The abundance of small enterprises in developing countries has led to debates regarding the role that of entrepreneurial skill in business performance. Analyses of the skills and characteristics important for success can inform entrepreneurship training programs or educational curricula designed to increase the number of successful entrepreneurs. We addressed these issues in the context of Indonesia, a low-middle-income country in which almost half of workers are self-employed. After developing a conceptual framework linking fluid intelligence, crystallized intelligence, and educational attainment, we estimated the effect of these different types of intelligence on the profit and value of non-farm-household businesses. We found that fluid intelligence had sizeable and positive returns on business. On the other hand, crystallized intelligence had a positive and large effect only in sectors that required intense concentration or computers. Some heterogeneous effects regarding business size were also found. Our results were robust when we controlled for possible selection into nonfarm entrepreneurship.
JEL: J24, J46, O15, L26
Keywords: cognitive skills, human capital, entrepreneurship, household firm, farm business, non-farm business