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
49 Pages Posted: 5 Aug 2019
Date Written: June 10, 2019
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: Transport Services, Food & Beverage Industry, Plastics & Rubber Industry, Textiles, Apparel & Leather Industry, Pulp & Paper Industry, General Manufacturing, Business Cycles and Stabilization Policies, Common Carriers Industry, Construction Industry, International Trade and Trade Rules, Public Sector Administrative and Civil Service Reform, De Facto Governments, Democratic Government, Public Sector Administrative & Civil Service Reform, Administrative & Civil Service Reform, Information Technology
Suggested Citation: Suggested Citation