Do entry costs provide an empirical basis for poverty traps? Evidence from Mexican microenterprises

A study was performed to determine whether minimum start-up costs are high relative to wealth and if returns to capital are low at low investment levels. Data from Mexico's National Survey of Micro Enterprises (ENAMIN) gathered in 1992 (first quarter), 1994 (first quarter), 1996 (first quarter) and 1998 (fourth quarter) were used. The survey sampled firms with five of fewer workers, except in manufacturing, where the upper limit is 15. It was found that the median investment levels of new firms in some sectors are very low, less than US$100 in construction and personal services. The marginal return to capital invested in these sectors was quite high for low levels of invested capital. Returns to capital were 15% per month for investment levels below US$200, substantial for investment levels below US$1,000 and more moderate for investment levels above US$1,000. Overall, the data suggest that nonconvexities may be important in certain sectors of activity and that convexities prevent small businesses from becoming larger.