(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONAs the potential source of growth and employment, microenterprises are essential part of development funding. Microfinance institutions and nongovernmental organizations (NGOs) have recently become the most common source of household enterprises with more than 70 million clients worldwide. A concerning question for policy makers in channels for development funding is how these microenterprises make investment decisions and what characteristics of entrepreneurs affect their profits. Broad field experiments (De Mel, McKenzie and Woodruff, 2008 (henceforth DMW); Banerjee and Duflo, 2006) show evidence that return to capital among microenterprises is much higher than market interest rate. However, few empirical evidence have been found in the choice of optimal scales and timing of interventions as well as the evaluation of riskiness from the perspective of policymakers and NGOs in developing countries.Previous literature on microenterprises in developing countries can be categorized from three perspectives: i) the form of production function; ii) the estimation of the returns to capital; iii) the implications for the functioning of markets. Ackerberg, Benkard, Berry, and Pakes (2007) points out the absence of plausible instruments with substantial inter-firm variation, while DMW's approach advances the related literature on instrumental variables estimates of production functions by giving randomly selected firms lump sum of money or physical materials or capital. They use these random grants as instruments for capital in the production function. Banerjee and Duflo (2009) have shown that with perfectly functioning capital markets, all firms should have the same risk-adjusted return to capital. Estimating the extent and sectors in which this prediction does not hold true may then inform us of the extent of capital market imperfections in the broader economy.Theoretical literature on poverty trap postulates that entrepreneurs might remain inefficiently small for some period of time, but would be able to grow by reinvesting profits. However the argument is in absence of minimum scale and lack of practical policy suggestions. How to maintain a longer-range future for microenterprises is critical for policy designers under the rapid urbanization in developing countries. Tracking the growth pattern of small-scale entrepreneurs provides quantitative analysis on the best time and amount for development funding to support. Therefore by investigating the growth path of returns to capital generated by random investment, we find that the returns to development funding vary across microenterprises in DMW Sri Lanka field experiment.There is a broad literature on heterogeneous return to human capital (Tazeen Fasih et al., 2012) while due to the complexity of capital markets, there are few papers concentrating on the heterogeneity of returns to capital. Different from previous literature, we investigate how entrepreneurs make investment decisions and operate microenterprises in developing countries. It concentrates on the heterogeneity of microenterprises, such as the initial capital endowment, the entrepreneur's ability and risk awareness.This paper aims at measuring the effects caused by heterogeneity and therefore evaluating the investment intervention. How nongovernmental organizations (NGOs) and private/state-run financial institutions can best design cost-effective interventions for microenterprises is relevant to improving access to credit and offering more investment opportunities in developing countries. Therefore we explore the optimal scale of capital stock for interventions in order to determine the peak effectiveness of investment funding policy.From the firm's perspective, there are a list of distorting factors affecting the growth of microenterprises such as government policies, credit market failures, intro-family inefficiencies, learning externalities, and even behavioral factors. …