What is the relationship between entrepreneurs' saving practices and their investment decisions? The authors present a simply stylized model that shows that entrepreneur's business investment decision depends on the efficiency of her saving practice, in addition to the productivity, liquidity needs, and the borrowing capacity of the entrepreneurial firm. Utilizing a novel micro and small enterprise survey from Tanzania we test the empirical implications of this stylized model. They find that (1) saving for business purposes and entrepreneurial earnings reinvestment are positively related, and (2) the practice of saving in a deposit account of a formal financial institution is more likely to foster reinvestment compared to the practice of keeping savings within the household. They also show that the negative impact of saving within-household on investment is more pronounced for life-style entrepreneurs; and also for family members with inherently low intra-household bargaining power - such as females and non-head household members. Their work contributes to the recent debate on the implications of saving instruments in developing countries, and suggests within-household saving practice as a bottleneck to microenterprise performance.
Beck, T.; Pamuk, H.; Uras, B. Entrepreneurial Saving Practices and Business Investment: Theory and Evidence from Tanzanian MSEs. (2014) 31 pp.