Product Market Competition and Bad Practice Selection
Developing economies exhibit a persistent, thick tail of severely mismanaged firms that survive indefinitely. Weak product market competition and high rates of family ownership prevent market reallocations from shutting down inefficient producers.
Picture this
Think of a town with only one grocery store that sells rotten produce at high prices; because no rival store can open, the bad grocery store stays in business forever instead of being forced to improve or close down.
What the evidence says
Whereas badly managed firms in competitive economies like the US systematically improve or go bankrupt, low product competition and family ownership in developing countries allow badly managed firms to survive, skewing overall average management scores downwards.
- Who
- Cross-country manufacturing firm dataset spanning 100 to 5,000 employee firms across the US, Europe, Asia, and Latin America.
- How
- Cross-sectional distribution analysis of firm management quality scores across countries.
What to do
Dismantle anti-competitive entry barriers and trade protections to force underperforming firms to adopt modern management practices or exit the market.
From the source
"The lower level of average management practices in developing countries occurs because of a persistent, thick tail of badly managed firms. In the United States badly managed firms appear to improve or exit, while in developing countries they do not."
533 firm management AEA2010.pdf