The perils of a soft start: Initial conditions, early strategy selection, and small firm performance

Abstract Research Summary This article analyzes the impact of initial conditions on firm strategy selection and performance amongst small firms in emerging markets. Leveraging a proprietary dataset from a minibus taxi financier in South Africa, I estimate the impact of lower than expected fuel prices in the first 3 months of operation on a critical strategic choice: asset utilization. Firms receiving this fuel shock are more likely to operate fewer days, drive fewer kilometers, and work fewer hours. This pattern persists beyond the firm's founding and is correlated with worse loan repayment. This result challenges the assumption that smaller firms always benefit from easier founding conditions. Qualitative and survey evidence suggest that firms determine their profitability frontier early in their lifecycle, and lower cost pressure might encourage them to adopt less profitable strategies. The results suggest incentivizing small firms to adopt more profitable strategies early on might positively influence their long‐term survival. Managerial Summary Small firms in emerging markets represent a substantial portion of global economic activity. However, researchers and policymakers have spent little time considering the importance of these firms' strategic decisions. This article uses a proprietary dataset to explore the early strategic choices of minibus taxi firms in South Africa. Firms exposed to lower‐than‐expected fuel prices in the first 3 months of operation adopt less profitable strategies. Qualitative and survey evidence suggests that firms determine their strategy when they begin operations, and lower variable costs might lead them to adopt less profitable ones. The results suggest incentivizing small firms to adopt more profitable strategies early on might improve performance.