All About Firms
Niranjan Rajadhakshya points us towards an excellent little essay by Karthik Tadepalli, whose seemingly provocative title is "Want Growth? Kill Small Businesses":
https://twitter.com/CafeEconomics/status/1844018327750115777
It's a lovely read, and if you are familiar with the literature, or with the history of development economics broadly speaking, it should be a fairly quick read. But if you're not familiar with the history of development economics, here's my quick summary of the essay:
RCT's are great, but growth is where it's at, if you really want to "do" development.
But how to grow? The best way is "trade integration", which really is just a way of saying "Build more stuff and sell more stuff"
And the best way to make that happen is to help domestic firms grow as large as possible, as quickly as possible.
In regards to the third point, the author of the essay, Kartik Tadepalli, lays out five analytical takeaways from the research in this area:
Firms in developing countries are smaller and more stagnant in rich countries
Self-employed individuals behave more like workers than like entrepreneurs
Small market size and information frictions constrain firm growth
Firms in developing countries do not use advanced technologies or management practices
Exporting internationally helps firms learn frontier techniques and become more productive.
The "why" and the "so what" of each point is discussed in the essay, and rather than further summarize it, I recommend you go read the whole thing.
Here's one thing missing in the essay that I really and truly wish had been there: a discussion of how to go about killing small firms. That, after all, is the title of the essay, and I was hoping there would be a discussion on what I happen to think is a crucial (and missing) ingredient from India's Industrial Policy - our inability to let smaller, relatively unsuccessful firms die.
Not, to be clear, because I take any ghoulish pleasure in watching firms die. But because the process of firms dying, and new firms taking their place, is pretty much what competitiveness means.
Firms learn best (as do all of us) in a competitive environment. But part of being in a competitive environment, by definition, is some participants losing. Not only do the firms that have lost learn something, but the other firms also learn the mistakes that need to be avoided.
If the firm that lost out did so because further government support was not forthcoming, that's a lesson for the other firms too. Two lessons, actually: one, avoid the mistake that the firm that lost out made. And two, ohmahgawd, the government is not kidding about their support being conditional.
Export promotion, that much loved and much abused phrase, usually found in every Indian textbook on the subject, isn't just about the fact that East Asian nations promoted exports. It is also begging the question.
How did the East Asian nations go about the task of export promotion?
And the answer is very simple: export discipline.
Firms that received government support were expected to dramatically increase their exports. Sure they received aid, and assistance. In the case of some countries, that aid and assistance was truly extraordinary. Help with transport infrastructure, labor issues, water, power, international technology licensing, and much much more.
But, if the firms that received the assistance didn't match up to expectations (and the expectations were around growth, and usually export oriented growth), well, they were ruthlessly culled.
Samsung and LG, to cite just two examples from one nation, are admiration-worthy firms, to be sure. But keep in mind that there is very much a survivorship bias effect over here. For every firm that received help from the South Korean government and is still surviving today, there are at least a couple that didn't make the cut.
This part of industrial policy receives precious little attention, and more's the pity.
Towards the end of the essay that we are talking about, the author includes a line, and it goes like this: "economic growth is intrinsically linked to the growth of firms."
Me, I'd change that to the following:
Economic growth is intrinsically linked to helping successful firms grow even more. At the same time, it is also intrinsically linked to culling the firms that do not succeed.
Until we figure that bit out, meaningfully and convincingly, with visible results on the ground, we haven't really figured out our industrial policy.