Product Market Competition and Bad Practice Selection

In Simple Words

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.

Research question

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.

Participants

Cross-country manufacturing firm dataset spanning 100 to 5,000 employee firms across the US, Europe, Asia, and Latin America.

Study Design

Cross-sectional distribution analysis of firm management quality scores across countries.

Results

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.

Takeaway

Dismantle anti-competitive entry barriers and trade protections to force underperforming firms to adopt modern management practices or exit the market.

Related findings

• Low Competition and Management Distribution Thick Tail Persistence →Firms & operations

  In a neighborhood with ten competing bakeries, a bakery that sells stale bread goes out of business within a month; but in an isolated town with only one protected bakery, the owner can sell terrible bread for forty years without ever losing customers.

• Management-Driven Firm Expansion →Firms & operations

  Imagine a chef running a single small diner who personally checks every dish before it leaves the kitchen. If the chef opens a second diner across town without written recipes or trained head cooks, food quality plummets because the chef cannot be in two places at once.

• Primogeniture Selection Penalty in Family Firms →Firms & operations

  Appointing the eldest son to run a major company simply because he was born first is like appointing the doctor's eldest son to perform surgery regardless of whether he went to medical school.

• Asymmetric Management Practice Stickiness →Firms & operations

  Think of house chores where putting a physical label on a storage bin stays forever because it requires a one-time setup, whereas writing a daily task log on a whiteboard gets abandoned quickly because it demands constant daily effort.