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

Abstract

The manufacturing sectors of less developed countries (LDCs) have traditionally been relatively protected. They have also been subject to heavy regulation, much of which is biased in favor of large enterprises. Accordingly, it is often argued that manufacturers in these countries perform poorly in several respects: (1) markets tolerate inefficient firms, so cross-firm productivity dispersion is high; (2) small groups of entrenched oligopolists exploit monopoly power in product markets; and (3) many small firms are unable or un-willing to grow, so important scale economies go unexploited. In this paper I assess each of these conjectures, drawing on plant and firm-level studies of LDC manufacturers. I find none to be systematically supported. Turnover is substantial, unexploited scale economies are modest, and convincing demonstrations of monopoly rents are generally lacking. Nonetheless I find some evidence that protection increases firms' price-cost margins and reduces average efficiency levels at the margin. Finally, al-though the econometric evidence on technology diffusion in LDCs is limited, it does sug-gest that protecting "learning" industries is unlikely to foster productivity growth. All of this suggests that the general trend toward trade liberalization has yielded larger benefits that the traditional gains from trade.