Market Size, Sunk Costs of Entry, and Transport Costs An Empirical Evaluation of the Impact of Demand-Side Factors versus Supply-Side Factors on Manufacturing Productivity

World Bank Group Policy Research Working Paper 8875

49 Pages Posted: 20 Jun 2019

See all articles by Patricia Jones

Patricia Jones

University of Oxford

Emmanuel K. K. Lartey

California State University, Fullerton; World Bank

Taye Mengistae

World Bank

Albert Zeufack

World Bank

Date Written: June 10, 2019

Abstract

This paper uses plant-level, panel data from the Ethiopian manufacturing census to estimate the effects of demand-side and supply-side factors on industrywide aggregate productivity. The paper focuses on the effects of three factors: (1) local market size, (2) the value of transportation costs that firms incur in selling to customers outside their market, and (3) licensing fees needed to enter the market. Identification is based on a model of production under monopolistic competition, which enables interpreting the estimated coefficients of a reduced form, dynamic productivity equation. The paper analyzes 11 industries in Ethiopia over 2000 to 2010. Several interesting results emerge. In the most parsimonious specification, the estimated coefficients are consistent with all three predictions of the model — but only for one industry: cinder blocks. In this industry, the expansion of the local market boosts industrywide total factor revenue productivity, while increases in transport costs and licensing fees reduce it. The picture is somewhat mixed in the other 10 industries but broadly consistent with the predictions of the model.

Keywords: Industry Studies-Manufacturing; Manufacturing and Service Industries; Industrialization; Microeconomic Analyses of Development

JEL Classification: L6, 014, 012

Suggested Citation

Jones, Patricia and Lartey, Emmanuel K. K. and Mengistae, Taye Alemu and Zeufack, Albert, Market Size, Sunk Costs of Entry, and Transport Costs An Empirical Evaluation of the Impact of Demand-Side Factors versus Supply-Side Factors on Manufacturing Productivity (June 10, 2019). World Bank Group Policy Research Working Paper 8875, Available at SSRN: https://ssrn.com/abstract=3403120 or http://dx.doi.org/10.2139/ssrn.3403120

Patricia Jones

University of Oxford

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Emmanuel K. K. Lartey

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States
714-278-7298 (Phone)

World Bank ( email )

1818 H Street NW
Washington, DC 20433
United States

Taye Alemu Mengistae (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Albert Zeufack

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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