Achieving Scale Collectively

Abstract

Many firms in developing countries could be too small to adopt modern technology embodied in expensive production machines. This paper shows that rental market interactions allow these small firms to increase their effective scale and mechanize production. We conduct a survey of manufacturing firms in Uganda, which uncovers an active rental market for large machines between small firms in informal clusters. We then build an equilibrium model of firm behavior and estimate it with our data. We find that the rental market is quantitatively important for mechanization and productivity since it provides a workaround for other market imperfections that keep firms small. The rental market also shapes the effectiveness of development policies to foster mechanization, such as subsidies to purchase machines. Overall, our results point to the importance of taking into account firm‐to‐firm interactions within informal clusters to understand technology adoption in low income countries: focusing on the small scale of firms in isolation might be misleading.

General Equilibrium Effects of Cash Transfers: Experimental Evidence From Kenya

“…While suggestive, this interpretation of the supply side response to a demand shock is consistent with other recent findings. In Uganda, Bassi, Muoio, Porzio, Sen, and Tugume (2022) found that employees in on‐demand manufacturing (e.g., welding, furniture‐making) spend about 25% of time “waiting for customers” or “eating and resting.” More broadly, it relates to the old idea in development economics that it might be possible to expand production without notable price inflation due to the availability of slack capacity. Classic arguments focused on “surplus labor” due to artificially high wages (Lewis (1954)), while here both labor and capital appear to have been under‐utilized due to limited flexibility to scale their employment to match demand.…”

“…Contracting frictions and institutions may also affect local market structure and capacity. For instance, Bassi et al (2022) documented a pattern of small industrial clusters in neighboring Uganda, in which a dozen small carpentry firms producing nearly identical products may co‐exist in the same area. Each of these separately owned firms has one or at most a few employees, and they are characterized by the slack labor capacity noted above.…”

Government procurement contracts, external audit certification, and financing of small-and medium-sized enterprises

“…Research into the impact of government procurement systems identifies improved access to financing as an explanatory factor that helps firms to achieve scale economies, a key challenge for improved financial performance and SME growth (Bassi et al, 2022). In a study of financially constrained US firms, Hebous and Zimmerman (2021) finds that increased government demand enables higher levels of capital investment by facilitating access to external financing.…”

Labor Productivity Growth and Industrialization in Africa

“…Nevertheless, it has not prevented generalizations about small firms based on tiny samples (for example, La Porta and Shleifer 2016). To see why this can be problematic, consider the work of Bassi et al (2020) on three sectors of urban manufacturing in Uganda with a mix of "small" and large firms. The authors show that the way in which one defines the borders of a small firm matters a lot.…”