Domestic and international search frictions in Ugandan firm markets

Project Active from to Firms and Trade

In low-income countries, firms do not have access to supplier databases, rendering information about firm reliability is difficult, supplier quality is variable, and search frictions between firms are likely to be large. Discussions with firms in Uganda suggest they expend substantial resources looking for new suppliers both domestically and internationally.

This project identifies what holds back Ugandan firms from connecting with each other. We find strong evidence for a lack of information restricting firms from making better linkages with potential customers and suppliers. Simulations of a quantitative model show that reducing search costs through better information would lead to substantial improvements in consumer welfare – a 25% reduction in search costs would increase consumer welfare by 8%.

The project suggests three policy options based on the experience of other countries to achieve a reduction in search costs:

  • Utilise internet retail platforms: Chinese firms have addressed the information problem by utilising internet platforms such as Ali Baba, which is currently the largest retailer in the world. The platform works by providing quick, reliable and verifiable information on firms and products.
  • Encourage peer-to-peer learning groups: Commission of Industry and Information Technology (CIIT) organised 1,500 firms into groups of 10 managers to meet monthly for one year. They discovered that just by having regular discussions with other business owners, firms revenue increased by 8.1 percent alongside increases in profits, inputs, reductions in utility costs, and better management practices.
  • Establish a supplier development programme: The third policy suggestion comes from Chile, where a government entity, CORFO, established a supplier development programme with the goal of generating more linkages between large firms in Chile and local suppliers. The programme aimed to strengthen management practices among SMEs through sponsored training, technical advice and technology transfer and was developed in partnership with large firms.