Differentiation in microenterprises

Abstract Research Summary Small unregistered firms contribute to a substantial proportion of global economic activity, particularly in developing regions. In explaining variation in productivity in these types of informal firms, research has focused primarily on the adoption of effective business practices and access to capital, with little focus on fundamental positioning. This article explores the nature of differentiation in microenterprises, introducing a text‐based measure of differentiation using state‐of‐the‐art sentence embeddings. Using a combined sample of nearly 10,000 microenterprises across eight developing countries, I examine whether (and which) microenterprises differentiate, whether differentiation is related to performance (and for whom), and whether any existing policy interventions affect differentiation. Managerial Summary Small unregistered firms contribute to a substantial proportion of global economic activity, particularly in developing regions. In studying how to improve the productivity of these types of tiny firms, researchers and policy makers have primarily focused on business practices and access to capital, rather than the fundamental market position of the product or service offered. This article explores the extent to which microenterprises differentiate themselves from peer businesses, introducing a measure of differentiation based on computational text analysis. Using a combined sample of nearly 10,000 microenterprises across eight developing countries, I examine whether (and which) microenterprises differentiate, whether differentiation is related to performance (and for whom), and whether any existing policy interventions affect differentiation.