Firms in developing countries operate on a smaller scale, do not grow as much, and are less likely to exit compared to their peers in developed countries. Such comparative differences in firm dynamics between developed and developing economies may in part stem from the differences in the supply-chain environments faced by firms. As firms try to grow, they constantly have to search for new suppliers for their intermediate inputs and new buyers for their products both domestically and internationally. If firms have access to productive potential suppliers that offer a large number of varieties, they can outsource more effectively and focus their activities toward their core competencies. If they have access to high-demand buyers interested in a large number of varieties, they have more opportunities for expanding their activities. It is therefore important to understand the process of firm growth in the context of their supply-chain network.
This project will assemble a unique dataset covering domestic and foreign trade relationships between Pakistani manufacturing firms as well as their buyers. This data will allow the researchers to examine the importance of upstream and downstream market access for firm selection and growth in Pakistan’s manufacturing sector. They will first rely on the data to document the joint moments of growth dynamics, exit, and entry of firms and their trading partners, as well as the sources of firm growth and selection as related to their production network. Then, they construct and estimate a general equilibrium model of firm-to-firm trade to quantify the importance of frictions in inter-firm markets for survival, growth, and the firm size distribution. Finally, they will use their framework to evaluate the effects of several industrial policies, such as the Pakistan textiles policy.
Frictions in inter-firm markets constitute sources of inefficiencies and hence give scope for policy interventions. This project does not by itself propose or suggest the use of a particular type of industrial policy, but it seeks to highlight the importance of different types of frictions in this context, which may then be addressed by policies.
