Achieving Scale Collectively
Whether the small firm scale might itself hinder labor productivity, thus spurring a vicious cycle of underdevelopment.
Abstract
It has long been argued that firms in developing countries enter small and struggle to grow large. This paper studies whether the small firm scale might itself hinder their labor productivity, thus spurring a vicious cycle of underdevelopment. The authors design and implement a novel survey to measure how firms produce output in three manufacturing sectors in urban Uganda. They find strong direct evidence that most firms operate at a scale that is too small to justify investment in modern high-capacity machines. However, an active inter-firm rental market has emerged in response, allowing firms to achieve economies of scale collectively. Interpreted through the lenses of an equilibrium model of firm behaviour, our data reveals that the rental market for machines limits substantially the productivity losses due to the small scale of production. Taken together, their results show that, while the small size of firms remains a concern, the design of effective development policies should take into account market level interactions between firms as a powerful mean to mitigate the cost of small scale.
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This research was funded under the Private Enterprise Development in Low Income Countries (PEDL) Programme
Citation
Bassi, V., Porzio, T., and Sen, R. (2019) “Achieving Scale Collectively”, PEDL