Returns to Capital — A Randomised Test of Cash and Equipment Grants for Sri Lankan Microenterprises

In the districts of Galle, Matara and Kalutara -- Sri Lanka's tsunami-hit southern coast -- researchers from UC San Diego, Stanford and the World Bank set out to answer a basic question in development economics: do small firms lack capital because they are credit-constrained, or because the marginal return on more capital is simply low?
They randomly assigned cash or in-kind equipment grants (roughly 10,000-20,000 Sri Lankan rupees) to microenterprises with fewer than one paid employee, then measured how profits moved relative to a control group that received no grant, tracking firms across repeated follow-up surveys.
The average real return to capital came out at 4.6% to 5.7% a month -- 55-63% a year -- far above what a bank would charge, evidence that credit constraints, not low returns, were holding these firms back. But the effect was highly uneven: returns rose with the owner's measured business ability and household wealth, and -- most strikingly -- the positive effect disappeared entirely for enterprises owned by women, even though male- and female-owned firms in the sample looked similar on paper before the grant.
The study is a landmark in the microenterprise-finance literature and has been replicated with variations in several other countries, but it was a research field experiment, not an operating programme -- there is no follow-on Sri Lankan institution scaling unconditional capital grants from this specific trial, and the gender gap in returns is a caution against assuming capital access is a universal fix for microenterprise growth.

Read the full analysis: https://docs.iza.org/dp2934.pdf