Taye Mengistae

Investment Climate and Firm Performance in Developing Economies

Drawing on recently completed firm‐level surveys in Bangladesh, China, India, and Pakistan, this article investigates the relationship between the investment climate and firm performance. These standardized surveys of large, random samples of firms in common sectors reveal that objective measures of the investment climate vary significantly across countries and across locations within these countries. We focus primarily on measures of the time or monetary cost of different bottlenecks (e.g., days to clear goods through customs, days to get a telephone line, and sales lost to power outages). For many of these costs, the obstacles are lower in China than in Bangladesh or India, which in turn are higher than in Pakistan. There is also systematic variation across cities within countries. We estimate a production function for garment firms and show that total factor productivity is systematically related to the investment climate indicators. Factor returns (wages for a given quality of human capital and rate of profit) are also higher where investment climate is better. These higher returns then have dynamic effects: accumulation and growth at the firm level are higher where the investment climate is better.

Competition and entrepreneurs' human capital in small business longevity and growth

Abstract An analysis of data on a sample of small-scale manufacturers shows that a business is less likely to survive and grows slower the smaller the average price–cost margin in the industry in which it operates. The probability of survival is also smaller in import competing industries. So is the mean growth rate among survivors. We interpret this as evidence that small businesses are less likely to survive and grow slower in industries where the pressure of competition is stronger. Given competitive pressure and establishment characteristics, the probability of business survival and the expected growth rate conditional on survival both increase with entrepreneurial human capital. This is in the sense that the probability of business survival increases with the number of years of schooling and the number of years of business experience of the entrepreneur as does the expected growth rate conditional on survival. These results are consistent with another finding that unobservable influences on business hazard are correlated with those on growth. As a result, the effect of competition and entrepreneurial human capital on the growth of survivors would be biased for the effect of the same variables on the expected growth rate of a startup.

To Formalize or Not to Formalize? Comparisons of Microenterprise Data from Southern and East Africa

Why do firms choose to locate in the informal sector? Researchers often argue that the high cost of regulation prevents informal firms from becoming formal and productive. Our results point to a more nuanced story. Using data from surveys of microenterprises in South Africa, Namibia, Botswana, Kenya, Uganda, Tanzania, and Rwanda, we find that the labor productivity of informal firms is virtually indistinguishable from that of formal firms in East Africa, but very different in Southern Africa. We provide a theoretical model to explain this result, based on the key assumption that firms may evade taxes subject to a cost (or concealment cost) that is increasing and convex in the firm’s employment size. Consequently, the productivity distributions reflect the differences in concealment costs and the opportunity cost of formality. Greater enforcement of laws and better provision of services such as finance and electricity to formally registered firms in Southern Africa means that firms are more likely to register; those that do not are likely to be operating as “survivalist” firms. But in East Africa, weak enforcement of tax payment and no significant difference in access to services between formal and informal firms means that these variables do not explain the allocation of firms across the informal-formal divide. We conclude that in countries with weak business environments, informal firms are just as likely as formal firms to increase their productivity as they grow. Thus, interventions to increase productivity and lower the cost of formality may be helpful. But in countries with strong business environments such as those in Southern Africa, owners of informal firms are likely to be better off entering the labor market as wage labor. In the latter case, investment in education or vocational training is probably more important.

Market access, supplier access, and Africa's manufactured exports: A firm level analysis

Abstract In a large cross-country sample of manufacturing establishments drawn from 188 cities, average exports per establishments are smaller for African firms than for businesses in other regions. Based on the estimation of firm level exporting equations, we show that this is mainly because, on average, African firms face more adverse economic geography and operate in poorer institutional settings. One part of the effect of geography operates through Africas lower ‘foreign market access’: African firms are located further away from wealthier or denser potential export markets. A second occurs through the regions lower ‘supplier access’: African firms face steeper input prices, partly because of their physical distance from cheaper foreign suppliers, and partly because domestic substitutes for importable inputs are more expensive. Africas poorer institutions reduce its manufactured exports directly, as well as indirectly, by lowering foreign market access and supplier access. Both geography and institutions influence average firm level exports significantly more through their effect on the number of exporters than through their impact on how much each exporter sells onto foreign markets.

Wage Rates and Job Queues: Does the Public Sector Overpay in Ethiopia?

