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Manufacuring firms in developing countries - how well do they do, and why?

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Author Info
Tybout, James
Abstract

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: a) markets tolerate inefficient firms, so cross-firm productivity dispersion is high; b) small groups of entrenched oligopolists exploit monopoly power in product markets; and c) many small firms are unable or unwilling to grow, so important economies of scale go unexploited. The author 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 then are uncertainty about policies and demand, poor rule of law, and corruption. The author 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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1965.

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Date of creation: 31 Aug 1998
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Handle: RePEc:wbk:wbrwps:1965

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Keywords: Environmental Economics&Policies; Economic Theory&Research; Labor Policies; Banks&Banking Reform; Microfinance; Economic Theory&Research; Private Participation in Infrastructure; Small Scale Enterprise; Microfinance; Environmental Economics&Policies;

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alan Hughes, 2000. "On Enlarging Employment By Promoting Small Enterprises," ESRC Centre for Business Research - Working Papers wp180, ESRC Centre for Business Research. [Downloadable!]
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