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Prosocial I-O: Quo Vadis

Enabling Capacity in the “Missing Middle”: Expanding Roles for Psychometric Tests?

Stuart Carr
Massey University

Bailey Klinger is a cofounder and director of Harvard University’s Entrepreneurial Finance Lab (EFL) and a fellow at Harvard’s Center for International Development. An economist by training, Bailey’s research focuses on entrepreneurial and small-business finance, as well as trade, structural transformation, and growth. He has consulted for the World Bank, United Nations, Inter-American Development Bank, and various country governments in Africa, Asia, and Latin America. He received his MPA (Master of Public Administration) in international development and PhD in public policy at Harvard’s Kennedy School of Government. Dr. Klinger’s work at EFL focuses on enabling access to finance for would-be small and medium enterprises (SMEs), and SME entrepreneurs, in lower income settings. In these low-income economies, SMEs are sometimes referred to as a “missing middle.” That is because SMEs fall between better served micro-enterprises (like informal credit networks) on the one hand and relatively macro-sized organizations—that is, corporations who have access to capital markets—on the other. In August 2010 however, the G20 (which includes for example the U.S.A., India, and South Africa) launched a competition to find models that best enable access to finance for these underserved SME organizations in low-income countries. From an international pool of 350 applicants, the EFL program was selected as an eventual winner of this global “SME Finance Challenge” (http://www.efinlab.com/index.php). EFL is also currently a competitor in the “People’s Choice” award, which closed November 8, 2010. Today, Bailey tells us more about the program and an expanding role for I-O psychology.

Bailey, can you tell us a little bit more about the work at EFL?
SMEs play a major role in economic development, particularly in “developed” economies where they are the single largest contributor to employment and job creation, and account for a significant share of gross domestic product (GDP). One big constraint to decent work and poverty reduction worldwide is the lack of SMEs in low-income countries. For example, it has been estimated by economists that $3.6 trillion of GDP is lost annually in the missing middle. Financing the development of SME organizations, in low income countries, is therefore critical to global development. The process of financing often starts with a basic process of credit screening. Yet banks are often short of decision-making information, for example, a formal business plan or financial statements. Even if they did have access to these, their transaction costs for smaller loan amounts would be impracticably high. So what happens is that they have to rely on crude indicators, such as credit history and demographic information. This reliance unfortunately ends up locking out many potentially successful entrepreneurs, thereby constraining business and employment in the local community. EFL thinks that the screening process could be vastly improved. Instead of only lending to the small minority that possess credit and other crude demographic indicators, our EFL program asks: What new information can be easily gathered to more effectively, and fairly, enable access and opportunity for small businesses in lower income countries?

Where does I-O psychology come in to your work?
We came to the issue as economists not psychologists. However within our discipline behavioral economics is on the rise. In that broad vein, initially we looked at lie detector and other physiological indicators. Eventually we arrived at psychometric tests. We were impressed with the amount of published validating research for many of those tests, including their predictive validity in workplace settings generally. In addition, there is an extended literature using such tools to analyze entrepreneurship in developed (for reviews, Ciavarella, Buchholtz, Riordan, Gatewood, & Stokes, 2003; Rauch & Frese, 2007) and also developing (e.g., Frese, 2000) countries. We felt then that selection for funding SMEs might be an analogous problem, especially with extant parallels in the wider finance sector. So we decided to begin exploring the usefulness of psychometric tests of cognitive and psychological characteristics. They included, for instance, personality, honesty and character, fluid intelligence, and applied business skills.

The first phase in our program has really been mostly about piloting and gauging the applicability and validity of such measures (“what works”). We have done this by working closely with team members and collaborators from a range of settings in Africa and Latin America. Aspects of the tests (like test norms) may need to be adjusted to suit culture and context, but on the whole we have found that some tools are robust at predicting outcomes (like business performance and loan repayment behaviour) across a range of country settings, without requiring any credit history or collateral. At the same time, it is really interesting to note that “which” of the measures, precisely, actually predicts successfully varies across type of organization (especially business size and activity). These findings may parallel new evidence from other sectors, such as international aid (ESRC, 2010).

All-in-all, the empirical evidence seems to be mounting that psychological tests have a role to play in enabling capacity in the missing middle and that organizations themselves have a key role to play.

How prominent then is I-O in your field?
Not really very active at all, at least not at the present time. We at EFL more or less stumbled upon psychometric tests during the early stages of the program. It is probably fair to say that economics has been quite closed to other disciplines in the past, working mainly with statistics and mathematics. The rise of behavioral economics is changing things, but I-O psychology nevertheless remains relatively new to other network teams like ours, working in enterprise development and in lower income settings. EFL is quite unusual by working with I-O psychologists in industry. For example, we purchase tests from pre-employment screening firms, and we work closely with the I-O psychologists working in those firms. As the EFL program expands (for instance, we are scheduled to conduct over 30,000 tests in the next year, across five African countries!), we are going to need many more tools, and more underlying constructs and theory, to help us explore and attempt to evaluate the application of testing processes. I guess that means that there is going to be much more need for local and international I-O input, and advice, in the near to midterm future.

How could our profession help more?
For us specifically, we are interested in deepening our connections with experts in these areas. We are looking for new forms of default tests. We are constantly trying out new tests and hoping at some stage to incorporate some of them into our growing EFL toolbox. Ultimately, the work we are doing at EFL fits quite well into the wider initiative being called humanitarian work psychology. This I believe is attracting growing interest globally across your profession (http://www.humworkpsy.org/). Our statistically validated tools are humanitarian because they will make a large portfolio of small SME bank loans economically viable and, to that extent, available. Even now, some 4,000 SMEs in Kenya will have credit through EFL and its psychometric tolls. EFL’s low-cost, automated screening tool will allow more and more banks to lend into the missing middle, thereby enhancing economic inclusion and fostering decent work and socioeconomic development out of poverty.

Do you have any take-home messages for the readers of TIP?
The research behind EFL was based on economic evidence of high returns to capital for SMEs that the missing middle is not just caused by inefficient business environments and the cost of formality but rather because finance is not reaching entrepreneurs. Enabling the context for high-potential entrepreneurs can help to grow businesses, employment, and economic growth in local communities. Our strong feeling is that access to finance is a key driver for development in low-income countries and that I-O psychology is a key component in that process. If you know of any research, instruments, ideas for opening up entrepreneurial finance, then we would like to hear from you at info@efinlab.com.

Thank you, Bailey, for a most enlightening, uplifting, and encouraging discussion!


     Ciavarella, M., Buchholtz, A., Riordan, C., Gatewood, R., & Stokes, G. (2003). The Big 5 and venture survival: Is there a linkage?” Journal of Business Venturing, 19, 465–483.
     Economic & Social Research Council (ESRC). (2010). Impact case study: Discrepancies in aid and development workers’ salaries. Impact Case Studies. Retrieved from
%20in%20aid%20and%20development%20workers%20salaries_tcm6-37066.pdf     Frese, M. (Ed.). (2000). Success and failure of micro-business owners in Africa: A psychological approach. Westport, CT: Quorum/Greenwood.
     Rauch, A., & Frese, M. (2007). Let’s put the person back into entrepreneurship research: A meta-analysis on the relationship between business owners’ personality traits, business creation, and success. European Journal of Work and Organizational Psychology, 16, 353–385.