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Manufacturing Firms In Developing Countries: How Well Do They Do, And Why?

  • James Tybout

    (Georgetown University)

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.

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Paper provided by EconWPA in its series Development and Comp Systems with number 9805004.

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Length: 61 pages
Date of creation: 23 Jun 1998
Handle: RePEc:wpa:wuwpdc:9805004
Note: Type of Document - Word 97; prepared on IBM PC; to print on HP; pages: 61 ; figures: included. This paper was partially funded by the World Bank's Economic Development Institute. I have benefited from discussions with Mark Dutz, Mark Gersovitz, Bernard Hoekman, Carl Liedholm, William Maloney, Desmond McCarthy, Howard Pack, Mark Roberts, Maurice Schiff, and William Steel. I am especially indebted to John Pencavel and several anonymous reviewers, who have improved this manuscript with many insightful suggestions.
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