Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?

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 disper-sion is high; (2) small groups of entrenched oligopolists exploit monopoly power in product mar-kets; and (3) many small firms are unable or unwilling 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. Productivity dispersion among LDC plants is not obviously higher than it is among plants in industrialized countries. Convincing dem-onstrations of monopoly rents are generally lacking, and unexploited scale economies are modest. Finally, while the evidence suggests that protection increases price-cost mark-ups and dampens productive efficiency, the general movement toward trade liberalization in LDCs has made this less of an issue today than it was 20 years ago. Each of these inferences is based on a limited body of crude evidence. There is substantial scope for improvement in the empirical literature, especially in terms of better measures of productive efficiency and the costs that firms incur to achieve it; better analyses of spillovers, and more at-tention to the effects of volatility and uncertainty on firm behavior. Progress on any of these fronts is likely to require improvements in the quality and quantity of primary data collection.