1=correct
(If 1 go to the next card)
2=wrong
(If 2 go to next Question)
a. 4 numbers
b. 5 numbers
c. 6 numbers
d. 7 numbers
e. 8 numbers
f. 9 numbers
g. 10 numbers
h. 11 numbers
1.3 Parents education
Highest level of education completed of father and mother
2. Specific human capital: and as entrepreneur
Years of experience in the industry: When did you start working in this industry?
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Years of experience as entrepreneur: Is this your first company?
a. If yes “When did you set it up” – Year
b. If no “When did you start your first company?”
Parental specific experience:
a. Did any of your parents owned a business?
b. Did any of your parents worked in the same industry/activity?
3. Managerial literacy
Yes=1 No=2
Marketing
In the last three months you visited one of your competitor’s businesses
to see what prices they are charging?
In the last three months you visited one of your competitor’s businesses
to see what products they have available for sale?
In the last three months you asked your existing customers whether
there are any other products they would like you to sell or produce?
In the last three months you talked with a former customer to find out
why they have stopped buying from your business?
In the last three months you asked a supplier about which products are
selling well in your industry?
Do you price any of your goods or services at prices slightly less than a
round number (e.g. pricing at 995 SLR instead of 1000 SLR, or 99 SLR
instead of 100 SLR)?
In the last three months have you used any special offer to attract
customers?
In the last six months, have you done any form of advertising?
Do you normally make suggestions of other items that customers might
want to buy?
Buying and Stock Control
In the last three months have you attempted to negotiate with a supplier
for a lower price on raw materials or goods purchased?
In the last three months, have you compared the prices or quality
offered by alternate suppliers/sources of raw materials or purchased
goods to the supplier/source you have?
Do you keep goods to sell, or of raw materials to use in providing a
service?
You run out of stock of these inventories or raw materials once a month
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or more frequent
You run out of stock of these inventories or raw materials very
infrequently, once every 6 months or so
You never run out of stock of these inventories or raw materials
you inspect/update information on your inventory levels daily
you inspect/update information on your inventory levels weekly
you inspect/update information on your inventory levels monthly
you have a written record-keeping system which allows you to know
how much stock you have on hand
Record keeping
you keep written business records
you record every purchase and sale made by the business
you able to use your records to see how much cash your business has on
hand at any point in time
you regularly use your records to know whether sales of a particular
product are increasing or decreasing from one month to another
you worked out the cost to you of each main product you sell
you know which goods you make the most profit per item selling
you have a written budget which tells you how much you have to pay
each month for rent, electricity, equipment maintenance, transport,
advertising, and other indirect costs of the business
you have a written budget which tells you how much you have to pay
each month for rent, electricity, equipment maintenance, transport,
advertising, and other indirect costs of the business
you sell any goods on credit to customers
you have a written record of how much each customer owes you
If you wanted to apply for a bank loan, and were asked to provide
records to show that you have enough money left each month after
paying business expenses to repay a loan, would your records allow you
to document this to the bank?
Financial planning
you review monthly the financial strength/performance of your
business and analyze/identify areas for improvement
you review two or three times a year the financial
strength/performance of your business and analyze/identify areas for
improvement
you review once a year or less frequent the financial
strength/performance of your business and analyze/identify areas for
improvement
you have a target set for sales over the next year
you compare monthly or more often actual performance to your target
you compare two or three times a year actual performance to your
target
you compare once a year or less frequent actual performance to your
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target
you made a budget of what costs facing your business are likely to be
over the next year
4. Financial literacy [Optional]
Let’s assume that you deposited $100 rubles in a bank account for 5 years at 10% interest rate. The
interest will be earned at the end of each year and will be added to the principal. How much money
will you have in your account in 5 years if you do not withdraw either the principal or the interest?
a. More than $150,000
b. Exactly $150,000
c. Less than $150,000
d. I cannot come up with even a rough number
Imagine, than you deposited the money in a bank account at 8% interest rate, while the annual
inflation rate was 10%. Do you think the money from your account can buy more or less, or the same
amount of goods and services on average now as a year ago?
a. More than a year ago
b. The same
c. Less than a year ago
d. I cannot estimate it even roughly
Let’s assume that you saw a TV-set of the same model on sales in two different shops. The initial retail
price of it was $1000rubles. One shop offered a discount of $150, while the other one offered a 10%
discount. Which one is a better bargain – a discount of $150 or 10%?
a. A discount of $150
b. A 10 % discount
c. I cannot estimate it even roughly
d. No answer
Let’s assume that you took a bank credit of $1000 to be paid back during a year in equal monthly
payments. The credit charge is $60. Give a rough estimate of the annual interest rate on your credit.
a. 3 %
b. 6%
c. 9 %
d. 12 %
e. I cannot estimate it even roughly
Wesley recently borrowed some money from a local moneylender. He wanted to buy some clothes for
his children. What do you think about Wesley’s loan? Read options aloud.
a. It is a Productive loan=1
b. It is an Unproductive loan=2
c. Don’t know=99
Lynda is preparing a budget for her business. Which of the following needs to be included in the
budget? Read options aloud.
a. Income only=1
b. Expenses only=2
c. Both income and expenses=3
George does plastering on tall buildings. It is a dangerous job and he is worried that if he gets
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injured his family’s income will become inadequate to meet their needs. If George comes to you
for advice what would you suggest? Do not read out options.
a. Take up some other (different) work=1
b. Purchase health / life / accident insurance=2
c. Open bank account/ increase savings=3
d. Other=4, Specify
References
Becker, G. (1964). Human Capital. Columbia University Press, New York
Bates, T. (1985). Entrepreneur Human Capital Endowments and Minority Business
Viability, Journal of Human Resources, 20: 54-554
Bates, T. (1990). Entrepreneur Human Capital Inputs and Small Business Longevity, Review
of Economics and Statistics, 72: 552-559
Bruhn, Miriam & Dean Karlan & Antoinette Schoar, 2010. "What Capital Is Missing in
Developing Countries?," American Economic Review, 100(2): 629-33
De Mel, Suresh and David McKenzie and Christopher Woodruff (2010). Who are the
Microenterprise Owners? Evidence from Sri Lanka on Tokman versus De Soto, in
International Differences in Entrepreneurship, University of Chicago Press: 63-87
Drexler, Alejandro, Fischer, Greg and Schoar, Antoinette, Keeping it Simple: Financial
Literacy and Rules of Thumb (September 2010). CEPR Discussion Paper No. DP7994.
Lazear, E. P. 2005. Entrepreneurship. Journal of Labor Economics 23 (4): 649– 80.
Lerner, Josh and Antoinette Schoar (2010). International Differences in Entrepreneurship,
National Bureau of Economic Research, University of Chicago Press
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Schoar,
A.
(2009).
The
Divide
Between
Subsistence
and
Transformational
Entrepreneurship, NBER Working Paper.
Ucbasaran, D., Westhead, P. and Wright, M (2008). Opportunity Identification and Pursuit:
Does Entrepreneur Human Capital Matter? Small Business Economics, 30: 153-173
Wagner, J. (2006). Are nascent entrepreneurs 'Jacks-of-all-trades'? A test of Lazear's theory
of entrepreneurship with German data, Applied Economics 38(20): 2415-2419.
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