Abstract

This paper uses plant-level, panel data from the Ethiopian manufacturing census to estimate the effects of demand-side and supply-side factors on industrywide aggregate productivity. The paper focuses on the effects of three factors: (1) local market size, (2) the value of transportation costs that firms incur in selling to customers outside their market, and (3) licensing fees needed to enter the market. Identification is based on a model of production under monopolistic competition, which enables interpreting the estimated coefficients of a reduced form, dynamic productivity equation. The paper analyzes 11 industries in Ethiopia over 2000 to 2010. Several interesting results emerge. In the most parsimonious specification, the estimated coefficients are consistent with all three predictions of the model—but only for one industry: cinder blocks. In this industry, the expansion of the local market boosts industrywide total factor revenue productivity, while increases in transport costs and licensing fees reduce it. The picture is somewhat mixed in the other 10 industries but broadly consistent with the predictions of the model.

Highlights

  • The starting point to answering this question is the well‐established fact that income gaps across countries are largely explained by differences in total factor productivity (TFP)

  • While much of the early growth literature highlighted the importance of supply‐side factors, such as technology, in explaining productivity gaps across countries, many recent studies have stressed the importance of demand‐side factors, such as market access, as well

  • The data include producers’ physical outputs, q, along with their respective prices, p. This allows us to distinguish between revenue‐based measures of total factor productivity (TFPR), defined as the value of revenue p q per input unit x and its physical counterpart (TFPQ), defined as the number of physical units produced per unit of output q /x

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Summary

Introduction

A central question in development economics is why some countries become rich while others remain poor. It is possible to have an alternative scenario in which a plant’s revenue productivity (TFPR) is a better predictor of its survival than its physical productivity (TFPQ) Such a case could arise if some plants in the industry exercise a degree of market power that allows them to charge higher prices for their product than others. The main predictions of the model are all borne out in the most homogenous of the 11 industries: cinder blocks (ISIC 2695) In this industry, the expansion of the local market boosts revenue productivity while increases in transport costs and licensing fees reduce it.

Theoretical Framework
Product differentiation and market size as demand‐side factors in competition
Transport cost as a supply‐side factor in competition and productivity
Sunk entry costs as a supply‐side factor in competition and productivity
Empirical Specification and Findings
Measuring market size, transport costs and sunk costs of entry
Determinants of aggregate productivity (TFPQ)
Determinants of aggregate revenue productivity (TFPR)
Effects on productivity and prices across the size distribution of establishments
Conclusion
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