Low Competition and Management Distribution Thick Tail Persistence
Observational StudyReview
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.
Picture this
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.
What the evidence says
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.
- Who was studied
- 6,000 medium-sized manufacturing firms (100 to 5,000 employees) across the US, Western Europe, Japan, Brazil, China, and India.
- How
- Cross-country double-blind management scoring surveys (BSVR methodology).
What to do
Reduce import tariffs and trade barriers to expose domestic manufacturing sectors to international product market competition.
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."
Why Do Firms in Developing Countries Have Low Productivity?