Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?

Abstract

Competition among manufacturers in developing countries is remarkably vigorous. Nonetheless, markets are imperfect, so the general trend toward trade liberalization has yielded benefits beyond the traditional gains from specialization.

Manufacturing firms in developing countries have traditionally been relatively protected. They have also been subject to heavy regulation, much of it biased in favor of large enterprises. Accordingly, it is often argued that manufacturers in these countries perform poorly in several respects:

- Markets tolerate inefficient firms, so cross-firm productivity dispersion is high. - Small groups of entrenched oligopolists exploit monopoly power in product markets. - Many small firms are unable or unwilling to grow, so important economies of scale go unexploited.

Tybout assesses each of these conjectures, drawing on plant - and firm - level studies of manufacturers in developing countries. He finds systematic support for none of them. Turnover is substantial, exploited scale economies are modest, and convincing demonstrations of monopoly rents are generally lacking.

Overprotection and overregulation are probably less a problem in developing countries than are uncertainty about policies and demand, poor rule of law, and corruption.

Tybout does find some evidence that protection increases firms' price-cost margins and reduces average efficiency levels at the margin.

And although the econometric evidence on technology diffusion in developing countries is limited, it does suggest that protecting learning industries is unlikely to foster productivity growth.

All of which suggests that the general trend toward trade liberalization has yielded greater benefits than the traditional gains from trade.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to link firm-level performance with commerical policy.