What is the extent to which differences in the misallocation of resources amongst firm explains cross country differences in economic growth and the extent of structural transformation? Several recent papers have emphasised that answering this question involves examining cross country differences in mean firm size (Hsieh and Klenow, 2009, Bento and Restuccia, 2017, 2021) and the firm size distribution (Poschke, 2018). The question answered in this research project is whether the stylised facts on cross country differences in mean firm size and the level of economic development shown by these authors hold up when using more comparable data for a large set of countries over multiple time periods.
The project focuses on sub-Saharan Africa, which has been neglected thus far, examining the extent to which recent economic growth has been accompanied by changes in the scale of production. The key contribution and advance over the previous work in this area is to use comparable IPUMS population census data and a simple, transparent method to measure mean firm size across many countries and multiple time periods. This extends the work of Bento and Restuccia (2017, 2021) by using a more comparable source of cross-country data on mean firm size as well as multiple time periods. It extends the work Poshcke (2018) in using multiple time periods and in extending to a larger number of countries, particularly sub-Saharan African countries, which were almost completely excluded.
The core focus of the project is on sub-Saharan Africa, although comparisons will also be made with other low and middle-income countries. Understanding the reasons for the large differences in incomes across countries is one of the fundamental challenges faced by policy makers. Current research in structural transformation and economic growth focuses on the role of frictions and misallocation, arguing that this can explain cross country income differentials. This suggests clear policy implications- adapt policies that reduce misallocation. Recent theories proposed in this literature have implications for cross country differences in firm size. By providing improved data on sub-Saharan Africa, which has been lacking, the research sheds light on the extent to which recent theoretical and empirical contributions do apply to sub-Saharan Africa.
