In Simple Words
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.
Observed poorly managed firms
- United States
- Appeared to improve or exit
- Developing countries
- Poorly managed firms survived
Cross-country survey synthesis; qualitative patterns, not a tested effect of competition or family ownership.
See source →Research question
Weak product market competition and unconstrained family ownership structures in developing countries allow grossly inefficient, poorly managed firms to survive indefinitely rather than being forced to improve or exit.
Participants
6,000 medium-sized manufacturing firms (100 to 5,000 employees) across the US, Western Europe, Japan, Brazil, China, and India.
Study Design
Cross-country double-blind management scoring surveys (BSVR methodology).
Results
Developing nations feature lower average management scores driven by a thick tail of persistent, badly run firms that fail to exit, whereas market competition in developed economies forces poorly managed firms to either reform or close down.
Takeaway
Reduce import tariffs and trade barriers to expose domestic manufacturing sectors to international product market competition.