Policy brief: What prevents more small firms from purchasing professional business services?

The professional business services market of providers offering accounting, marketing, human resources, consulting, and legal services to other businesses is estimated to exceed US$5 trillion in annual revenue. However, few small firms in developing countries use these services. A recent experiment in Nigeria (Anderson and McKenzie, 2020) provided subsidies to firms with 2 to 15 workers, which paid for them to use a human resources firm to insource an accounting or marketing worker, or paid for them to outsource business functions to a professional accounting or marketing firm. It found that this approach of getting firms to use the market for business services led to a much larger improvement in business practices than the traditional approach of trying to train the entrepreneur in these skills, and resulted in these firms using higher quality digital marketing practices, innovating with new products, and achieving greater sales and profits growth over a two-year horizon.

The natural question that then arises is: Why don’t more small firms simply purchase these services for themselves? That is, why are government subsidies needed to get firms to start using these services? This report focuses on a series of follow-on activities designed to better understand how the marketplace for professional business services works in Nigeria, and on an experiment to test the effects of providing small firms with information and quality ratings on the business service providers. It then draws lessons for policymakers interested in helping small firms grow.