Producer Turnover and Productivity Growth in Developing Countries

The reallocation of resources, either across sectors or across producers within a sector, can serve as a potential source of productivity growth. New research findings exploit comprehensive microeconomic data on the manufacturing sectors of Chile, Colombia, and Morocco to document resource shifts as producers enter, expand, contract, and exit operation. The micro-level adjustment is substantial; between 25 and 30 percent of the total number of manufacturing jobs turn over each year. In the short run, the productivity effects of this turnover are modest because the new plants that come on line are only slightly more productive than the ones they replace‹and both are typically small. In the longer term, however, the turnover generates more substantial increases in productivity because the new firms that survive record substantial productivity gains in their early years. Moreover, firms that exit are typically on a downward productivity spiral and would probably have dragged down sectoral efficiency farther if they had continued in operation.