Framework Session: Firms

The session focused on the determinants of productivity, constraints to productivity, and the means with which governments can increase productivity.

Dr. Rocco Macchiavello, (Professor, University of Warwick) started by describing how economies of Sub Saharan Africa have witnessed increases in the manufacturing sector but that agriculture remains the most important part of GDP, engaging larger shares of the labour force. Deliberating on East African countries and Kenya, he noted that the majority of employment is aggregated in low value added sectors, whilst high-value sector jobs are in minority. To sustain competitive growth an economy will not only have to provide new jobs but also invest in and increase participation in higher-value sectors at both the intensive and extensive margins of productivity. He further explained that productivity across developing countries is stalled by any combination of three basic factors: high dispersion in levels of productivity, correlation of managerial quality with productivity, and a weak relationship between physical productivity and profitability.

Citing examples from studies on Rwandan Coffee washing stations and the garment industry in Bangladesh, and comparing total factor productivity across US, India and China, Prof. Macchiavello emphasised the fact that productivity dispersion is larger in poorer countries than richer ones. The explanation, in part, is because multinationals, with their knowledge of supply-chains, are more productive than nationals. He further explained the relationship between managerial quality and productivity. Citing results from a series of studies done by researchers, he showed that average management scores in the manufacturing sector varies significantly across countries. For example, the US tops the chart, benchmarking managerial quality while many African countries at the bottom. Presenting figures on USA, Brazil, India and China, he further shows a strong positive relationship between managerial quality and total factor productivity.

Further to facts on productivity, he presented a broad set of factors that determine productivity and the mechanism of achieving it – competition. Efficient and competitive markets should naturally drive inefficient firms out of the market (survival of the fittest). Competition drives down prices, which are then passed on to consumers. Explaining the role competition plays in increasing productivity, Prof. Macchiavello gave the example of the US Iron ore industry, when it was opened to Brazilian firms, the pressure of foreign competition drove top US firms to become more productive forcing prices down and improving the industries productivity levels. However, he cautioned against generating too much entry, which could produce other barriers to running competitive businesses. At the end, Professor delved into areas for further research such as the impact of vertical integration on social returns. He concluded the session with a “wish-list” where, he said, much of current research is focussed on productivity, and not enough on market structures or intensity of regulation. Answers should be drawn from beyond industrial manufacturing, instead from sectors such as Agribusiness, Banking, Insurance and Services.

Summary was written by Pankaj Verma, Country Economist – IGC India, Bihar