In low-income countries (LICs), production is concentrated in many small firms whose measured productivity differs widely. These features are particularly salient in Sub-Saharan Africa, where a myriad of small firms appear to be generally unproductive and stagnating. The presence of many small firms and large productivity dispersion has repeatedly been interpreted at the macro level as evidence of severe frictions distorting the organisation of production and limiting aggregate productivity. This view has been influential in the literature and has guided policy action. At the same time, micro-level interventions targeting market frictions have often showed limited effects by failing to spur firm growth, raising the possibility that the estimated frictions could partly reflect mismeasurement rather than resource misallocation. This proposal aims to shed light on this disconnect between macro and micro approaches by improving the measurement of how firms produce output in low-income countries.
The researchers will do so by collecting a representative panel survey of firms in urban Uganda with detailed information on (i) the entire production process for multiple products and (ii) firm-to-firm interactions within and across informal firm clusters. The proposed survey collects four waves of panel data over two and a half years for a representative sample of manufacturing firms in three sectors – carpentry, metal fabrication, and grain milling. This survey directly builds on and extends a previous cross-sectional survey the researchers conducted in these same sectors and urban areas in 2018-19 (Bassi et al. 2022). The primary goal of this new survey is to shed light on the organisation of production in LICs and estimate firm-level production functions. The researchers will then interpret the data through a dynamic general equilibrium model that will help quantify the extent of resource misallocation across firms (and its relationship to improved estimation of production functions) and shed light on the role of firm-to-firm interactions, either as catalyser or constraint for economic growth.
Identifying ways to raise the productivity of SMEs is a priority of the Ugandan government. There is specific policy demand for understanding how to improve the productivity of firms’ clusters, and policymakers in the country are considering expanding industrial areas and industrial parks to include also small firms. This project will speak to these demands, by generating actionable policy guidelines on how governments can leverage and improve the functioning of informal firms’ clusters to spur firm productivity, and how industrial parks can best be designed.
