Bigger is Better? Firms and Principles for Job Growth

Should developing countries prefer big firms or small firms? Are slow gains in productivity and hiring across all small firms preferable to seeing faster graduation of a few small firms into larger ones? Can big firms really pull an economy up, like they say (or not) happened in East Asia?

The latest post from World Bank’s Africa Can blog toes the line like a boss. (Very informatively though):

At the end of the day, size may not be as much a driving force for business development as the ability and propensity to create vital linkages between small and large firms. These do not only facilitate transfers of skills, know-how, and technology, but they also promote economies of scale by reducing the entry costs for small firms.

This seems to be what lots of OECD countries are struggling with too: how to achieve a balance between the advantages of large, multinational firms and the higher potential for immediate job creation and innovation of small firms.

But in developing countries, Dani Rodrik tells us that the trend for these lower-productivity segments of the economy (by and large small firms, often informally set up), is on the rise:

Productive heterogeneity – or what development economists used to call economic dualism – has always been a central feature of low-income societies. What is new – and distressing – is that developing economies’ low-productivity segments are not shrinking; on the contrary, in many cases, they are expanding.

Something is obviously not going right. Dani says essentially that leading with the firms is the more effective thing to do- find those more productive sectors of the economy and make sure that they are well equipped to absorb new workers. With so many people employed in informal microenterprises in some of these countries though, it seems kind of hard to tell if that would really be an easier transition than removing barriers to formalizing existing enterprises, and giving them the proper assets (training, work space) to become more productive.

Other noteworthy tidbit in this World Bank article: In the United States, “small (young) firms contribute up to two-thirds of all net job creation and account for a predominant share of innovation.” Weird.

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Chris Blattman

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