Structural constraints and excess capacity: an international comparison of manufacturing firms

Abstract

Excess capacity results in real and opportunity costs as well as lower factor productivity. Conventionally, variation in capacity utilisation rates has been explained with reference to the business cycles and market imperfections. In this article, we show that these two factors do not always fully explain the causes of idle capacity. Our findings suggest that manufacturing firms in low‐income countries tend to have lower capacity utilisation (CU) rates than those in middle‐ and upper‐middle‐income groups. To explain this peculiarity, it is proposed in this article that the level of excess capacity partly depends on supply‐side conditions and institutional variables. The findings provide strong support for this view and suggest that there are gains to be made in the manufacturing industries of the lower‐income countries through improvements in the structural conditions.