Cash grants are better than earmarked matching grants for businesses in Burkina Faso

Cash grants appear to be more promising than matching grants, especially if the survival of small businesses, rather than innovation, is the key objective in fragile political contexts. This is the result of a study conducted by economists from the University of Passau and the World Bank in Washington D.C. and Burkina Faso.

The research is published in the Journal of Development Economics.

An unresolved policy question is whether support for small firms in the form of grants should be flexible (“cash grant”), and its exact use left to the discretion of the beneficiary, or whether it should be earmarked and accompanied by strict procurement rules and possibly an earmarked contribution (“matching grant”).

To shed light on that question, researchers from the University of Passau and the World Bank conducted a randomized controlled trial (RCT) in Burkina Faso to compare 400 firms that received flexible cash grants with 400 firms that received subsidies earmarked for investments in individualized technical training and consulting services. The study concludes that cash grants score higher in all categories and are also more cost-efficient.

“Beneficiaries of cash grants showed higher survival rates, improved business practices, more formalization, and more innovation activities compared to beneficiaries of matching grants and firms in the control group,” explains Professor Michael Grimm, holder of the Chair of Development Economics at the University of Passau. He is the lead author of the study, which was published under the title “Supporting small firms in a fragile context: Comparing matching and cash grants in Burkina Faso.”

Together with his co-authors Dr. Sidiki Soubeiga, former doctoral student at the University of Passau and now consultant at the World Bank in Burkina Faso, and Dr. Michael Weber, senior economist at the World Bank in Washington D.C., Professor Grimm conducted a randomized controlled experiment in Burkina Faso, to assess the medium-term impacts and cost-effectiveness of two innovative interventions to enhance firm growth and job creation in a fragile and rural setting. Cash grants can be used for any business purpose. Matching grants are earmarked for business development services (BDS), such as technical training and expert consulting.

Results at a glance

Two years after implementing the interventions, the research team observed the following effects:

• Across all outcomes, beneficiaries of cash grants outperformed those receiving matching grants.
• Most cash grant beneficiaries chose to spend the grant on capital goods, inputs, and livestock rather than BDSs. Overall, there was little evidence of fraud or misuse, even for the more flexible cash grants.
• Cash grant beneficiaries increased investment, saw greater growth in capital stocks, and were more resilient to the COVID-19 crisis, which could boost profits, sales, and employment in the longer term.
• However, neither cash nor matching grants significantly increased profits, sales, and employment relative to the control group.
• Cash grants are more cost-effective to implement. Including the grants, the cost per beneficiary was USD 6,658 for recipients of cash grants and USD 7,135 for recipients of matching grants.

The economists conducted the study as a randomized controlled trial in Burkina Faso from 2019 to 2022, in partnership with the local Maison de l’Entreprise du Burkina Faso (MEBF) and Innovations for Poverty Action (IPA), which fielded the surveys. Participating firms were eligible for up to USD 8,000 either in the form of cash or matching grants. Procurement rules were stricter for matching grants to prevent misuse. In order to qualify for a grant, firms had to take part in a business plan competition. On behalf of MEBF, experts selected 1,200 entrepreneurs from 2,279 applications, who were randomly allocated into two treatment arms (cash grants or matching grants) and a control group.

“Cash grants appear to be the more promising alternative, especially if survival of the firm rather than innovation is the key objective,” says Professor Grimm, summarizing the results. “A flexible cash intervention, therefore, can be a worthwhile policy option in other fragile contexts with weak institutions and a low-skilled workforce.”

According to the researchers, this is the first study to compare matching grants with cash grants based on a randomized field experiment in a fragile context.