Cognitive Skills, Entrepreneurship, and Economic Growth in Indonesia

Team Member: Niken Kusumawardhani, Nurmala Selly Saputri, Veto Tyas Indrio
Completion Year:
Economic Policy, Microfinance & Micro, Small, and Medium Enterprises

Collaborating Partners

Funding Body :

Partnership for Economic Policy (PEP)


Description & Progress

This study aims to identify the skills of small business owners and their relationship to economic growth.



The abundance of small enterprises in developing countries has led to related but distinct debates on the skills of small business owners and their relationship to economic growth. The first revolves around how policymakers should view this large mass of household enterprise owners: what skills and characteristics distinguish the owners of fast growing “gazelles” from those that own subsistence enterprises with limited prospects for success? The second debate revolves around whether and how the development of household enterprises contributes to economic growth.

Each question has important implications for policymakers. First, analysis of the types of skills and characteristics important for success among entrepreneurs can inform entrepreneurship training programs or educational curriculum designed to increase the number of successful entrepreneurs. Second, better understanding the informal sector can inform broad strategies for growth and poverty reduction. Currently, little is known about the role of household enterprises in promoting growth. 



The proposed project will address these questions in the context of Indonesia, a low-middle income country where almost half of total workers are self-employed and virtually all of those self-employed can be considered as stagnant enterprises. 

The specific research questions are:

  1. How much do cognitive skills, as measured by national exit test scores or direct skills exams – conditional on other personal characteristics and environmental characteristics – distinguish successful enterprises from subsistence enterprises? Do these same characteristics distinguish high-growth from stagnant enterprises?
  2. To what extent do high-potential entrepreneurs contribute to growth and poverty reduction? Are regional growth differences attributable to variation in the number of high-potential entrepreneurs, their profitability, or a shift from less profitable enterprises into more productive wage work?  


Methodology and Data Source

This study will mainly focuses on quantitative research and will utilize the Indonesian Family Life Survey (IFLS), a publicly available longitudinal household survey that was first fielded in 1993. Each wave of the IFLS contains information on the profits and size of the household’s primary farm and non-farm business, as well as detailed information on respondents’ characteristics and labor market histories, allowing us to understand which factors are important for the success of the business. This study will focus primarily on the data from 2000 to 2014, which collects a significantly richer set of information on household enterprises.


Research Findings

In this paper, we estimate the association between two types of general skills, fluid and crystallized intelligence, on the performance of non-farm household enterprises in Indonesia. Using a model that controls for individual, household, enterprise, and district characteristics, we find that fluid intelligence has a positive, sizeable, and statistically significant association with business profits. The statistical significance of fluid intelligence appears to be robust even when time-invariant unobserved heterogeneity is taken into account. A one standard deviation increase in performance in Raven's test leads to a higher profit of around 6.3%. On the other hand, we do not find evidence that crystallized intelligence has any correlation with business performance.

Further examination by separating he non-farm businesses into sectors based on the kind of skills most needed shows that indeed, crystallized intelligence leads to higher profits only in the brain- intensive sector. In this sector, higher fluid intelligence leads to higher profits only in significant benefits. IN contrast, fluid intelligence increases profits in businesses engaged in social skills-intensive sectors. Therefore, we find that intelligence leads to higher profits only when an entrepreneur is engaged in the sector that is most appropriate given her or his skills.




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