This essay is based on the working paper “Aggregate Implications of Barriers to Female Entrepreneurship” by Gaurav Chiplunkar and Pinelopi K. Goldberg.
Despite considerable progress over time, female labor force participation remains low in developing countries. Women face a range of barriers, cultural norms, and other constraints that affect their labor choices. However, patterns in the data suggest that female entrepreneurship may play a powerful role in female employment.
According to the World Bank’s Enterprise Surveys, an estimated 22.5 percent of firms globally are owned by women, with significant heterogeneity across sectors. Among petroleum firms, for example, women’s share of ownership is just 3 percent, while textile firms have the highest share at 35 percent (Figure 1). Female ownership is positively correlated with women’s employment: in male-owned firms, the average share of female workers is just 25 percent, while in female-owned firms it is 43 percent. Even more striking is the correlation between female ownership and women’s leadership within firms: only 6.2 percent of male-owned firms have a woman as their top manager, compared to more than 50 percent of women-owned firms (Figure 2).
Figure 1. Global average fraction of female entrepreneurs across industries
Figure 2. Global average fraction of women employees and managers
Given that around half of the world’s population is women, such gender disparities may entail significant economic costs. In advanced economies, recent work has shown that eliminating gender gaps and other distortions can improve the efficient allocation of talent, resulting in sizable productivity and welfare gains. Eliminating such distortions could entail even larger gains in developing countries, several of which are characterized by resource misallocation, low productivity, and low per capita income levels. If these aggregate effects could be realized, policies to promote gender equality would be more than human rights initiatives; they would contribute to economic development.
To better understand the macroeconomic implications of gender-based distortions that affect female entrepreneurship, we develop a framework for analyzing the barriers to entry, operation, and expansion faced by female-owned firms. To quantify these implications, we pair our model with data from India, where female labor participation and entrepreneurship are particularly low.
Female Labor Participation and Entrepreneurship in India
Despite impressive economic growth, India’s total female labor force participation has stagnated for three decades. However, female entrepreneurship has shown signs of progress. Since women entrepreneurs are more likely to hire other women as employees, this progress suggests that expanding female entrepreneurship could help promote women’s labor force participation more broadly. It is therefore useful to better understand the challenges faced by India’s female entrepreneurs.
To estimate the entry and operation costs faced by India’s female-owned firms, we use data from two waves of India’s Economic Census. In contrast to the World Bank Enterprise Surveys, the Census data are nationally representative and include the informal sector. This latter feature is important, given that the informal sector commands a large share of economic activity in developing countries and most female-owned businesses are informal.
More than 99 percent of total firms in our sample are informal. Female-owned firms account for less than 10 percent of total firms. In the informal sector, firms owned by women are slightly smaller in size than firms owned by men. However, this pattern is reversed in the formal sector: While there are very few formal firms owned by women, these firms are on average larger in size than firms owned by men.
Importantly, the pattern shown in Figure 2 also applies to India. Female-owned firms are more likely to hire women workers compared to male-owned firms, and much more so in the informal sector. We show that this pattern is not driven by sorting across sectors and regions and is robust to controlling for firm characteristics and excluding family-owned businesses from our sample.
Modeling the Aggregate Implications of Gender-Based Barriers
Our analysis is guided by a simple, stylized model that captures some important features of developing economies. It features an economy with multiple industries, each with a formal and an informal sector. All firms must pay an entry cost to operate. Firms in the formal sector must pay registration costs and taxes. Firms in the informal sector face penalties if caught evading taxes as well as the implicit costs of lacking access to formal finance. The only input in production is labor, and firms make hiring decisions conditional on entry. We assume perfect competition in both product and labor markets. Individuals are characterized by their gender, innate entrepreneurial ability, and their disutility of work. Based on these characteristics, they decide whether to participate in the labor force, and—conditional on labor force participation—whether to become wage workers or entrepreneurs. If they choose entrepreneurship, they decide in which sector (formal versus informal) and industry to operate.
Gender enters our model in several ways, which together cover several of the factors that the literature has offered as potential explanations for gender inequality. We allow for male and female workers to be imperfect substitutes in the production function and to have different productivities in manufacturing and agriculture relative to services. Men and women are allowed to differ in their disutility of work (or, equivalently, costs of labor force participation). Male and female entrepreneurs can differ in their entry and registration costs in the formal and informal sectors as well as in their realized industry-specific productivity distributions. Finally, we assume that there are hiring frictions in the labor market that prevent firms from expanding and allow these frictions to differ by both the gender of the entrepreneur and the gender of worker.
