RETHINKING THE PURPOSE OF MICRO ENTERPRISES IN DEVELOPING COUNTRIES: EVIDENCE FOR MEXICO

A large body of economic literature has established that the primary purpose of any firm assuming unitary and constant elasticity of substitution of production inputs, among other necessary conditions, is profit maximization. However, the prevailing operating conditions of the micro enterprises rais...

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Bibliographic Details
Published in:Journal of developmental entrepreneurship 2016-09, Vol.21 (3), p.1650019
Main Authors: MUNGARAY-LAGARDA, ALEJANDRO, AGUILAR-BARCELÓ, JOSÉ G., OSORIO-NOVELA, GERMÁN
Format: Article
Language:English
Subjects:
Economic analysis
Economic models
Entrepreneurs
Small business
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Summary:A large body of economic literature has established that the primary purpose of any firm assuming unitary and constant elasticity of substitution of production inputs, among other necessary conditions, is profit maximization. However, the prevailing operating conditions of the micro enterprises raise concerns about the applicability of this formalization. Through an empirical study for Mexico using a four-input translog function (capital, labor, energy and supplies), and based on cross-sectional data, we find that the elasticities of substitution between production inputs are not unitary; in fact, some of them are complementary. This forces us to consider that instead of seeking to maximize profits, some types of micro enterprises are looking to optimize their installed capacity or achieve financial survival of the owner and their family, thus relaxing the foundations of economic analysis for the very small-scale and nascent micro enterprises.
ISSN:1084-9467
1793-706X
DOI:10.1142/S1084946716500199