Uganda's manufacturing sector is dominated by small, unproductive firms with high employee turnover, hindering economic development and structural transformation. Small firms often operate in clusters where they share resources such as assets, labour, credit, and customers. These clusters may substitute for internal firm growth by facilitating cooperation and addressing market frictions. Despite potential economies of scale, firms remain small and rely heavily on relational contracts with other firms and workers. This project aims to investigate how relational contracts within and between firms affect firm boundaries and growth in Uganda's manufacturing sector.
The research involves a multi-phase data collection process. In the first phase, the research team conducted six focus groups with firm owners and key stakeholders from Uganda Small Scale Industries Association (USSIA) and other organisations alongside semi-structured interviews and a small-scale quantitative survey. The goal was to identify the incentives and constraints faced by both firms and workers and provide qualitative insights into how firms cooperate with each other and with their employees, and how these relationships evolve over time. The current phase (in progress) is to map firm clusters across the three study sectors. This comprehensive mapping involves listing around 2,400 businesses across areas of Kampala with high concentrations of same-sector firms. Finally, the research will survey a subsample of the workers and owners to understand workers’ incentives to be employed rather than setting up their own businesses, and firms’ incentives to hire workers internally vs. outsourcing production.
Recognising how firm clusters substitute for internal growth can help policymakers design targeted support that fosters collaboration while addressing the constraints that prevent firms from expanding. For instance, interventions that reduce information asymmetries and strengthen legal institutions could facilitate more formal and stable relationships, encouraging firms to reduce turnover and promote firm expansion. The project has engaged extensively with policymakers and industry stakeholders, including USSIA, UMA, and UNBS, fostering collaboration and ensuring the research addresses pressing economic concerns.
The preliminary data analysis highlights key patterns among small manufacturing firms in Kampala. Resource sharing among firms is prevalent, with 75% of firms sharing resources like machines (56%) and workers (38%). The study further finds that firms with higher variability in demand are more likely to share resources, possibly as a coping mechanism. Worker tenures exhibit some heterogeneity across sectors: tailoring firms have shorter tenures, possibly due to lower startup costs or higher apprenticeship rates. Notably, the study finds that demand variability is negatively correlated with worker retention, which could have implications for firm growth in the long-term. Finally, women-owned firms appear to be different than men-owned firms in that they are less likely to hire casual labour and share workers. Along with detailed network analysis, unpacking the gender-based heterogeneity carefully is left for ongoing and future analysis.
