Capital Allocation in Developing Countries

31 Pages Posted: 15 Nov 2019

See all articles by Joel Michael David

Joel Michael David

Federal Reserve Bank of Chicago

Ana P. Cusolito

World Bank

Venky Venkateswaran

New York University (NYU) - Leonard N. Stern School of Business; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Tatiana Didier

World Bank

Date Written: October 1, 2019

Abstract

This paper investigates the sources of capital misallocation across a group of 11 developing and developed countries. The main findings are (i) technological frictions, namely, adjustment costs and uncertainty, account for only a modest share of observed misallocation, leaving ample scope for other factors; (ii) heterogeneity in firm-level technologies potentially explains between one-quarter and one-half; but (iii) dispersion in markups is much smaller; and (iv) after accounting for these factors, on average, at least 50 percent of misallocation within each of these countries remains unexplained, suggesting a large role for additional, potentially distortionary factors. These factors are largely attributable to a component that is correlated with firm size/productivity and one that is essentially permanent to the firm. The paper reports a broad set of moments describing firm-level investment dynamics and detailed parameter estimates on a country-by-country basis, with an eye toward future work in this area.

Keywords: Pulp & Paper Industry, Plastics & Rubber Industry, Construction Industry, Business Cycles and Stabilization Policies, Food & Beverage Industry, Common Carriers Industry, Textiles, Apparel & Leather Industry, General Manufacturing, Public Sector Administrative and Civil Service Reform, De Facto Governments, Democratic Government, Public Sector Administrative & Civil Service Reform, Administrative & Civil Service Reform, International Trade and Trade Rules, Economic Conditions and Volatility, Trade and Services

Suggested Citation

David, Joel Michael and Cusolito, Ana P. and Venkateswaran, Venky and Didier, Tatiana, Capital Allocation in Developing Countries (October 1, 2019). World Bank Policy Research Working Paper No. 9031. Available at SSRN: https://ssrn.com/abstract=3485913

Joel Michael David (Contact Author)

Federal Reserve Bank of Chicago

230 South LaSalle Street
Chicago, IL 60604
United States

Ana P. Cusolito

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Venky Venkateswaran

New York University (NYU) - Leonard N. Stern School of Business ( email )

Suite 9-160
New York, NY
United States

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Tatiana Didier

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States
(202)458-1525 (Phone)

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