This dissertation provides a theoretical and empirical investigation of the role of two under-explored factors in the performance of industrial firms in developing countries – one external to the firm in source, electricity service quality, and one internal to the firm, management practices.
The first chapter lays out a theoretical framework that illustrates how poor electricity service quality can have particularly negative impacts on industrial productivity, including unexpected consequences like increased market concentration and oligopolistic behavior. The key idea here is that, because firms can produce their own electricity using private generators when the public grid is down, unreliable central power systems translate the substantial economies of scale in where relatively small producers are otherwise cost-competitive. As a result, larger firms can more easily dominate markets, potentially resulting in lower output and slower productivity growth.
The second chapter turns to state- and firm-level data from India over the period 1979-2005, providing econometric estimates of the impacts of increases in electricity generation capacity on aggregate manufacturing output, employment and productivity, as well as suggestive evidence on the relationship between electricity shortages and the firm size distribution. The headline result is that a 1% increase in public sector electricity generation capacity is associated with a 0.13-0.26% increase in manufacturing output, about half of which comes from increased employment in the manufacturing sector and the remainder from increased productivity. These results put the present value of investments in public sector electricity generation capacity at roughly 2-4 times their cost.
The third chapter turns to management practices, a similarly under-studied determinant of firm performance that lies primarily internal to the firm. Using data from an experiment on the randomized provision of management consulting services to textile manufacturing firms in India, this chapter provides a detailed methodology for measuring management practices on the shop-floor as well as econometric estimates of the impact of improved management practices on firm-level productivity, quality and profitability. The econometric results confirm the commonly held suspicion among businesspeople that the quality of management matters for firm performance; the improvements in management practices induced by the treatment increased the average plant’s productivity by about 15% and its profitability by about 24% per year. The chapter also offers some suggestive evidence on why firms do not necessarily rapidly adopt modern management practices despite their benefits for productivity, focusing on the notion of management as a technology which diffuses slowly via knowledge transfer.
Together, these three chapters provide a complex picture of the performance of firms in developing countries. External obstacles like poor electricity service quality broadly hinder economic growth and require improvements in state capacity, regulatory quality and the market environment to overcome. However, firms nonetheless can potentially make large gains in productivity and profitability from improving their internal systems and processes, including management practices. This story is consistent with the evidence of great competitive difficulties felt by many Indian firms struggling to compete with Chinese imports on the one hand, and the rise of great Indian multinationals like Tata and Reliance from humble beginnings as family businesses on the other.