Session 4: Firm Capabilities

Professor John Sutton presented his on his Enterprise Map series. As economies have grown and developed, new qualitative work has been needed to understand the changes going on. However, the interesting aspect is that there have been very similar changes across countries, and the firms at the front of this are world-class. Of successful areas, they share certain qualities: an internalised supply chain within the country, and a large enough domestic market in the particular industry within a country to support it.

The challenge is how to broaden the industrial base. Investment agencies have been crucial in identifying new areas for expansion of the supply chain, and the crucial factor behind investment agencies’ success has been trusted relationships. The challenge beyond this is to ensure increasing sophistication of the activities undertaken by firms and, particularly, multinationals.

There are, though, several misconceptions. First, is that large engineering firms should be targeted. Not necessarily so. Mid-size service firms can be hugely beneficial. Similarly, other sectors, like retail are unfairly overlooked.

Professor Jonas Hjort of Columbia University spoke about the broader challenges firms face based on the Liberian context. His research covers three questions in this area: information frictions between firms which hinder their ability to connect and grow, informality, and linkages across firms – how different parts of the economy are inter-related.

Information frictions, when firms cannot identify partners and work with them, can be a factor in holding back the growth of firms, forcing them to stay small. Randomising the information which firms receive and looking at the effects provides an indication of the extent to which information frictions matter.

Informality: there are three theories of why firms choose to be informal. One, informal firms are “entrepreneurs waiting to be released” – reduce government regulation that holds them back. A second theory sees them as parasites, where informal firms take advantage of public gods without contributing to them. The third theory is that informal firms exist because it is the only option available to people – reducing informality may just devastate people who have no other choices. Research looking at randomising ‘carrots’ and ‘sticks’ to move out of informality has been designed to reveal which of these theories dominate in Liberia

Linkages across firms: is economic activity shared across sectors, or is it concentrated in particular areas? Looking at shocks which affect firms, and seeing what happens to its suppliers gives an indication of the linkages between firms.

By Charles Beck, Country Economist, IGC South Sudan