Project

Clustering at the Business Level: Competitive Forces and Micro-Firm Markets

Iacopo Bianchi and Dominik Biesalski

This project has been retired

Small Research Grant (PhD)

Congested, hardly diversified clusters of micro-firms are a pervasive spatial pattern of economic activity across sub-Saharan Africa. As growth prospects are scant, entrepreneurs in these clusters rarely achieve incomes above the subsistence level and their firms remain small and unproductive. This project, focusing on manufacturing firms in urban Uganda, aims to take a closer look into how the market structure of firm clusters affects firm growth and productivity, specifically exploring the following questions: First, are micro-firms in these clusters exposed to high competition or is collusive behaviour prevalent? Second, why don’t entrepreneurs diversify more but instead tend to sell homogenous, substitutable goods? Third, how does market structure affect growth and are there opportunities to increase growth prospects, for example by promoting the adoption of promising innovations?

To answer these questions, the research team constructs an extensive firm survey that: i) geographically maps micro-firms across Kampala’s business districts; ii) collects information on prices and firm performance; iii) elicits firm owners’ preferences and beliefs about competition intensity and prevalence of collusion; and iv) examines diversification and innovation behaviour. In addition, they conduct lab-in-the-field games to investigate the relationship between market structure, innovation and firm-growth. These activities will provide important insights for future interventions that investigate how market structure drives the behaviour of micro-firms.

Finding rigorous answers to our research questions is important for policymakers in the light of structural transformation dynamics in Sub-Saharan Africa. In the absence of significant increases in formal sector labour demand, productivity gains in the agricultural sector and continuing urbanisation will likely lead to strong pressures on the informal labour market, with subsistence entrepreneurship remaining as the last resort for many individuals. Smoothing this transition by providing evidence on the economic forces within these markets and identifying growth opportunities to lift informal entrepreneurs out of subsistence thus constitutes a crucial task.

Research Team

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