Competition – important but no silver bullet

It’s hardly a surprise, but somehow we put too much faith in competition, and not enough in all the other things like building capability not to mention a bunch of other things – not covered in the study below – like getting market architecture right, improving information flows. Anyway, here’s a straw in the wind.

Business Practices in Small Firms in Developing Countries by David McKenzie, Christopher Woodruff – #21505

Abstract:

Management has a large effect on the productivity of large firms. But does management matter in micro and small firms, where the majority of the labor force in developing countries works? We develop 26 questions that measure business practices in marketing, stock-keeping, record-keeping, and financial planning. These questions have been administered in surveys in Bangladesh, Chile, Ghana, Kenya, Mexico, Nigeria and Sri Lanka. We show that variation in business practices explains as much of the variation in outcomes – sales, profits and labor productivity and TFP – in microenterprises as in larger enterprises. Panel data from three countries indicate that better business practices predict higher survival rates and faster sales growth. The effect of business practices is robust to including numerous measures of the owner’s human capital. We find that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices. Competition has less robust effects.

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GrueBleen
GrueBleen
6 years ago

We “put too much faith in competition” ? No, no, say it isn’t so. Just the fact that almost everything of any substance or value that the human race has ever done requires cooperation rather than competition wouldn’t have clued us in to this idea, would it. <- and there's no question mark here because that is a rhetorical question.

So, we now have a definitive study showing that superior management – ie being both effective and efficient – helps enterprises both big and small to succeed whereas the contrary has a contrary effect.

John walker
6 years ago

Don’t quite understand this. : We find that owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices.
And in general would have thought it a no brainer that firms with the opposite characteristics to those above,would be less competitive?