Why size matters?

Until now, the main focus of government has been directed to the development of small business in order to maintain the desired level of employment in the economy and to make the national economy flexible in response to the challenges of globalization and external shocks. However, economic development based on innovation and competitiveness needs such a market structure that can get access to financial, technological and international markets without difficulty.

We observe a negative correlation between firm size and income in developing countries. The size distribution of manufacturing firms in developing countries has a thick left tail compared to developed countries. The literature provides two explanations: (1) it is driven by distortions created with size-dependent policies of the government; (2) it is driven by preferences and technologies: poor households have high demand for low quality goods which can be produced efficiently at small-scale firms, but as households get richer, they tend to demand higher quality goods and the production of those goods requires a larger scale due to the need for expensive technologies.

Dear bloggers, rather than arguing which hypothesis is true, can we state that market structure where medium sized firms dominate becomes more efficient as economy develops?

 


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