The public sectors share in wage employment is higher in Africa - including Ethiopias urban labor market - than in developed economies. Fuller unionization, greater job security, and more generous non-wage benefits in the public sector lead one to assume that workers might queue up for public sector jobs. Do higher wage rates in Ethiopias public sector create such a queue? The author extends Lees two-stage structural probit analysis to test (with data from a recent urban household survey) and measure the existence and scope of such a queue for public sector jobs in Ethiopia. The results reject the absence of job rationing in favor of an implicit queue of most private sector workers for public sector jobs. The queue exists mainly because of popular expectations of a wage premium (between 11 and 40 percent) in the public sector. Controlling for individual differences in expectations of the sectoral wage differences, the author finds that skill does not significantly affect a workers sector preferences, but some social characteristics do. A worker with a traditional farming background is more likely to be in the queue than is a second-generation urban dweller. This is interesting, considering that the influx of rural migrants to urban centers in the last few decades has been partly fueled by hopes of public sector employment. On average, women are more likely than men, and workers in provincial towns more likely than workers in the capital, to prefer public sector jobs. Level of schooling and job experience do not seem to affect preferences for the public over the private sector. The probability of a workers being selected from the public sector queue decreases with the wage rate the worker potentially commands as a public sector employee. Workers on the lower end of the pay scale are more likely to be selected. Among workers who join the queue for public sector jobs, men are more likely to be hired than women and skilled workers are more likely to be hired than less-skilled workers.

Business Environment, Clustering, and Industry Location: Evidence from Indian Cities

How do differences in the local business environment influence location of industry within countries? How do the benefits of a good business environment compare to those from good market access and agglomeration economies from industry clustering? We examine these questions by analyzing location decisions of individual firms. Using data from a recently completed survey of manufacturing firms in India, we find that both the local business environment and agglomeration economies significantly influence business location choices across cities. In particular, excessive regulation of labor and of other industrial activities reduces the probability of a business locating in a city. Our findings imply that in order to attract industrial activity, smaller or remoter cities need to offer even more attractive policy concessions or reforms in order to offset the effects of their relatively adverse (economic) geography. Our methodology pays special attention to the identification of agglomeration economies in the presence of unobserved sources of natural advantage.

Mobility and Earnings in Ethiopia's Urban Labor Markets, 1994-2004

An analysis of panel data on individuals in a random selection of urban households in Ethiopia reveals large, sustained, and unexplained earnings gaps between public and private, and formal and informal sectors over the period 1994-2004. The authors have no formal evidence whether these gaps reflect segmentation of the labor market along either of these divides. In other words, they cannot show whether they are at least in part due to impediments to entry in the higher wage sector. But they do have evidence that, if segmentation explains any part of the observed earnings gaps, then it could only have weakened over the survey decade. The authors find, first, that the rate of mobility increased between the two pairs of sectors. Sample transition rates grew across survey waves, while state dependence in sector choice decreased. Second, the sensitivity of sector choice to earnings gaps increased over the same period. In particular, the role of comparative earnings in selection into the informal sector was evident throughout the survey decade and increased in magnitude over the second half of the period.

Diagnosing Development Bottlenecks: China and India

Although it had a a lower income level than India in 1980, Chinas 2006 per capita gross domestic product stands more than twice that of Indias. This paper investigates the role of the business environment in explaining Chinas productivity advantage using recent firm-level survey data. The analysis finds that China has better infrastructure, more skilled workers, and more labor-hiring flexibility than India, but a worse access to finance and higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labor flexibility. Labor flexibility is also likely a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for Indias disadvantage in productivity, and the complementarity of proxies of labor flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China. The empirical analysis suggests that it is important to consider country-specific growth bottlenecks and the indirect effects of policy reforms.

Labor Market Integration in Urban Ethiopia, 1994-2004

An analysis of panel data on individuals in a random selection of urban households in Ethiopia reveals large, sustained, and unexplained earnings gaps between public and private and formal and informal sectors over 1994–2004. At the same time, we find, first, that the rate of mobility increased in the two pairs of sectors. Sample transitions rates grew across survey waves, while state dependence in sector choice decreased. Second, the correlation between sector choice and earnings gaps increased over the same period. In particular, the correlation between comparative earnings and selection into the informal sector was high throughout the survey decade and increased in magnitude over the second half of the period. These results suggest that Ethiopia’s urban labor markets might be integrating.

Economic Geography and Manufacturing Productivity in Africa: Ananalysis of Firm Level Data

We compare samples of textiles and garments producers across groups of countries to find that, in general, productivity is far lower in Sub-Saharan Africa than it is in India. Indian manufacturers in turn are significantly less productive than their counterparts in Morocco, while producers in some SSA countries do match or exceed the Indian standard. The paper assesses the importance of geography as a possible factor in these gaps compared to such possible causes as trade policy and the quality of public institutions. It turns out that both institutions and trade policy are strong influences on country productivity averages. However, geography is also as powerful an influence in as far as it affects access to export markets and to input supplies.