Growth in a Dual Economy

Growth and structural transformation of the manufacturing sector in developing countries are generally considered to be the result of the expansion of the `modern' (large-scale) sector relative to the `traditional' (small-scale) sector. Examining the sources of labour productivity growth in Mexican manufacturing, however, does not provide support for this conclusion. Although we find that labour productivity levels vary almost in direct relation to establishment size, labour productivity growth shows no systematic variation by size class. In fact, small establishments have had the same rate of labour productivity growth as larger ones, partly because of the `excise-effect' (the exiting of low-productivity, small plants). Moreover, most of the variation in labour productivity across plant class sizes is found to be due to differences in capital intensity. The variation in TFP levels across size classes tends to be small. Thus, our results remove some justification of the policy measures that favour large firms in developing countries.