Low and variable firm productivity has long been considered a key driver of low GDP, yet there is little understanding of why the competition and innovation that fuels productivity growth in the developed world seems lower in low and middle income countries. A fundamental role for policy is to facilitate the operation of markets, and a robust, productive private sector is a central outcome of an efficient market. Thus when many firms show low productivity and use inferior technologies even when more efficient ones are available, it suggests that markets are not functioning efficiently and there may be a role for policy intervention. Yet the question of which policy intervention is both crucial and highly dependent upon an understanding of the constraints inhibiting efficient market functioning. Answering this question requires accurate estimation of production functions, investment dynamics and competition, perhaps only possible through an in-depth focus on a single industry. Yet correlations between competition and productivity or technology and profits may be driven by unobserved characteristics. To control for these confounding factors, this study implements a field experiment that induces random variation in firm’s technologies and the technologies of their competitors.
Building upon a baseline study of the Indian brick industry, this study will collect detailed information about firm productivity from a sample of 600 brick kilns, dispersed across three states: Uttar Pradesh, Madhya Pradesh and Karnataka. With assistance from The Energy and Resources Institute (TERI), this randomized trial will experimentally increase the productivity of randomly chosen firms by providing technical assistance and access to financing for firm upgrades. Impacts of firm upgrades on revenue, pricing and employment decisions will be compared between treated firms and untreated firms at distal locations from the treated firms. As well, the study will examine the impact of introducing upgrades into the local market by comparing revenue, pricing, sales and firm decision-making among untreated firms in close proximity to treated firms to the same factors in untreated firms located at distances too far from the treated firms to be considered part of its local market. This study will improve our understanding of the dispersion of productivity within local markets and the impacts of productivity gains on firm growth in the developing country context.