Micro-data on the full distribution of manufacturing firms in India, Indonesia and Mexico yields evidence of a missing "missing middle"

Although a large literature seeks to explain the “missing middle” of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, this study documents three facts. First, while there are a very large number of small firms, there is no “missing middle” in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models in which small firms with high returns are constrained from expanding. Third, the paper examines regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth, and find no economically meaningful bunching of firms near the notch points. The authors show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.

By Chang-Tai Hsieh and Benjamin Olken (2014)