Firm Size, Employment and Value Added in African Manufacturing Firms: Why Ghana Needs Its 1%

Abstract

AbstractIn this paper, we use manufacturing firm census data to examine the size distribution of firms in Ghana for 1962, 1987 and 2003 and the distribution of employment and value added across the size distribution for 2003. We make four contributions to the literature on firm size in Africa. First, we compare the Tybout procedure, of matching employment shares to that implied by a Paretian distribution, to obtain the shape parameter from the Paretian distribution with a direct estimate from the firm size distribution. We show they differ. Our second contribution is to follow up on Tybout’s suggestion that a policy undistorted environment would produce a Paretian distribution and show that such a distribution can describe firm size, for both the 1987 and 2003 censuses, for firms with more than nine employees. The implication we draw is that processes of firm growth are quite different for firms above and below the nine employees’ threshold. Rather than there being a ‘missing middle’ of mid-sized firms, the data are better described as a ravine at nine employees, whereby the density of the distribution of firm size collapses at this point. Our third contribution is to show that the increasing dominance of the small, which has characterised firm growth in Ghana over this period, implies an increasing proportion of employment in the low productivity part of the size spectrum. Finally, we show that in 2003 while 95% of firms have less than ten employees, they produce only 14% of value added. At the other end of the size spectrum, less than 1% of the firms produced nearly 80% of value added.