On the other hand, we impose the assumptions that the productivity of male and female workers is the same in services; that men and women do not differ in their preferences for the formal versus informal sector or for different industries; that there is no wage discrimination; and that men and women do not differ in their ex ante innate ability for entrepreneurship (though they can differ in their ex post industry-specific productivity distributions).
Our estimates suggest that female workers are less productive than male workers in manufacturing and agriculture, consistent with the view that they have a comparative advantage in brain- as opposed to brawn-related activities. However, we do not find any support for the hypothesis that male and female entrepreneurs differ in their industry-specific entrepreneurial productivities.
Women Entrepreneurs Face Substantial Barriers Compared to Men
Our main findings are:
- Women face substantial costs to labor force participation—two to three times those faced by men.
- Conditional on labor force participation, barriers to expanding businesses are much more important for female entrepreneurs than barriers to starting them.
- There is substantial heterogeneity across industries and regions. For example, the costs of labor force participation are substantially higher in the northern and central states of India than the southern ones.
- The only area where female entrepreneurs seem to have a significant advantage over their male counterparts is in hiring female workers. As noted earlier, this advantage is not driven by sectoral effects, as it holds even within narrowly defined industries.
- Correlating our estimates of barriers faced by women to various measures of female empowerment across Indian states reveals an interesting pattern: As expected, the costs of labor force participation are highest in states with a low index of women empowerment (i.e., northern and central states). However, the entry costs to entrepreneurship are lower in such states. Similarly, the aforementioned “advantage” of female entrepreneurs in hiring female workers is more pronounced in these states. A possible interpretation is that this “advantage” reflects in fact distortions. For example, it is possible that women work for other women not because of preferences, but because they feel safer or because they face less opposition from their families in this case—hence, this pattern is strongest in those areas with the most conservative norms.
- Irrespective of the reason for it, the fact that female entrepreneurs tend to hire more female workers suggests that female entrepreneurship can boost female labor force participation.
Estimating the Aggregate Gains from Removing Barriers to Female Entrepreneurship
Given these results, we investigate the potential gains to the economy through a series of counterfactual scenarios where each of the barriers are eliminated. Specifically, in all industry-regions where women entrepreneurs face higher costs than men, we sequentially remove the excess costs. However, in the one case where women have an advantage over men (i.e., hiring female workers), we do not eliminate the advantage. While we do not address the question of which specific policies would be most effective at reducing such barriers, our analysis leads to several policy-relevant insights:
- Removing the excess barriers faced by women-owned firms meaningfully expands female entrepreneurship. Eliminating excess formalization and entry costs leads to very small productivity and welfare increases, while eliminating barriers to business growth results in more substantial gains.
- Promoting female entrepreneurship also promotes female labor force participation. The key here is that female entrepreneurs hire more women.
- Policies that target female labor force participation only may have large effects on women’s labor force participation, but the increased labor supply of women leads to lower wages for female workers and lower profits for female entrepreneurs in equilibrium. In contrast, policies that promote female entrepreneurship in addition to labor force participation boost female wages and profits.
- The simulations highlight the presence of low productivity male-owned firms that operate only because they do not face competition from female-owned firms (which cannot enter or expand because they face excessive barriers). Removing the excess barriers results in high-productivity women entrepreneurs entering the economy and displacing low-productivity male entrepreneurs.
- This improves the efficiency of talent and resource allocation in the economy, resulting in substantial gains in aggregate productivity and welfare (as measured by real income).
These results demonstrate that promoting gender equality in entrepreneurship is beneficial not only to women, but to the entire economy. Further research should assess which specific policy interventions are most effective in reducing the barriers to entry, operation, and expansion faced by female-owned firms. A key challenge is that several of these barriers are not due to legal constraints, but to norms and attitudes that are more difficult to measure. Combining case studies of specific interventions to empower women with our framework would be a fruitful approach towards assessing not only whether such interventions are successful, but also their aggregate impacts.
Read the full working paper here.
Pinelopi K. Goldberg is the Elihu Professor of Economics at Yale University. She is also a research associate at the National Bureau of Economics Research (NBER), a Distinguished Fellow of the Center for Economic Policy Research (CEPR), and a board member of the Bureau for Research and Economic Analysis of Development (BREAD).
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